In brief
The courts were busy in the second half of 2021 with developments in the space where insolvency law and environmental law overlap.
In Victoria, the Court of Appeal has affirmed the potential for a liquidator to be personally liable, and for there to be a prospective ground to block the disclaimer of contaminated land, where the liquidator has the benefit of a third-party indemnity for environmental exposures.1
In the penultimate act in the Linc Energy prosecution saga, the Queensland Court of Appeal2 also clarified a key matter for the criminal responsibility of an executive officer. An exposure arises for executive officers when they are in that role at the time serious environmental harm eventuates. It then becomes a matter for a prospective defence to show that person could not influence the conduct of the company in relation to the occurrence of that harm. Cases in recent years have made it clear liquidators and receivers are executive officers.
Key takeaways
In Victoria:
- Liquidators can be “occupiers”. On the court’s logic so could other insolvency appointees. The Victorian Environmental Protection Authority can use its powers to recover its costs of cleaning up contamination from occupiers of polluted land. This can give the EPA indirect access to third party indemnities of liquidators or other insolvency appointees.
- Insolvency professionals, sensibly seeking to protect themselves with an indemnity before taking an appointment, could attract attention in doing so if there are unperformed environmental obligations of the company. It appears open to the Victorian EPA in these circumstances to block a liquidator’s disclaimer of the contaminated land, if the disclaimer would mean the EPA’s remediation costs cannot then be charged to the liquidator, and then claimed under that indemnity.
In Queensland:
- “Executive officer” has a functional definition, focusing on whether the person is concerned, or taking part, in the company’s management. Liquidators and receivers and likely also administrators, can fall under that definition. Executive officers may be exposed to deemed-liability offences if they are in that role when serious environmental harm occurs. They do not need to be in the role at the earlier time when the company caused the harm.
For insolvency appointees therefore, a potential exposure to an offence exists when harm first emerges during the period of their appointment. For the purposes of a defence, insolvency appointees would then need to show that they, as executive officers, took all reasonable steps to ensure the previous activities ultimately do not result in that environmental harm. Alternatively, they would need to show they could not influence the conduct of the company in relation to the occurrence of the harm.
In depth
What the Victorian Court of Appeal decided
The Victorian appeal court decision largely endorsed the reasoning of the trial judge. The liquidators of The Australian Sawmilling Co Pty Ltd’s (In Liquidation) attempted to disclaim contaminated land. They did so in the absence of funds to cover the costs of any remediation works, but with the benefit of an indemnity. The core conclusions in the case and their implications are set out in our alert about the earlier decision here.
In dismissing the appeal, the court went one step further than the trial judge. It found the ability of the Victorian EPA to charge a liquidator personally for the EPA’s costs to clean up the site, involved no “incurring” of expenses by the company or the liquidator. Under the Corporations Act 2001 (Cth) (Corporations Act), a liquidator need not take steps in a liquidation if those steps would require an “incurring” of further expense and there are no funds or assets to pay. But as there was no “incurring”, that statutory protection did not apply here. That being the case, no issue of constitutional inconsistency arose between the State environmental legislation and the Commonwealth corporations legislation over any “incurring” of an expense by the EPA’s actions.
In Victoria, this right of the EPA to on-charge its costs can be a powerful way to compel payment of remediation costs when a company enters liquidation. The EPA was careful to run its case in a way that did not leave a liquidator personally exposed without recourse to any funds. However the mechanism for the EPA to recover payment can operate through the personal liability of a liquidator.
The decision does not directly address the priority of payment of such costs, were there to in fact be funds in the liquidation. It does though suggest the possibility that they may not be given priority under sections 556(1)(a) or (dd) of the Corporations Act over other general unsecured creditors. Those provisions give priority to expenses “incurred” by the liquidator or other relevant insolvency appointees. The appeal decision suggests the EPA’s right to charge the liquidator as occupier means these costs are not “incurred”, potentially leaving them to be recovered pari passu after other priority expenses are met. Were that to be the case, and given the personal exposure of the liquidators, that outcome would be highly unsatisfactory.
