Court of Appeal Clarifies the Tension Between Disclaimed Property and State Based Laws

On 9 March 2018, the Queensland Court of Appeal overturned the controversial first instance decision of the Supreme Court in the matter of Linc Energy Pty Ltd (In Liquidation).[1]

The Court of Appeal’s judgement is significant, as it clarifies the position regarding:

  • the duties of a liquidator to comply with state based laws regarding a disclaimed property
  • the relationship between the Corporations Act 2001 (Cth) (CA) and other state based legislation under section 5G of the CA.[2]

Justice of Appeal McMurdo, with Bond J and Gotterson JA in agreeance, confirmed that environmental obligations of a company in insolvency will not continue after the relevant property and licences have been disclaimed under section 568 of the CA.

Disclaimed Property

Liquidators have the power to disclaim property under section 568 of the CA. Once property has been disclaimed, the company in liquidation extinguishes its whole interest on that property. The rights of other persons are also affected, to the extent necessary to release the company from all liabilities regarding the disclaimed property. The disclaimer provisions under the CA are aimed at allowing liquidators to relieve themselves of ongoing liabilities that would be a cost to creditors, prolong the liquidation, and delay the declaration of dividends to the company’s stakeholders.

Linc Energy Limited (in liq) (Linc) operated a pilot underground coal gasification project on land which it owned in Queensland (Site). The project was operated under the authority of a mineral development licence (MDL), a petroleum facility licence (PFL) and other environmental authorities issued under the Environmental Protection Act 1994 (Qld) (EPA).

Shortly prior to the appointment of liquidators to Linc (Liquidators), an environmental protection order (EPO) was issued to Linc under the EPA for its coal seam gas project at the Site. The EPO required Linc to comply with the ‘general environmental duty’ under the EPA. This duty required Linc, amongst other things, to:

  • undertake certain work on the Site
  • retain and maintain any infrastructure on the Site, which was necessary to ensure compliance with the requirements of the EPO.

After their appointment, the Liquidators disclaimed the Site, the MDL, PFL and all other environmental authorities obtained by Linc, on the basis that it was reasonable to expect that the costs, charges and expenses incurred in seeking to realise this property would likely exceed the proceeds that would be received in the realisation.

The Department of Environment & Heritage Protection accepted that the Site and licences had been validly disclaimed by the Liquidators. However, the key issue for the Liquidators was whether, notwithstanding the disclaimer, the company would be required to comply with the obligations imposed by the EPO.

Reasons for Judgment

The Court in both the Court of Appeal and first instance decisions, attached significance to the fact that the disclaimer of the Site and licenses meant that Linc had ‘no cause’ and ‘no entitlement’ to carry on any environmental duties in respect of the Site. The effect of this was that Linc could no longer be obliged to comply with the EPO. Accordingly, the Court found that there was an inconsistency between the disclaimer provisions in the CA, and the environmental duties imposed by the EPA.

Under section 109 of the Commonwealth Constitution, Commonwealth law prevails to the extent of any inconsistency between Commonwealth and State legislation. However, section 5G of the CA was introduced at the time of the CA’s drafting to ensure certain existing state based laws continued to operate despite being inconsistent with the terms of the CA. In the first instance, Jackson J interpreted section 5G of the CA to mean that the EPA, as a pre-existing state based law, prevailed over the terms of the CA in Queensland. As such, Jackson J found that despite the disclaimer under the CA, Linc remained liable to comply with the terms of the EPO.

On appeal to the Court of Appeal, the Court considered the case of HIH Casualty and General Insurance Ltd (in liq) v Building Insurers’ Guarantee Corporation (HIH).[3] In HIH, the Court found that certain sections of the CA were incapable of applying inconsistently between the states and territories. The disclaimer provisions of the CA were found to be examples of these types of provisions that are not geographically indiscriminate in that they apply to a body corporate in the whole of the area to which the CA applies, being all states and territories. The Court of Appeal found that section 5G of the CA could not operate to give priority to the EPA, as this would result in the disclaimer provisions under the CA applying in all states and territories except for Queensland. As such, McMurdo JA found that once the Site and licences had been disclaimed, there was no activity which could be carried out by Linc to which the general environmental duty could attach.

The significance of the Court of Appeal’s judgment is that it gives liquidators comfort that they will not be bound by state based environmental obligations imposed on disclaimed property. The effect of the first instance decision was to give state based environmental laws priority over other unsecured creditors in the winding up of the company. Despite the Court of Appeal decision, practitioners should still carefully consider all environmental obligations imposed on a company in liquidation.

In addition, the Court of Appeal’s judgment confirms that certain provisions of the CA are not ‘divisible’ and will not apply to some states and territories with exclusion in others. Following this judgment, it will be important for practitioners to take note of any future decisions which detail what other sections of the CA will be ‘indivisible’ and thereby have priority over state based laws.