Climate Change and Corporate Insolvency Law

Sulette Lombard

Australian insolvency law is divided into personal insolvency law, which deals with the insolvency of natural persons and partnerships, and corporate insolvency law, which deals with the insolvency of corporations. Personal insolvency is primarily regulated under the Bankruptcy Act 1966 (Cth), whereas corporate insolvency is regulated under the Corporations Act 2001 (Cth) (‘Corporations Act’). The focus of this chapter is on climate change and corporate insolvency law. The topic of climate change and personal insolvency law is dealt with under a separate chapter .

It is no doubt true that climate change and adverse weather conditions might cause or contribute to the insolvency of corporations. Sectors like farming, tourism, and hospitality could be particularly vulnerable in this regard. Other non-climate related adverse conditions may similarly cause or contribute to the insolvency of corporations. Principles of corporate insolvency law will apply to insolvent corporations in the same way, whether or not the cause of the insolvency is climate related. The purpose of this chapter is therefore not to describe the number of ways in which climate change could cause or contribute to corporate insolvency (the economic implications of climate change), but to consider the legal implications of climate change in the context of corporate insolvency.

Traditionally, the ‘fundamental purpose’ of insolvency law is ‘to provide a fair and orderly process with the financial affairs of insolvent individuals and companies’.^[1] This fair and orderly process emphasises the position and rights of creditors — in other words, private obligations. In the case of an insolvent company, it is clear that the company does not have sufficient assets to satisfy all the claims against it. Insolvency law recognises this and provides rules to facilitate a fair distribution to creditors when company funds are insufficient to pay every creditor in full. A key principle in this regard is the one of ‘pari passu’ distribution, which requires that all unsecured creditors should receive an equal proportionate amount of assets available for distribution.^[2] There are exceptions to this rule — for example, some unsecured claims, such as costs of administration, insolvency practitioner remuneration and employee claims, enjoy a statutory priority and will consequently be paid in advance of other unsecured claims.^[3]

As the impact of climate change becomes more apparent, there is increased interest in the issue of how insolvency law deals with public obligations, particularly environmental obligations and stranded assets. The ‘polluter pays principle’ demands that ‘the polluter should be charged with the cost of whatever pollution prevention and control measures are determined by the public authorities, whether preventive measures, restoration, or a combination of both’.^[4] In the context of a financially stable ‘polluter’ company it is clear that the company, as a separate legal entity, will be liable for these types of obligations and associated costs. However, an insolvent company may not have sufficient funds to meet these and other obligations. In that case the question becomes ‘Who should pay when the polluter cannot pay?’ Since insolvency law frameworks emphasise private obligations in the first instance, these frameworks are perhaps ill equipped in their current form to deal with questions of this nature. As a result, courts are often tasked with resolving these types of issues. Strictly speaking, unmet environmental obligations as such is not a ‘climate change’ issue. However, increased focus on the impacts of climate change may influence how the court approaches application of competing policy rationales in respect of environmental obligations of an insolvent polluter company where current principles of insolvency law do not always provide clear answers.

The issue of environmental obligations and stranded assets is not the only climate change matter relevant to insolvency law. A second question is whether insolvency law, and particularly its related restructuring mechanisms, could promote environmental sustainability objectives. A company in financial distress may enter a financial restructuring of its operations under pt 5.3A of the Corporations Act with a view to its survival.

This chapter will consider the impact of climate in relation to insolvency law in the context of two forms of external administration that could apply to insolvent corporations, namely liquidation and restructuring (either voluntary administration or small business restructuring). In a liquidation context the primary question revolves around liability or responsibility for unmet environmental obligations. In a restructuring context the focus is on the way in which insolvency law could indirectly promote environmental sustainability objectives, by way of general law and statutory officers’ duties that apply to administrators of companies.^[5]

This chapter will consider these questions with reference to the following three core insolvency law topics:

• the disclaimer of onerous assets;
• debts and distribution rules; and
• insolvency practitioner obligations.