Need to know
What is the Queensland ‘chain of responsibility’ law and how might it affect you?
The Queensland government has now passed amendments to the Environmental Protection Act 1994 (Qld) which may impact significantly on the approach lenders and investors take to financing or investing in mining or industrial projects in Queensland, especially where the project may be at risk of being in financial distress.
Under the changes, the Department of Environment and Heritage Protection (EHP) will have the power to issue an “environmental protection order” (EPO) to “related persons” of companies carrying out environmentally relevant activities in certain circumstances – something that is not possible under the current legislation. EPOs can be issued for a range of reasons, including for breaches of environmental approvals (such as a failure to remediate a mining or industrial site).
EPOs will be able to be issued from the Act’s assent – which we understand was 27 April 2016 – and can relate to circumstances prior to assent (i.e., the Act has potentially retrospective application to existing arrangements).
Importantly, for stakeholders in situations of financial distress, the new “related person” concept is very broad. It could include third party financiers – there is no express carve-out for arm’s length debt financiers – as well as other investors, which raises the prospect of a financier or investor inheriting clean-up liabilities of another (possibly unrelated) entity.
So, financiers and investors on both new and existing investments in Queensland should consider increasing due diligence on the adequacy of arrangements for clean-up liabilities at the project site. They should also closely monitor the development by EHP of its proposed statutory guideline, which is intended to provide greater clarity on the proposed administration of the “related persons” concept.
More detail on this important issue follows, along with our suggestions on how to respond to this significant development.
Some more detail
The ‘chain of responsibility’ law is now in force
Queensland’s new environmental laws, aimed at ensuring an unbroken chain of responsibility for environmental damage and clean-up where the polluter fails (or is at risk of failing) to meet their clean- up obligations, passed in the early hours of Friday 22 April 2016 as the Environment Protection (Chain of Responsibility) Amendment Act 2016 (Act).
The amendments will commence on assent, which we understand occurred on 27 April 2016.
As set out in our previous alert, the Act will empower EHP to cast its enforcement and cost recovery net beyond the company carrying out environmentally relevant activities (first company), to that first company’s “related persons”. The Act is intended to ensure EHP is able to more effectively enforce compliance by asset operators with their environmental obligations, and help protect against significant liability falling to the State where operators do not comply with those obligations.
Once the Act commences, EHP may issue environmental protection orders (EPOs):
- to each related person of a first company which has received an EPO; and
- to each related person of a “high-risk” first company (i.e. externally administered body corporate), even if no EPO has been issued to the first company.
Each recipient of an EPO in these circumstances is jointly and severally liable with each other recipient for the full cost of compliance with the EPO.
The retrospective operation of the Act
EHP’s new powers to give EPOs to related persons of first companies are now in effect.
Potential ‘related persons’ should also note that EHP’s decision to give an EPO, and as to whether someone has a relevant connection to a first company, would take into account events that occurred and circumstances that existed prior to the commencement of the Act. So, while EHP’s new powers to give EPOs to related persons commences on the date of assent, it is possible that its decisions to do so will be made based on events that have already occurred, and based on the circumstances of relationships between first companies and potential related persons that are already in place.
The powers include EHP’s ability to give an EPO to a person who was a related person at any time during the period from the introduction of the Environment Protection (Chain of Responsibility) Amendment Bill 2016 (Bill) on 15 March 2016 until 27 April 2016 when the Act came into force, but who was no longer a related person by the date the Act came into force.
Changes to final form of Bill
The Bill, introduced into the Queensland parliament on 15 March 2016, underwent review by the Agriculture and Environment Parliamentary Committee, with submissions received from a range of individuals, conservation groups and local governments as well as companies in the banking, resources and agricultural sectors (submissions available here).
The key issue raised by many of the submissions was the broad nature of, and the level of subjectivity around, the test for identifying ‘related persons’.
The Bill was amended in response to various concerns raised in submissions, as set out below.
- New statutory guideline: EHP is to develop a binding statutory guideline to provide greater clarity regarding the manner in which it will administer the ‘related persons’ test – i.e. how it will determine which related persons of a first company should receive an EPO, and how it will determine the persons who have a relevant connection to the first company.
