High Court refuses special leave to liquidators liable for contaminated land - Insolvency/Bankruptcy

This week's TGIF focuses on The Australian Sawmilling Company Pty Ltd (in liq) v Environment Protection Authority [2021] VSCA 294 in which the Court set aside a disclaimer of onerous property, such that liquidators were held liable under environment protection legislation.

Key Takeaways

The setting aside of a disclaimer of onerous property can result in liquidators being liable for the costs of remediating contaminated land.
Courts can take environmental considerations into account in applying their discretion to set aside disclaimers of onerous property.
Victoria's recently revamped environment protection regime may create additional environmental duties for liquidators and open the door to further litigation in this area.

What happened?

The applicant liquidators (the Liquidators) were appointed to the Australian Sawmilling Company (TASCO) on 14 March 2019 following a voluntary winding up by the company's creditors (the Creditors).

TASCO was the registered proprietor of land in Lara, Victoria which contained around 320,000 cubic metres of mixed construction and demolition waste left by a former licensee. The land had also been subject to orders by the Victorian Civil and Administrative Tribunal in 2018 regarding fire management and rehabilitation.

The Liquidators accepted their appointment on the condition that TASCO's sole shareholder indemnify them for an unlimited amount as to any environmental liabilities.

On 29 April 2019, the Victorian Environment Protection Authority (EPA) determined to conduct its own clean-up pursuant to the Environment Protection Act 1970 (Vic) (EP Act), due to the ongoing fire, health and environmental risks.

The next day, the Liquidators lodged a notice of disclaimer under section 568 of the Corporations Act 2001 (Cth) (Corporations Act).

Section 568(1) of the Corporations Act allows a liquidator to disclaim property:

which is unsaleable or not readily saleable; or
which may give rise to a liability to pay money or some other onerous obligation; or
where it is reasonable to expect that the costs, charges and expenses that would be incurred in realising the property would exceed the proceeds of realising the property.

The EPA then successfully applied to have the disclaimer set aside under section 568B of the Corporations Act. This resulted in the EPA being able to seek to recover the clean-up costs from the Liquidators (limited to the amount recovered by them under the indemnity).

Why was the disclaimer set aside and was that decision correct?

Section 568B(3) allows the Court to set aside a disclaimer if satisfied that it would cause prejudice to a person who has, or claims to have, an interest in the property that is out of proportion to the prejudice that setting aside the disclaimer would cause to the company's Creditors.

Section 62 of the EP Act allows the EPA to recover costs from an 'occupier', which, by definition, includes a person in control of premises.

The Court of Appeal (COA) held that:

the trial judge's decision that the disclaimer would cause significant prejudice to the EPA vis-à-vis the company's Creditors was correct. The effect of the disclaimer was that the EPA could not seek to recover its significant clean-up costs from the Liquidators, in circumstances where the Liquidators had the benefit of an indemnity. On the other hand, it was common ground that regardless of whether or not the disclaimer was set aside, TASCO's Creditors would receive no dividend;
the Liquidators were occupiers of the relevant land. Liquidators fall within the definition of 'occupier' under the EP Act because they exercise physical and legal control over land owned by companies in liquidation, in order to carry out their functions of collecting, applying and distributing a company's assets;
the Court's discretion in setting aside the disclaimer had not miscarried because the trial judge had considered the desirability, on public policy grounds, of preventing the use of liquidators to avoid environmental liabilities; and
furthermore, the trial judge had correctly taken into account the public function of liquidators in concluding that the exercise of judicial discretion to permit the EPA to recover its clean-up costs would not impact the willingness of insolvency practitioners to accept a liquidation appointment, as their legal and financial position was protected by the Corporations Act, as well as the indemnity in this case.

Special leave refused – what about the new environment protection regime?

TASCO made an application to the High Court of Australia for special leave to appeal the decision of the COA.

On 16 March 2022, the High Court refused special leave to appeal because the EP Act had been repealed, such that there was no issue of public importance. While this effectively affirms the decision of the COA, it does not rule out future litigation under the successor to the EP Act, the Environment Protection Act 2017 (Vic).

The new legislation confers the EPA with a new power to recover the costs of a clean-up from an occupier of premises. However, unlike the EP Act, it does not expressly define 'occupier'. Additionally, there are now duties that apply to a person with 'management or control' of land, which would likely apply to liquidators under the COA's reasoning.

Comment

The COA's reasoning highlights the significant personal risks to liquidators of accepting appointments involving potential environmental liabilities. Although the COA's reasoning was limited to the now repealed EP Act, the COA's finding that liquidators were 'occupiers' by reason of their appointment alone was significant.

In addition, there appears to be a fine balance as to whether a liquidator should obtain an indemnity in respect of environmental liabilities. Under the COA's reasoning, the fact that the Liquidators were fully indemnified in respect of environmental liabilities was relevant to the discretion to set aside the disclaimer. However, it remains possible that even without an indemnity a disclaimer could be set aside, leaving the liquidator personally exposed.

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