Linc Energy convicted of causing serious environmental harm but avoids liability under Environmental Protection Order

On 9 April 2018 Linc Energy Ltd (in liquidation) was convicted of causing serious environmental harm at its pilot underground coal gasification facility near Chinchilla, Queensland.

Administrators were appointed to the company on 15 April 2016. On 23 May they were appointed liquidators after creditors resolved that the company be wound up.

The liquidators did not defend the charges brought against the company by the Department of Environment and Heritage Protection (now the Department of Environment and Science (DES)), consequently the conviction is unsurprising. The DES is now expected to pursue a number of executive officers (as defined in the Environmental Protection Act 1994 (EPA)) for offences under section 493 of the EPA (executive officer liability provisions).

Of more interest than the uncontested conviction is the liquidators’ successful disclaimer of property under section 568 of the Corporations Act 2011 (Cth)(CA). On 9 March 2018, the Queensland Court of Appeal found that this had the effect of terminating the company's liability to comply with an Environmental Protection Order (EPO) issued to the Company on 13 May 2016 by the DES.[1]

While this is a decision of the Queensland Court of Appeal, the decision will be of interest to liquidators operating in various Australian jurisdictions where environmental laws allow regulators (through various means) to require works to be done to remediate contamination or to undertake other measures in connection with suspected contamination.

The DES is seeking leave to appeal to the High Court.

The Linc plant and the EPO

Linc originally commenced a pilot underground coal gasification project with Queensland State Government approval (and originally, participation), on a large site near Chinchilla.

The coal gasification process involves igniting coal in what are called underground gasifiers and converting the gas into liquid fuel in an aboveground conversion plant. The process involves applying pressure to the gasifiers within certain limits. Linc was alleged to have caused contaminants from the gasifiers to spread beyond the gasifiers in ways not authorised by the site’s Environmental Authorities issued under the EPA.

Linc held a number of mining and petroleum tenements in respect of the site under the Mineral Resources Act 1989 (Qld) and the Petroleum and Gas (Production and Safety) Act 2004 (Qld). These included a Mineral Development Licence (MDL) and Petroleum Facility Licence (PFL). Linc also held environmental authorities issued under the EPA associated with those resource tenures.

The EPO issued by the then Department of Environment and Heritage Protection (now DES) to Linc required it to comply with the general environmental duty under section 319 of the EPA. Section 319 requires that all reasonable and practicable measures be taken in connection with an activity to prevent or minimise risk of environmental harm.

Specifically, the EPO required certain things to be done including sampling and monitoring of gas and groundwater and maintenance of certain infrastructure which might be required for future remediation. The EPO did not specifically require remediation but the possibility of a further EPO requiring remediation was alluded to by the DES during the proceedings.

On 30 June 2016, the liquidators gave notice, disclaiming the land on which the pilot plant was being conducted, the MDL and the PFL and the Environmental Authorities Linc held for the site. The liquidators then sought directions under section 511 of the CA to the effect that, having so disclaimed, they would be justified in not causing Linc to comply with the EPO.

The Primary Decision

The liquidators sought a judicial direction that they were justified in not causing Linc to comply with the EPO, or any other environmental protections orders that might be issued. The Chief Executive of DES was the respondent.

Before the primary judge (Jackson. J), the Chief Executive conceded that the liquidators had validly disclaimed the land (including equipment) and the MDL. The PFL had by this time expired and was no longer relevant. The Chief Executive contended that the environmental authorities were not property capable of being disclaimed. The primary judge determined that Linc’s obligations under the EPO continued. This decision hinged on the application of section 5G of the CA operating to favour the application of the provisions of the EPA in the face of inconsistencies between Commonwealth and State law. Section 5G operates to avoid inconsistencies where they may arise between the CA and State laws.

Specifically, the primary judge held that a direct inconsistency exists between sections 568 and 568D of the CA and sections 319 and 358 of the EPA. Application of sections 568 and 568D of the CA would terminate the obligations of Linc and the liquidators under the EPO, however application of sections 319 and 358 of the EPA would oblige Linc to comply with the EPO (and require the liquidators to make efforts to ensure compliance). The primary judge determined that section 5G(11) applied, which section stipulates that a provision of the Corporations legislation does not apply in a State or Territory to the extent necessary to ensure that no inconsistency arises between the provision of Corporations legislation and the provision of State and Territory laws which would otherwise be inconsistent.

The primary judge held that application of the EPA would be preferred over the CA, and that Linc’s compliance with the EPO (and the liquidator’s obligation to cause Linc’s compliance) remained.

The Appeal

The liquidators (appellants) argued on appeal that the acceptance of the disclaimer, which was pursuant to sections 568 and 568D of the CA, meant that section 568 should operate accordingly, and that no consideration of section 5G was necessary.

