Australia: Franchisors exposed under new Queensland environmental law

Third parties such as lessors, lenders, investors and franchisors could now be exposed to liability for the actions of related companies operating under the Environmental Protection Act 1994 (Qld) (EP Act). Amendments to the EP Act have widened the scope of persons who may be liable for compliance with an environmental protection order (EPO), a statutory enforcement tool which can be issued by the Department of Environment and Heritage Protection (DEHP) to require a person to undertake specific actions, such as the clean-up and rehabilitation of land, within specific timeframes.

The amendments, made by the Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld), which commenced on 27 April 2016, were intended to facilitate enhanced environmental protection of sites operated by companies in financial difficulty and avoid the State bearing the costs for their management and rehabilitation, said to be a "looming major problem" posed by the downturn in the mining sector. But the scope of the new powers is very broad and could have significant implications for those operating and investing in a range of different sectors.

What is the effect of the new laws?

Under the amended EP Act, DEHP can now issue an EPO to:

  • a related person of a company that is being, or has already been, issued with an EPO (in the circumstances listed in section 358 of the EP Act, which include the purpose of securing compliance with the general environmental duty); 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.

In the first scenario, the EPO issued to the related person can impose any requirements imposed (or to be imposed) on the company. In the second scenario, where an EPO is issued to a related person of a high risk company, DEHP may impose any requirements that it would otherwise be permitted to impose under the general EPO provisions of the EP Act, as if the related person were the high risk company. Specifically, it can require the related person to take actions to prevent or minimise a risk of environmental harm, take actions to rehabilitate or restore land, or to give a bank guarantee or other security for their compliance with the order.

Who could be a related person?

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 (eg. 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 under the EP Act that was, or is being, carried out by the company under an environmental authority, or that was, or is being, carried out by the company and has caused, is causing, or is likely to cause, environmental harm. Environmentally relevant activities include mining and other resource activities, as well as a whole suite of particular industrial and manufacturing activities such as activities relating to food processing, chemical storage, waste management and water treatment services.

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).

There are a number of factors DEHP may consider when deciding whether a person has a relevant connection with a company. They include:

  • the extent of the person's control of the company;
  • the extent of the person's financial interest in the company (ie. 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 definition of a "related person" remains quite broad in its potential application, particularly because of what can constitute a "relevant connection" with a company. There is a real concern that all company directors may have that relevant connection. Even the franchisor-franchisee relationship could be capable of being a relevant connection for the purpose of the EP Act.

Mitigating factors

In deciding whether to issue an EPO to a related person of a company, DEHP:

  • must have regard to applicable statutory guidelines (which are yet to be released); and
  • 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.

What you need to do

The applicable statutory guidelines, which are expected to be released later in the year, may assist to clarify the intended scope of the new laws. In the interim however, 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 (or that otherwise has obligations under the EP Act), should consider the potential impact of the new laws.

For entities with potential exposure as a related person, it will be important to be able to demonstrate taking all reasonable steps to ensure the operator company's compliance with the EP Act. It may be prudent to update relevant agreements or other documentation to require operator companies to comply with their obligations under the EP Act and make adequate provision for the environmental rehabilitation and restoration of land. More proactive measures, such as compliance audits and inspections, may also be warranted.

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