Not so appealing Court of Appeal confirms liquidator liability for contamination clean-up

What you need to know

The Victorian Supreme Court of Appeal has confirmed a Supreme Court ruling that the liquidator of a sawmilling company is liable for clean-up costs.  The Court determined that the liquidator was an "occupier" of the company's land, with direct control over the company's property.  

The Court drew comparisons to the role of a director.   That comparison alone is fascinating.

Given the chilling impact on the profession, it is possible that leave may be sought to take the issue to the High Court. 

What you need to do

When appointed over a company that has a history of environmental concerns, insolvency practitioners should think very carefully before entering into deeds of indemnity.  Although the EPA was not a party to the indemnity entered into between the liquidator and the company's only shareholder, the EPA was entitled to claim against the liquidators for the costs of cleaning up the land.  Without an indemnity in place, it is possible that the EPA would have not sought personal liability.  

Where there is no indemnity,  insolvency practitioners should consider seeking directions upfront in relation to a property that is potentially subject to environment liabilities under Victorian law.  This is because they could be held  responsible for costs arising from pollution, waste or contamination on land within their control.  The obvious alternative is to not take the appointment.   Another may be to engage with the EPA.  

Key Facts

The Victorian Supreme Court of Appeal has upheld a decision of the Victorian Supreme Court, that the liquidators of the Australian Sawmilling Company (TASCO) are liable to pay the Victorian Environment Protection Authority's (EPA) costs of remediating contamination on TASCO's land, despite the liquidators disclaiming the land. 

TASCO is the registered proprietor of land which, since 2016, contained large stockpiles of mixed construction and demolition waste generated by a former licensee.  The land was the subject of proceedings in the Victorian Civil and Administrative Tribunal, and in 2018 VCAT ordered that a rehabilitation plan be developed in respect of the land.  Prior to their appointment in March 2019, the liquidators were on notice that TASCO was facing environmental issues relating to the pollution of the land. 

The liquidators entered into a deed of indemnity with Dongwha Australia Holdings (being TASCO's only shareholder) where Dongwha agreed to indemnify the liquidators in an unlimited amount as to "Environmental Liabilities".

On 29 April 2019, the EPA told the liquidators that due to the ongoing environmental risks of the land to the community, it had decided to exercise its power to enter and conduct a clean up of the land under s55(1) and s62 of the Environment Protection Act 1970 (Vic) (EP Act 1970). 

On 30 April 2019, the liquidators lodged with ASIC a notice of disclaimer of onerous property on the basis that the land was, among other things, unsaleable.  The EPA then filed an application to set aside the disclaimer under s568B(2) of the Corporations Act 2001 (Cth).  Under s568B(3) of the Corporations Act, the Court may set aside a disclaimer only if satisfied that the disclaimer would cause prejudice to persons who have interests in the property, that is out of proportion to the prejudice that setting aside the disclaimer would cause to the company's creditors. 

The trial judge set aside the disclaimer, following an undertaking by the EPA and the State of Victoria that the liquidators' liability would be limited to the amount recovered under the Indemnity (see our 28 September 2020 RSSG Alert Liquidators found liable to pay the EPA's costs of cleaning up contaminated land, despite disclaimer  here). 

Liquidators have direct control of company property: trial judge was not wrong to find that the liquidators were "occupiers" under s62 of the EP Act 1970

The Court compared the role of a liquidator with a director and held that there is a "considerable overlap" in the responsibilities of a liquidator and a director. Specifically, a liquidator exercises a "specific statutory function" that necessitates "more direct control of company property", for the purpose of collecting and distributing the company's assets (at [80]).  This function takes the liquidator's direct relationship with property beyond that of a director, as a director's core function is concerned with control of the company's business (and not necessarily its assets) (at [80]).  

The Court was satisfied that the liquidators had the requisite physical and legal control over the land such that they were considered "occupiers" of the land under s62 of the EP Act 1970 (at [88]).  The Court further held that there is no reason why liquidators should not be responsible for environmental damage which has occurred on the land that is within their "control" (at [106]). 

Key Insights – impact of the Environment Protection Act 2017 (Vic)

It is worth noting that going forward, it is the provisions of the new Environment Protection Act 2017 (Vic) (EP Act 2017) which will be relevant, given the substantive provisions commenced on 1 July 2021.  The EP Act 2017 contains similar, yet somewhat broader, EPA powers in relation to managing risks to the environment.

