2. Insolvency Law Responses to Environmental Obligations

2.1 Environmental Obligations in Liquidation: Case Studies on Disclaiming Onerous Property

In the context of insolvent liquidation, the issue in regard to the intersection between insolvency law and environmental issues often involves a disclaimer of property of the insolvent company that is subject to some form of environmental obligation. There is obvious tension between principles of environmental law and those of insolvency law in this context, and there are examples of cases in Australia and abroad where this tension resulted in litigation. Judgments of the Queensland Supreme Court of Appeal and the Victoria Supreme Court of Appeal in relation to a disclaimer of onerous property that involved environmental concerns provide a good illustration of the complexity of this issue.

In Queensland, an appeal was lodged against a judgment of the court at first instance^[1] in the case of Longley v Chief Executive, Department of Environment and Heritage Protection (‘Linc Energy’).^[2] This case involved liquidators disclaiming land that was subject to an environmental protection order (‘EPO’) issued by the Department of Environment and Heritage Protection (‘DEHP’). The liquidators approached the court to seek directions on whether they were to comply with the EPO. The effect of the disclaimer was a key issue, with the DEHP arguing that the environmental liabilities under the EPO would not be affected by the liquidators’ disclaimer. The argument of the DEHP relied on interpretation and application of s 5G(11) of the Corporations Act, which deals with the ‘roll back’ of the operation of the Act to the extent that any provision is inconsistent with state legislation. The court at first instance found in favour of the DEHP, stating that ‘liquidators are not justified in causing the company not to comply with the environmental protection order’.^[3] The Court of Appeal found that s 5G(11) did not apply. In spite of having found that the provision did not apply, the Court considered the application of s 5G(11) and rejected the argument of the DEHP that s 5G(11) has the effect of disapplication of the disclaimer provisions under the Corporations Act. The apparent acceptance of the validity of the disclaimer by the DEHP proved detrimental to their case, ultimately causing the Court to find that the disclaimed property vested in the state. Any environmental obligations in respect of the property were thus to be fulfilled by the state.

The Court of Appeal in Victoria was confronted with a similar type of issue in The Australian Sawmilling Company Pty Ltd (in liq) v Environment Protection Authority^[4] (‘TASCO’). At first instance,^[5] the Environmental Protection Authority (‘EPA’) in Victoria successfully applied to have a disclaimer notice set aside. The liquidators’ appeal against the judgment of the Court at first instance was unsuccessful. As a result, the state was able to avoid the property vesting in itself in a similar manner that occurred in Linc Energy. This raised the question of who was liable for the environmental clean-up costs.

Under environmental legislation in force at the time,^[6] the EPA was entitled to conduct clean-up under particular circumstances, and would then be able to recover any reasonable costs incurred in that way, from the ‘occupier’ of the premises.^[7] The definition of ‘occupier’ includes ‘a person who is in occupation or control of the premises, whether or not that person is the owner of the premises’.^[8] The EPA and the state argued that the liquidators were the ‘occupiers’ of the land, and therefore personally liable for the clean-up costs. The Victorian Supreme Court, at first instance and on appeal, agreed that liquidators are captured by the definition of ‘occupier’ in s 4(1) and that they could thus be personally liable for the clean-up costs.

It may initially appear alarming that liquidators may become personally liable for environmental clean-up costs in respect of property of a company in liquidation. However, it should be noted that a critical factor in this case was that the holding company of the company in liquidation provided the liquidators with an indemnity in an unlimited amount in respect of ‘environmental liabilities’. In fact, the order of the Supreme Court of Victoria setting aside the disclaimer was made subject to the EPA and the state providing an undertaking that the liability of the liquidators would be limited to the amount recovered under the indemnity. Even though liquidators were thus personally liable in principle, they were not required to cover the liability through use of personal assets. This was just one of many of the unique circumstances in this case, and it is difficult to predict the outcome of future cases involving disclaimer of onerous property subject to environmental obligations on the basis of this judgment.

Special leave to appeal to the High Court was denied, due the relevant environmental legislation having been repealed, and the Court being of the opinion that the application therefore did not raise an issue of significant public importance. Special leave to appeal to the High Court was also denied in Linc Energy. With the High Court thus not having settled the issue yet, the impact of constitutional law principles on the interaction between principles of insolvency law in respect of the liquidators’ right to disclaim and the principles of environmental law remains uncertain.

What is clear is the fact that relevant environmental legislation will be a key consideration in determining the effect of a disclaimer of onerous property, and that this could vary from jurisdiction to jurisdiction.

