Broad new environmental “chain of responsibility” laws have been introduced in Queensland, Australia, in response to increasing public focus on the risk to the State of insolvent companies failing to meet environmental compliance obligations. Queensland has considerable mining and gas industries, as well as being home to many older, potentially high-risk industrial processing/manufacturing facilities.

The changes may impact significantly on the approach lenders and investors take to financing or investing in mining or industrial projects in Queensland, especially where the project may be at risk of being in financial distress.

“Related persons” of original environmental obligation holder may be made liable

The Department of Environment and Heritage Protection (EHP) now has the power in certain circumstances to issue an environmental protection order (EPO) to “related persons” of companies carrying out environmentally relevant activities (e.g., under an environmental authority (EA)) – something that was not previously possible. The EPO may impose any requirement on the related person that is or could be imposed on the company, as if the related person were the company.

EHP has the power to issue an EPO for a range of reasons, including for a failure to comply with the conditions of an EA. It is an offence to fail to comply with an EPO, with penalties that are some of the highest able to be imposed for environmental offences in Queensland. The recipient of an EPO may be ordered to, e.g., stop all (or some) activities indefinitely, modify its operations, rehabilitate land or take particular actions.

Further, EHP may issue an EPO to the related person of a high-risk company even where the company has not received an EPO. A high-risk company is a company that is an externally-administered body corporate or a company that is an associated entity of such a company.

EPOs will be able to be issued from the Act's assent on 27 April 2016, and can relate to circumstances prior to that date (i.e., the laws have potentially retrospective application to existing arrangements).

Who is a “related person”?

Determining if an entity may fall within the category of “related persons” to a particular company will depend heavily on the circumstances of the parties' commercial and legal relationship. A statutory guideline will assist with this; however it is not expected to be available for some months.

Under the new laws, a person will be a related person of an EPO recipient or high-risk company (first company) if:

  • the person is a holding company of the first company;
  • the person is the owner of the land on which the first company carries out or has carried out an activity under an EA or an activity that has caused environmental harm; or
  • EHP decides that the person has a “relevant connection” to the first company.

EHP is required to take the following matters into account when deciding whether a person has a relevant connection with the first company:

  • the extent of the person's control of the first company, including whether the person took all reasonable steps to ensure that the operation’s 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);
  • whether the person is an executive officer of the first company or of a holding company with a financial interest in the first company;
  • the extent to which the person is in a position to obtain a significant financial benefit from the first company's activities due to a particular corporate structure or arrangement;
  • the extent to which dealings between the person and the company are at arm's length, are on an independent, commercial footing, are for the purpose of providing professional advice, or are for the purpose of providing finance, including the taking of a security; or
  • the extent of the person's compliance with EHP's requests for information when making a decision to issue an EPO.

Implications and recommendations

In our view, the legislation is likely to mean that investors and lenders will be seeking much greater certainty at the initial stages of a project (or when new finance is sought) as to any clean-up/remediation liabilities the project is likely to accrue during its life.

We also suggest that lenders or 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, lenders or 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 lender or investor is in a position to influence the first company's conduct, making sure that it could demonstrate it has taken all reasonable steps to ensure that 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;
  • obtaining guarantees or similar security 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 lender or investor if it receives an EPO in relation to clean-up of the first company's land.