What the Queensland Court of Appeal decided
In Queensland, the appeal arose out of the prosecution of executive officers of Linc Energy Ltd (Linc). Linc was alleged to have caused serious environmental harm in carrying out its now-defunct coal gasification project near Chinchilla, Queensland. The individuals prosecuted in this case were those in place as officers in the business during those activities. The case did not involve the subsequently appointed liquidators. The company was said to have committed the offence of wilfully and unlawfully causing serious environmental harm. The officers were prosecuted for deemed-liability offences under the Environmental Protection Act 1994 (Qld) (the Qld EP Act) flowing from Linc’s serious environmental harm.
Executive officers may be liable for offences of their companies (a “deemed-liability offence“) under the Qld EP Act:
If a corporation commits an offence against a provision of [the Qld EP Act], each of the executive officers of the corporation also commits an offence, namely, the offence of failing to ensure the corporation complies with [the Qld EP Act].
To defend a prosecution for the deemed-liability offence, the onus shifts to the officer to show:
- if they were in a position to influence the company at the time of the offence, that the officer took all reasonable steps to ensure the company complied with its obligations; or
- alternatively the officer was unable to influence the company’s conduct in relation to the offence.
The appeal raised the issue of whether individuals have to be executive officers when activities are carried out which only later cause any harm (the position taken by the prosecution), or whether they have to be officers at the time the harm subsequently eventuates (the position taken by the executive officers). The Court of Appeal agreed with the executive officers. In this prosecution, the relevant offence of the company was committed when the harm occurs. The consequential deemed-liability offence for the executive officers was committed when the company commits its offence. Therefore, its executive officers were exposed to committing this deemed-liability offence only when the harm occurs.
The deemed-liability offence did not require conduct by the officer such as planning, approving, or implementing any actions which ultimately led to the harm. Actually doing the activities causing the harm did not constitute the underlying offence. An officer who, for example, resigned before environmental harm emerged would therefore avoid exposure, as an executive officer, at least for the associated deemed-liability offence. (Other offences may still be committed by the person’s more direct and knowing involvement in those activities. Just the deemed-liability offence has no application.)
Whilst the case did not consider the position of insolvency appointees, it would appear to have implications for them. Strictly, on the reasoning of the case, a liquidator, receiver or administrator assuming control of a company which has historically engaged in conduct, and which results in harm finally emerging on her or his watch, has a potential exposure to a deemed-liability offence.
The Court of Appeal had no issue with the implications of its conclusion where the company’s wilful act occurred long before the resulting harm. Where the executive officer was appointed long after the time of activities ultimately causing the harm, the Court said the focus of the defence would need to be on:
- whether the executive officers took all reasonable steps to ensure that the prior activities (but occurring before their appointment) did not eventually cause harm; or
- whether they could simply not influence the conduct of the company in relation to the occurrence of the harm.
Receivers, liquidators and likely administrators, by reason of their role and status, would appear to have sufficient control of the company to exercise some influence. The onus would therefore appear to shift to their showing that they actually took steps after their appointment to stop the harm, or that no step they could have taken during their appointment would have done so.
This exposure exists in parallel to the ability to impose environmental protection orders, including under Queensland’s chain of responsibility laws explained here.
The case refocuses the disclaimer powers of a liquidator considered in previous decision, and explained in our previous alerts that can be accessed here and here.
The Victorian TASC decision also raises the need for careful consideration, including in Queensland, of the strategy for a restructuring or liquidation process around the obtaining a third party indemnity for a prospective insolvency appointee.
1 The Australian Sawmilling Co Pty Ltd (In Liq) and Ors v Environmental Protection Authority & Ors [2021] VSCA 294
2 R v Dumble & Ors [2021] QCA 161. The prosecution against the former officers was dropped in August 2021.
