Let's start with a scenario – you contract with a 'rogue' to buy Australian Carbon Credit Units (ACCUs). Before instructing the regulator to transfer the units into your name, they flee the jurisdiction. What do you do? In other words, what happens if a contract is entered into for the sale and transfer of ACCUs, but the requirements of the legislation aren't fulfilled and (legal) title doesn't pass?
An order for damages won't do much against a fleeing rogue – it is property in the ACCU that the purchaser wants.
The ACCU regime, under the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (the CFI Act), outlines the specific requirements which must be met in order for title to ACCUs to pass at law. Consequently, the purchaser's recourse in the above scenario is more than merely a matter of alleging that "I bought what they sold".
Characteristics of the ACCU regime
As mentioned in Fuelling carbon reduction in Australia, the transfer of ACCUs is governed by the CFI Act. The Clean Energy Regulator (CER) is the body which oversees the ACCU regime.
By way of comparison, ACCUs are somewhat similar in nature to shares, at least insofar as they both represent a personal property right in an intangible object. Such an understanding is supported by the defining of ACCUs as 'investment instruments' under the Personal Property Securities Act 2009 (Cth).
The legal ownership of ACCUs is determined by consulting the Australian National Registry of Emissions Units (ANREU). The person registered on the ANREU is, for all intents and purposes, the legal owner of an ACCU.
Under the CFI Act, there are two mechanisms for the transfer of ACCUs.
The first is 'transmission by assignment', which requires:
- the vendor to instruct the CER to transfer the ACCU
- the CER to comply with that instruction.
Therefore, until the instruction is complied with by the CER, there has not been a transfer of the ACCU at law.
The second is 'transmission by operation of law', which is defined as being where an ACCU is transmitted by any lawful means that isn't assignment. In other words, there must be a "legal requirement for the transfer" of those ACCUs, arising independently of any agreement to assign.
Like transmission by assignment, a transmission by operation of law will not have legal effect until the CER moves the ACCU from one account to another. In order to compel the CER to make a transfer under this mechanism, the purchaser must provide:
- a 'declaration of transmission'
- the relevant evidence of transmission, being a certified copy of the document(s) showing the legal basis for the transfer, including for example a court order or arbitration award. Further examples include a requirement to transfer under the Bankruptcy Act 1966 (Cth), Chapter 5 of the Corporations Act 2001 (Cth), the Proceeds of Crime Act 2002 (Cth) or the law relating to wills and intestacy.
Dealing with these characteristics
As is evident from the characteristics of the ACCU regime, the hypothetical purchaser of ACCUs is left in a precarious position where their legal title to the asset, for which they've paid valuable consideration, is contingent on the actions of the vendor and regulator.
To make up for this shortfall (at least in part), the CFI Act allows for the creation, dealing with and enforcement of equitable interests over ACCUs. One way an equitable interest over ACCUs may arise in our 'rogue' scenario is by what is known as equitable assignment.
As the Western Australian Court of Appeal explained in Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd [2012] WASCA 216:
"an agreement for value to immediately assign... that does not comply with... [the relevant requirements at law] will, if the consideration is executed, constitute an equitable assignment... [This] flow[s] from the application of the maxim that equity regards as done that which ought to be done".
The result of such an assignment is to create an equitable (as opposed to legal) interest in the ACCUs, held by the purchaser.
Enforcement
To vindicate their equitable interest, an ACCU purchaser may be required to bring an action naming the rogue entity as defendant, either in court or, where the parties have so agreed, by way of arbitration. Where successful, the aggrieved purchaser could then submit a certified copy of the court or arbitral tribunal's award to the CER, pursuant to the provisions of the CFI Act which allow for transmission of ACCUs by operation of law. Relevantly, this must be done within 90 days and must comply with the formalities set out in the Carbon Credits (Carbon Farming Initiative) Rule 2015. Only once the CER has complied with this request will the ACCU purchaser hold legal title to the promised ACCUs.
How to proactively protect your interest
To sure up their interest in purchased ACCUs, parties may wish to insist upon the inclusion of certain contractual protections in their ACCU dealings, such as:
- a clause deeming all purchased ACCUs to be held on trust for the purchaser
- a clause assigning the beneficial interest in the ACCUs to the purchaser
- an obligation on the vendor to transfer the ACCUs to the purchaser within a certain period of time, this obligation being inclusive of all the steps involved in a transfer as that term is understood in s 151 of the CFI Act.
Takeaways
Because of the way title passes under the CFI Act, parties must be clear about properly protecting their interests when transacting with ACCUs.
If you are involved in the trading of ACCUs and would like assistance in protecting your interests, please get in touch with Geoff Farnsworth from our Transport, Shipping and Logistics.
In next article in our ACCU series, we will look at the start of a transaction and discuss appropriate ways to structure an arrangement for the sale and purchase of ACCUs.
What's next?
We note that the at the time of writing, the CER and the Australian Securities Exchange (ASX) are working together to establish a centralised exchange for the purchase and sale of carbon units, known as the Australian Carbon Exchange (ACE), and which is expected to be online by mid-2025.
As part of the introduction of the ACE, a new 'Unit & Certificate Register' (U&CR) will replace the ANREU, which the writers expect will operate in a similar manner to the ASX's electronic subregister for shares in listed companies.
The introduction of the U&CR will mandate re-examination of the issues raised in this article, at least insofar as the transfer of title in ACCUs is concerned.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.