Eric Baijal

This is the latest in a series of judgments grappling with how the law approaches the liability of officeholders and companies in insolvency in relation to environmental statutory compliance (see Administrator of Dawson International Plc [2018] CSOH 52 and The Joint Liquidators of Scottish Coal v Scottish Environment Protection Agency [2014] SC 372).

Doonin had carried on a waste management business at a number of sites including a former mine in central Scotland.  The Liquidators had approximately £635,000 before payment of the liquidation expenses.  They estimated that the cost of complying with various notices served upon Doonin by the Scottish Environment Protection Agency in relation to the former mine, could be up to £3.7 million.  The Liquidators applied for directions in relation to whether the cost of compliance fell to be treated as an expense of the liquidation, in which event they applied for a direction in terms of section 156 of the Insolvency Act 1986 that their remuneration and outlays be treated in priority to the cost of complying with the notices.

The Decision

Lord Docherty analysed the wording of the Environmental Protection Act 1990 in some detail.  He concluded that when considered with the underlying waste framework directive (and its polluter – pays principal) the cost of remedial compliance was an expense of the liquidation.  This was despite the facts that the obligations contained in the notices served by SEPA were not a debt of any sort owed by the company, and it was accepted that there was no personal responsibility on the Liquidators for compliance. 

The position was different from Scottish Coal where the applicable statutory provisions had expressly imposed liability on the Liquidators.  Here, rather, Lord Docherty held that it must “reasonably have been intended by the legislature that expenditure by a Liquidator complying with a notice should be a liquidation expense”.  He held so saying “otherwise it is very likely that polluters that had become insolvent would frequently escape paying for the damage to the environment”.  

The liquidator’s counsel argued that the effect of such a judgement would be that insolvency practitioners would not accept appointment as liquidators in certain cases.  That was because of the risk that compliance in environmental liability cases would have priority over the claim for remuneration unless the court ordered otherwise.  Lord Docherty disagreed.  He held “in my view there is no real risk that the court would refuse to order that a Liquidator’s remuneration be paid in priority to section 59(1) expenditure if that is necessary to ensure that a Liquidator would be remunerated. 

In negotiating contracts the Liquidator may be expected to safeguard his own legitimate interests as well as those of the company.  Decisions as to the ways in which limited available resources ought to be used may be expected to be taken following consultation with SEPA”.  A section 156 order was granted directing that the liquidator’s remuneration and outlays were to be paid in priority to the other expenses of the Liquidation.

Advice

It remains to be seen if this decision will be appealed by the joint liquidators.  While every environmental liability case will, to some extent, differ depending on the particular liability and notices served, it seems clear that the direction of policy is that available funds being used for remedial work will often be the priority rather than unsecured creditors.  The court’s comments about remuneration provide some comfort but Insolvency Practitioners should take advice as early as possible about making an application for a section 156 order if it appears that the cost of complying will use up the funds held on account.

Eric Baijal is managing director of BBM Solicitors