EPA & Anor v Australian Sawmilling Company Pty Ltd (in liq) & Ors [2020] VSC 550
What you need to know
- Insolvency practitioners will have to carefully consider taking appointments over property that is potentially subject to environmental liabilities under Victorian law.
- Those indemnifying insolvency practitioners who take such appointments will have to be very careful about the scope of the indemnity – lest they be held liable under it.
- Disclaiming property may not be effective in relation to environmental liability risk.
- In some cases, liaising with the EPA prior to appointment may make sense.
- Whilst the EPA gave an undertaking that it would not pursue the liquidators personally beyond the indemnity in this case, such a concession does not apply by default.
Liquidators found liable for clean-up costs
The Victorian Supreme Court has found that the liquidators of a wood processing business (The Australian Saw Milling Company or TASCO) were liable to pay the Victorian Environment Protection Authority's (EPA) costs of remediating contamination on TASCO's land, despite the liquidators disclaiming the land.
This finding will send a shiver through the insolvency profession, and those appointing and indemnifying practitioners. It suggests that the costs of environmental liabilities will be put on indemnifying creditors. In this case, the EPA undertook to limit the liquidators' exposure to the extent that they enjoyed an indemnity from their appointors. However, such a concession does not apply by default. Practitioners will need to carefully consider taking appointments over land that is potentially subject to environmental liabilities.
Having said that, the facts of this case were of particular concern to the EPA, and it is very unlikely that a blanket pursuit of practitioners and their indemnifiers will occur as a matter of course.
The contaminated land, indemnity and disclaimer
TASCO leased land (Land) to C&D Recycling, who operated a materials recycling business. The Land became contaminated after it was used to store industrial waste such as concrete, asbestos, plastic, and tyres. C&D Recycling subsequently went into liquidation, and ceased to occupy the Land.
Liquidators were then appointed to TASCO by way of a creditors' voluntary winding up. At that time, the Land was TASCO's only asset. Dongwha Australia (an entity related to TASCO) granted the liquidators an indemnity for an unlimited amount in respect of environmental liabilities (including for the liquidators' costs and remuneration arising out of such liabilities) (Indemnity).
During the liquidation, the EPA exercised its statutory powers under the Environment Protection Act 1970 (Vic) (EP Act) to enter the Land and remediate the contamination. The EPA has a right to recover remediation costs from the polluter or "occupier" of the land as a statutory debt.
The next day, the liquidators disclaimed TASCO's interest in the Land on the basis that the contamination made the Land unsaleable, and the costs of realising the Land would exceed any potential return. The disclaimer would effectively terminate the liquidators' obligations in respect of the Land, including any potential obligation to pay the EPA's remediation costs.
The EPA and the State of Victoria (the State) then brought an application to set aside the liquidators' disclaimer under s 568B(1) of the Corporations Act 2001 (Cth) (Corporations Act). In the course of the proceedings, the EPA gave an undertaking to the Court that it would limit the liquidators' liability to the amount recovered by them under the Indemnity (Undertaking).
The six key issues
There were six key issues in the case. The Court's findings with respect to each are summarised in the table below.
| Issue |
Findings |
The EPA may recover remediation costs as a statutory debt from parties who are "occupiers" of "premises" (e.g. the Land) under section 4(1) of the EP Act: section 62(2) EP Act.
Are the liquidators "occupiers" of the Land? |
- When the liquidators were appointed and assumed control of TASCO's affairs, they became "occupiers" of the Land under section 4(1) of the EP Act. They were therefore potentially liable for the EPA's remediation costs.
- A person is an "occupier" if they are in control of land. There is no requirement that an "occupier" own or be in possession of the land.
- The liquidators held physical and legal control over the Land pursuant to their powers under the Corporations Act as external administrators. This is despite the fact that legal ownership of the Land remained with TASCO, and the liquidators exercised their control over the Land as TASCO's agents.
- It would be contrary to the objectives of the EP Act if companies occupying or controlling contaminated land could be placed into liquidation to avoid environmental liabilities.
