Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Courts ‘should be wary of [liquidator] disclaimers where environmental liabilities are to be passed onto taxpayers or innocent persons’

A court has set aside liquidators’ disclaimer of contaminated property on a challenge by the environmental regulator. Particularly in a voluntary liquidation of a company, the Court said it should discourage the use of that process as a means to avoid the company’s environmental responsibilities.

Ultimately however, environmental responsibilities are better enforced earlier, than at the time the company enters insolvency and the environmental damage is revealed.   

The law of insolvency allows the liquidator or trustee to ‘disclaim’ certain property of the company that is not wanted because it is worth little or is unsaleable, or its retention costs pending sale are too high, or it involves risk. Contaminated land, or a long-term lease, are examples. Those who suffer financial loss as a result can lodge a proof of debt for the amount of loss involved.

It is a matter of some controversy in Australia, and internationally, as to how the remediation of contaminated land – say from mining, or chemical works – is to be ensured.  Securing and enforcing the cost of clean-up from the company itself by way of a bond or through the licensing and regulation of its operations, or some other up-front mechanism, seem better than trying to recoup those costs if the company fails and then goes into insolvency.

The Court has a discretion whether to allow a disclaimer if it is challenged by those adversely affected.

EPA v Australian Sawmilling

A disclaimer by liquidators in a voluntary liquidation has been sent aside because the Judge was ‘satisfied that it would cause prejudice to others that was “grossly out of proportion” to the prejudice that setting aside the disclaimer would cause the insolvent company’s creditors, this being a criterion under s 568B(3) of the Corporations Act: EPA & Anor v Australian Sawmilling Company Pty Ltd (in liq) & Ors  [2020] VSC 550.

Justice Garde accepted that the land was unsaleable and of no value. But the liquidators had the benefit of an unlimited indemnity from a parent company, Dongwha Australia, in relation to environmental liabilities, upon which they could call if the EPA were to serve a demand on them under s 62(2) under the Environment Protection Act 1970 (Vic) (‘EP Act’); to conduct a clean-up of the land.  The EPA gave an undertaking that it would limit the liquidators’ liability to the amount recovered by them under the indemnity, noting that the liquidators’ costs, charges and expenses all fell within the definition of ‘environmental liability’ in the deed of indemnity.

Liquidators’ arguments

Arguments of the liquidators that the Court should exercise its discretion not to set aside the disclaimer included that it would be unfair if the disclaimer were set aside and the liquidators were left with the risk of pursuing Dongwha under an indemnity which may or may not be satisfied; and that it would unduly delay the liquidation.

They also argued that

“the exercise of discretion against the liquidators would create uncertainty and risk for liquidators generally and may engender reluctance among practitioners to take on a liquidation where a company’s property is potentially affected by environmental contamination”.

Arguments rejected

The Court did not accept these as being enough to allow the disclaimer to stand.

“The Court should be wary of disclaimers where environmental liabilities are to be passed onto taxpayers or innocent persons. The Court should discourage the use of voluntary liquidation as a device to avoid environmental responsibilities, or to impose unwanted or unexpected burdens on the taxpayer. Where there are opportunities open to recover the costs of environmental clean up, they should be taken unless outweighed by other factors”.

The Court had cited earlier cases to the effect that a voluntary liquidation should not be seen as “no more than a way in which the company in liquidation could avoid its regulatory obligations” and that it was “against public policy to pass the onus onto the Crown to avoid legal obligations”.  In one case involving barrels of contaminated waste, the Judge had said that

“the whole exercise had been one of the company to rid itself of its obligations with respect to hazardous goods by foisting them onto the transport company or onto the taxpayer by having the property declared bona vacantia and so vest in the Crown”.

In this case, the Judge accepted that the clean-up costs would vastly exceed the value of the land, and that the company had no other assets. Loss of access to the indemnity from Dongwha Australia would cause the EPA and the State serious prejudice. The position of the company’s creditors would be unaffected if the unlimited indemnity for environmental liabilities were called upon.

Nor was it likely that the liquidators would suffer any material prejudice.

“They are protected by the deed of indemnity, which extends to their remuneration charged on a time cost basis. They are also prevented from personal liability by s 545 of the Corporations Act, which limits their liability for expenses in the winding up, and by the undertaking”.

They would not be liable beyond the amount of clean-up costs recovered under the deed of indemnity, and would receive their professional fees and expenses.

While the process of liquidation would take somewhat longer, this was an acceptable outcome given that they were to be remunerated for their time under the deed of indemnity.

“As to the position of insolvency practitioners generally, I do not consider that the exercise of my discretion to permit the EPA and State to recover clean up costs to the extent of the indemnity would have any impact on their willingness to accept liquidation appointment. Their legal and financial position is well protected by the Corporations Act”.

The factors that favoured the exercise of discretion substantially outweighed those that did not.

Comment

The tension between insolvency and environmental law is more evident in other cases; in this one, the indemnity was a decisive factor.

The significant outcome of the Redwater decision in Canada, in relation to “orphan” oil wells, may not have resolved the tension, the Supreme Court there making some distinction between costs of a liquidator which could properly be disclaimed, and obligations to remediate, which could not.  To some extent that is the outcome of the decision here.

Australian parliamentary attention is also being given to the regulation of mining and related companies, and the need for financial security as a condition of a license.  The problems of disclaimer arose in Kimberley Mining, prompting political comment that

“we don’t want irresponsible mining companies offloading their clean-up costs onto the [state] because this means responsible companies will be subsiding irresponsible companies. That’s not fair, which is why we’re calling on the Commonwealth to ensure action is taken quickly”.

That remains an issue of distant law reform. Cleaning up the law – WA’s old diamond and other mines.

The other issue is as to the personal liability of insolvency practitioners, which came up in Queensland’s chain of responsibility laws.  Regardless of that law, I have suggested that we consider the approach in Canada of a statutory provision saying that a liquidator has no responsibility or liability for environmental harm caused before their insolvency appointment, hardly necessary to say but perhaps useful anyway, in the face of laws like those in Queensland: The Last Man Standing [2017] 18(2) INSLB 38.

Bankruptcy

Necessarily, the same law of disclaimer generally applies in bankruptcy: s 133 Bankruptcy Act. But although the 1988 Harmer Report [611] said that it was desirable that the provisions for disclaimer in individual and corporate insolvency be the same where possible, and some uniformity was achieved, the “grossly out of proportion” factor does not appear in s 133.

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