Disclaimer Dysfunction - Liquidators Prevented From Disclaiming Contaminated Land

In the recent decision of The Australian Sawmilling Company Pty Ltd (in liquidation) (ACN 075 382 580) & Ors v Environment Protection Authority & Ors [2021] VSCA 294 the Victorian Court of Appeal dismissed an appeal by the liquidators (Liquidators) of The Australian Sawmilling Company Pty Ltd (in liquidation) (TASCO) against orders setting aside the Liquidators’ disclaimer of contaminated land.

The decision raises critical issues in relation to the liability of external administrators under Australia’s environmental protection legislation.

Background

The Liquidators were appointed to TASCO on 14 March 2019 pursuant to a creditors’ voluntary winding up.

TASCO’s only asset was a property located in Lara, Victoria (the Land).  The Land had previously been leased to a materials recycling business, which had stockpiled construction and demolition waste on the Land.  By 2018, there was approximately 320,000m3 of waste stockpiled on the Land which gave rise to significant issues including fire hazards and environmental pollution.  The Land had also been the subject of several proceedings in the Victorian Civil and Administration Tribunal which had made enforcement orders requiring the development of fire management and rehabilitation plans for the Land.

Given these issues, and prior to their appointment, the Liquidators entered into a deed of indemnity with a creditor and former shareholder of TASCO which broadly provided that if the Liquidators accepted the appointment to TASCO, and if there was a shortfall in the available assets of TASCO, then the shareholder would indemnify the Liquidators for an unlimited amount as to any “Environmental Liabilities” (the Indemnity).

Once they were appointed, the Liquidators determined that TASCO had insufficient funds to meet the obligations in relation to the Land and commenced negotiations with the Environment Protection Authority (EPA) for remediation options to be funded by the State of Victoria (State). 

However, on 29 April 2019, the EPA advised the Liquidators that it had decided to exercise its power to enter the Land under s55 of the Environment Protection Act 1970 (VIC) (the EP Act), and  conduct a clean up of the Land under s62 of the EP Act, and that it would seek to recover its costs of the clean up from TASCO or the Liquidators.  It was common ground that the clean up costs would exceed the value of the Land.

On 30 April 2019, the Liquidators arranged for the EPA to access and secure the Land and lodged a notice of disclaimer of onerous property in respect of the Land with ASIC (Disclaimer).

Subsequently, on 14 May 2019, the EPA and the State applied to set aside the Disclaimer under s568B(2) of the Corporations Act 2001 (Cth) (Corporations Act).

Decision at first instance

The key issues for determination by the Victorian Supreme Court at first instance were as follows:

  • Were the Liquidators “occupiers” of, and in control of, the Land such that they could be liable for the EPA’s clean up costs under s62 of the EP Act?; and
  • Would the Disclaimer cause the EPA and the State prejudice that was grossly out of proportion to the prejudice that setting aside the Disclaimer would cause to TASCO’s creditors (as required by s568B(3) of the Corporations Act)?

Garde J held that:

  • The Liquidators were occupiers of the Land for the purposes of the EP Act as they had physical and legal control of the Land from the time of their appointment.  This was also consistent with the object and purpose of the EP Act; and
  • The Disclaimer prejudiced the EPA and the State as it deprived them of the opportunity to recover the costs of the clean up of the Land from the Indemnity granted to the Liquidators.  Balanced against this, the parties accepted that there would be no dividend to the creditors of TASCO regardless of whether the Disclaimer was set aside, and the only apparent prejudice to the creditors would be a delay in the finalisation of the Liquidation.  In the circumstances, the Disclaimer would cause prejudice to the EPA and the State that was grossly out of proportion to the prejudice to the creditors if the Disclaimer was set aside.

Garde J went on to make orders to set aside the Disclaimer subject to an undertaking by the EPA and the State that the Liquidators’ liability would be limited to the amount recovered by them under the Indemnity.

The Appeal

The Liquidators appealed the decision on the following 3 grounds:

  1. The Judge erred in holding that the Liquidators were “occupiers” of the Land;
  2. The Judge erred in finding that the Disclaimer would cause relevant prejudice to the EPA and the State; and
  3. The Judge’s exercise of discretion to set aside the Disclaimer pursuant to s568B(3) of the Corporations Act had miscarried.

The Liquidators also submitted that s62(2) of the EP Act was inconsistent with s545 of the Corporations Act, in that s62(2) of the EP Act sought to impose unlimited liability on them whereas s545 of the Corporations Act capped their liability to the available property in the liquidation.

Ground 1 - The judge erred in holding that the Liquidators were “occupiers”

The Court of Appeal upheld the Judge’s findings that the Liquidators were occupiers of the Land.  

The Court of Appeal was satisfied that:

  • The definition of “occupier” in the EP Act clearly includes a person who is in in control of premises, whether or not that person owned or physically occupied the premises;
  • The Liquidators had both physical and legal control of the Land following their appointment; and
  • There was nothing in the text or the purpose of the EP Act that required that liquidators be excluded from the definition of “occupier”.

Ground 2 - Whether the Disclaimer would cause relevant prejudice to the EPA and the State

The Court of Appeal found that the Disclaimer would cause real prejudice to the EPA and the State as:

  • The EPA and the State would have to bear the clean up costs for the Land;
  • The Disclaimer would prevent them from recovering those costs from the Indemnity available to the Liquidators; and
  • There was sufficient evidence to conclude that the indemnifying creditor had substantial assets and would honour the Indemnity.

Ground 3 -   Whether the Judge’s exercise of discretion to set aside the Disclaimer pursuant to s568B(3) of the Corporations Act miscarried

The Court of Appeal noted that the Judge at first instance had weighed up a number of matters in deciding whether to exercise the discretion to set aside the Disclaimer, including:

  • The principles of environment protection underpinning the EP Act;
  • The desirability (from a policy perspective) of discouraging external administrations as a tool for avoiding environmental responsibilities; and
  • The fact that while the Liquidators were not personally responsible for the pollution, they were also unlikely to suffer any material prejudice as they were protected by the Indemnity, the undertakings by the EPA and the State, and s545 of the Corporations Act.

The Court of Appeal was ultimately satisfied that there was no specific criteria limiting the exercise of the discretion under s568B of the Corporations Act, and that there had not been any demonstrable error by the Judge at first instance in this case.

Constitutional submission

Finally, the Court of Appeal rejected the claim that there was any constitutional inconsistency between s62 of the EP Act and s545 of the Corporations Act as:

  • s545(1) of the Corporations Act is concerned with a liquidator’s decision to incur an expense in light of available funds and not with liabilities arising independently of the liquidator; and
  • as the liability in this case arose from costs incurred by the EPA in cleaning up the Land which the EPA then sought to recover under s62 of the EP Act, s545 of the Corporations Act had not been engaged.

Lavan comment

This case is very important as it confirms that liquidators (a) can constitute occupiers of property and can be liable under applicable environmental protection legislation, and (b) may not be able to disclaim the contaminated property.

This raises significant issues for practitioners considering an appointment to a company that has contaminated property, or for parties who hold contaminated property and who are considering their options in relation to a restructure or a liquidation.

It is worth noting that the Environmental Protection Act 1986 (WA) has a provision similar to s62(2) of the Victorian EP Act.

If you have any questions about this case or about a scenario involving contaminated property, Lavan’s insolvency and planning and environment teams are here to help.