Disclaimer Denied: liquidators personally liable for clean up costs

The Australian Sawmilling Co Pty Ltd (in liq) v Environment Protection Authority [2021] VSCA 294

The Victorian Court of Appeal’s decision in The Australian Sawmilling Co Pty Ltd (in liq) v Environment Protection Authority [2021] VSCA 294 casts significant doubt on liquidators’ capacity to rely upon section 568 of the Corporations Act to disclaim environmental liabilities, despite the absence of any involvement of the liquidator in the creation of those liabilities.

This is a particularly important decision for liquidators of companies operating within industries that are heavily governed by environmental regulations, such as agribusinesses, mineral and resources extraction, forestry management and waste management industries.

The Victorian Court of Appeal found that a liquidator will be unable to disclaim environmental liabilities where the prejudice to the State and taxpayers will outweigh prejudice suffered by the company’s creditors if the disclaimer was not upheld.

The current law as confirmed in Australian Sawmilling is that a decisive factor in preventing liquidators from avoiding personal liability for environmental clean-up costs is the existence of a full indemnity for the liquidators’ benefit in respect of those liabilities and the consequent absence of prejudice to the liquidator and creditors compared with the corresponding detriment suffered by the State if such a disclaimer is upheld.

Background

The company to which the liquidators were appointed was a sawmilling company (TASCO) which was the registered proprietor of land which was leased to C&D Recycling, a materials recycling business. The land (which was TASCO’s sole asset upon the liquidators’ appointment) was unusable and unsaleable, as it contained large piles of industrial waste and other contaminants following C&D Recycling’s entry into liquidation and cessation of occupation of the land. Shortly after commencement of the liquidation, the Victorian EPA exercised its statutory powers to take possession of the land to undertake works for remediation of the contamination. The EPA then sought to recover the costs of those works as a statutory debt due and payable by the “occupier” of the land under section 4 of the Environmental Protection Act 1970 (Vic) (the EP Act). The liquidators sought to disclaim TASCO’s interest in the land under s 568 of the Corporations Act on the basis that the contamination made the land unsaleable and realisation costs would significantly exceed any sale proceeds.

The EPA and the State of Victoria sought to set aside the disclaimer in order to preserve the liquidators’ ongoing liabilities relating to the land, including in relation to the EPA’s environmental clean-up costs.

The decision

At first instance, and on appeal, the Court found in favour of the EPA and the State. Those findings included the following:

• A liquidator is an “occupier” under the EP Act and thereby potentially liable for the EPA’s costs incurred in remediating contaminated land. A key aspect of this finding was the Court’s focus on the liquidator’s statutory function which, while featuring a considerable overlap with the responsibilities of a director, entails a more direct control of company property;
• A liquidation’s financial consequences should neither be used as a device to avoid environmental responsibilities nor impose an unduly harsh burden upon taxpayers and the State more generally. The Court noted that if liquidators were allowed to disclaim all environmental liabilities, then companies might look to exploit that loophole by entering into voluntary liquidation as a way to avoid complying with their environmental responsibilities, an outcome which would be contrary to the EP Act’s policy objectives.

The following matters were of particular importance to the Court’s deliberations:

• TASCO’s sole shareholder, Dongwha Australia Pty Ltd, had provided an uncapped indemnity to the liquidators for environmental liabilities associated with clean-up costs and remediation, including the liquidators’ remuneration and costs; and
• During the course of the litigation, the EPA and State undertook to limit the liquidators’ liability to the extent of the substance of the indemnity.

The availability of the indemnity, combined with the effect of both the EPA’s undertaking and the operation of section 545 of the Corporations Act, meant that neither creditors nor the liquidators would be materially prejudiced if the disclaimer were set aside. Conversely, if the disclaimer were to stand, the EPA and the State would have suffered significant prejudice by reason of becoming solely responsible for meeting remediation costs.

Impact on insolvency practitioners

• The Court of Appeal’s decision is likely to make liquidators more reluctant to accept appointments over companies operating in heavily environmentally regulated sectors, whilst diminishing the availability of substantial indemnities for such appointments.
• The decision raises the threshold requirements for the ongoing availability to a liquidator of section 568 of the Corporations Act to avoid personal liability for onerous environmental liabilities of the company in liquidation.
• In the absence of a successful special leave application to the High Court or legislative reform, the Australian Sawmilling decision exemplifies the importance of practitioners obtaining considered legal advice regarding preparation for potential liquidation appointments over land that is likely to be subject to significant environmental liabilities. Practical measures that should be considered in this context may include:
  • early and proactive engagement with the relevant regulator to explore the possibility of obtaining the regulator’s agreement not to hold the liquidator personally liable, particularly in the absence of an indemnity; and
  • assessing the utility of approaching the court for relevant directions, including excusing the liquidator from personal liability.