Clean-up And Companies In Liquidation

Two Scottish cases have considered the issue of the relationship between statutory clean-up requirements and corporate insolvency.

In Joint Liquidators of Doonin Plant Limited [2018] CSOH 89 the liquidators sought directions from the court in circumstances where the company in liquidation had run a waste management business and had unlawfully deposited waste at the site, its waste licence having been revoked. Prior to liquidation, SEPA had served a notice under s. 59 of the Environmental Protection Act 1990 requiring removal of the waste. The liquidators had realised all the company’s assets other than the site. The cost of remediation was estimated to cost between £2.3 and £3.7 million. The company’s funds stood at about £635,000 before payment of liquidation expenses. It was not disputed by SEPA that the section 59 liabilities were liabilities of the company, not personal liabilities of the liquidators. The court (Lord Doherty) regarded the first issue logically as being whether the expenditure to comply with the notice would be an expense in liquidation, which under the Insolvency (Scotland) Rules 1986 would have the highest priority. However, that was not the way in which the parties had ordered the questions. The first question on the parties’ formulation was whether the obligations arising under the notice were a contingent debt. It was common ground that the statutory obligation to comply with the notice was not a debt at all. However, s. 59(6) provides that where the notice is not complied with the authority may itself carry out the relevant steps and recover expenses reasonably incurred, and the issue was whether this gave rise to a contingent liability. Lord Doherty applied the test formulated by Lord Neuberger PSC in In re Nortel GmbH [2014] AC 209 at para. [77] of whether (a) the company done or had been subject to some step which had a legal effect; (b) resulted in it being vulnerable to liability, such that there would be a real prospect of the liability being incurred; and (c) whether it would be consistent with the regulatory regime in question to conclude that it gave rise to a contingent liability. The unlawful deposit of the waste by the company satisfied (a), rendering it subject to action under s. 59. Limb (b) was much more problematic, and the judge concluded that in reality there was no prospect of SEPA, with limited resources, incurring the expenditure in circumstances where it was highly unlikely to be reimbursed. The judge also did not regard limb (c) as being satisfied. The key question for the judge was whether expenditure to comply with the notice was a liquidation expense, which would promote it to a high level in the statutory “waterfall of priorities”, ranking above preferential debts and ordinary debts. Unlike some other provisions, s. 59 did not make clear whether liability to comply with the notice was a company obligation which the liquidator was required to meet in the liquidation. The critical issue therefore was whether the nature of the s. 59 liability was such that it must have been intended by the legislature that it would be such an expense. The judge held that this was indeed the intention, when s. 59 was viewed through the prism of the EU waste framework directive which Part II was intended to implement: i.e. the polluter-pays principle and effective protection of human health and the environment, as “otherwise polluters who become insolvent would frequently escape paying for the damage to the environment which their conduct has caused” (para. [65]). This was supported by the conclusion of the Inner House in Joint Liquidators of Scottish Coal v. SEPA 2013 SLT 1055. Lord Doherty declined to follow the reasoning of Morritt LJ in In re Celtic Extraction Limited [2001] Ch 475 para. [39] as “unpersuasive”. Nor did he find persuasive the argument that to treat such expenses as liquidation costs would create practical problems or disincentives to insolvency practitioners.

In Administrator of Dawson International PLC [2018] CSOH 52; 2018 SLT the administrator sought directions as to potential liability in respect of a contaminated site in Berwick-on-Tweed which had been operated by a subsidiary (Pringle Knitwear) resulting in ongoing groundwater pollution by tetrachloroethylene. The company had about £3.3 million in assets and faced a claim of about £10.4 million for pension liabilities. The issue was whether the costs on ongoing remediation or maintaining a pump and treat system (possibly on an indefinite basis), with potential liabilities under Part IIA or pursuant to a works notice under the Water Resources Act 1991 were liabilities, or possibly an administration expense which would rank in priority to creditors. Because of the border location, such liabilities would arise under English law. The case was on preliminary issues, as to whether the court had jurisdiction to give directions (it was held it did) and whether the Environment Agency has locus to participate in the proceedings. In determining this second point in favour of the Agency, interestingly, applying the test at para. [77] of In re Nortel GmbH [2014] AC 209, Lord Clark reached the opposite conclusion to that in Doonin Plant Limited, that the service of a remediation notice under Part IIA was a contingent liability, there being a real prospect of such a notice, or a works notice, being served. On that basis the Environment Agency was a person who could have a claim against the company and had standing in the proceedings. However, as a preliminary issue, the Agency’s case was accepted at its highest and was not tested in the same way as in Doonin. Also interestingly, like the judge in Doonin Plant, Lord Clark found no assistance in the Celtic Extraction case.

Text references: paras. 5-58; 9-11; 19-52


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