21 September 2009

Expanding the net of corporate liability

Increasingly, the manner in which companies tackle their environmental responsibilities is under the spotlight. Our environmental legislation is some of the best in the world but it continues to be more reactive than proactive. Flouting environmental obligations may have consequences beyond the realm of environmental legislation when the new Companies Act commences in 2010.

Read together with the King III Code, the new Companies Act contains a number of provisions which impose corporate environmental governance requirements. This is in line with the Act's aim to "provide appropriate legal redress for ... third parties", including those acting on behalf of the environment.

The Act will empower the Companies and Intellectual Property Commission to order the cessation of business where it considers a company, amongst other things, to be trading recklessly or under insolvent circumstances. Its obligation to prevent prohibited conduct may include environmental infringements, which are contrary to the requirements of good corporate governance.

Precedent shows that what constitutes "reckless" conduct is likely to include "a serious departure from the standard of care to be exercised by a reasonable company". What is "serious" may be bolstered by the Constitutional recognition of an environmental right. Breaches of the standard of care may, for example, include a failure to properly account for actual environmental liability or where, given the extent of a company's environmental liability, it is de facto trading under insolvent circumstances.

Serious departures from the standard of care may not only be easier to prove but are likely to be a more proactive means to securing sound environmental management. The potential for directives and compliance notices under environmental law is limited. They may only be issued where environmental degradation has already taken place (or at the very least that the threat is imminent).

Directives require a breach of the duty of care (which requires that a company take reasonable measures to prevent pollution) whereas compliance notices under the Environment Conservation Act require human activities to have seriously damaged, endangered or detrimentally affected the environment.

An order to cease business may be a far greater deterrent to companies flouting their corporate environmental obligations than the apparently less drastic administrative remedies under, amongst others, the National Environmental Management Act (NEMA).

Not only is the threat of cessation of business greater to companies than an administrative measure under environmental laws, but these new measures carry the added bonus of requiring companies to abide the principles of good corporate governance - an effective tool for achieving good environmental management which, in turn assists in the ultimate aim of achieving sustainable development.

Justine Sweet
Senior Associate, Environmental Law

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