CoRA Guideline approved - But is it just a bandaid solution?

Feb 2017 |

Introduction

The much awaited guideline to the ‘Chain of Responsibility’ amendments to the Environmental Protection Act 1994 (Qld) (EP Act) was released on 27 January 2017. While the guideline provides some comfort to industry participants regarding their exposure to liability under the new environmental regime, there is still some speculation as to how the concepts in the guideline will be implemented by the regulator.

Background

On 22 April 2016, the Queensland parliament passed the Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld) (Chain of Responsibility Legislation), amending the EP Act.

The objective of the Chain of Responsibility Legislation was to amend the EP Act to:

  1. Facilitate enhanced environmental protection for sites operated by companies in financial difficulty; and
  2. Avoid the State bearing the costs for managing and rehabilitating sites in financial difficulty.1

The introduction of the legislation followed the Yabulu Nickel Refinery being placed into voluntary administration. The Yabulu Nickel Refinery has significant outstanding remediation obligations, including the disposal and remediation of an estimated 3.2 billion litres of contaminated water in the tailings storage facility.2

In our previous newsletters published in March 2016 titled ‘Has the Queensland Government overreached in its battle with Clive Palmer?’ and April 2016 titled ‘Chains of Responsibility – Queensland Government passes amendments to Environmental Protection Act’, we have explained the key amendments made by the Chain of Responsibility Legislation. Arguably, the most significant amendment is to afford the regulator the power to issue an Environmental Protection Order (EPO) to ‘related persons’ of a company bearing principal environmental responsibility, known as a ‘CoRA EPO’. An EPO is a direction to do something, as opposed to a fine or a penalty. As an example, an EPO can require the recipient to remediate an area, or to pay increased financial assurance.

Concern among heavy industry participants, land owners, banks, directors, officeholders and individuals involved in activities that could have an environmental impact is the uncertainty with which the amendments to the EP Act have been drafted and, in particular, the potential breadth of the class of ‘related persons’ to which an EPO can be issued.

Approved Guideline

In accordance with commitments made on passage of the legislation, the Queensland Government has developed a guideline (Guideline) to assist the regulator to determine whether to issue a CoRA EPO, and to provide consistency and transparency in administration. The Guideline was released in draft for public consultation during November 2016. On 27 January 2017, the final version received the approval of the executive committee and takes effect as a statutory instrument approved by regulation.

The approved Guideline can be found on the Department of Environment and Heritage Protection website.

Implementation

Section 363AB(7) of the EP Act requires the administering authority to ‘have regard to any relevant guidelines’ when determining whether to issue a CoRA EPO.

The expression ‘must have regard to’ indicates that some weight must be given to the Guideline by the administering authority. However, the language used does not impose a strict obligation on the administering authority to apply the Guideline in all circumstances.

The passive language becomes more obvious when compared with s 548 of the EP Act (which addresses the general power of the administering authority to create and implement guidelines), which states that the administering authority ‘must follow any guidelines’ made pursuant to that section.

Accordingly, to what extent the Guideline will be followed by the administering body remains to be seen.

Key considerations

The Guideline confirms that the overall intent of the legislation is to ensure that companies and their related parties bear the cost of environmental non-compliance.

The Guideline also describes the key steps that the regulator will take when considering whether to issue a CoRA EPO. Those steps include determining:

  1. Culpability;
  2. Whether a party is a ‘related person’; and then
  3. Whether that party took ‘all reasonable steps’ to ensure the company complied with its environmental obligations.

We consider each step in turn below.

1. Culpability

The Guideline states that the establishment of culpability is fundamental in deciding whether to issue a CoRA EPO. In this way, the Guideline may act to limit the scope of the ‘related parties’ that can be issued with a CoRA EPO.

Application of the culpability principle will be key, as the principle is at odds with many of the enforcement mechanisms under the new CoRA regime.

As the culpability test is not included in the legislation, any decision to issue a CoRA EPO will be made based on the facts and merits of the facts in front of the administering authority at the time, and the Guideline, containing the requirement to consider culpability, will only be one factor to which the regulator must have regard.

The Guideline states that when determining culpability, the regulator will take the following considerations into account:

  1. Who committed the act?
  2. Who formed the intention to commit the act (if relevant)?
  3. Who created the material circumstances leading to the alleged offence?
  4. Who benefitted from the offence?

Pursuant to the CoRA regime, a party who has received a significant financial benefit can be considered to be a related party and can therefore be the recipient of a CoRA EPO.

