Thursday, 4 May 2017

Creditors become a weaker Linc in the chain: You can’t disclaim the environment in insolvency

Regional towns across Queensland are often recognised, remembered and cherished for their unique attributes and historic events.  Birdsville has their famous races, Barcaldine has the tree of knowledge, Longreach has the Stockman’s Hall of Fame and the Qantas Museum, and now the town of Chinchilla, in addition to being the melon capital of Australia, has a new claim to fame as the town where the environment conquered creditors.

The recent Linc Energy(Linc) decision did not frame the arguments in such terms, but nonetheless considered whether the liquidators of Linc were justified in causing the company not to comply with an Environmental Protection Order (EPO). Ultimately, Jackson J of the Queensland Supreme Court held that the liquidators had to use available money to help the environment at the expense of other claims.

Of course at the outset it’s important to note that Jackson J confined his analysis and the direction he gave to the specific set of facts before him. Nonetheless, there are lessons to be learnt from this fracas.

How did we end up at a face-off?
It’s undoubtedly well known that the Linc underground coal gasification project at Chinchilla did not go to plan. Some have described the venture into so-called ’clean energy‘ as “the biggest pollution event probably in Queensland’s history.”2

The underground coal gasification plant operated by Linc is alleged to have polluted soil and groundwater during its operation in a significant way.  In April 2016, Linc was placed into administration.  Shortly thereafter the Department of Environment and Heritage Protection of the Queensland Government (DEHP) issued an EPO to Linc, which imposed obligations on Linc regarding environmental monitoring and reporting.  When the company was placed into liquidation in May 2016, the issues regarding those EPOs and in particular who was liable for the obligations under them, came to a head.  

Asking nicely: the liquidators seek clarity 
After Linc went into liquidation, the liquidators gave notice under the Corporations Act 2001 (Cth) (Corporations Act) disclaiming land at Chinchilla, the Environmental Authorities (EAs) issued under the Environment Protection Act 1994 (Qld) (EP Act) and the Mineral and Petroleum Licences.  

The liquidators sought directions as to whether they would be justified in allowing Linc to not comply with the EPO issued.  If the liquidators were obliged to cause Linc to comply with the EPO, it would require them to use all available money to do so (money, which would otherwise go to creditors such as employees).  Linc’s liquidators argued that: 
  • the disclaimer of the land, licences and authorities had the effect of discharging Linc from future compliance with the EPO
  • the requirement to make Linc comply under the EP Act was inconsistent with the termination of that liability by the disclaimer
  • to the extent of the inconsistency, the EP Act was invalid by reason of section 109 of the Constitution of Australia, and
  • they were not ‘executive officers’ of Linc under Queensland’s environmental laws.

The DEHP contrarily argued that the liquidators were executive officers of Linc and that in this capacity they were obliged to cause Linc to comply with the EPO.

It’s the law. It’s the vibe. It’s the Constitution. 
The Court considered the inconsistency of the EP Act and the Corporations Act.  Ordinarily, there is a general rule that where there is inconsistency between State and Federal legislation, the Federal legislation will prevail; but this was no ordinary case. 

The Queensland Attorney-General weighed in on the matter on behalf of the DEHP and successfully utilised section 5G of the Corporations Act, which doesn’t typically see the light of day. This rarely used provision gives State laws a leg up over federal laws where the State law was in operation when the States referred their corporations’ powers to the Commonwealth in 2001.  The result was a finding by the Court that the EPOs established by Queensland law were inconsistent, but ultimately prevailed, over the disclaimer provisions of Corporations Act.

Liquidators left lonely at the top
Linc’s liquidators contended they were not executive officers under the EP Act, meaning they didn’t have to cause Linc to observe its environmental obligations. Jackson J didn’t see it that way and found no difficulty in resolving that the liquidators were executive officers of Linc for the purposes of the EP Act. 