In the event that it was necessary to consider section 5G, the appellants relied on the considerations of Barrett J in HIH Casualty and General Insurance Ltd (in liq) v Building Insurers’ Guarantee Corporation (2003) 202 ALR 610 (HIH). Barrett J considered that section 5G(11) could not be applied because of the interpretation of the term ‘in a State or Territory’ which suggests that the exclusion should be applied only where the implementation of the CA provisions takes on a character specific to a State or Territory.

Before the Court of Appeal, the respondents (DEHP, now DES), attempted to rely on section 5G(8) of the CA, which states that the provisions of Chapter 5 of the CA, which incorporates sections 568 and 568D, do not apply to the extent to which a winding up is carried out in accordance with a provision of a law of a State or Territory. The appellant countered that the relevant State law, being the EPA, is not a law providing for winding up, and is not a law under which the winding up of Linc was being carried out.

The following issues were considered by the court:

1. The relevance of the stated ground of the EPO;
2. Whether Linc’s obligation to comply with the EPO should be characterised as a liability in respect of disclaimed property; and
3. Whether section 5G of the CA could be applied to preference the application of the EPA over the CA.

The relevance of the stated ground of the EPO

The only stated ground of the EPO was to secure compliance by Linc with the general environmental duty. The EPO set out the facts and circumstances for the EPO, and outlined the obligations imposed on Linc by the EPO. Each requirement of the EPO required Linc to be on the site. Further, the EPO’s stated purpose was to oblige Linc to comply with the general environmental duty, which duty is discharged only in the course of carrying out an activity. The EPO did not oblige Linc to carry on any relevant activity. The subject activity had ceased, and the State had taken control of the site.

Whether Linc’s obligation to comply with the EPO should be characterised as a liability in respect of disclaimed property

That the land, equipment and MDL were disclaimed was not in contention. For clarity, section 568 of the CA gives a liquidator the ability to disclaim property. Section 568(1)(d) provides that a liquidator may at any time, on the company’s behalf, disclaim property of the company that consists of property that may give rise to a liability to pay money or some other onerous obligation. For the purposes of the CA, property is defined as any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action. Section 568D provides that a disclaimer is taken to have terminated, from the day that it takes effect, the company’s rights, interests, liabilities and property in or in respect of the disclaimer property, but does not affect any other person’s rights or liabilities except so far as necessary in order to release the company and its property from liability.

A disclaimer terminates those liabilities which are ‘in respect of’ the disclaimer property. The respondents argued that the liabilities imposed by the EPO were independent of property owned by Linc. On appeal, it was determined that the relevant question was whether the requirements of the EPO in question imposed liability in respect of disclaimed property. By virtue of the fact that the EPO was issued specifically in respect of activities engaged in by Linc in accordance with the MDL (and the now irrelevant PFL), and as the land and MDL are accepted as having been disclaimed, Linc no longer had authority or ability to engage in the activities to which the EPO applied. The disclaimer, having been accepted by the Chief Executive, terminated Linc’s rights and obligations to carry out activity on the land, rendering them incapable of discharging the general environmental duty, which requires the carrying out of activity.

Whether section 5G of the CA could be applied to preference the application of the EPA over the CA

In respect of the arguments related to section 5G of the CA it was found that the acceptance of the validity of the appellants disclaimer in accordance with section 568, affecting Linc’s rights and interest in the property, necessarily gives effect to section 568D which affects Linc’s liabilities in respect of the property. To give effect to section 568 but to disapply section 568D would mean that Linc would have no right or interest in the disclaimed property, but would still have liabilities with respect to the disclaimed property in relation to the EPO. The court held that this could not be an outcome intended by the Commonwealth Parliament in relation to the application of section 5G. In this respect the primary judge was found to have erred in failing to recognise the impact of the respondents’ admission of the validity of the disclaimer. The court agreed with the appellant’s arguments in respect of section 5G(8)

Having determined that section 5G was not applicable, the only question remaining for the court to determine was whether the requirements of the EPO imposed liabilities in respect of disclaimed property. As this was found to be the case, the court could only conclude that those liabilities had been terminated.

Implications for liquidators

This case provides useful guidance for liquidators in determining whether obligations under an EPO (and possibly similar regulatory instruments in other jurisdictions), amount to liabilities ‘in respect of’ validly disclaimed property.

The outcome of the appeal confirms that in determining their obligations under a previously existing EPO, liquidators may have regard to the subject matter of the EPO and the relationship between the stated grounds of the EPO and any disclaimed property.

Subject to the outcome of the High Court appeal, where validly disclaimed property is the subject of the EPO, specifically where relinquishing rights to licences or authorities disables the company in liquidation from carrying out the activities which are the subject of the EPO on land the subject of the EPO, the company’s obligations to comply with the EPO are terminated with the disclaimer.

This is the case unless an EPO specifically requires the company to continue to carry out the activities prescribed under the licences or other authorities or tenures, in a circumstance where those licences, authorities or tenures are not validly disclaimed.