Australia: Chain Of Responsibility Reforms Set To Overhaul Liability For Environmental Clean-Ups In Queensland

The mining and resources downturn is bringing forward the closure of many of Australia's ageing smelters, steelworks, power stations and mines and their corresponding environmental rehabilitation obligations. Often, the owners of those assets lack the financial ability to cover their statutory obligations. Due to inconsistent regulatory practices across states and industries, the rehabilitation bonds and other financial assurances provided by owners are either nonexistent or inadequate, leaving it for state governments to fund the shortfall. Facing tight fiscal operating conditions and limited budgetary maneuverability, state governments have increasingly been moving to close the gaps in legislation which have made it difficult to ensure that rehabilitation liabilities are not passed back to the taxpayer.

As a resource economy, Queensland has been affected more than other Australian states. To address this looming problem, on 15 March 2016, the Queensland Government introduced proposed "Chain of Responsibility" amendments to the Environmental Protection Act ("Amendments") in Parliament. The Amendments broaden the category of persons that can be held responsible for environmental rehabilitation when holders of environmental authorities ("Approvals") lack the financial ability to meet their obligations.

The Yabulu Nickel Refinery in Queensland ("Refinery"), operated by mining entrepreneur Clive Palmer's Queensland Nickel Pty Ltd, is the highest profile example of the problem which led to the proposed Amendments.

With the recent drop in the price of nickel, and the insolvency of Queensland Nickel Pty Ltd (which holds the Approval but does not own the Refinery assets), the Queensland Government is now concerned about funding for the "end of life" environmental rehabilitation in the absence of adequate security held by the Environmental Protection Agency ("EPA").

The Amendments make it easier for the EPA to obtain financial assurances from related parties of an Approval holder. If passed, the Amendments will also allow the EPA to issue environmental protection orders for rehabilitation to any party that had some relevant relationship to a "high risk" company that is experiencing financial difficulty (which may include, for example, a parent company or executive officer). In addition to the financial obligation that arises from the issue of an environmental protection order, noncompliance with an order is a criminal offence.

Specifically, the Amendments allow the EPA to serve environmental protection orders on persons whom it considers to have a "relevant connection" to an Approval holder, including:

  • Persons who have benefitted financially, or are capable of doing so, from carrying out the underlying activity; or
  • Any person who is or has been in a position to influence the company's conduct in complying with its obligations under the Environmental Protection Act in the previous two years.

The EPA can take into account the following matters in determining whether a person has a "relevant connection" to the Approval holder:

  • The extent of a person's control;
  • The executive position of the person;
  • The extent of the person's financial interest;
  • The corporate structure or arrangement by which the person has or may receive a financial benefit; and
  • Whether the transactions by which the financial benefits arose were at arm's length on an independent commercial footing.

A "financial benefit" includes deriving a profit, revenue, income, dividend, distribution, advantage or preference, whether directly or indirectly. The breadth of the statutory language and the discretionary nature of the regulatory decision-making process means that a broad range of parties could be made to contribute to environmental rehabilitation costs. These could include executives and directors; financiers; insolvency practitioners such as receivers, liquidators and voluntary administrators; and possibly even former holders of the Approval or former owners of the asset.

Currently, the environmental and resources legislation in all Australian states already includes provisions which allow regulatory authorities to obtain financial assurances from parties which operate mining, resources and other industrial facilities. Some states also have legislative provisions to prevent "asset stripping" by related parties when environmental protection orders have already been issued. However, to date, only South Australia has provisions in its environmental legislation which can result in the imposition of responsibility for environmental compliance and rehabilitation on "related parties", often a matter for consternation by investors in that state.

However, if the proposed Amendments are passed in their current form in Queensland, they will represent the high water mark in Australia for environmental and resource management legislation, exposing corporate shareholders, financiers, insolvency practitioners and any others who have received, or may receive, direct or indirect financial benefits, as well as the directors or managers of those parties. Moreover, the proposed Amendments will operate retrospectively, meaning that existing structures and arrangements may need to be reviewed as liability can extend back for transactions occurring before the Amendments are passed. This will be highly concerning for prospective investors in companies with a significant environmental footprint. Major investors may think twice before investing in Queensland mining and resource projects without special regulatory or legislative arrangements which provide certainty as to the end of life rehabilitation obligations. This may place pressure on the Government to revive the use of State Agreements (private agreements between the Government and investors or contractors that were favoured in approving new mining and resources projects in Queensland until the 1980s).

It is expected that the mining and resource industry will put up significant resistance to the proposed Amendments. As the current Queensland Government does not have a majority of seats, it is possible that the Amendments will either not be passed into law or will be substantially changed by Parliament before they take effect.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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