Insolvency Disclaimer As Priority Over Conflicting State Law
By Georgie Cape, Law Clerk, MST Lawyers and Alicia Hill, Principal, MST Lawyers
Insolvency practitioners and company directors will be relieved to learn that in general circumstances disclaimers of onerous obligations by a liquidator will have priority over conflicting state laws. The recent case of Longley & Ors v Chief Executive, Department of Environment and Heritage Protection and Anor [2018] QCA 32 (Longley) overturned a contentious decision of the Brisbane Supreme Court and reiterated the general priority of the Corporations Act (Cth) (Act) over State laws.
The Longley case involved an inconsistency between a provision of the Act giving power to liquidators to disclaim onerous property and an Environmental Protection Order (EPO) issued under Queensland state law which placed expensive and burdensome liabilities on the company. The liquidators sought to utilise their power to disclaim onerous obligations and rid the company and directors of the EPO liabilities.
Insolvency practitioners were left feeling apprehensive after a surprising first instance decision allowed the State law to prevail, resulting in the company having to comply with the liabilities of the EPO. However, the Queensland Court of Appeal said the Commonwealth law, namely the Act, would prevail to disclaim the EPO obligations.
What happened?
Linc Energy Limited (Linc) operated an underground coal gasification project on land near Chinchilla in Queensland. On 13 May 2016, the Chief Executive of the Department of Environment and Heritage Protection (Department) fixed an EPO to Linc under section 358 of the Environmental Protection Act 1994 (QLD) (EPA). The EPO required Linc to minimise any environmental harm that Linc may be causing on its site. The EPO included the monitoring and sampling of gas and groundwater with reports to be submitted to the Chief Executive of the Department. It also prohibited Linc from certain activities on site such as releasing chemicals without permission from the Chief Executive of the Department. Infrastructure on site was also required to be maintained and retained.
Shortly after the commission of the EPO, Linc was put into liquidation and liquidators (Liquidators) were appointed.
On 30 June 2016, the Liquidators gave notice disclaiming the land pursuant to section 568 of the Act. This section enables liquidators to disclaim certain types of property of the company, which includes property:
- that may give rise to a liability to pay money or some other onerous obligation; and
- which it was reasonable to expect that the costs, charges and expenses that would be incurred in realising the property would exceed the proceeds of its realisation.
Disclaiming property has the effect of causing the company to lose all rights and interests in or in respect of the property.
The Liquidators argued that the property was a liability as it was subject to the conditions of the EPO. The notice of disclaimer also stated that the costs associated with remediating the land pursuant to the EPO would be ‘significantly greater’ than the value of the land.
The Liquidators claimed that as a result of disclaiming the property, the EPO no longer applied. The Department disputed this, asserting that Linc was obliged to comply with the EPO, despite the disclaimer, and the Liquidators were bound by the EPA to cause Linc to comply.
Hearing at First Instance
The Liquidators applied to the Supreme Court in Brisbane to obtain approval to not comply with the EPO. The Department with the support of the Attorney-General for the State of Queensland opposed the granting of this approval.
The Department submitted before the primary judge that the Liquidators had validly disclaimed the land, but that the property (being the EPO which attached to the company) was incapable of being disclaimed under section 568 of the Act. The Department submitted that the EPO is not a liability ‘in respect of’ the Chinchilla land or the environmental authorities. Alternatively, if it was a liability, then the power to terminate liability in the Act is inconsistent with the EPA’.
The primary judge, Justice Jackson, held in favour of the Department, ordering that the Liquidators must cause Linc to meet the requirements of the EPO. It was found that it was unnecessary to determine whether the property was capable of being disclaimed. However, the primary judge held that there was an inconsistency between sections 568 and 568D of the Act and the operation of sections 319 and 358 of the EPA. The primary judge found that the EPA State law provisions would have been invalid to the extent of the inconsistency under section 109 of the Constitution. However, it was held that section 5G of the Act, which is a section to avoid direct inconsistency between the Act and State laws, rolled back the operation of the EPA’s provisions, so that no inconsistency existed. Therefore, his Honour concluded that effect was to be given to the EPA provisions.
The Liquidators appealed the first instance decision.
Appeal
The appeal was heard in the Court of Appeal before Gotterson, McMurdo JA and Bond J, where the decision of the primary judge was unanimously overturned.
It was found that the EPO imposed liabilities on Linc and hence constitute liabilities in respect of the disclaimed property. Consequently, Linc’s liability to comply with the EPO was terminated upon the issuing of the disclaimer notice.
A direct inconsistency arose between the liquidator’s ability to disclaim property under Commonwealth legislation and the operation of State legislation imposing the EPO. It was held that the inconsistency would be resolved in favour of the Commonwealth legislation pursuant to section 109 of the Constitution.
Their Honours found that the purpose of section 568D of the Act is to facilitate an effective winding up of a company by allowing a liquidator to free Linc of burdensome financial obligations which may otherwise have a negative effect on those interested in the administration.
The Department submitted that section 5G of the Act affects section 568D to an extent and that Linc should have no right or interest in the disclaimer property, but should still be obliged to comply with the EPO. This argument was rejected.
It was found that if it applies, section 5G(11) and section 5G(8) of the Act roll back the operation of the Act in order to avoid inconsistencies with State laws.
However, it was held that the rollback provision in section 5G of the Act could not apply as the Act could not be construed to operate in a way that was not intended by the Commonwealth Parliament.
McMurdo JA stated that the Commonwealth Parliament would not have intended that for a ‘disclaimer of property, a liquidator could cause a company to lose all of its rights and interests in or in respect of the property, but remain burdened by a liability in respect of it’.
It was held that there was no way of ensuring that no inconsistency would arise. Section 5G of the Act could not shift the operation of section 568D of the Act to rid of some of a company’s liabilities but not on the other effects of a disclaimer. Thus, section 5G would only apply if the disclaimer itself was disputed, which in this case it was not.
The appeal was allowed, and the primary judge’s orders were set aside.
A Note to Insolvency Practitioners and Directors
During insolvency or administration, the power to disclaim onerous property can be an important step towards achieving the most successful outcome for the company and its creditors. Longley has confirmed the importance of this power and has ensured it is applied wholly, and not in part. In doing so, liquidators should still be wary of and have regard to existing State laws including environmental compliance requirements that may be inconsistent with this power as personal liability may arise.
If you would like to discuss any aspect of this article further, please do not hesitate to email Alicia Hill or phone +61 3 8540 0200.