If culpability can be demonstrated by simply ‘receiving a benefit from the offence’ (as noted as item 4 above), then it follows that receiving a significant financial benefit (such as a shareholder) may be enough in and of itself to demonstrate culpability. If this is the case, then the Guideline will not provide any comfort to parties that may receive a significant financial benefit from a company, but who otherwise have no control or influence over that company’s actions.

Furthermore, where culpability is established, it does not necessarily follow that the most culpable person will be the only party issued with a CoRA EPO. While the regulator will consider whether one related party is ‘more culpable’ than another, the Guideline does not stipulate that only the ‘most culpable’ are to be issued with a CoRA EPO. This is a particular concern if there are multiple insolvencies within a group of ‘related persons’.

On balance, the Guideline as approved indicates that a separate element of culpability needs to be established before a CoRA EPO can be issued. This aligns with the original intention of the CoRA Legislation, as described in the first reading speech by the Honourable SJ Miles, Minister for the Department of Environment and Heritage Protection, who stated that the legislation ‘targets those who stand to make large profit, those who are really standing behind the company and whose decisions have put the environment at risk’.3

While the concept of culpability included in the Guideline is a step in the right direction, it ultimately remains insufficient to remedy the inadequacy of the CoRA legislation in its current form.

2. Related person

There are four circumstances in which a person may be considered to be a related person of a company, and therefore issued with a CoRA EPO:

  1. Parent companies – the person is a holding company of the company; or
  2. Landowners for non-resource activities – the person owns land on which the company carries out, or has carried out, a relevant non-resource activity; or
  3. Landowners for resource activities – the person owns land on which the company carries out, or has carried out, a relevant resource activity and is an associated entity of the company; or
  4. Relevant connection – the department decides under s 363AB of the EP Act that the person has a ‘relevant connection’ with the company.

Item 4, a person having a ‘relevant connection’ to the company, has caused the greatest concern for many associated with heavy industry and mining in particular.

There are two ways that a person can be determined to have a relevant connection. Either:

  1. 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
  2. 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 EP Act.

As the legislation is drafted, these are two separate considerations. A person may have a relevant connection if the regulator determines that a person satisfies only one of the above considerations.

With respect to the significant financial benefit test, the Guideline provides that the regulator will determine the meaning of ‘significant’ in the context of the specific circumstances of any individual factual scenario, but that the following factors may also be considered:

  1. The proportion of the benefit relative to the total assets or benefit available from the activities carried out under an environmental authority; or
  2. The proportion of the benefit, relative to the costs of restoring or rehabilitating the environment, or protecting the environment from harm; or
  3. The abnormality of benefit received, for example where a benefit received as a wage was above normal market value.

The Guideline includes an example of a significant shareholder and recipient of $3.55 million in dividends from a large company in liquidation that caused environmental damage. The Guideline confirms that the shareholder is someone who has derived a ‘significant financial benefit’ from the company, and therefore may be a related person. A shareholder who receives no dividends is specifically excluded by another example in the Guideline.

While the examples relating to shareholders are clear, they represent extreme ends of the scale, and the regulator will still have significant administrative discretion to determine at what point a shareholding or other financial interest becomes significant.

Banks and investors are also included in the examples given in the Guideline. It is clear that most ordinary arm’s length arrangements will not be considered to result in a significant financial benefit, but where a bank becomes a major investor and derives dividends, the bank may be considered to have a significant financial interest for the purpose of the legislation.

In this way, the Guideline has gone some way to alleviate concerns of specific classes of shareholders, banks and investors, however the Guideline does not address the some of the key issues regarding the limitations and concerns of the nature of the test itself.

One such issue is the lack of consideration of equality and equity between generations. Intergenerational and intragenerational equity, a cornerstone of environmental law and policy, calls for fairness between the generations and within each generation. The CoRA legislation provisions state that any person who ‘has’ received a significant financial benefit can be the subject of a CoRA EPO. The Guideline confirms that only those who received a benefit from the period of time relevant to the causation of the issue or incident being investigated will be considered. Once again, while this provides some comfort to who might be considered to have received a significant financial benefit, determining the timing of the causation of any environmental harm or incident is extremely difficult. As with the Yabulu Refinery example, a company can suffer an insolvency event after decades of operation with its rehabilitation obligations outstanding. It is not necessarily the case that a single breach of legislation, or a single event, will be the only precursor to environmental harm.