In reaching his decision, Jackson J looked to the general purpose of the EP Act, which was to ”protect Queensland’s environment while allowing for development that improves the total quality of life, both now and in the future, in a way that maintains the ecological processes on which life depends.“ He went on to say that if the liquidators’ argument were accepted, there would be no-one with a personal statutory obligation to ensure that the obligations of Linc under the EP Act were met during the liquidation. 

What was not decided
There was no dispute that the liquidators were able to disclaim the land and the Mineral and Petroleum Licences.  The result of disclaiming such land and licences is that Linc ceased to have any further rights, liabilities or obligations in relation to the land or under the licences.  

As for the EAs, because Jackson J had found that in these circumstances the Queensland EP Act prevailed over the Federal Corporations Act, he felt it was unnecessary to decide the question of whether the EAs were property able to be disclaimed under the Corporations Act.  Unfortunately for our readers, this means that the question as to whether you can disclaim an EA is still up in the air. 
The DEHP has power to issue an EPO for many reasons, including securing compliance with the general environmental duty that a person must not carry out any activity that causes, or is likely to cause, environmental harm, unless the person takes all reasonable and practicable measures to prevent or minimise the harm.  His Honour conceded that it wasn’t completely clear that an EPO could be made to secure compliance with a general environmental duty relating to activities that had ceased. 

But what does it all mean?
The broad brush view is that those accepting insolvency appointments in Queensland, whether as liquidator, administrator or a receiver, need to very carefully consider any environmental concerns facing the company they’re involved with.  The Linc decision is authority that liquidators are executive officers under the EP Act.  This means liquidators have duties to cause the company to comply with environmental responsibilities under the EP Act.  The same would apply to administrators or receivers.  Failure to do so could lead to prosecution, because where a company commits an offence under the EP Act, each executive officer of the company is deemed to have committed an offence.   

Given this decision (unless overturned), it now appears Jackson J has significantly altered the landscape of insolvency law in Queensland.  This ‘environment-comes-first’ notion, whilst arguably admirable depending on your view on the environment versus economic development debate, departs from well-established standards of insolvency law.  It means that money that would otherwise be paid to creditors, including employees, will have to be spent on environmental issues.  For example, it would push the Federal Government down the queue in recovery of payment of unpaid entitlements which it has paid under the Fair Entitlement Guarantee scheme.  This is of course relevant to other insolvent mining companies like Queensland Nickel. 

The decision may result in insolvency practitioners refusing to accept insolvency appointments over any insolvent company that has environmental obligations.  This places directors in an invidious position.  If they continue to trade whilst the company is insolvent, they risk being liable for insolvent trading.  If they decide to do the right thing and place the company into administration or liquidation, they may be unable to find anyone willing to take the appointment.  The end result may be directors simply resigning from their positions leaving companies with environmental responsibilities without any officers at all.

Of course, it is noteworthy that this decision did not consider the amendments to the EP Act under the Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld) (Chain of Responsibility amendments).  These amendments came into force in 2016 and widened the definition of a ‘related person’ and hence extended the persons to whom the DEHP can issue an EPO.

Insolvency practitioners had been concerned about the impact of the Chain of Responsibility amendments on them as they would fall within the definition of ‘related persons’.  The recently issued Issuing ‘chain of responsibility’ environmental protection orders guidelines (Guidelines) clarifies how the DEHP will apply the Chain of Responsibility amendments when issuing EPOs to ‘related persons’.  Importantly, if it is determined that the related person was not culpable for a matter, or was culpable but took all reasonable steps in the circumstances, DEHP will not issue the person with an EPO.  The Guidelines provide some level of comfort to ‘related persons’ about when they may or may not be issued with an EPO.  But these are cold comfort to administrators, receivers and liquidators given they are executive officers and have obligations as such, even if an EPO is not issued directly to them as a related person. 

Wednesday, 15 March 2017

Proposed changes to PPS lease definition

On 1 March 2017 the Federal Government introduced the Personal Property Securities Amendment (PPS Leases) Bill 2017 into parliament, which, if passed, will amend section 13 of the Personal Property Securities Act 2009 (Cth) (PPSA) to:
  • replace the current one year threshold for deeming a commercial lease or bailment to be a PPS lease to two years, and
  • remove the much criticised ‘indefinite term’ category of PPS lease, unless the lessee or bailee has held the goods for longer than two years with the lessor or bailor’s consent.

