The government in the Australian state of Queensland could have to spend millions of dollars of taxpayers’ money on environmental liabilities of contaminated sites and has decided to change the law to stop that from happening in the future.
New so-called chain of responsibility rules shift the onus for environmental clean-ups from taxpayers to decision makers. Directors, holding companies, landowners and financiers in sensitive sectors, such as mining and natural resources extraction, should be aware of their legal risks and liabilities. Other states in Australia are watching closely to see how the law is applied in Queensland and may introduce their own versions.
The chain of responsibility laws came into force at the end of January and how the government proceeds with implementation is being watched carefully. With these new rules, Queensland’s Department of Environment and Heritage Protection (EHP) can issue an environmental protection order (EPO) to a “related person” who has a relevant connection with the company. A relevant connection is created where a person has received a significant financial benefit from a company’s activities, or is in a position to influence the company’s compliance with the Act.
Businesses in liquidation, especially those in the natural resources sector, have resulted in Queensland taxpayers footing the bill for environmental remediation of contaminated sites. Cases such as the Queensland Nickel Yabalu mine and Linc Energy’s Chinchilla underground coal gasification plant have left behind unfunded environmental liabilities, which could leave taxpayers exposed, some politicians in the state say could be in the hundreds of millions of dollars. This has driven the Queensland government to take the drastic step to change its regulation. “While there was quite a lot of concern from industry groups when the law was first introduced, the heat has gone out since industry has been working with the government to create the statutory guidelines,” says Antra Hood, partner at MinterEllison. “I haven’t seen industry groups mobilise so quickly and it was unusual to see the groups so galvanised.”
Wide ranging powers
The new laws are not limited to any sector and cast a wide net to encompass a diverse range of people who may be a related person. “While commentary on the reforms has focused on the mining and resources sector, a wide range of sectors are affected, including aquaculture, food processing, chemicals, gas, energy generation, sugar milling, metals, ports and waste disposal,” says Bill McCredie, partner at Allens.
“The change in law expands the scope of persons who can be targeted to receive an environmental protection order (EPO), including directors, landowners, financiers, holding companies and shareholders, allowing the Queensland government to hold a wider group of persons accountable for meeting environmental liabilities before such costs would fall to taxpayers,” McCredie adds. “The measures are going well beyond the existing executive officer liability provisions.”
Two separate tests provide the threshold in determining when a person may have a relevant connection with a company:
- When the person is capable of significantly benefiting financially, or has significantly benefited financially, from the carrying out of a relevant activity by the company; or
- The person is, or has been at any time during the previous two years, in a position to influence the company’s conduct in relation to the way in which, or extent to which, the company complies with its obligations under the Environmental Protection Act.
“Holding companies can receive an EPO if the State environmental regulator looks up the chain in shareholding from the entity operating under an environmental authority,” says McCredie. “Landowners with agreements with companies operating under an environmental authority on their land may also be liable to receive an EPO. A broader group of potential related persons may be affected where they are considered to have a ‘relevant connection’ to a company that is the holder of an environmental authority. One test for a relevant connection is whether the person has or can significantly benefit financially from the activity by the company holding the environmental authority.”
“A separate test allows the State environmental regulator to look back at the past two years to see whether the person was in a position to influence the environmental conduct of the company holding the environmental authority for shadow directors,” says McCredie.
“In considering whether to issue an EPO to a related person, the regulator will look to whether there is a high level of culpability by the person, and may assess whether the related person took all reasonable steps to ensure the company holding the approval complies and has made adequate provision to fund the environmental rehabilitation and restoration of land,” says McCredie.
“When engaging in new dealings with a company operating under an environmental authority, a potentially related person should take into account whether the company has made adequate provision for potential environmental liabilities,” says McCredie. “Those who are stepping into new ownership or investment arrangements or vendors exiting ownership should ensure that the business is complying with environmental laws and has suitable provisions to meet potential environmental liabilities.”
Businesses should prepare
Businesses need to make sure that they are complying with environmental obligations and those with financial ties with companies in sensitive sectors should be cautious about their lending practices. “There will likely be a need for increased reporting on environmental performance under this regime and investors and lenders will be looking for evidence not only that operating companies have taken steps to comply with environmental laws, but also made suitable provision to meet potential environmental liabilities” says McCredie.
“Those who clearly fall within the categories set out by the law should make sure that they have environmental management systems in place and ensure that they are updated regularly,” says Hood. “Directors should check their insurance policies to find out whether a breach of law is covered and the limitations of the coverage.”
“The banking and finance sector should consider the implications of the law and make sure that their borrowers have regular reporting systems in place and look to see that their borrowers provide regular updates, and funding set aside for remediation and restoration,” says McCredie.
“Banks may need to reconsider their lending structures if they are closely involved with the day to day activities of an entity that could leave them exposed,” says Hood.
“The law will allow the regulator to pierce the corporate veil to get to wealthy entities and individuals related to the entity causing the environmental problems and even environmental consultants and accountants may be liable,” says Hood. “Liquidators haven’t been ruled out, so insolvency practitioners may need to fulfil the environmental requirement.”
“Further work will need to be done with the banking industry,” adds Hood. “It will be up to the courts to interpret cases and the guideline may be changed as case law develops.”
“Other Australian states are watching how the reforms will operate in Queensland and may look to follow,” says McCredie. “The law is a significant expansion of the power of the State’s environmental regulator.”
The chain of responsibility laws will allow the Queensland government to target those with deep pockets who benefit financially or have influence over the activity of environmentally sensitive businesses should an environmentally damaging matter arise and the business evades cleanup costs. Those with business dealings, including lending, in Queensland should be vigilant of these rules and ensure they are conducting thorough due diligence.