What a waste: liquidation expense at the creditors' expense?

A liability incurred by the company pre-liquidation to remove waste from a site (pursuant to a waste removal notice issued under s56(1)) Environmental Protection Act 1990) has been deemed by the Scottish Courts to be a liquidation expense and thus payable before general creditors. Furthermore the cost incurred from this remedial work therefore must be paid by the liquidator out of the company's assets before he is entitled to his remuneration.

Background

Doonin Plant Limited was a Scottish waste management company who deposited waste without a license between 2010 and 2015. The Scottish Environmental Protection Agency ("SEPA") issued a s.59 notice in 2012 requiring the company to remove the waste and a further notice after the company fell into liquidation in 2015, as it had not cleared up the waste. The remedial costs were at least £2.3m but the company only had around £630,000 in assets.

Judgment

The decision of Lord Doherty was divided into three main issues:

1. Was the company's liability under the s59 notice / its potential liability to reimburse SEPA for the remedial work under s59(6) EPA a provable contingent debt in the liquidation?

No – the liability created by the s59 notice was not a provable debt, as it didn't create a debt liability as such. Although liability under s59(6) for reimbursing SEPA for the work did constitute a contingent debt, Lord Doherty did not consider it to be a provablecontingent debt. This was because, following the test laid down in In re Nortel Companies and others [2013] UKSC 52, there was no real prospect of SEPA undertaking the remedial works on the site due to the huge costs involved, their limited resources and the fact that they knew they were highly unlikely to be reimbursed. It was also inconsistent with the s59 regime that it should be a provable debt; therefore it should be a liquidation expense.

2. If these liabilities aren't provable debts, is the liquidator still obliged to use the company's assets to pay for the remedial work? And, if so, what priority should be given to these costs?

Yes – the obligations continue despite the company entering liquidation. As to priority, this is where Scottish and English law differ.

Under Scottish law, if the expense falls into the broad general category of "any outlays properly chargeable or incurred by…the liquidator in carrying out his functions in the liquidation" (Rule 4.67(1)(a) ISR 1986), then this takes priority over all other expenses like the liquidator's remuneration.

In England & Wales, the categories of expenses under Rule 6.42(4) IR 2016, are narrower and more precise. Following Re Doonin, if the English courts were similarly to categorise the liability as an expense, would the cost of the environmental liability fall within "any other expenses properly chargeable by the liquidator in carrying out the liquidator’s functions in the winding up" (rule 6.42(4)(k) IR 2016) or, similar to rent and other expenses arising from occupation, would it be regarded as "expenses which are properly chargeable or incurred by the liquidator in preserving, realising or getting in any of the assets of the company" (rule 6.42(4)(a) IR 2016)? This determination is important as the former ranks at the bottom of all other liquidation expenses, and below the liquidator's remuneration, the latter having top priority.

3. Do the clear-up costs fall within this top priority, general category of liquidation expenses?

Yes – Lord Doherty felt that it must have been reasonably intended by the legislature that expenditure by a liquidator complying with a s59(1) notice is such a liquidation expense.

The strong public interest in the maintenance of a healthy environment was a key policy influence on Lord Doherty's rationale. He warned that the "polluter pays" principle should be upheld, as otherwise polluters who become insolvent could frequently escape paying for damage that they had caused to the environment. He acknowledged the difficulties that this may cause the liquidator, but maintained that they were not insurmountable. He considered there was no real risk that a court would refuse an order to prioritise the liquidator's remuneration where the Liquidator may not receive it.

Conclusion

Evidently environmental protection is at the heart of Lord Doherty's rationale. Therefore this decision's application to other non-environmental types of expenses is unclear. However it certainly infers that environmental liabilities are to be prioritised over all but fixed charge holding creditors.

Despite prioritising such statutory liabilities ahead of the liquidator's fees, the Scottish Outer House clearly considers that a liquidator could apply to the Court to prioritise their remuneration. Of course this would result in additional costs and perhaps an unwillingness to take on an appointment where there is a risk of environmental liability.