Environmental protection orders may be given to "related persons"

Queensland's new environmental laws, aimed at ensuring an unbroken chain of responsibility for environmental damage and clean-up where the polluter fails (or is at risk of failing) to meet their clean-up obligations, passed in the early hours of this morning as the Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Act).

The amendments will commence on assent, which we expect will be within the next few business days.

As set out in our previous alert, the Act will empower the Department of Environment and Heritage Protection (EHP) to cast its enforcement and cost recovery net beyond the company carrying out environmentally relevant activities (first company), to that first company’s “related persons”. The Act will ensure EHP is able to effectively enforce compliance by asset operators with their environmental obligations, and help protect against significant liability falling to the State where operators do not comply with those obligations.

Once the Act commences, EHP may issue environmental protection orders (EPOs):

  • to each related person of a first company which has received an EPO; and
  • to each related person of a "high-risk" first company (i.e. externally administered body corporate), even if no EPO has been issued to the first company.

Each recipient of an EPO in these circumstances is jointly and severally liable with each other recipient for the full cost of compliance with the EPO.

Changes to final form of Bill

The Environmental Protection (Chain of Responsibility) Amendment Bill 2016 (Bill), introduced on 15 March 2016, underwent review by the Agriculture and Environment Parliamentary Committee, with submissions received from a range of individuals, conservation groups and local governments as well as companies in the banking, resources and agricultural sectors. The submissions, including Baker & McKenzie's submission, are available under the 'Submissions' tab.

The key issue for many submitters was the broad nature of, and the level of subjectivity around, the test for identifying "related persons". However, the effectiveness of the amendments could be jeopardised if the related persons test was made so objective or inflexible that it failed to cover the range of complex and innovative corporate relationships that may exist between first companies and related persons.

The Bill was amended in response to various concerns raised in submissions, as set out below.

New statutory guideline: EHP is to develop a binding statutory guideline to provide greater clarity regarding the manner in which the department will administer the "related persons" test – i.e. how it will determine which related persons of a first company should receive an EPO, and how it will determine the persons who have a relevant connection to the first company.

The "related persons" test is also amended so that:

  • financial benefit must be significant: to be a related person, a person must receive a significant financial benefit from the operations, not just any financial benefit. This is intended to ensure "mum and dad" investors are not caught by the test. Financial benefit now expressly excludes compensation under certain landholder/resource company agreements for resources projects, and payments made under indigenous land use or cultural heritage agreements. "Significant" in this context is not defined in the Act, but the Minister indicated in parliament that there would be guidance on this point in the statutory guideline;
  • diligent related persons may be exempt: a person may be excluded under the related persons test where it can show that it took all reasonable steps to ensure the operations’ environmental obligations were complied with and that any rehabilitation or land restoration would be adequately funded (where the related person was in a position to influence the first company's conduct). "Reasonable steps" is not intended to be defined, and a common law test would be used to determine if reasonable steps had been taken by the related person; and
  • certain landowners excluded: the amendments remove some categories of land owner from falling within the "related persons" test – owners of the underlying tenure of mining and petroleum projects (who may be compelled by law to permit those projects to operate on their land). All other categories of landholder are still included in the test.

New financial assurance on share sale: in addition to the new power in the Bill for EHP to impose a condition requiring financial assurance (i.e. environmental performance guarantee) be provided at the time of a transfer of an environmental authority (EA), EHP will also be able to exercise this power in the event of a share sale (i.e. where the EA will not be transferred but the ownership of its holding company changes).

Review in two years: the new provisions will be reviewed by the Minister for appropriateness in two years.

Recommendations

The Minister noted during parliamentary debate early this morning that he is willing to work with organisations in business and the legal profession to develop the guidelines. Affected investors may wish to become involved in this process. We understand the guideline will be intended to evolve over time to incorporate new information, and different circumstances that arise.

We also suggest that investors who may potentially be "related persons" of assets held by a first company should review the statutory guideline, when available, to determine the likelihood of being considered a "related person". If there is a likelihood, investors should consider protections they might put in place, such as:

  • obtaining a clear and comprehensive understanding of actual and potential environmental liability associated with the investment, in order to quantify potential liability falling to related persons of a first company;
  • where the investor is in a position to influence the company's conduct, measures it may take to ensure that it could demonstrate it has taken all reasonable steps to ensure the first company complied with its environmental obligations and that it has made adequate provision to fund rehabilitation or land restoration;
  • seeking to impose contractual obligations on the first company in relation to that company's environmental performance and in particular, the company's prompt and comprehensive compliance with any EPOs the first company receives;
  • guarantees or similar from any parent company of the first company in relation to EPOs given to the investor as a related person; and
  • requiring from first companies pre-agreed entry rights to relevant land which can be relied on by the investor if it receives an EPO in relation to clean-up of the first company's land.

Key dates

EHP's new powers to give EPOs to related persons of first companies will be in force from the date of assent, likely to be within days.

The powers include EHP's ability to give an EPO to a person who was a related person at any time during the period from the Bill's commencement until the Act came into force, but who was no longer a related person by the date the Act came into force.

Potential "related persons" should also note that EHP's decision to give an EPO, and as to whether someone has a relevant connection to a first company, would take into account events that occurred and circumstances that existed prior to the commencement of the Act. So, while EHP's new powers to give EPOs to related persons commences on the date of assent, it is possible that its decisions to do so will be made based on events that have already occurred, and based on the circumstances of relationships between first companies and potential related persons that are already in place.