Under the EP Act 2017, the EPA can "take any action" it considers necessary, including conducting a clean-up, in a situation where the EPA considers that there is "an immediate or serious risk of harm to human health or the environment arising from pollution, waste or contaminated land" (see s294).  In taking any action under s294, the EPA may recover in any court of competent jurisdiction as a debt due to the EPA any reasonable costs incurred by the EPA (see s297(1)).  Such costs are recoverable from any person who the EPA reasonably believes caused the circumstances that required the action to be taken, the owner or occupier or previous owner or occupier of the place or premises, or a person issued with an EPA notice (see s297(2)).

Under the EP Act 1970, the "occupier" of land was defined to include "a person who is in occupation or control of the premises whether or not that person is the owner of the premises."  Accordingly, as the Court found that the liquidators had "control" of the land the liquidators were found to be occupiers for the purposes of s62.  "Occupier" is no longer defined in the EP Act 2017, despite an occupier being a person from who the EPA may seek to recover remediation costs.  Furthermore, the EP Act 2017 now applies some duties (including in relation to contaminated land and waste) to the person with "management or control" of the land or waste. Given these provisions only came into effect on 1 July 2021, it is too early to have any examples available as to how "occupier" will be interpreted by the Court in the context of liquidators, especially given the inclusion of the phrase "management or control" which perhaps suggests that "occupier" now means something different. Under the EP Act 2017, is possible that there may be greater exposure for liquidators given they may still be "occupiers" as well as a person "in management and control" of land.

Trial judge did not err in finding that the disclaimer would cause prejudice to the EPA and to the State

The Court found that prejudice could clearly be established - if the disclaimer was not set aside, there would be prejudice to the State as any debts recovered were to be paid into the Consolidated Fund, and there would be prejudice to the EPA given it had already incurred costs in cleaning up the waste stockpiles.  The Court found that it was "inconceivable" that the EPA would not seek to recover its costs from the liquidators as provided for by the EP Act 1970, if it is able to do so (at [121]). 

If the disclaimer was not set aside, then the Indemnity would be lost, and the EPA could not claim against the liquidators for the costs incurred in cleaning up the land (as provided by s62(2) of the EP Act 1970).  The fact that the EPA was not a party to the Indemnity did not prevent the EPA from seeking costs from the liquidators. The Court found that the liquidators asked for, and had the benefit of, the Indemnity specifically with respect to environmental liabilities (at [122]-[123]). 

Trial judge did not err in exercising discretion to set aside disclaimer

The Court found that in order for the liquidators to establish that the judge had made an error in exercising the discretion under s568B of the Corporations Act to set aside the disclaimer, the liquidator must establish that the environmental considerations were irrelevant to the exercise of the discretion (at [142]).  

The Court found that environmental considerations were clearly relevant, given exercising the discretion required a focus on the "prejudice" encountered by the EPA and the State, and this prejudice was that they would be unable to recover clean-up costs under the EP Act 1970. Consequently, the disclaimer was validly set aside by the trial judge under s568B of the Corporations Act.  

On the topic of the "important public function of liquidators in the statutory insolvency regime", the Court found that the trial judge had expressly considered and properly decided that enabling the EPA and State to recover clean-up costs from the liquidator would not have an impact on the willingness of liquidators to accept appointments (at [143]). 

What next?

The Court's comparison of liquidators to the role of a director will have a chilling impact on the profession.  Given the implications, it is possible that leave may be sought to take the issue to the High Court. 

What should liquidators do now? 

When appointed over a company that has a history of environmental concerns, insolvency practitioners should think very carefully before entering into deeds of indemnity.  Although the EPA was not a party to the indemnity entered into between the liquidator and the company's only shareholder, the EPA was entitled to claim against the liquidators for the costs of cleaning up the land.  

Without an indemnity in place, it is possible that the EPA would have not sought personal liability.  

Where there is no indemnity, insolvency practitioners should consider seeking directions upfront in relation to a property that is potentially subject to environment liabilities under Victorian law.  This is because they could be held responsible for costs arising from pollution, waste or contamination on land within their control.  

The obvious alternative is to not take the appointment.   Another may be to engage with the EPA.  

Authors: Michael Sloan, Partner; Jane Hall, Partner; Panagiota Houpis, Lawyer;  Tess Birch, Lawyer.