Queensland’s environmental chain of responsibility laws: draft Guideline released

Publication November 2016


Introduction

Many would be aware of the “chain of responsibility” amendments made to the Environmental Protection Act 1994 (Qld) (EP Act ) with effect from April this year.

The Queensland Government has now released for public comment a draft Guideline regarding the issue of an environmental protection order (EPO) to a “related person” of a company under the EP Act.

Submissions on the draft Guideline can be made until 5pm on Friday 25 November 2016.

The draft Guideline seeks to clarify the powers of the Department of Environment and Heritage Protection (DEHP) to issue an EPO to a related person and introduces new concepts such as culpability, which are not found in the EP Act.  The draft Guideline should provide some comfort to those who would otherwise be at risk of falling within the broad statutory definition of “related person”.

Whilst the Minister for the Environment and Heritage Protection refers to the proposed Guideline as a ‘binding instruction’, once finalised and approved by regulation, DEHP need only have regard to the Guideline when deciding whether to issue an EPO to a related person.  It is not required to follow the Guideline and may therefore act contrary to the principles set out in it.  In our view, to the extent that limits are to be placed on the circumstances in which the DEHP will issue an EPO, this should be done by way of legislative amendment and not a statutory guideline.

The draft Guideline is detailed and contains several case studies.  This update discusses the key principles of the draft Guideline and explores the implications for financial institutions, creditors, shareholders and suppliers.  

Overview of the chain of responsibility provisions

An EPO is a statutory enforcement tool which can require a person to undertake specific actions within specific timeframes, such as cleaning up or rehabilitating land, giving a bank guarantee or other security.

The “chain of responsibility” amendments made to the EP Act broadened DEHP’s powers to issue an EPO to:

  • a related person of a company that is being, or has already been, issued with an EPO; or
  • a related person of a “high risk company” (including a company in administration, liquidation or receivership, or an associated entity of such a company), irrespective of whether the high risk company is being, or has been, issued with an EPO.

Under the EP Act, a “related person” of a company means:

  • a holding company of the company;
  • a person who owns land on which the company carries out, or has carried out, a relevant activity other than a resource activity;
  • an associated entity of the company who owns land on which the company carries out, or has carried out, a relevant activity that is a resource activity (e.g. a mining or petroleum activity); or
  • a person who DEHP decides has a relevant connection with the company.

A “relevant activity” means an environmentally relevant activity (ERA) under the EP Act that was, or is being, carried out by the company under an environmental authority (EA), or that was, or is being, carried out by the company and has caused, is causing, or is likely to cause, environmental harm.

Key principles

The draft Guideline contains a set of key principles that will be used to guide DEHP’s decision-making in relation to the issue of an EPO to a related person. These principles include that:

  • the issue of an EPO to a related person will only be explored where enforcement against EA holders or ERA operators will not achieve restoration or rehabilitation of the environment, or the protection of the environment from harm;
  • when deciding whether to take enforcement action and who the recipient of any enforcement action is to be, DEHP will have regard to its Enforcement Guidelines;
  • culpability will be established prior to a related person receiving an EPO;
  • DEHP will only consider issuing an EPO to a related person where an EA holder or operator company has avoided, or attempted to avoid, its environmental obligations;
  • any enforcement action taken by DEHP will be proportionate to the seriousness of the matter;
  • there is no pre-determined order in which related persons will be pursued;
  • a security or bank guarantee will not be required under an EPO where the EPO relates to the same matter for which financial assurance (FA) is already held and the FA is sufficient to cover the cost of complying with the requirements of the EPO.

Guidance about what constitutes a “relevant connection”

Under the EP Act, DEHP may decide that a person has a “relevant connection” with a company if it is satisfied that:

  • 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 2 years, in a position to influence the company’s conduct in relation to compliance with its obligations under the EP Act (including by giving a direction or approval, or by making funding available).

Note that a person need only satisfy one of the above criteria in order to have a “relevant connection”.

DEHP may consider a number of factors when deciding whether a person has a relevant connection with a company, including:

  • the extent of the person’s control of the company;
  • the extent of the person’s financial interest in the company (i.e. a direct or indirect interest in shares in the company, the income or revenue of the company, or a mortgage, charge or other security given by the company); and
  • the extent to which dealings between the person and the company are at arm’s length, on an independent, commercial footing, for the purpose of providing professional advice, or for the purpose of providing finance (including the taking of security).

The draft Guideline clarifies which of these matters relate to the above “significant financial benefit criteria” and/or “position to influence criteria” and the evidence that DEHP may collect and consider (Appendix 4).

Significant financial benefit

The draft Guideline states that the significance of any financial benefit will be considered within the context of the specific circumstance of each case and may be considered in relation to:

  • the proportion of the benefit relative to the total assets or benefit available from the activities carried out under the EA; or
  • the proportion of the benefit, relative to the costs of restoring or rehabilitating of the environment, or protecting the environment from harm.

