Reclaiming the Disclaimer: Queensland Court of Appeal confirms far reaching consequences of the disclaimer provisions

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By Ariel Borland, Partner and Jennifer O’Farrell, Senior Associate

Introduction

In Longley v Chief Executive, Department of Environment and Heritage Protection [2018] QCA 32, the Queensland Court of Appeal reversed a decision of the Supreme Court of Queensland, in which the Court found liquidators were bound to cause a company to comply with an environmental protection order, notwithstanding the relevant property which related to the order had been disclaimed.  That decision was highly controversial in the insolvency industry, as it placed obligations on liquidators to comply with onerous EPOs, notwithstanding they may not have been in a position to do so practically or financially.

The industry will welcome the Court of Appeal’s decision, which confirms the far reaching effects of a disclaimer.  However, liquidators should be aware that the effect of a disclaimer may still vary in each case.

Facts

Linc Energy Limited (in liq) (Linc) operated a pilot underground coal gasification project near Chinchilla.  The project was operated under licenses and environmental authorities granted under Queensland legislation.  On 15 April 2016, administrators were appointed to the Company.  On 13 May 2016 the Chief Executive of the Queensland Department of Environment (Chief Executive) issued an environmental protection order (EPO) to Linc under the Environmental Protection Act 1994 (Qld) (EPA) which required Linc to comply with a ‘general environmental duty’ to take ‘all reasonable and practicable measures to prevent or minimise’ environmental harm.

On 23 May 2016, the administrators were appointed as liquidators (Liquidators) to Linc, following the second creditors’ meeting.  On 30 June 2016, the Liquidators gave notice disclaiming the land, the licences and the authorities pursuant to which the project took place.  The Liquidators contended that Linc no longer needed to comply with the EPO, because the EPO imposed ‘liabilities… in respect of the disclaimer property’, and section 568D of the Corporations Act 2001 (Cth) (Act) notes that such liabilities are taken to have terminated from the date that the disclaimer takes effect (in this case, a day after the notice was given, so 1 July 2016).

The Chief Executive contended that Linc remained bound by the EPO, notwithstanding the disclaimer.  The Liquidators sought directions as to their and Linc’s obligations under the EPO.

Decision

The primary judge held that there was inconsistency between the disclaimer provisions of the Act and the provisions of the EPA.  However, this was not a case where Commonwealth legislation would prevail over State legislation (as would ordinarily be the case under section 109 of the Constitution).  Rather, section 5G of the Act would ‘roll back’ the effect of the disclaimer provisions to resolve the inconsistency, such that Linc remained bound by the EPO.  The Liquidators appealed that decision.

All three judges of the Queensland Court of Appeal found in favour of the Liquidators. The Court noted that the ‘general environmental duty’ imposed by the EPO applies in respect of activities conducted by the recipient (Linc).  It does not require a recipient of an EPO to remedy past environmental harm.  Once the Liquidators disclaimed the property, Linc no longer had any ‘rights, interests, liabilities and property in or in respect of the disclaimer property’ under section 538D of the Act.  So, Linc could no longer carry out the project and the activities with or on the property.  Because the activities could no longer take place, the concomitant obligation to comply with the EPO and the general environmental duty also ceased.

The Court also found that section 5G of the Act did not apply.  Section 5G sits in Part 1.1A of the Act.  The purpose of that part was to prevent Commonwealth (ie, the Act) encroaching on State laws, in circumstances where the States had referred the power to enact the Act to the Commonwealth Parliament.  However, McMurdo JA said that because the disclaimer would cause a company to ‘lose all of its rights and interests in or in respect of the property’ it would be an ‘absurd operation of law’ if Linc were to remained burdened by the EPO. As a matter of construction, section 5G cannot displace the effect of section 568D. His Honour also noted the difficulty if s 5G were to disapply the disclaimer provisions of the Act in Queensland under this section, but the disclaimer provisions would nonetheless continue to apply in other States.

Outcomes

As this decision is important and has far reaching implications, the Chief Executive or the State of Queensland may appeal the decision to the High Court, in which case the following is subject to the outcome of that appeal.  However, the outcome is obviously a good one for liquidators, who are often appointed to businesses which operate in industries heavily regulated by various State laws.  In this regard, the decision at first instance (now reversed) caused considerable alarm in the industry.  When considering whether to disclaim onerous or burdensome property, liquidators should consider all of the circumstances, including the regulations which affect that property and the activities which take place on it.

The question in every case will be whether the relevant regulations impose liabilities in respect of the disclaimed property.  In the decision, the McMurdo JA stated that the ‘requirements of an EPO will not have the requisite connection with property [for the purposes of the disclaimer provisions]… in every case’.  However, if the liabilities are in respect of the disclaimed property, they will terminate when the disclaimer takes effect.

If you are considering disclaiming property burdened by onerous regulations, you should seek advice as to those which will be released upon a disclaimer.  It is foreseeable that some obligations may remain, depending on the terms of and the type of regulation and the property disclaimed.  In circumstances where it is unclear, it may be necessary to seek the Court’s direction as the Liquidators of Linc did.

For further information, please do not hesitate to contact us.

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