The Supreme Court of Queensland has delivered a significant judgement concerning the obligations of liquidators to cause an insolvent company to incur the costs of complying with State environmental laws, in priority to other unsecured creditors.

On instructions from the liquidators of Linc (Stephen Longley, Grant Sparks and Martin Ford of PPB Advisory) JWS made an application for directions in respect of both the liquidators’ and Linc’s environmental obligations in Queensland.

The decision of Jackson J in Linc Energy Ltd (in Liq): Longley & Ors v Chief Executive Dept of Environment & Heritage Protection [2017] QSC 53 has wide-ranging consequences for the insolvency industry, as the outcome effectively relegates (at least in Queensland) liquidator remuneration, employee entitlements and all other unsecured creditors behind State imposed environmental compliance and rehabilitation costs. The environmental obligations of the company were found to continue despite the liquidators’ disclaimer of the relevant land and licences of the company and the liquidators were obliged to procure Linc to comply.

Background

Linc previously operated an underground coal gasification test facility at Chinchilla in Queensland. It held Environmental Authorities (EAs) issued under the Environmental Protection Act 1994 (Qld) (EPA) and a Mineral Development Licence No 309 and Petroleum Licence 5 (Licences) for the purpose of conducting the UCG facility on the site.

In April 2016, administrators were appointed to Linc. In May 2016, the Queensland Department of Environment & Heritage Protection (DEHP) issued an Environmental Protection Order (EPO) to the company, requiring ongoing monitoring and testing to be done in relation to previous contamination of the site. The company’s creditors resolved to wind up the company later that month.

In June 2016, the liquidators gave notice disclaiming the Chinchilla land, the EAs, the Licences and various infrastructure on the land (Disclaimer) under section 568(1) of the Corporations Act 2001 (Cth) (Corporations Act).

The liquidators sought directions from the Court under section 511 of the Corporations Act, as to whether they were justified in not complying with the EPO (and any future EPOs issued by DEHP) due principally to the Disclaimer (pursuant to section 568D of the Corporations Act) terminating all liabilities in respect of the disclaimed property.  

The DEHP contended that the liquidators were obliged, as executive officers of the company, to ensure Linc complied with the EPO where there are funds available in the winding up to do so.

Issues

The key issue in the case was whether the Disclaimer had the effect of discharging the company from compliance with the EPO. Critical to this issue was the resolution of the apparent inconsistency between the State (EPA) and Federal (Corporations Act) legislation, in terms of the requirements of the EPO and the effect of the disclaimer provisions.

The importance of this inconsistency issue saw the Attorney-General for the State of Queensland (Qld A-G) intervene in the proceedings, joining with the DEHP in opposing the orders JWS sought on behalf of the liquidators. Although the general rule where inconsistency lies between State and Federal legislation sees the Commonwealth law prevail (pursuant to section 109 of The Constitution) the Qld A-G (and DEHP) argued in this case that section 5G(11) of the Corporations Act operated to give the relevant State laws precedence in Queensland.   

A further issue was whether liquidators fall within the definition an “executive officer” for the purposes of section 493 of the EPA, and are therefore obligated to cause Linc to comply with the Act (and the liquidators would be committing an offence if they failed to do so).

Outcome and Consequences

Jackson J refused to grant the directions sought, finding that despite the Disclaimer, the application of section 5G(11) meant that the relevant State laws (under the EPA) prevailed in Queensland and Linc therefore remained liable to comply with the EPO.  Further, his Honour found that the liquidators were executive officers for the purpose of section 493 of the EPA, and were therefore obligated to cause Linc to comply with the EPO.  

Although his Honour made clear that his decision only applies to the particular EPO issued to the liquidators in May 2016, he recognised the liquidators’ concern as to further EPOs that may be issued by the DEHP, directed to environmental clean-up and remediation of the Chinchilla site.  

There are a number of significant consequences for liquidators (and unsecured creditors) that arise for consideration in light of this decision:

An insolvent company’s costs of compliance with environmental obligations under Queensland laws (and potentially other States with similar provisions to those in the EPA) are to be incurred by a liquidator in priority to the liquidator’s own remuneration, employee entitlements and other unsecured creditors;

Compliance with such environmental obligations may require many millions of dollars to be incurred over many years, significantly reducing or extinguishing any returns otherwise available to creditors and delaying the finalisation of the winding up process until those environmental obligations are satisfied or there are no further funds left in the winding up;

Insolvency practitioners will need to give serious thought to the risks associated with taking appointments to companies which have (or may have) substantial environmental liabilities, both in terms of their ability to recover their fees and the potential for personal liability attaching to them as executive officers to ensure satisfaction of the company’s environmental obligations.