Environmental ‘chain of responsibility’ draft statutory guideline released for consultation: The path clears ahead – but is it paved with certainty?

Today the Queensland Government released a draft statutory guideline to help clarify when ‘chain of responsibility’ EPOs (CoRA EPOs) will be issued under the Environmental Protection Act 1994 (Qld) (EP Act).

The EP Act was amended in April this year by the Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld) (EPCOR Act) to expand the scope of liability for corporations, their associated entities, officers, and financiers. Specifically, the scope for issuing environmental protection orders (EPOs) was broadened and the Department of Environment and Heritage Protection (DEHP) was given the power to make a statutory guideline, to which regard must be had by DEHP when deciding to issue CoRA EPOs

This statutory guideline (Guideline)¹,  was released today for public consultation in draft form. An overview of the Guideline is provided below. 

The good news for financiers, investors, external administrators and minority joint venture participants is that the Guideline makes it clear that a CoRA EPO will only be issued where there is evidence of culpability and avoidance behaviour and generally not where transactions are ‘arms length’ or where a party had little legal or practical ability to influence a company’s conduct.

Background

Under the EP Act, an EPO is an order issued by the DEHP which can require the recipient to do, or to refrain from doing, particular acts in relation to the environment. 

Prior to the EPCOR Act, the DEHP could only issue EPOs to:

• entities undertaking activities with the potential to cause environmental harm (activities); or 
• holders of environmental authorities (EAs).

As a result of the EPCOR Act, CoRA EPOs can now be issued to a:

• ‘related person’ of any company, where an EPO is also issued to the company; and
• ‘related person’ of a ‘high risk company’ (being a company under external administration, or an associated entity of that company), irrespective of whether an EPO has also been issued to the company.

Generally, a person will be a ‘related person’ in the following circumstances:

• where they are a holding company of the company carrying out the activity;
• for non-resource activities, where a person or company owns the land on which the company carries out, or has carried out, the activity;
• for resource activities, where a person or company that is an associated entity of the company owns the land on which the company is carrying out, or has carried out, the activity; or
• where the DEHP decides that the person has a ‘relevant connection’ with the company, which may arise if:
  • the person has gained, or has the potential to gain, a significant financial benefit from the carrying out of the activity; or
  • at any time in the previous 2 years, the person has been 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 environmental obligations.² 

Key principles of the Guideline

The Guideline contains a number of principles that the DEHP will use to make decisions about issuing CoRA EPOs.

Those principles include that:

1. EA holders and operators of activities have responsibility for environmental compliance;
2. Where enforcement against EA holders and operators will not achieve restoration or rehabilitation, the issue of a CoRA EPO will be explored;
3. Culpability of a ‘related person’ (determined using the DEHP’s Enforcement Guidelines)³  must be established before a CoRA EPO will be issued;
4. DEHP will only issue a CoRA EPO where there is evidence of avoidance behaviour; and
5. DEHP will not require a bank guarantee under a CoRA EPO if the existing financial assurance is adequate.

Key components of the Guideline

The Guideline is not intended to be a standalone document and should instead be read in conjunction with the DEHP’s Enforcement Guidelines. 

Among other things, the Guideline seeks to clarify when:

1. the ‘related person’ tests will be satisfied;
2. the DEHP will decide to issue CoRA EPOs to ‘related persons’; and
3. a bank guarantee or security will be required under a CoRA EPO.

The Guideline includes a number of examples to better indicate when liability will and will not be attributed to a person or entity, including example situations for shareholders, vendors, financiers, external administrators, executive officers, suppliers and joint venture participants. 

Who will be a ‘related person’?

Part 4 of the Guideline elaborates on the types of individuals and entities that may be captured as ‘related persons’ under the EPCOR Act, focussing on the ‘significant financial benefit’ and ‘position of influence’ aspects of the ‘relevant connection’ test. 

(a)        Significant financial benefit

Under the Guideline, whether or not there is a ‘financial benefit’ will largely be a question of fact and ‘significance’ will be determined on a case-by-case basis. The DEHP may consider ‘significance’ 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
• relative to the costs of restoring or rehabilitating the environment, or protecting the environment from harm.

Importantly, although no specific time period has been imposed, only significant financial benefits from the period of time relevant to the causation (and, if relevant, mitigation) of the issue or incident being investigated will be considered.

(b)        Position of influence 

The Guideline clarifies that a position of influence includes any position in which a person is capable of influencing the actions of the company, be it in an official or unofficial capacity.

