Linc Energy – High Court refuses special leave to Qld State Government

Articles Written by David Proudman (Partner), Dougal Ross (Partner)

The High Court has refused to grant the Queensland State Government (Qld Government) special leave to appeal the Queensland Court of Appeal’s March 2018 decision in favour of the liquidators of Linc Energy, concerning the liquidators’ obligations to cause Linc Energy to comply with an Environmental Protection Order (EPO).

Given the important implications of the issues in dispute, particularly regarding resolution of the apparent inconsistencies between State environmental laws and the Federal winding up provisions, the decision of the High Court to refuse a full hearing was surprising to many.  However, as explained below, due to an issue relating to the legislative grounds (originally) relied upon by the Qld Government in seeking enforcement of Linc Energy’s environmental obligations, the High Court did not consider the case was an appropriate vehicle for the High Court to examine the more significant inconsistency issues.    

JWS acted for the liquidators of Linc Energy (Grant Sparks, Stephen Longley and Martin Ford from PwC) in the proceedings.

Background

The case, which has been before the Courts since late 2016, concerned the environmental liabilities arising from Linc Energy’s operation of an underground coal gasification (UCG) test facility at Chinchilla in Queensland. 

In April 2016, administrators were appointed to Linc Energy. In May 2016, the Queensland Department of Environment and Heritage Protection (DEHP) (now called the Department of Environment and Science), issued an EPO to Linc Energy, pursuant to the relevant provisions of the Environmental Protection Act 1994 (Qld) (EPA).  The EPO was expressly issued to secure compliance by Linc Energy with its “general environmental duty” under section 319(1) of the EPA.  The EPO required ongoing monitoring and testing to be carried out in relation to the contamination caused by the UCG facility at Chinchilla.

Linc Energy’s creditors resolved to wind the company up in late May 2016.  On 30 June 2016, the liquidators disclaimed the Chinchilla land and related property (including the relevant mining licences, plant and equipment) (Disclaimer) under section 568(1) of the Corporations Act 2001 (Cth) (Corporations Act).     

The liquidators sought directions from the Supreme Court of Queensland that, in light of the Disclaimer, they were justified in not causing Linc Energy to comply with the EPO (and therefore not incur the ongoing costs of doing so).  In particular, the liquidators relied on section 568D of the Corporations Act, which has the effect of terminating all liabilities of a company “in respect of” property disclaimed under section 568(1).  It is an offence under the EPA for a company not to comply with an EPO, and indeed for executive officers (including liquidators) of the company who fail to ensure the company complies.  Therefore, whether compliance with the EPO was required by the liquidators was certainly an appropriate issue for Court direction.

The DEHP, joined subsequently by the Queensland Attorney-General (Qld A-G), argued against the directions sought by the liquidators, taking the view that the Disclaimer did not terminate Linc Energy’s environmental liabilities under the EPO (and therefore the liquidators’ obligations to cause Linc Energy to satisfy those liabilities remained).

The liquidators were unsuccessful at first instance before Jackson J in the Supreme Court. However, this decision was unanimously overturned by the Court of Appeal in March 2018. The DEHP and Qld A-G then applied to the High Court for special leave to appeal.

Key Issues

The key issues in the case, through the initial Supreme Court application, the Court of Appeal proceedings and the special leave applications included the following:

  1. whether the environmental liabilities arising under the EPO were “in respect of” the disclaimed land and mining licences;
  2. if so, whether the Disclaimer had the effect of terminating Linc Energy’s liabilities under the EPO (and therefore the related obligations of liquidators as executive officers); and
  3. the application of section 5G(11) of the Corporations Act upon the inconsistency between the State and Federal legislation (i.e. the EPO provisions -v- the disclaimer provisions).

Under section 109 of The Constitution, Commonwealth laws take precedence over State laws in the event of an inconsistency.  However, section 5G of the Corporations Act essentially serves to reverse that usual outcome where the relevant State laws existed prior to the commencement of the Corporations Act.  The High Court had not conclusively considered this issue in previous cases, although similar issues were raised (but not determined) in the Bell Group litigation. 

The Court of Appeal had found in the liquidators’ favour on this issue, ruling that section 5G(11) could not operate on the Disclaimer so as to dis-apply the operation of section 568D of the Corporations Act and thereby prevent the termination of the liabilities under the EPO.

Relevant to the Court of Appeal’s determination of the matter was that the Qld Government had admitted the Disclaimer (but not the termination of the liabilities) and had taken over control of the Chinchilla property from the liquidators following the Disclaimer.

Special Leave Refused

Having regard to the various interesting and unresolved (at least by the High Court) legal issues in the case, many expected the High Court to grant special leave to appeal to the Qld Government.  However, special leave was refused.  This refusal was essentially based on a technical legal issue, specific to the EPO the subject of the case.

The EPO was issued by the DEHP on the single and express ground that it was for the purpose of securing compliance by Linc Energy with its “general environmental duty” under section 319(1) of the EPA.  The general environmental duty applies to a person who is carrying out an activity that causes, or is likely to cause, environmental harm. It requires the person to whom it applies to take all reasonable and practicable measures to prevent or minimise the harm. The High Court expressed doubt as to whether it was possible to enforce the EPO in circumstances where the environmental damage had already been caused by Linc Energy and the relevant activity which is said to have caused the damage was no longer being carried out by Linc Energy (or the liquidators).  Further, as the Disclaimer had been accepted as valid by the Qld Government and the Chinchilla property had been under government control since July 2016, Linc Energy was not carrying out (and could not carry out) the relevant activity to which the general environmental duty could attach.

The High Court considered that the Qld Government did not have strong enough prospects of overcoming this issue, and if not overcome then the more significant issues in the case would not need to be determined.  Therefore, the High Court did not consider the case to be an appropriate vehicle to examine the important issues surrounding the application of section 5G of the Corporations Act upon the interaction between the EPO provisions (of the EPA) and the disclaimer provisions (of the Corporations Act).

Implications

The implications for this case loomed large for various stakeholders, including insolvency practitioners, creditors and State and Federal governments.

In the event that the High Court had found for the Qld Government (consistent with the original Supreme Court decision), the likely effect would have been to elevate a liquidator’s costs of compliance with environmental liabilities under an EPO above the liquidator’s own remuneration, employee entitlements and other unsecured creditors.  

Such an outcome may have been welcomed by State governments (which may otherwise have to foot the bill for relevant environmental costs in insolvencies) and environmental groups. However, that outcome would also have undoubtedly introduced significant uncertainties both for the recovery of secured and unsecured debts and for the winding up process of a company with material environmental liabilities. In those circumstances, access to credit/finance for those companies would also be questionable.

The Court of Appeal’s March 2018 decision on these issues, and in particular the application of section 5G, now remains the highest level judicial authority to be relied upon by liquidators faced with similar environmental liabilities.  However, there is little doubt that these issues will be tested before the High Court in due course.

Until the High Court has settled these issues, insolvency practitioners should remain cautious when taking appointments to companies with potentially significant environmental liabilities.  The usual due diligence conducted by insolvency practitioners pre-appointment should carefully address environmental matters.  In Linc Energy’s case, the relevant liabilities were only avoided because of a disclaimer of the relevant assets.  Disclaimer may not always be available or applicable to the relevant liabilities.  For example, the company in liquidation may continue to have a remediation liability (but not the relevant land/asset to disclaim) and, of course, the disclaimer process is not available to administrators or receivers.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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