Is it fair or equitable that the current directors, investors and shareholders are potentially exposed to the accumulated liability of an insolvent company that has operated over many decades? Is it reasonable that an investor, director or shareholder who has previously received a significant financial benefit from a now insolvent company be responsible for the cost of rehabilitation required today?

In addition, is it equitable that individuals or companies with any ‘financial interest’ are treated equally in the eyes of the legislation? Should a director of a company bear the same exposure to liability as a shareholder or investor, who has limited control of the company’s actions with respect to environmental compliance?

The QRC, in its submission following the introduction of the CoRA legislation, recommended the adoption of a hierarchy of ‘related persons’ that are responsible for environmental compliance or rehabilitation.4 The QRC recommended that the EA Holder or polluter should be primarily liable, followed by the holding company, and then other related companies or individuals.5 The QRC also strongly recommended that companies and individuals be responsible only to the extent of their interest in the company.6

While the Guideline and, more specifically, the culpability test, might temper these concerns in the short term, in light of the uncertainty associated with the implementation of the Guideline, and the wide discretion of the regulator, these concerns remain relevant and need to be addressed.

3. The ‘all reasonable steps’ test

If a related person is culpable for environmental harm, but took all reasonable steps in the circumstances, the regulator will not issue that person a CoRA EPO.

While the Guideline does not provide a list of reasonable steps that are available, this is a sensible approach given the wide range of activities and ‘steps’ that could be contemplated. Nevertheless, the regulator again is afforded a significant amount of administrative discretion.

In determining whether an individual or company has taken all reasonable steps, the regulator will consider:

  1. The ability for that person to legally and practically influence the company’s conduct;
  2. The subjective knowledge of the related person at the time, and in the lead up to, the issue or incident; and
  3. The foreseeability and probability of the issue or incident occurring.

The examples provided consider the different types of steps that different stakeholders are in a position to take, including local governments, directors and officeholders, and external administrators. The Guideline confirms that each party will only be responsible for taking steps reasonably available to it, which provides some comfort for stakeholders that have limited influence or assume responsibility for the site after an incident (such as an administrator). The Guideline does, however, confirm that an external administrator will be responsible for harm resulting from acts or omissions during their involvement with the company.

While the Guideline again provides some comfort with respect to how the ‘all reasonable steps’ test will operate, implementation of the test ultimately remains at the discretion of the regulator.

Conclusion

It is important at this point to reconsider the original intention of the Chain of Responsibility legislation. Minister Miles, in his first reading speech introducing the legislation, stated:

‘The government has a clear focus on parties who are actively avoiding their proper responsibilities. The chain of responsibility will not attach itself to genuine arm’s length investors, be they merchant bankers or mum-and-dad investors. It will not impact contractors or employees. This legislation targets those who stand to make large profit, those who are really standing behind the company and whose decisions have put the environment at risk and who in many cases have personally profited from the operations that have contributed to the environmental risk or harm.’7

He continued the same sentiment in his second reading speech: ‘To make it very clear that the provisions of the bill are intended to capture only those entities that are genuinely responsible for addressing environmental harm’.8

The broad drafting of the legislation in its current form arguably goes beyond the original intention of the legislature. While the Guideline has addressed some key concerns, it fails to address the underlying issues with the implementation of the legislation itself, and still affords the regulator wide discretion to issue CoRA EPOs.

There is real evidence that the introduction of the Chain of Responsibility legislation has had an impact upon Queensland’s investment landscape, and has added additional uncertainty to an already fragile setting. While the introduction of the Guideline represents a good start in addressing the most unsettling aspects of the legislation, there is no doubt that the principal legislation remains flawed, and potentially damaging to the State.

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1 Explanatory Memorandum, Environmental Protection (Chain of Responsibility) Bill 2016 (Qld) 1.
2 Nick Wiggins, ‘Queensland Nickel: new laws introduced to prevent taxpayers funding mine clean-ups’ ABC News (Online) 15 March 2016.
3 Honourable SJ Miles, Minister for Environment and Heritage Protection and Minister for National Parks and the Great Barrier Reef, First Reading Speech Environmental Protection (Chain of Responsibility) Amendment Bill, 15 March 2016, page 692.
4 Queensland Resources Council, above n 5, 19.
5 Ibid.
6 Queensland Resources Council, above n5, 15.
7 Ibid.
8 Honourable SJ Miles, Minister for Environment and Heritage Protection and Minister for National Parks and the Great Barrier Reef, Second Reading Speech Environmental Protection (Chain of Responsibility) Amendment Bill, 21 April 2016, page 1459.

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