Who is protected on insolvency: the environment or the creditors?

Recent decisions in Scotland consider the balance between environmental clean-ups and creditor claims. Are the English cases which prioritised the creditors ripe for revision?

13 November 2018

Restoring damage to the environment can be an expensive business. When a company responsible for the damage becomes insolvent, what happens to those environmental liabilities for clean-up? There has long been a tension between insolvency law’s protection of the company’s creditors and the public benefit of environmental restoration. 

The English approach to date

In England, the Courts have appeared to favour the creditors. In the leading Court of Appeal decision in Celtic Extraction [2000] Env. L.R. 86, handed down in 1999, the judges rejected an Environment Agency argument that the official receiver should not be allowed to disclaim a waste management licence as 'onerous property’ and in doing so avoid costs of dealing with the environmental harm caused by the waste deposits. The Agency had argued that insolvency law should be read in light of the “polluter pays” policy when resolving apparent inconsistencies between the two.

In the leading judgment, Morritt LJ said 'There is nothing… to suggest that the "polluter pays" principle is to be applied to cases where the polluter cannot pay so as to require that the unsecured creditors of the polluter should pay to the extent of the assets available for distribution among them' and found for the creditors, leaving the environmental restoration works to be borne by the public purse.

Has there been a shift in the status of environmental protection within society in the subsequent 20 years that might cause such a case to be decided differently today? Two recent Scottish cases provide an interesting insight into how these questions are being addressed. Although the facts in each case are different to Celtic Extraction, the underlying policy considerations across all three cases are comparable.

The Doonin Plant case

In Doonin Plant [2018] CSOH 89, the company, Doonin Plant Limited, carried on a waste management business. The Scottish Environment Protection Agency (SEPA) alleged that between 2010 and 2015, the company unlawfully deposited controlled waste at one of the company’s sites. A notice was issued in 2012 pursuant to section 59(1) Environmental Protection Act (EPA) 1990, requiring the company to remove the waste by 2013. This notice was not complied with; therefore a further notice was issued in 2015.

The company went into liquidation in 2015, prior to the issue of the second notice. The liquidators applied to the court to seek directions, as the company’s financial situation was such that the estimated cost of remediation work necessary in order to comply with the s.59 notices far outstripped the remaining funds available.

The questions for the court were:

  1. Were the liquidators required to utilise the company’s remaining funds to complete the remediation works?
  2. If so, how should the statutory environmental liability be categorised on the statutory regime of insolvency? A contingent provable debt or as an expense of liquidation?
  3. If categorised as liquidation expenses, would the court vary the statutory regime so as to prioritise the liquidator’s remuneration?

Lord Doherty held that both liabilities were to be properly categorised as a liquidation expense and therefore to be paid in priority to provable debts. In other words, the costs of remediation were to be paid before any distribution to the creditors, and of course on the facts of the case, there would not be any money left for the creditors at the end of the environmental restoration. 

On question three, Lord Doherty held that it would be rare for a court to refuse to order that a liquidator’s remuneration be paid in priority to the liquidation expenses, and therefore insolvency practitioners need not be unduly concerned with accepting appointments for companies with pre-existing statutory environmental liabilities. That may be a welcome relief for those IPs handling difficult sites.

Lord Doherty made it clear that this was a decision based on statutory interpretation and not policy. Although the facts are similar, the legal question was different to the Celtic Extraction case. However, unlike the Court of Appeal in the Celtic Extraction case, Lord Doherty was prepared to interpret the environmental protection legislation through the 'prism' of the EU Waste Framework Directive 2008 and the 'polluter pays' principle embodied within it.

The Dawson International case

In Doonin Plant, there was an extant s.59 notice under the EPA, and therefore a clear regulatory requirement on the company (had it been solvent) to carry out the remediation action required by that notice. 

However, what would be the position for a company that had been carrying out remediation on a voluntary basis, as is so often the case? The preferred approach of many environmental regulators is for companies to address contamination issues without the need for formal action. What happens if the company becomes insolvent during that remediation project?

This was the subject of another Scottish case of Dawson International [2018] CSOH 52, in which Burges Salmon is acting for the insolvency practitioners. The Court of Session was asked to consider a number of preliminary issues. For the purposes of this update, the most interesting of those questions was the argument advanced by the majority creditor that the Environment Agency (the site in question was located in England) did not have standing to take part in the proceedings, on the grounds that it was not a creditor.

The majority creditor argued that the fact that the Environment Agency might, at some time in the future, be able to issue a notice did not make it a contingent creditor, and it was not entitled to hold up the conclusion of the administration for what could be many years while it investigated the matter, nor was the Environment Agency entitled to insist that the companies in administration continued to operate a groundwater remediation equipment (a pump and treat system) indefinitely, at the expense of the creditors.

In the reported decision, Lord Clark refused to conclude that the Environment Agency could not be a contingent creditor and that it did not have standing. Taking the Environment Agency’s case at its highest (and being a preliminary issue, that case was not tested further), Lord Clark held that the action of the companies created a contingent liability because the companies 'had assumed control of knowingly contaminated subjects, failed to take reasonable measures to remediate the contamination at the site and thus knowingly permitted the continued contamination' and as such 'the steps taken by the companies therefore had "some legal effect" and put them under "some legal duty or into some legal relationship" which resulted in them being "vulnerable to the specific liability in question"'.

Lord Clark held that the ability of the Environment Agency to serve a notice was sufficient to create that legal duty or relationship, even though no notice had been served. As Lord Clark went on to observe: 'Otherwise, a company could knowingly cause contamination and any liability could be avoided by entering into insolvency prior to enforcement becoming possible'. It is interesting to compare that observation with the Court of Appeal in Celtic Extraction where liability for remediation was avoided by doing exactly that.

Concluding thoughts

Doonin Plant and Dawson International are interesting decisions, but do they have wider application and what can we learn for the future? Our thoughts are as follows:

First, although Scottish cases are not binding in England, the legal provisions interpreted in Doonin Plant and Dawson International are applicable in both jurisdictions, and this was the first time that these particular questions has been heard in a court in either country. It therefore follows that the decisions may be persuasive in England. Of course, the Dawson International decision was only a preliminary issue, but the legal reasoning could readily be deployed in other cases.

Second, although in Doonin Plant Lord Doherty said he did not need to resort to policy considerations because the matter could be resolved through statutory interpretation, he went on to say that he did not think it entirely beyond the court’s remit to do so. Where does the balance between protecting creditors and protecting the environment now lie, given the growing concerns over environmental issues within wider society?

Third, the forthcoming draft Bill on environmental principles and governance, due before Christmas, must embody the 'polluter pays' principle (and others) into English law, thanks to an eleventh-hour amendment to the European Union (Withdrawal) Act 2018. How might that change the interpretation of inconsistent provisions of insolvency law in future cases?

This is an area that is ripe for further challenge. 

Key contact

Simon-Tilling--250px x 250px 72dpi - web

Simon Tilling Partner

  • Head of Environment
  • REACH, Chemicals and Product Stewardship
  • Energy, Power and Utilities

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