Insights

In brief - Liability may not be limited to assets of company in liquidation

The recent decision of his Honour Justice Jackson of the Queensland Supreme Court in Longley & Ors as liquidators of Linc Energy Limited (In Liquidation) v Department of Environment and Heritage Protection [2017] QSC 53 raises significant issues of the interaction between the Corporations Act 2001 (Cth) and the Environmental Protection Act 1994 (Qld) (EPA), and contains some significant practical implications for liquidators, administrators and receivers. 

EPO issued to Linc Energy whose liquidators issue disclaimer under section 568(1) of Corporations Act

Linc Energy operated a pilot underground coal gasification project at Chinchilla in Queensland. The company was the proprietor of a parcel of land, and held a Mineral Development Licence (MDL) and a Petroleum Facility Licence (PFL) relating to its operation on the land. In association with the MDL and the PFL, the company held environmental authorities (EAs). 

On 15 April 2016, the applicant Liquidators were appointed as administrators to the company. On 13 May 2016, the Department of Environment and Heritage Protection (DEHP) issued an environmental protection order (EPO) to the company in administration as the recipient. On 23 May 2016, the company's creditors resolved that the company be wound up, and the former administrators were appointed as its liquidators. 

On 30 June 2016, the Liquidators issued a notice disclaiming the land, site infrastructure, MDL, PFL, and the EAs under section 568(1) of the Corporations Act. Following the disclaimer, the DEHP went into possession of the land and facilities. 

Does disclaimer discharge company from future compliance with EPO, or must liquidators cause company to comply?

The DEHP contended that, notwithstanding the disclaimer, the company is obliged to comply with the EPO and the Liquidators are obliged to ensure that the company complies with the EPO where there are funds available in the winding up to do so. 

In one of those typically convoluted applications arising from the Corporations Act, the Liquidators applied to the Court for directions that they would be justified in: 
  • not causing the company to comply with the EPO, and 
  • not causing the company to comply with any further EPOs issued by the DEHP 
The central question in the dispute was whether the disclaimer had the effect of discharging the company from future compliance with any obligations under the EPO and, if not, whether the liquidators are bound to cause the company to comply. 

Validity of disclaimer and EPO

There was no significant dispute that the Liquidators' right to disclaim onerous property could be exercised in the context of the land, MDL, PFL and various items of infrastructure situated on the land. There was significant dispute about whether the EAs are property that could be the subject of a disclaimer. Ultimately, his Honour found that he was not required to determine whether the EAs are in fact property because the EPO clearly related to the land and site infrastructure, and due to his findings regarding the basis for the EPO. 

His Honour found that the EPO was issued to secure compliance with the general environmental duty under the EPA.

This left a clear inconsistency between the ability of a liquidator to disclaim onerous property under the Corporations Act on the one hand, and the effect of an EPO issued under the EPA on the other, where powers under both appear to have been validly exercised. What, then, is the effect of the disclaimer of the property the subject of the EPO?

Statutory inconsistency does not invalidate relevant EPA provisions

After lengthy exposition of interest mainly to lovers of constitutional law, his Honour found that the relevant legislative provisions dealing with inconsistencies between commonwealth and Queensland laws did not operate to invalidate the relevant provisions of the EPA. It is worth noting that both parties advanced arguments that their particular interpretation of the relevant provisions served the public purpose of the legislation, but his Honour declined the opportunity to prefer one public purpose over another. 

The outcome of his Honour's reasoning was that the company was not absolved of the obligation to comply with the terms of the EPO by reason of the Liquidators' notice of disclaimer. His Honour then moved to consider the terms of section 493 of the EPA which requires "executive officers" of a corporation to ensure that the corporation complies with the EPA. 

His Honour was not minded to accept the Liquidators' submissions that the essential nature of a liquidation is that liquidators are not concerned with or take part in the corporation's management, and accordingly found that Liquidators are executive officers under the EPA. Executive officers commit an offence if they fail to ensure that a corporation complies with the EPA. 

Liquidators should consider the principles which can be drawn from Linc Energy case

As this was an application for directions on specific factual grounds, the orders made by his Honour were limited to refusing the directions sought. He specifically did not decide whether EAs are disclaimer property, nor whether the conclusions that he reached would apply to EPOs issued under another ground. 

However, some distinct principles can be drawn from the judgment:
  1. Where an EPO is issued to a company to secure compliance with the general environmental duty under section 319 of the EPA, liquidators will not be able to avoid the company's obligation to comply with the EPO by disclaiming the land or infrastructure to which the EPO relates. In this case, the EPO was issued prior to the disclaimer, but his Honour's reasoning implies that the relevant timing of the disclaimer and the issuance of the EPO are irrelevant. 
  2.  As liquidators are executive officers for the purposes of the EPA, the liquidators are obliged to ensure that the company complies with the EPO. 
  3. The liquidators' costs of doing so are expenses of the liquidation ranking in priority to the claims of other creditors of the company under section 556 of the Corporations Act

Continuing uncertainty for liquidators, administrators and receivers

While this case was specifically about a company in liquidation, and whether a liquidator is an executive officer, his Honour's reasoning regarding the liability of a liquidator would appear to also apply to administrators, and to receivers of the whole of a company's assets.

By agreement between the parties in this case, any obligation of the liquidator to cause the company to comply with the EPO was limited to the assets of the company. This is a commendable approach by the DEHP, as the potential ramifications of a liquidator having unlimited personal liability under any EPO issued to the company prior to or after the liquidation would most likely lead to a refusal of insolvency practitioners to consent to accepting an appointment to any company with any exposure to environmental harm.

As it is, the priority afforded to the costs and expenses of complying with an EPO must give any insolvency practitioner pause in similar circumstances, as the result of being issued with an EPO could be that those costs would rank in priority to their remuneration, including remuneration incurred in undertaking the work required by compliance with the EPO.

Due to the parties' agreement, the extent of liquidators' personal liability is untested. Nothing in the reasoning of and conclusions reached in this decision imply that a court would limit that liability to the assets of the company. 

There are general principles that liquidators are not required to undertake any actions in a liquidation where there are insufficient funds, but whether those principles could apply where a failure to cause the company to comply is an offence is a fascinating, if potentially terrifying, question for liquidators contemplating the liquidation of mining companies and others involved in potentially environmentally damaging industries.

This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal advice. Please seek your own legal advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.​

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