Legal Insights

Disclaiming the environment: not an easy clean-up

By Sam Kingston & Susannah Stanford

• 09 September 2020 • 7 min read

On 2 September 2020, the Supreme Court of Victoria ruled in favour of the Environment Protection Agency (EPA), setting aside the liquidators’ disclaimer of contaminated land[1]. In doing so, the Court issued some potentially ominous warnings for liquidators as ‘occupiers’ of land:

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…

The day is long past when responsibility for environmental clean up of industrial waste or contamination was confined solely to persons who have dumped or abandoned industrial waste or other perpetrators of contamination…

…The construction of the term ‘occupier’ to include liquidators as controllers of the premises of corporations in liquidation would potentially render them responsible for compliance with abatement and clean up notices, the payment of reasonable clean up costs incurred by the EPA, and the furnishing of information to the EPA in accordance with the respective statutory provisions. They would be in the same position as other occupiers of land in Victoria.

What does this mean for liquidators dealing with contaminated land?

Key takeaways

  • Liquidators may be ‘occupiers’ of land for the purposes of liability for clean up costs under section 62(2) of the Environment Protection Act 1970 (Vic) (EP Act). Practitioners should tread carefully when contemplating accepting an appointment where the corporation owns or occupies contaminated land.
  • Although liquidators can disclaim onerous property, a disclaimer may be set aside where it would cause prejudice to persons with interests in the property that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company’s creditors.[2] Prejudice to related party creditors who may ultimately bear the burden of the clean up costs may not constitute sufficient prejudice to prevent the setting aside of a liquidators’ disclaimer.
  • There is no direct inconsistency between the operation of the EP Act in Victoria and the provisions in the Corporations Act 2001 (Cth) (Corporations Act). Regardless, if there had been inconsistency, the disclaimer provisions would not operate to the extent necessary to allow the proper operation of the EP Act provisions. This approach distinguishes other judgments.[3]
  • The Court rejected an argument that setting aside the disclaimer would create uncertainty and risk for liquidators generally because, amongst other things, liquidators are adequately protected by the Corporations Act. In particular, liquidators are not obliged to incur expenses where there are insufficient assets to meet the liquidator’s costs[4] and this limits any personal liability. The presence of an undertaking given by the EPA to limit the recovery of clean up costs to amounts recovered under a funding indemnity granted to the liquidators was clearly a determinative factor and the outcome is likely to have been different if that limitation did not exist.

The judgment

The Australian Sawmilling Company Pty Ltd (in liq) (TASCO) is the registered owner of a large parcel of industrial land at Lara, Victoria. The land was most recently leased to a materials recycling business and large stockpiles of industrial waste have accumulated creating a fire risk and risks to environmental and/or human health. TASCO is ultimately owned by a group of companies based in Korea, the Dongwha Group.

In March 2019, the liquidators were appointed by way of a creditors’ voluntary winding up. The liquidators accepted the appointment on the condition of an unlimited indemnity in relation to environmental liabilities given by Dongwha Australia Pty Ltd.

The land was valued at $11,155,000 on the assumption that clean up had been completed. However, the clean up costs are estimated to be at least 5 times the value of the land. The land is currently unsaleable. TASCO has no other assets and there will be no dividend to creditors in any circumstances.

In April 2019, the EPA notified TASCO (and the liquidators) of its intention to enter the land to conduct a clean up under sections 55(1) and 62 of the EP Act and to recover the clean up costs. Subsequently, the liquidators disclaimed TASCO’s interest in the land under section 568A(1) of the Corporations Act.

The EPA sought to have the liquidators’ disclaimer set aside. The EPA offered an undertaking that it would limit the liquidators’ liability to the amount recovered by them under the Dongwha Australia indemnity.

The Court found in favour of the EPA and set aside the disclaimer on the basis that:

  • The liquidators (as agents of TASCO) have the requisite degree of control over the land so as to be properly considered ‘occupiers’ of the land for the purposes of liability for clean up costs under section 62 of the EP Act. It is irrelevant that the land remains owned by the corporation as it is within the liquidator’s custody or power. While the parliament has specifically limited the liability of financial institutions when they act as mortgagees in possession, controllers or managing controllers, it has not legislated to limit the liability of liquidators.
  • Including liquidators within the definition of ‘occupier’ is entirely consistent with the purposes of the EP Act and it would be contrary to the EP Act to allow companies who have contaminated land to be placed in liquidation in order to avoid the requirement to pay reasonable clean up costs. The Court should uphold clean up obligations, and not let the costs pass by default to the State.
  • It is unlikely that the liquidators will suffer any material prejudice as they are prevented from personal liability by section 545 of the Corporations Act. The liquidators also have the benefit of the indemnity from Dongwha Australia and the EPA has agreed to limit the liquidators’ liability to the amount recovered by them under that indemnity.
  • There is no direct inconsistency between the operation of the EP Act in Victoria and the disclaimer provisions in the Corporations Act, as distinct from the Linc Energy[5] case in Queensland. Even if there had been any such inconsistency, the Court was of the view that the disclaimer provisions would not operate to the extent required to allow the proper operation of the EP Act provisions.
  • Although companies in the Dongwha Group are TASCO’s only real creditors and it will be Dongwha Australia that will ultimately bear the burden of the clean up costs (under the indemnity), that does not constitute sufficient prejudice to creditors of the kind referred to in section 568B(3) of the Corporations Act to prevent the setting aside of the disclaimer.

Conclusion

In this case, the Court was satisfied that the liquidators were adequately protected as they had the benefit of the Dongwha Australia indemnity and the EPA undertaking. They were also prevented from personal liability by section 545 of the Corporations Act, which limits their liability for expenses in the winding up. However, the case is a reminder that liquidators may face both civil and criminal liability for environment-related offences as officers of corporations and that care must be taken to minimise personal exposures.

[1] EPA & Anor v Australian Sawmilling Company Pty Ltd (in liq) & Ors [2020] VSC 550

[2] Section 568B of the Corporations Act 2001 (Cth)

[3] See, for example, Longley v Chief Executive, Department of Environment and Heritage Protection [2018] QCA 32

[4] Section 545 of the Corporations Act 2001 (Cth)

[5] Longley v Chief Executive, Department of Environment and Heritage Protection [2018] QCA 32 (leave to appeal to the High Court refused: [2018] HCA Trans 185)

Please contact a member of the Restructuring & Insolvency Team.

By Sam Kingston & Susannah Stanford

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