Environmental obligations given priority over liquidators’ remuneration

In Linc Energy Ltd (in liq)¹(Linc Case), the Supreme Court of Queensland handed down a significant judgment regarding liquidators’ obligations to comply with Environmental Protection Orders (EPO), in priority to unsecured creditors and liquidators’ remuneration.

The Linc Case is significant because it raised untested questions of law regarding the scope of liquidators’ powers under the Corporations Act 2001 (Cth) (Corporations Act) and state law that imposes obligations on insolvent companies.

Background

Linc Energy Ltd (in liq) (Linc Energy) operated a coal gasification demonstration facility in Chinchilla, Queensland. The Department of Environment and Heritage Protection alleged that Linc Energy was responsible for contamination caused by the facility. On 13 May 2016, the Department of Environment & Heritage Protection, the respondent, issued an EPO pursuant to the Environmental Protection Act 1994 (Qld) (EP Act) to Linc Energy. The EPO was made whilst the company was under administration. Subsequently Linc Energy went into liquidation.

The EPO imposed numerous obligations on Linc Energy, including to conduct environmental monitoring and reporting, and prohibited Linc Energy from disposing of, and obliged Linc Energy to maintain the infrastructure, on the facility site.

Linc Energy gave a notice pursuant to section 568 of the Corporations Act disclaiming the Chinchilla land, the EPOs and the infrastructure on the land. Section 568 of the Corporations Act enables liquidators to relieve themselves of ongoing liabilities associated with property which prolongs the liquidation.²

The liquidators argued the disclaimer had the effect of terminating Linc Energy’s interest in and liabilities with respect to the disclaimed property and therefore discharged Linc Energy from their obligation to comply with the EPO.

The liquidators sought directions from the court under section 511 of the Corporations Act as to whether they were justified in not complying with the EPO because of the disclaimer.

Issues

The issue for determination was whether the disclaimer had the effect of discharging Linc Energy’s obligations under the EPO.

In order to answer this question, the court was required to determine:

1. The status of Queensland state law (the EP Act) that imposed obligations on insolvent companies that were inconsistent with commonwealth law (the Corporations Act); and
2. Whether the liquidators were executive officers for the purpose of the EP Act.

Decision

The court refused to grant the directions the liquidators sought, and held the liquidators were obliged to comply with the EPO, despite the disclaimer.  Further, the liquidators were executive officers for the purpose of the EP Act.

Inconsistent laws

The liquidators argued the Corporations Act prevailed over the EP Act to the extent of any inconsistency.

The court determined that the relevant provisions of the EP Act operated to cause a direct inconsistency with the liquidators’ powers to disclaim property pursuant to the Corporations Act.³

Through the operation of complex interactions between state and commonwealth law, and specifically section 9(1) of the Corporations (Ancillary Provisions) Act 2001 (Qld), which provides that state law operates despite the effect of any inconsistent commonwealth law, the court held that the EP Act took precedence over the Corporations Act. This meant the liquidators were unable to disclaim the property in order to terminate Linc Energy’s obligations under the EPO.⁴

Liquidators as executive officers

The court also had to determine whether the liquidators were executive officers for the purpose of the EP Act. The court held the liquidators were executive officers of Linc Energy because they were appointed as liquidators for the purpose of winding up the affairs and distributing the property of Linc Energy, which included carrying on the business of Linc Energy so far as was required for the beneficial disposal or winding up of Linc Energy.⁵

This meant the liquidators, as executive officers, were personally liable to ensure that Linc Energy complied with the EPO.

Lavan comment

The effect of the court’s decision meant the costs required to comply with the EPO ranked ahead of typical priority claims under section 556 of the Corporations Act, including liquidators’ remuneration and unsecured creditors. Further, the liquidators were personally liable and would commit a serious offence if they did not cause Linc Energy to comply with the EPO.

There are a number of important consequences that follow from this significant decision:

Obligations that insolvent companies have pursuant to state law may take precedence over liquidators’ power to disclaim property under the Corporations Act; and

The cost to comply with these obligations may take priority over liquidators’ remuneration and unsecured creditors.

Insolvency practitioners should consider the risks associated with accepting appointments over companies that have, or may have, substantial environmental obligations. Further, insolvency practitioners should consider whether a company has sufficient funds to comply with environmental obligations before accepting an appointment.