Specific examples are provided, including for:

  • Financial institutions:
    • although the Guideline mentions only “banks” it is likely from the context that relevant guidance will apply also to other (non-bank) financial institutions who provide relevant services;
    • a bank would not be regarded as having a relevant connection on the sole basis that it provided banking products and services to a company for a fee;
    • a bank would not be regarded as having a relevant connection on the sole basis that it provided credit to a company under a lending agreement on arm’s length commercial terms and receives financial benefits (e.g. interest and the repayment of the loan) at commercial market rates;
    • a bank may be regarded as having a relevant connection to a company where it “enters into a lending agreement with a company becoming a major investor in the company and deriving significant dividends and capital gains from the company”.  This is somewhat confusing; even if a lender may be described as a “major investor”, a “lending agreement” does not normally deliver dividends or capital gains
  • Third party suppliers:
    • a supplier would not be treated as having a relevant connection with a company on the sole basis of having received a significant financial benefit from the sale of goods to the company through an arm’s length transaction;
    • Shareholders:
    • a shareholder with a substantial shareholding and dividends received from the company may be considered to be a related person where the financial benefit received is significant having regard to the net profit of the company.

Position to influence

The draft Guideline states that person will be in a position to influence if the person is capable of influencing the decisions or actions of the company in relation to its compliance with the EP Act whether in an official (e.g. appointed company director) or unofficial capacity (e.g. someone acting as a shadow director).

Again, specific examples are provided, including for:

  • Financial institutions:
    • a bank would not be regarded as having a relevant connection with a company on the sole basis that it provided information about its banking services and possible options which may suit the company’s objectives and requirements (for example loan arrangements) on arm’s length commercial terms, as this would be considered professional advice provided for commercial purposes;
    • a bank would not be considered as having a relevant connection solely on the basis of engaging in debt-restructuring discussions or negotiations with a company related to and for the purpose of providing finance to the company;
  • Creditors:
    • a secured creditor who decides to appoint a receiver would not be considered to have a relevant connection on the basis of a position to influence where it does not exercise influence or control over the business of the company or direct the receiver (in this respect, no distinction is made between publically listed and private companies);

Guidance about what constitutes “reasonable steps”

In deciding whether to issue an EPO to a related person of a company, DEHP may consider whether the related person took all reasonable steps having regard to the extent to which the person was in a position to influence the company’s conduct to ensure it complied with its obligations under the EP Act and made adequate provision to fund the rehabilitation and restoration of the land because of environmental harm from a relevant activity.

The draft Guideline states that if it is determined that a related person was not culpable for a matter, or was culpable but took all reasonable steps in the circumstances, DEHP will not issue the person with an EPO.

There are a number of other factors DEHP may consider when determining whether a related person took all reasonable steps in the circumstances, including:

  • their legal and practical ability to influence the company’s conduct:
  • the extent of their actual and expected knowledge in relation to the company’s environmental obligations:
  • whether they exerted power or influence in a positive or negative way to ensure environmental harm was avoided and adequate provision was made for rehabilitation;
  • what financial decision making powers were exercised and in what manner were those powers exercised;
  • their reliance on others to ensure environmental harm was avoided and whether it was reasonable.

For liquidators, administrators and receivers, the draft Guideline states that the reasonable steps expected, will be considered in light of the external administrator’s requirements and powers under the Corporations Act 2001 (Cth) or the terms of the external administrator’s appointment. The draft Guideline acknowledges that external administrators are required to act in the interests of all creditors as a whole, not merely for the benefit of one creditor or stakeholder. External administrators who exercise their powers and control in a manner which is permitted or required by the Corporations Act 2001 (Cth), the terms of their appointment or general law, will not automatically be considered to have failed to take all reasonable steps. Consideration will be given to an external administrator’s powers and their obligations under the EP Act when determining potential reasonable steps.

Joint and several liability

EPOs issued to two or more related persons may provide that the related persons are jointly and severally liable for compliance with the EPO, including for the costs of compliance. In this respect, the draft Guideline states that DEHP will consider the relationship between the related persons when deciding to hold those persons jointly and severally liable but that any apportionment of compliance costs is a matter to be determined between those parties by private agreement.

Implications

The chain of responsibility amendments have been controversial, in part because the broad definitions of “related person” and “relevant connection” have the potential to capture anyone who contracts with, leases land to, invests in, or is otherwise in a position to influence the conduct of a company carrying out an environmentally relevant activity under the EP Act.

As stated above, the draft Guideline does assist to clarify the intended scope of the new laws and will provide some comfort to some financial institutions, shareholders and third party suppliers in certain types of arrangements. The draft Guideline makes it clear that at least some level of culpability will be required before a related person will be pursued.

Nonetheless, DEHP is only required to have regard to the Guideline. It remains important for all persons and entities with a relationship with an EA holder or operator company to carefully consider both the EP Act and Guideline in relation to:

  • whether they might be considered a related person of an operator company; and
  • if so, whether they can demonstrate taking all reasonable steps to ensure the operator company’s compliance with the EP Act.

Where concerns arise about being captured by the chain of responsibility provisions, it will be prudent to update relevant agreements or other documentation to require companies to comply with their obligations under the EP Act and make adequate provision for the environmental rehabilitation and restoration of land. Depending on the circumstances, more proactive measures, such as due diligence, compliance audits and regular inspections to ensure compliance with the EP Act, may also be warranted.


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