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Did the liquidators cease to be "occupiers" of the Land when the EPA entered the Land and conducted remediation works?
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- The liquidators continued to be "occupiers" of the Land, because the EPA's remediation actions did not end the liquidators' control over the Land.
- Nor did the EPA become an "occupier" to the exclusion of the liquidators. If that were the case, the EPA's power to recover remediation costs would be pointless, because it would only be entitled to recover from itself.
- In any case, there can be multiple "occupiers" of land.
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A liquidator does not have to incur post-liquidation expenses unless there is sufficient available property: section 545(1) Corporations Act.
Does this section bar the EPA's claim for remediation costs if TASCO does not have sufficient available property? |
- The Indemnity constituted "sufficient available property" to meet the EPA's remediation costs.
- Where there is sufficient available property, section 545(1) puts a cap on the liquidators' liability. It does not give the liquidators immunity from specific liabilities such as statutory debts.
- The Court also considered whether the EPA's right to recover remediation costs as a statutory debt was inconsistent with the liquidators' right to not incur post-liquidation expenses unless there is sufficient available property. It found that there was no inconsistency. Post-liquidation statutory debts (e.g. rates, charges, taxes etc.) have always operated concurrently with section 545(1). This case was no different, because the EPA's right to recover remediation costs is consistent with corporate insolvency laws relating to debt recovery, priority of debts, and liquidation procedures.
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A person who has or claims to have an interest in disclaimed property has standing to apply to the Court to have the disclaimer set aside: section 568B(1) Corporations Act.
Are the EPA and the State persons who have, or claim to have an interest in the Land?
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- Both the EPA and the State had an interest in the Land, and therefore standing to apply to the Court to set aside the disclaimer.
- The EPA had an interest in the Land as a prospective chargee, because remediation costs incurred by the EPA can form a charge over land.
- The State had an interest in the Land pursuant to a claim to radical title, and to be the fee simple owner if the Land vested back in the Crown by the operation of the disclaimer.
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The Court can only set aside a disclaimer if it is satisfied that the disclaimer would cause prejudice to those with an interest in the property that is grossly out of proportion to the prejudice suffered by the creditors if the disclaimer was set aside: section 568B(3) Corporations Act.
Would the EPA and the State be so prejudiced by the disclaimer?
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- The Court was satisfied that the EPA and the State would be so prejudiced.
- TASCO only had four known creditors: Dongwha Australia, Dongwha Holdings (TASCO's sole shareholder and a related entity), the State (for land tax) and the ATO (for PAYG payments).
- It was clear that TASCO's creditors would not receive a dividend whether or not the disclaimer was set aside.
- TASCO's creditors would suffer no prejudice if the disclaimer was set aside, other than a delay in finalising the liquidation.
- If the Indemnity was called on, Dongwha Australia would incur costs as TASCO's indemnifier. However, it would not be prejudiced in its capacity as TASCO's creditor.
- By contrast, if the disclaimer was not set aside, the EPA and the State would be heavily prejudiced, because they would have to bear the remediation costs.
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Even if standing and prejudice have been established, the Court has discretion on whether or not to set aside a disclaimer: section 568B(2) Corporations Act.
Should the Court exercise its discretion to set aside the disclaimer?
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The Court exercised its discretion to set aside the disclaimer, taking into account the following factors:
- Voluntary liquidation (and a liquidator's power to disclaim property) should not be used to avoid environmental responsibilities, or to impose the cost of remediation on tax payers or the State.
- The Indemnity was available to satisfy the EPA's remediation costs.
- The creditors would not be materially prejudiced if the Indemnity was called on.
- The liquidators were unlikely to be prejudiced. They were protected by the Indemnity (which extended to their costs and remuneration) and sheltered from personal liability by section 545(1) of the Corporations Act and the Undertaking.
- Setting aside the disclaimer is consistent with the purpose of the EP Act (e.g. minimising harm to the environment and holding polluters accountable).
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Authors: Michael Sloan, Partner; Robert Jamieson, Partner; Jane Hall, Senior Associate; Daniel Dai, Lawyer