- The ‘related persons’ test is also amended so that:
- financial benefit must be significant: to be a related person, a person must receive a significant financial benefit from the operations, not just any financial benefit. This is intended to ensure ‘mum and dad’ investors are not caught by the test. Financial benefit now expressly excludes compensation under certain landholder/resource company agreements for resources projects, and payments made under indigenous land use or cultural heritage agreements. ‘Significant’ in this context is not defined in the Act, but the Minister indicated in parliament that there would be guidance on this point in the statutory guideline;
- diligent related persons may be exempt: a person may be excluded under the related persons test where it can show that it took all reasonable steps to ensure the operations’ environmental obligations were complied with and that any rehabilitation or land restoration would be adequately funded (where the related person was in a position to influence the first company’s conduct). ‘Reasonable steps’ is not intended to be defined, and a common law test would be used to determine if reasonable steps had been taken by the related person; and
- certain landowners excluded: the amendments remove some categories of land owner from falling within the ‘related persons’ test – owners of the underlying tenure of mining and petroleum projects (who may be compelled by law to permit those projects to operate on their land). All other categories of landholder are still included in the test.
- New financial assurance on share sale: in addition to the new power in the Bill for EHP to impose a condition requiring financial assurance (i.e. environmental performance guarantee) be provided at the time of a transfer of an environmental authority, EHP will also be able to exercise this power in the event of a share sale (i.e. where the EA will not be transferred but the ownership of its holding company changes).
- Review in two years: the new provisions will be reviewed by the Minister for appropriateness in two years.
- Who are “related persons” and what is the potential ‘reach’ of the legislation?
Determining if an entity is a ‘related person’ of a particular company will depend heavily on the circumstances of the parties’ commercial and legal relationship. The concept, however, is wide.
The Minister for Environment has been clear in his press statements and in parliament that the changes are intended to resolve difficulties EHP faces when attempting to enforce environmental clean-up and other obligations, where the owner of the facility is insolvent, by giving EHP the ability to enforce those obligations against related entities who receive a financial benefit from the facility. This is supported by the fact that related persons automatically include holding companies of the first company.
The legislation, however, goes beyond parent companies – importantly, arm’s length, third party lenders and other debt and equity investors may also be the recipient of an EPO under the changes. This is because ‘related persons’ may also include:
- a person who is capable of benefitting financially, or has benefitted financially, from the first company’s activities;
- a person who is, or has been within the last 2 years, in a position to influence the first company’s conduct in relation to its compliance with the Queensland environmental law – including where that person must give a direction or approval, or by making funding available.
We have also noted that under the changes, the first company does not need to actually be in financial distress for the power to give an EPO to its related person(s) to be exercised.
Critically, there is no clear or automatic carve-out for arm’s length, third party lenders from the concept of ‘related person’ in the legislation. Related persons also automatically include the person who owns the land on which the project is carried out (subject to the exceptions notes above), which could include a mortgagee in possession.
Although the Bill does provide that EHP would consider certain things when identifying related persons of a company, including the extent to which dealings between the person are at arm’s length or for the purposes of providing finance, this would still require EHP to assess each case individually and at the relevant time.
In our view, the legislation is likely to mean that investors and lenders will be seeking much greater certainty at the initial stages of a project (or when new finance is sought) as to any clean-up/remediation liabilities the project is likely to accrue during its life.
The Minister noted during parliamentary debate early on 22 April 2016 that he is willing to work with organisations in business and the legal profession to develop the guidelines. Affected investors may wish to become involved in this process. We understand the guideline will be intended to evolve over time to incorporate new information, and different circumstances that arise.
We also suggest that lenders or investors who may potentially be ‘related persons’ of assets held by a first company should review the statutory guideline, when available, to determine the likelihood of being considered a ‘related person’. If there is a likelihood, lenders or investors should consider protections they might put in place, such as:
- obtaining a clear and comprehensive understanding of actual and potential environmental liability associated with the investment, in order to quantify potential liability falling to related persons of a first company;
- where the lender or investor is in a position to influence the first company’s conduct, steps it may take to ensure that it could demonstrate it has taken all reasonable steps to ensure the first company complied with its environmental obligations and that it has made adequate provision to fund rehabilitation or land restoration;
- seeking to impose contractual obligations on the first company in relation to that company’s environmental performance and in particular, the company’s prompt and comprehensive compliance with any EPOs the first company receives;
- guarantees or similar from any parent company of the first company in relation to EPOs given to the investor as a related person; and
- requiring from first companies pre-agreed entry rights to relevant land which can be relied on by the lender or investor if it receives an EPO in relation to clean-up of the first company’s land.