Di­rec­tors still li­able, de­spite in­sol­vency

How­ever, not all en­vi­ron­men­tal li­a­bil­i­ties can be dis­charged through in­sol­vency pro­ceed­ings

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - MATTHEW BURNELL

THE en­vi­ron­men­tal li­a­bil­i­ties of in­sol­vent com­pa­nies are not specif­i­cally reg­u­lated by en­vi­ron­men­tal and in­sol­vency laws. The Na­tional En­vi­ron­men­tal Man­age­ment Act 107 of 1998, the Com­pa­nies Act 71 of 2008 and In­sol­vency Act 24 of 1936 are rel­e­vant but en­vi­ron­men­tal li­a­bil­i­ties do not fit neatly into the ex­ist­ing cat­e­gories of claims which may be lodged against an in­sol­vent com­pany. In terms of these laws share­hold­ers, di­rec­tors and lenders could be held re­spon­si­ble for the en­vi­ron­men­tal li­a­bil­i­ties of in­sol­vent com­pa­nies.

Not all en­vi­ron­men­tal li­a­bil­i­ties can be dis­charged through in­sol­vency pro­ceed­ings. In the US a dis­tinc­tion is drawn be­tween (a) obli­ga­tions to make pay­ment for non-com­pli­ance with en­vi­ron­men­tal laws; and (b) sit­u­a­tions where the obli­ga­tions of the debtor re­quire per­for­mance rather than fi­nan­cial resti­tu­tion. The for­mer is con­sid­ered to be a “claim” for pur­poses of in­sol­vency and can be dis­charged dur­ing pro­ceed­ings. The lat­ter, how­ever, is more com­pli­cated. If the gov­ern­ing leg­is­la­tion only per­mits the defaulting party to cor­rect the non-com­pli­ance by tak­ing mea­sures, then a claim can­not be dis­charged through in­sol­vency pro­ceed­ings. Where the leg­is­la­tion per­mits the state to cor­rect the non-com- pli­ance and re­claim the costs from the rel­e­vant party, a claim can be sub­mit­ted and the en­vi­ron­men­tal li­a­bil­ity dis­charged dur­ing pro­ceed­ings.

The Na­tional En­vi­ron­men­tal Man­age­ment Act per­mits the rel­e­vant au­thor­ity to step in, im­ple­ment the re­quired rea­son­able mea­sures and claim the re­me­di­a­tion costs back from, among oth­ers:

Any person in con­trol of the land or any person who has a right to use the land at the time when the en­vi­ron­men­tal li­a­bil­ity arose;

Any person who neg­li­gently failed to pre­vent the en­vi­ron­men­tal li­a­bil­ity; and/or

Any person who “ben­e­fited” from the ac­tion be­ing taken to rem­edy the en­vi­ron­men­tal li­a­bil­ity.

In the US, share­hold­ers have been found to ex­er­cise con­trol (although not in the in­sol­vency arena) where they ex­er­cised dom­i­na­tion over a sub­sidiary to ef­fect a fraud or delict or su­per­vised the un­law­ful dis­posal of haz­ardous waste. In SA, “con­trol” could be ex­er­cised through the so­cial and ethics com­mit­tee re­quired by the Com­pa­nies Act. The com­mit­tee is tasked with mon­i­tor­ing the com­pany’s ac­tiv­i­ties, com­pli­ance with leg­is­la­tion and codes of good prac­tice re­lat­ing to, among oth­ers, the en­vi­ron­men­tal im­pact of the com­pany. The com­mit­tee must in­form the board and re­port to the share­hold­ers at the an­nual gen­eral meet­ing. In this way, the share­hold­ers are aware of the com­pany’s ac­tiv­i­ties and will be re­quired to take rea­son­able mea­sures needed to avoid li­a­bil­ity.

Im­pos­ing li­a­bil­ity on share­hold­ers for neg­li­gence pre­sup­poses that the share­hold­ers held a cer­tain de­gree of knowl­edge over the op­er­a­tions of the com­pany and (de­spite this knowl­edge) failed to take rea­son­able mea­sures to pre­vent such en­vi­ron­men­tal li­a­bil­ity.

Costs can be re­claimed from any person who has “ben­e­fited” from the mea­sures taken to rem­edy the com­pany’s pol­lu­tion. Share­hold­ers may “ben­e­fit” where they re­ceive a div­i­dend while the com­pany still has out­stand­ing en­vi­ron­men­tal li­a­bil­i­ties or where the state reme­died any li­a­bil­i­ties.

Di­rec­tors should be en­cour­aged to make com­mer­cial de­ci­sions and take risks with­out fear of li­a­bil­ity pro­vided that such de­ci­sions are in the best in­ter­ests of the com­pany. Where these de­ci­sions cause en­vi­ron­men­tal li­a­bil­i­ties, di­rec­tors could be li­able in terms of the Na­tional En­vi­ron­men­tal Man­age­ment Act in sit­u­a­tions where the direc­tor ought to have taken, but neg­li­gently failed to take, rea­son­able mea­sures to pre­vent pol­lu­tion or en­vi­ron­men­tal degra­da­tion.

Direc­tor li­a­bil­ity for en­vi­ron­men­tal harm has re­cently been im­posed in a case in Lim­popo where the MD of a min­ing com­pany was held crim­i­nally li­able in terms of Sec­tion 34 of the Na­tional En­vi­ron­men­tal Man­age­ment Act af­ter com­menc­ing a listed ac­tiv­ity with­out en­vi­ron­men­tal au­tho­ri­sa­tion. It was the first South African case in which di­rec­tors were held re­spon­si­ble for en­vi­ron­men­tal mis­de­meanours.

Although the Na­tional En­vi­ron­men­tal Man­age­ment Act is broad enough to im­pose li­a­bil­ity on lenders that ex­er­cise “con­trol” of the land or premises on which pol­lu­tion or en­vi­ron­men­tal degra­da­tion oc­curs, they could pos­si­bly avoid li­a­bil­ity where it ex­er­cises its se­cu­rity by show­ing that it has taken all com­mer­cially rea­son­able ef­forts to di­vest of the fa­cil­ity within a rea­son­able time, and on com­mer­cially rea­son­able terms.

Act­ing in ac­cor­dance with the Equa­tor Prin­ci­ples and gen­eral sus- tain­able bank­ing good prac­tice should be suf­fi­cient to pro­tect lenders against li­a­bil­ity for neg­li­gence.

Lenders ben­e­fit from a trans­ac­tion if they re­ceive fees or in­ter­est on the loan amount aris­ing from trans­ac­tions. This is a ben­e­fit in the course of busi­ness and the pos­si­bil­ity that it could be deemed a “ben­e­fit” from a pol­lu­tion­caus­ing ac­tiv­ity must be re­mote.

It is con­ceiv­able that a party may ben­e­fit where re­me­dial mea­sures are un­der­taken by the state and the lender holds and sells the prop­erty in ex­e­cu­tion as a re­sult of the debt by the bor­rower not be­ing paid. In this case, the lender would ben­e­fit as it is able to sell the prop­erty at a greater value than it would have had the re­me­dial mea­sures not been un­der­taken.

Pic­ture: THINKSTOCK

CLEAN­ING UP YOUR OWN MESS

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