(c)        ‘Relevant connection’ factors

In deciding questions of ‘significant financial benefit’ and ‘position of influence’, the Guideline contains a table of factors which the DEHP may consider. These include, for example, the extent of the person’s control over the company and the extent of the person’s financial interest in the company.   

When will an EPO be issued to a ‘related person’?

Part 5 of the Guideline provides that ‘related persons’ will only be pursued where there is evidence of avoidance behaviour and enforcement action against the actual EA holder or operator of the activity is not available or will not result in restoration of the environment and the protection of the environment from harm. Further, the DEHP does not intend to issue every possible ‘related person’ with a CoRA EPO.

A ‘related person’ will not be issued a CoRA EPO if it can be determined that they 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 that the company complied with the EP Act and that there has been adequate provision to fund rehabilitation.

The DEHP will consider on a case-by-case basis whether all reasonable steps were taken by a ‘related person’ and will typically consider factors such as the person’s:

• legal and practical ability to influence the company’s conduct;
• actual and expected knowledge of the company’s environmental obligations;
• exertion of power or influence, including any financial decision making; and
• reliance on others to ensure environmental harm was avoided and whether this reliance was reasonable.

Examples

The Guideline provides hypothetical examples of when a CoRA EPO might be issued to a number of potential ‘related persons’ including joint venturers, external administrators and financiers. 

(a)        Joint ventures

For incorporated joint ventures (IJVs), IJV participants may be ’related persons’ on the basis of their ‘significant financial benefit’. If a minority IJV participant is shown to have a limited ability to influence the IJV’s conduct, the reasonable steps expected of the minority participant would be less onerous than a participant in a greater position to influence. 

(b)        External administrators

The examples throughout the Guideline provide some clarification around when external administrators will be liable, given that external administrators may be in a ‘position of influence’ over the company’s conduct (and therefore be considered ‘related persons’).

Notably, external administrators may have a defence against the company not adequately providing for rehabilitation or failing to comply with environmental obligations on the basis that:

• the Corporations Act 2001 (Cth) requires external administrators to act in the best interests of the creditors as whole; or 
• the external administrator exercised their powers and control in a manner permitted or required by the Corporations Act 2001 (Cth).

(c)        Financiers

The liability of financiers is also sought to be clarified through the examples in the Guideline, given that financiers may stand to gain a ‘significant financial benefit’ from a project they finance (which would potentially make them a ‘related person’).

Where financiers, such as banks, provide typical finance services to a company for a fee, this will generally not amount to a ‘significant financial benefit’. Similarly, where financiers lend money to a company on arm’s length commercial terms and receive general financial benefits in return (such as loan repayments and interest) at commercial market rates, this too will generally not amount to a ‘significant financial benefit’. 

However, where financiers lend money to a company and also become a major investor in the company deriving significant dividends and capital gains, this may result in a ‘relevant connection’ being found and the financier deemed a ‘related person’.

When will bank guarantees or security be required under the EPO?

Under the EPCOR Act, the recipient of a CoRA EPO can be required to give the DEHP a bank guarantee or other security for their compliance with the EPO. However, many EA holders have already provided financial security to the State in the form of financial assurance (FA).

Part 6 of the Guideline provides that where the DEHP already holds FA for a particular site and a CoRA EPO has been issued, a bank guarantee or security is only likely to be required where the extent of the environmental impact exceeds that for which the FA was calculated, or the environmental impact is unrelated to the relevant activity for which the FA is held. Generally, a relevant FA held will be used first and a bank guarantee or security under the CoRA EPO will only be required to cover any shortfall (or where no FA is held at all).

According to the Guideline, where a bank guarantee or security is required under a CoRA EPO, it will only be claimed in the event that the recipient of the EPO fails to comply with the EPO.

Review and appeal rights

Importantly, the Guideline provides that a person may apply for internal review of the DEHP’s decision to issue them a CoRA EPO or classify them as a ‘related person’. If a person is not satisfied with the outcome of the internal review, there is a right to appeal to a court. 

Additionally, the Guideline expressly provides for judicial review under the Judicial Review Act 1991 (Qld).

Next steps

The Guideline is open for public consultation from Monday 14 November 2016 until Friday 25 November 2016 at 5pm. 

Submissions on the Guideline can be made to [email protected].

Endnotes

1. The Guideline
2. For further information on the EPCOR Act, see our earlier article Piercing The Corporate Veil For Environmental Liability – Chain Of Responsibility Amendments Passed By Queensland Parliament 
3. The Enforcement Guideline