As the marketplace enters unchartered territory for corporate governance in response to the COVID-19 pandemic, an increase in business restructurings and insolvency (R&I) proceedings are becoming commonplace for those companies struggling to recover from the pandemic’s devastating effects.
“Notwithstanding changing business or operational requirements, environmental compliance remains critical and subject to stringent regulation and enforcement, and should therefore be considered in all R&I processes.“
Many companies may need to restructure their business to survive or recover from the negative impacts of the national lockdown.
Where initial restructuring activities – such as reducing business overheads, retrenching employees or renegotiating contracts – have the result that the management response may increase environmental risks on site, environmental compliance and risk on site must continue to be managed to avoid costly enforcement action and significant liability.
Companies are reminded to act proactively in accordance with the statutory duties of care, as well as all regulatory and licensing requirements, to the extent possible within the ambit of the COVID-19 response measures.
For example, monitoring and reporting functions / schedules stipulated in licence conditions or legislation continue to be prescriptive, while other administrative processes governed by statute have been delayed by the various COVID-19 restrictions.
Specific legal advice may be required to confirm the scope and extent of statutory obligations which continue to require environmental compliance, despite reduced or changed operational circumstances.
If not successfully restructured, many operations may face solvency issues and be placed under business rescue or, if this is unsuccessful, will ultimately be subject to winding up or liquidation.
The business rescue and insolvency scenarios require a host of considerations to be taken into account from a regulatory perspective where environmental impacts and consequences may surface.
The appointment of a Business Rescue Practitioner (BRP) to manage the affairs, business, and property of the company in business rescue brings with it the following tasks which should be flagged by the company and the BRP:
- In undertaking an assessment of the company asset(s) under business rescue, do any operations need to manage environmental impacts and has a due diligence been conducted into their state of compliance?
- In assessing the contractual obligations of the company to determine which ones must be suspended, has the BRP considered the consequences of terminating service level agreements whose objective is to manage, in some way, the environmental duties of the company?
- In addition to the business rescue plan, will the BRP be required to consider, draft and implement business continuity, management and/or interim care and maintenance plans (for those operations requiring continuous processes, to avoid damage to their continuous operations and to ensure that the site remains in a safe and stable condition)? If yes, have the environmental obligations and statutory requirements which must be included in each of these been assessed?
- If the business will be liquidated / wound up and the operation or its assets sold, have the BRP and management team considered and assessed the statutory / regulatory requirements informing: (i) the transfer of liabilities to the potential purchaser; and (ii) transferability restrictions in permits held by the operation and/or statutes? In addition, has legal counsel signed off on those clauses in the Sale and Purchase Agreement (or Sale of Business Agreement) relating to the transfer of rehabilitation and environmental obligations to the potential purchaser?
Overall, and given the mandate of BRPs to step into the shoes of directors in managing the affairs, business and property of the company in the interim, the BRPs must remain cognisant of the fact (or must be made aware of the fact) that they will also be subject to statutory duties of care, which impose significant obligations upon them.
Failure to comply with these duties of care and to take “all reasonable measures” in the circumstances to prevent pollution or degradation of the environment carries significant statutory penalties, including personal civil liability and potential imprisonment.
BRPs may thus require nuanced legal advice on the scope of their statutory duties, how these duties may be discharged in the relevant circumstances and the liabilities they incur as a consequence of non-compliance.
In addition, a significant issue which must be granted due consideration is, in the case of enforcement action being taken by the regulators against the business while under management of the BRPs, whether such enforcement actions fall outside of the purview of the moratorium on legal proceedings.
Mining companies bear the added weight of understanding, during business rescue or when subject to liquidation, whether the operation’s residual environmental liabilities are adequately covered.
Environmental claims (contractual or otherwise) against the company falling outside the mandated rehabilitation financial provision put up by the company may not be prioritised.
The powers of the Department of Mineral Resources and Energy to draw on the financial provision put up by a company in business rescue may also require further assessment, as well as the consequences of a shortfall exceeding the available financial provision.
From a general regulatory perspective, it cannot be stressed enough that in the current COVID national lockdown scenario (even with the easing of restrictions), regulatory concerns are particularly relevant.
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BRPs will have to consider these afresh and upfront in virtually any appointment they take in a regulated industry, and legal assistance will always be available in guiding their review and understanding of the complex legal frameworks.
AUTHOR: Paula-Ann Novotny, an Associate at Webber Wentzel