15 March 2018

Paramountcy of federal corporate insolvency priority regime upheld again – Linc Energy

This article was written by Philip Pan and Cameron Mew. 

The Queensland Court of Appeal has upheld an appeal by the liquidators of Linc Energy Limited (In Liquidation) (“Linc”) and given full effect to their disclaimer of contaminated mining property and onerous obligations the subject of an environmental protection order (“EPO”) issued by the Queensland Department of Environment and Science (“DES”).[1] 

The DES issued the EPO in an endeavour to force the executive officers of Linc and the liquidators upon their appointment to use available company funds to secure Linc’s compliance with its general environmental duty. This was despite Linc having ceased activities on the site and the onerous nature of the different remediation options, which ranged from $13M to $78M in cost over a period from 8 to 30 years. In issuing the EPO, DES sought to, in effect, impose personal liability upon the liquidators and jump the established priority waterfall prescribed by section 556 of the Corporations Act 2001 (Cth) (“Act”) to defeat preferential employee entitlements and the liquidators’ general claims for fees and expenses.

For now, the decision provides comfort to insolvency practitioners that they can once again accept appointments to Queensland mining companies without having to immediately cease all mining activity to avoid personal liability and receive payment for their genuine restructuring efforts for the benefit of all stakeholders.

Facts

Linc owned a pilot underground coal gasification project, which it operated under a mineral development licence granted under the Mineral Resources Act 1989 (Qld) and environmental authorities issued under the Environmental Protection Act 1994 (Qld) (“EPA”). DES issued Linc with an EPO, which required Linc to undertake certain works on its site, refrain from certain conduct and comply with the general environmental duty contained in section 319 of the EPA.

The liquidators gave a notice of disclaimer under section 568(1)(e) of the Act disclaiming the mineral development licence and the associated equipment and the environmental authority on the basis that it was reasonable to expect that the costs, charges and expenses that would be incurred in realisation would exceed the proceeds. DES contended that, notwithstanding the disclaimer, Linc remained bound to comply with the EPO and the liquidators were bound under the EPA to cause Linc to do so. The liquidators applied under section 511 of the Act for a court direction that they would be justified in not causing Linc to comply with the EPO or any further environmental protection order which might be issued.

The Queensland Court of Appeal granted the direction sought by the liquidators (which was denied at first instance), holding that:

  • the requirements of the EPO were liabilities in respect of disclaimed mining property (being the mineral development licence and equipment) and, therefore, by virtue of section 568D of the Act, the disclaimer had the effect of terminating any obligation to perform the requirements of the EPO;
  • the provisions of Part 1.1A of the Act (which are intended to preserve certain State laws existing at the time of the referral of the corporations power to the Commonwealth) did not deny the non-severable operation and constitutional paramountcy of the disclaimer. This is because confining the operation of the disclaimer to Queensland property would not avoid any inconsistency arising between the provisions of the Act and those of the EPA.

Liquidator’s statutory power to disclaim property

The Queensland Court of Appeal’s decision also reaffirmed some fundamental principles concerning a liquidator’s power to disclaim property under section 568 of the Act. In particular, the Queensland Court of Appeal confirmed that:

  • the purpose of the liquidator’s power is “to enable insolvency administrators to relieve themselves of ongoing liabilities which so prolong the administration and delay the dividend”;
  • in considering what “property” a liquidator may disclaim, the word “property” should not be given a narrow meaning, but “should be understood as referring to the company’s possession of any of a wide variety of legal rights against others in respect of some tangible or intangible object of property”;
  • once there is a valid exercise of the power to disclaim property, the disclaimer has all of the consequences prescribed by section 568D of the Act (namely, the prospective termination of the company’s rights, interests, liabilities and property in, or in respect, of the disclaimed property) and the effect of the disclaimer cannot be confined; and
  • in considering the effect of the disclaimer, the words “in respect of” have a wide meaning and the necessary connection between the disclaimed property and the liabilities will be established if the continued enjoyment of the property (namely, the mineral development licence and the equipment) depends on meeting those liabilities. However, it was unnecessary to determine whether the environmental authority constituted property.

Section 556(1)(dd) priority

Ultimately, the reason for the DES seeking to challenge the effect of the liquidators’ disclaimer was to force the liquidators, as executive officers of Linc, to use available company funds to secure compliance by Linc with the EPO. The DES submitted that such expenditure would be in the nature of expenses properly incurred by the liquidators within section 556(1)(dd) of the Act. In that event, the expenditure incurred by the liquidators in ensuring compliance with the EPO by Linc would have ranked ahead of preferential employee entitlements, the liquidators’ general claims for fees and expenses and the claims of ordinary unsecured creditors.

Availability of “reasonable steps” defence in the EPA

Each liquidator was an executive officer of Linc for the purposes of the EPA, being a person who is “concerned with, or takes part in, the corporation’s management”. As such, in the absence of the disclaimer, the liquidators would have been bound under the EPA to take all reasonable steps to have Linc comply with the EPO. Significantly, the Queensland Court of Appeal noted that it was “far from clear” that the liquidators would be considered to have taken all reasonable steps if they had instead applied the necessary funds to the payment of debts and claims according to the priorities prescribed by section 556 of the Act. Although any penalty imposed on Linc would not have been admissible to proof in the liquidation in accordance with section 553B of the Act, the liquidators would have been exposed to a penalty of up to 5 years’ imprisonment.

Takeaway points

The key takeaway points, subject to any High Court challenge, for insolvency professionals are:

  • the long recognised purpose, operation and constitutional paramountcy of the disclaimer and principal insolvency priority provisions of the Act, which facilitate an orderly winding up, have been restored in Queensland in respect of environmental compliance requirements and clean-up costs;
  • a counterparty to a liquidator’s disclaimer should consider taking timely action to challenge any grossly prejudicial disclaimer;
  • insolvency practitioners, as executive officers, will still need to implement effective environmental monitoring and compliance systems to be able to prove they took all reasonable steps to ensure compliance with the company’s general environmental duty; and
  • the attention will now turn to how the DES exercise its powers under the Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld), which came into effect on 27 April 2016, to pursue company executives and other related persons for clean-up costs, which powers were not engaged against the liquidators of Linc or the subject of the Queensland Court of Appeal’s decision.

[1] Prior to recent machinery of government changes, the DES was known as the “Department of Environment and Heritage Protection”.

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