Tuesday, 17 January 2017

Hanjin Shipping recognition proceedings answer question about extent of the automatic stay under the Model Law on Cross-Border Insolvency

Readers will recall that on 23 September 2016 we posted an article about recognition under the UNCITRAL Model Law on Cross-Border Insolvency (Model Law) of the Korean rehabilitation proceedings for Hanjin Shipping.

After granting interim recognition of the rehabilitation proceedings in September 2016, the Federal Court granted final recognition orders on 11 November 2016.  The final orders obtained and the court’s reasons for granting the orders are significant as they answer the question of how the scope of the automatic stay is determined upon recognition of a foreign main proceeding of a corporate debtor under the Model Law.

Thursday, 1 December 2016

Unchain my … environmental responsibilities. The Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld) explained

The insolvency profession (and the Queensland market in particular) has been abuzz this year with the issue of CORA – a shorthand reference to the Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld). 

What does it mean for insolvency practitioners?  Can banks really be hit with a bill to clean up their borrowers’ environmental damage?  Will turnaround and restructuring professionals refuse to accept appointments out of fear of falling foul of the new regime?

Tuesday, 22 November 2016

The Arrium Administration breaks new ground with a novel group DOCA structure

‘Shipping steel, shipping steel . . .
Nobody knows, the way it feels
Caught between Heaven and the Highway
Shipping steel, shipping steel . . .’ 1

On 7 April 2016, Administrators were appointed to South Australian-based steelmaker and iron ore miner Arrium, which reportedly owed approximately AUD4.3 billion to its lenders, suppliers and staff.  The appointment covered 94 direct and indirect subsidiaries of Arrium Limited (the Arrium Companies), which at the time employed around 8,100 employees and contractors.

The broader Arrium Group also includes the Moly-Cop group, which is located mostly overseas, trading profitably and not subject to the insolvency proceedings.  The Administrators announced on 4 November 2016 that US private equity firm American Industrial Partners had bought Moly-Cop for US1.23 billion (AUD1.6 billion).  The proceeds of the sale will predominantly go to Moly-Cop’s lenders, reducing their debt by about 50%.

Tuesday, 8 November 2016

The regulatory crackdown on the illegal phoenix

Unscrupulous advisors, unconscionably preying on desperate directors driven by the fear of losing everything, have created a boom in illegal phoenix activity.  The below article, originally published on the McCullough Robertson white collar crime blog, Collared, sheds some light on the illegal phoenix, the gravity of the problem in Australia and considers what is being done to monitor and control the issue. 

We didn't start the fire
It was always burning since the world's been turning
We didn't start the fire
No, we didn't light it, but we tried to fight it’
[1]

The Illegal Phoenix
Illegal phoenixing is a major problem in corporate Australia.  In this post we consider what illegal phoenix activity is, how the problem is affecting the Australian economy and the recent regulatory crackdown on the issue.

Thursday, 3 November 2016

Will a deed of company arrangement be recognised and enforced by US and Canadian courts?

In August I presented on cross-border insolvency at the joint Federal Court of Australia and Law Council of Australia conference on corporations law.  The audience consisted of over 30 Federal Court judges and a range of other experienced corporate and insolvency lawyers.  I decided to present a case study, a major part of which was considering whether a hypothetical deed of company arrangement (DOCA) could be recognised and given the force of law in the US and Canada under their legislation based on the UNCITRAL’s Model Law on Cross-Border Insolvency (Model Law) in order to prevent US based creditors seeking court orders against assets in the US and Canada.  This sparked sufficient interest that I was then asked to present the same paper at the annual conference of the Insolvency and Reconstruction Law Committee of the Law Council of Australia a few weeks ago.  I thought I would share some insights from the paper in this blog.