2.2 Environmental Obligations in Liquidation: Actions against Directors

The relevance of directors’ duties to issues of climate change has been mentioned previously. This aspect may also be relevant in the context of liquidation of an insolvent company.

Liquidators have an obligation to investigate the affairs of the insolvent company and to determine whether it is possible to increase the pool of assets available for distribution among the general body of unsecured creditors. One of the ways in which that could be achieved is by successful action against directors of the company for not having complied with their duties. Liquidators have statutory powers to bring or defend any legal proceeding in the name of or on behalf of the company.^[9] It is therefore possible for liquidators to pursue an action against delinquent directors on behalf of the company where directors’ failure to properly consider climate change issues may be seen as contravention of the good faith duty or of the duty to act with care and diligence. Successful action brought in this way may increase funds available for distribution among the general body of unsecured creditors.

2.3 Environmental Obligations in Corporate Restructuring

As mentioned previously, administrators and restructuring practitioners are ‘officers’ of the company and thus subject to statutory directors’ and officers’ duties. Similar to directors, these duties, particularly the duty of good faith and the duty of care and diligence, could potentially require administrators and restructuring practitioners to be cognisant of the company’s environmental obligations and to exercise their powers accordingly. However, context in this regard is critical, and there is a significant difference between the position of a director of a prosperous, profitable company and the administrator or restructuring practitioner of an insolvent company.

It has already been explained  that the duty of good faith could require directors of a company in financial distress to consider the interests of creditors, along with or rather than those of shareholders. Given that a company under administration or small business restructuring is insolvent, it is clear that the focus is on the interests of creditors rather than shareholders. The duty of good faith will thus not expect the same careful balancing between interests of shareholders and creditors from insolvency practitioners as it does from directors of companies in financial distress.

However, a question is whether the insolvency practitioner may also need to consider a broader range of interests, such as social and environmental considerations (including climate change), in terms of this duty. The importance of insolvency practitioners being alive to these issues may increase as policy shifts become more apparent. One may argue that there are already indications that this shift has started, when considering the case of Preston, re Qenos Pty Ltd (Administrators Appointed).^[10]

The case involved a group of companies which operated Australia’s largest plastics and chemical manufacturing business, and which was important to the continued production and supply of natural gas in south-east Australia. The administrators in this case were seeking directions from the Court in relation to the entry into of a $200 million facility agreement, for orders that the agreement was justified, specifically for the purpose of limiting their personal liability under statute.^[11] The facility would enable a managed slow down and winding up of operations, without significant environmental hazards and disruption of the natural gas supply to south-east Australia. The alternative would be to liquidate the companies and to disclaim their assets. The administrators argued that ‘the significant safety and environmental risks … were such that the “public interest weighs firmly in favour of the orders being made”’.^[12] The orders approving the entry into the facility agreement were granted and were non-controversial, as creditors would also benefit from this agreement.

However, an interesting aspect of this case is the statement from the Court, in the context of an insolvent company under administration, that a focus on creditors’ interests does not suggest that ‘administrators should take a course of action that is cavalier or reckless as to environmental hazards and risks … simply because it would be advantageous to unsecured creditors’. ^[13] This statement appears to point to the fact that interests other than those of just the creditors could and should be considered where the circumstances warrant — for example, in relation to environmental hazards and risks. This statement was not critical to the outcome but does indicate an interesting potential development.

The relevance of the directors’ duty of care and diligence in the context of climate change matters has been discussed , and this approach also applies in respect of administrators and restructuring practitioners in their capacity as company officers. That said, it is once again important to consider context, particularly as the statutory duty of care and diligence is framed to indicate that the standard of conduct that is expected will depend on the circumstances of the corporation^[14] and the particular office^[15] held by the person. Liquidity concerns in the insolvent company have the effect of amplifying the usual tension that exists between long-term sustainability goals and financial returns. The extent to which environmental factors are capable of being considered may thus look different when the focus is on trying to keep the company alive — it may mean that long-term sustainability goals are sacrificed as a result of the acute focus on short-term liquidity.

It is also necessary to consider how what is expected from the insolvency practitioner could vary, depending on the extent to which directors remain involved in the management of the business of the company. This would, of course, depend on whether the insolvency practitioner is acting as an administrator under voluntary administration, an administrator of a deed of company arrangement (‘DOCA’) or a small business restructuring practitioner, and the extent to which the particular appointment will result in them displacing the directors of the company.