Liquidators disclaimer power not fail-safe - Insolvency/Bankruptcy

This week's TGIF considers Linc Energy Ltd (in Liq) v Chief Executive Dept of Environment & Heritage Protection [2017] QSC 53, in which the Queensland Supreme Court directed that the liquidators of Linc Energy were not justified in causing it to fail to comply with an environmental protection order

BACKGROUND

On 13 May 2016, the Department of Environment & Heritage Protection (respondent) issued an environmental protection order (EPO) under the Environmental Protection Act 1994 (Qld) (EPA) to Linc Energy Ltd (Linc) whilst it was in administration. The EPO prohibited Linc from disposing of, and obliged Linc to maintain, the infrastructure on the site necessary to ensure compliance with the EPO. Liquidators were subsequently appointed to Linc.

On 30 June 2016, the liquidators gave notice under section 568(1) of the Corporations Act 2001 (Cth) (Act) disclaiming property which was subject to the EPO. The liquidators argued that the effect of the disclaimer was to terminate Linc's interest in, and liabilities in respect of, the disclaimed property and thereby discharged Linc's future compliance with the EPO.

ISSUES FOR CONSIDERATION

The liquidators applied for directions under section 511 of the Act that they were justified in not causing Linc to comply with the EPO. Central to their argument was that any liabilities arising under the EPA to comply with the EPO are inconsistent with the termination of that liability arising from the disclaimer scheme under the Act.

COURT'S DISCUSSION ON INCONSISTENCY BETWEEN ACTS

The liquidators argued that the Act prevailed over the EPA to the extent of any inconsistency.

Section 5G(3) of the Act provides that where a direct inconsistency exists between a provision of a State law and the Corporations legislation, the State law will apply only where the State provision operated, immediately before the Act commenced, despite the operation of the Corporations Law of the State (in force at that time).

The relevant law of the State is sections 358 and 361 of the EPA and the Corporations Law of the State is sections 568 and 568D of the Corporations Law of Queensland (as it then was prior to the enactment of the Act).

The respondent relied on section 9 of the Corporations (Ancillary Provisions) Act 2001 (Qld) (CAPA) under which any relevant law of the State that is inconsistent with a provision of a national scheme law has effect despite the provision of the national scheme law (i.e. the Act).

The relevant test to determine whether provisions are inconsistent is a question of whether the State law would "alter, impair or detract from the operation of the law of the Commonwealth Parliament", under section 109 of The Constitution.

The relevant provisions of the EPA oblige Linc to comply with the EPO (and create liability in the event of non-compliance) in respect of the disclaimed property in a way which would be directly inconsistent with the liquidators' power to terminate Linc's interest in and liabilities in respect of the disclaimed property under sections 568 and 568D. Accordingly, section 9(1) of the CAPA declares the provisions of the EPA to operate despite the provisions of the Act.

LIQUIDATORS AS EXECUTIVE OFFICERS UNDER EPA

The Court also noted that the liquidators were personally liable to see that Linc complies with the EPO, given they would be considered an "executive officer" of Linc under the EPA.

WERE THE LIQUIDATORS JUSTIFIED IN NOT CAUSING LINC TO COMPLY WITH OBLIGATIONS UNDER THE EPO?

The Court directed the liquidators were not justified in causing Linc not to comply with the EPO.

The relevant provisions of the EPA under which the EPO was issued had the effect of impairing the liquidators right to disclaim property under the Act.

CORRS COMMENT

The effect of this decision will see the costs of complying with an EPO ranking ahead of the typical priority claims under section 556 of the Act.

This case identifies a specific scenario in which the liquidators' power of disclaimer could not be used to avoid an environmental protection order. The Court has noted that the effect of this direction is confined to the specific set of facts and may not be helpful for other facts or provisions. However, liquidators will need to be mindful of any similar environmental protection orders or powers in the future to ensure that there is sufficient funding available to comply with these types of environmental obligations rather than rely upon their power to disclaim the relevant property.

A notice of appeal was filed on 10 May 2017, so watch this space.

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