Australia: Stuck in the middle – Court finds liquidators personally liable for environmental remediation costs

The Supreme Court of Victoria in EPA & Anor v Australian Sawmilling Company Pty Ltd (in liq) & Ors [2020] VSC 550 has set aside a notice of disclaimer for land the liquidators of the Australian Sawmilling Company Pty Ltd (In Liq) (TASC) had issued to avoid incurring further costs associated with the highly polluted site.

The liquidators, and not just TASC, were held to be “occupiers” as that term is defined in the EP Act because functionally they controlled the site. This was notwithstanding that they were only officers of the land owning company. The EPA has the power to issue “occupiers” with a notice to pay the EPA’s costs of cleaning up a site that is polluted or environmentally hazardous.

Key factors in this case were:

• The liquidators had the benefit of an indemnity from a third party for environmental liabilities the liquidators incurred.  The Court’s decision served, in effect, to make that indemnity available for the benefit of the EPA.

Were that indemnity not available, indications are that the EPA would not have pursued the liquidators for the clean-up costs. The EPA gave an undertaking in the proceedings to the effect that any recovery would be strictly limited to the extent to which the liquidators’ indemnity responds.

• TASC’s unsecured creditors were no worse off as a result of the continued ownership of the land. If either the liquidators bore the costs of that work, or avoided them by disclaiming the land, there would still be no return to those creditors.

It is not certain that the outcome of the case would have been the same had there been substantial detriment to such creditors.

The logic of the case would appear to apply equally to receivers, who would also be “occupiers” by controlling property over which they were appointed. Administrators would also exercise such control, being in a similar position to that of liquidators.

Whilst it is prudent for external administrators to have an indemnity before taking on insolvency appointments involving environmentally hazardous assets, all stakeholders need to be aware such an indemnity may itself become a source of recovery for remediation costs.

Insolvency processes do potentially provide a process for dealing with liabilities, including environmental liabilities. However, care needs to be taken by those structuring or taking such insolvency appointments to consider and manage potential environmental liabilities.

In more detail

TASC was the owner of a 14.9 hectare parcel of land located in Lara, Victoria on which was stored approximately 320,000m³ of various mixed construction and demolition waste in stockpiles, which was estimated to cost around five times the value of the property to clean up. Prior to consenting to their appointment as liquidators in a creditors’ voluntary liquidation, TASC’s liquidators obtained an uncapped indemnity from a related entity which would cover environmental liabilities incurred by the liquidators, and provided a fixed amount in respect of the liquidator’s other remuneration and expenses.  The indemnity was conditioned on the liquidators using reasonable endeavours to minimise any such environmental liability.

The liquidators issued a disclaimer notice for the land on 30 April 2019. Section 568(1) of the Corporations Act 2001 (Cth) (Corporations Act) allows a liquidator of a company to disclaim property on behalf of the company if, relevantly:

1. the property is unsaleable or not readily saleable;
2. the property may give rise to a liability to pay money or some other onerous obligation; or
3. 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, whether or not the liquidator has already tried to sell the property.

By this time the EPA had entered the land and was seeking proposals for the clean-up of the site. It was yet to incur those costs. Section 62 of the EP Act allows the EPA to recover the costs of such a clean-up from the “occupier” of the land. A person with an interest in the disclaimed property may ask a court to set aside the disclaimer before it takes effect under s 568B(1) of the Corporations Act. In this case, the EPA was considered to have that interest because it could assert a statutory charge over the land for its clean-up costs.

“Occupier” as defined in the EP Act refers to a person exercising control over a property.  TASC’s liquidators were considered to have the requisite control of the assets of TASC (including the land) by reason of their appointment. The EPA’s intervention at the site did not change this.

Ordinarily, section 545 of the Corporations Act permits a liquidator to avoid incurring expense in a liquidation unless there is “sufficient available property” to pay it. The liquidators’ indemnity from the related entity in respect of these expenses though was held by Court to be “property” for the purposes of paying such expenses. Therefore, the Court reasoned, the liquidators could be obliged to incur further expense in cleaning up the pollution. Here the “incurring” would be the claim made by the EPA for its clean-up costs in due course. The liquidators themselves were not expected to undertake the work.

The Court considered the potential for inconsistency between the disclaimer regime under the Corporations Act and the EP Act, but reached a different conclusion from that reached by the Queensland Court of Appeal in the Linc Energy appeal.

The Court was also influenced by the possible dangers of allowing a company to use the voluntary liquidation and disclaimer of property processes to avoid environmental responsibilities and to leave the State and taxpayers to cover the costs of environmental clean-ups.

Despite indicating an intention to exercise powers against the liquidators personally, the EPA showed a willingness to avoid reaching beyond the available property of TASC, providing an undertaking to the Court to avoid any risk that the liquidators’ personal liability would extend beyond their indemnity.