1. Insolvency Law and Climate Change Impacts

1.1 Contextual Background

Corporate insolvency is regulated under chapter 5 of the Corporations Act. The Act broadly creates two ways to deal with an insolvent company, namely through a reorganisation process (administration^[1] or small business restructuring^[2]) and winding up or liquidation.^[3]

Voluntary administration and small business restructuring involve the appointment of an insolvency practitioner (an ‘administrator’ or a ‘restructuring practitioner’, both of whom are registered liquidators) and the financial reorganisation of the company’s debts.

In the case of voluntary administration and the appointment of an administrator, the administrator displaces the directors of the company.^[4] The restructuring practitioner does not displace directors in the case of a small business restructuring, in which case the company retains control of its business^[5] and the directors are able to enter transactions or dealings in the ordinary course of the business of the company.^[6]

Both mechanisms require creditor approval in order for the restructuring to be implemented.^[7]

The purpose of the administration process is to return the insolvent company to a successful concern, or if that is not possible, to achieve a better outcome for creditors than would have been the case if the company went into immediate winding up.^[8]

The purpose of the small business restructuring process is to develop a payment plan with the assistance of a small business restructuring practitioner, and for the company to enter into a restructuring plan with creditors.^[9]

Liquidation involves the liquidator taking control of company assets, realising the assets and distributing the proceeds among creditors according to distribution rules of insolvency law.^[10] Once the liquidation process has been completed, the company’s existence is terminated by way of deregistration of the company.^[11]

In order to understand the intersection between environmental obligations and insolvency law, it is important to recognise the impact of the constitutional power to legislate in respect of ‘corporations’. Even though the Corporations Act is federal legislation, the constitutional power to legislate in respect of corporations vests in respective states and territories.^[12] Federal corporations legislation was possible in spite of this, as the desire for uniform corporations legislation motivated states and territories to cede their power to regulate corporations to the federal government. As a result, corporations legislation, even though Commonwealth legislation, may not necessarily prevail in case of an inconsistency between state or territory environmental legislation and the law under the Corporations Act,^[13] as would usually be the case.^[14] This arrangement has important consequences in respect of a conflict between environmental legislation and corporations legislation insofar as the treatment of environmental obligations in insolvency is concerned.

1.2 How is Climate Change Relevant to Insolvency Law?

The extent to which and the way in which climate change is relevant to insolvency law will be affected by the form of external administration that applies to the insolvent company. In the context of a company in insolvent liquidation, the primary question will revolve around determining liability for environmental obligations that the company has not met and is unable to meet. It is possible that a company in insolvent liquidation has an asset that is subject to environmental clean-up or remediation costs that are so significant that these costs will exceed the value of the asset. Such property is of no benefit to the insolvent liquidation and the liquidator may disclaim the property for that reason.^[15] A disclaimer has the effect of terminating the company’s rights, interests and liabilities in respect of the disclaimed property.^[16]

There is statutory protection for a person who has an interest in the disclaimed property. For example, a person who has an interest in the disclaimed property may apply to court for an order setting aside the disclaimer before it takes effect, provided they do so within the timeframes prescribed by legislation.^[17] A person who is aggrieved by the operation of a disclaimer is further regarded as a creditor of the company to the extent that they suffered a loss due to the disclaimer, and may prove such a loss as a debt in the winding up.^[18] A successful disclaimer in respect of an asset subject to significant environmental obligations will have the effect that the liability of the company in that regard has been terminated. The question then becomes who is liable for the environmental obligations. As the disclaimer has the effect of terminating the rights of the company in respect of the property, the property becomes ‘ownerless’ and may vest in the State due to the operation of the bona vacantia doctrine,^[19] with the State thus potentially becoming liable for environmental obligations.

Hypothetically, a second scenario is also possible. If the environmental obligations are not so significant as to exceed the value of the relevant property, the liquidator may elect not to disclaim the property. The company therefore retains its interest in the property and on the basis of principles of corporate and insolvency law only, would appear to remain liable for the cost of meeting the environmental obligations. If that assumption is correct, the following could occur: claims in respect of environmental obligations are likely to be unsecured, do not enjoy a statutory priority^[20] and will therefore have to share in the residue, if any, with other unsecured claims on a proportionate basis^[21] once unsecured claims with a statutory priority have been paid. In a practical sense, this scenario is likely to result in the environmental claims not being paid, or not being paid in full, due to the typical insolvent liquidation leaving very little or nothing available for distribution among the general body of unsecured creditors. However, this would ultimately depend on the provisions of the relevant environmental legislation — a critical factor to consider in light of the fact that the Corporations Act may not have paramountcy in case of a conflict with state or territory environmental legislation.

The issues in a restructuring context are different. Unlike a liquidator, the administrator or restructuring practitioner does not have as the ultimate aim the winding up and termination of the company’s existence. Instead, the administrator or restructuring practitioner aims to ‘restructure’ the business of the company in an effort to allow the company to become a successful concern again. In this regard it is important to consider that administrators and restructuring practitioners are captured by the definition of ‘officer’.^[22] They will consequently be subject to statutory duties that apply to directors and officers. The indirect influence that these duties could have in relation to climate change, particularly the duty of good faith and the duty of care and diligence, has been mentioned previously in the context of directors of companies . This also applies to administrators and restructuring practitioners as ‘officers’ of the company. However, while administrators and restructuring practitioners are subject to the same duties, it is important to recognise that the context in which administrators and restructuring practitioners operate is very different from the context in which directors operate. Administrators and restructuring practitioners deal with an insolvent company, appointed pursuant to, and with authority under, a particular statutory regime, as a result of which expectations of administrators and restructuring practitioners in respect of these duties may be quite different when compared with what is expected of directors.

1.3 How is Insolvency Law Relevant to Society’s Response to Climate Change?

Insolvency law is unlikely to have a significant direct role in society’s response to climate change. However, it can have an indirect influence. In a liquidation context, this will occur in relation to the determining of liability for environmental obligations. In a restructuring context the duties of administrators and restructuring practitioners could play an indirect role in supporting sustainability goals.

The intersection between insolvency law and climate change is a developing area of law. As a result, legal principles are not always clear. Policy considerations are likely to play a significant role in matters where the court is required to exercise judicial discretion. With increased awareness of the impact of climate change, it is possible that there may increasingly be a policy shift from the traditional and exclusive focus of insolvency law on interests of creditors. A question is whether current insolvency law principles are equipped to deal with these new demands being made on it.

You are encouraged to read some of the academic literature on the intersection between insolvency law and environmental obligations^[23] to inform your thinking about your answers to the questions below.