Scottish court gives clean up costs priority over creditor repayment

Out-Law Legal Update | 14 Jan 2019 | 3:48 pm | 2 min. read

LEGAL UPDATE: The Court of Session in Scotland has ruled that liquidators should treat the costs of complying with environmental clean-up liabilities as a liquidation expense. This means that compliance with certain environmental liabilities will now take priority over unsecured creditors in Scottish insolvencies.
Doonin Plant Limited carried on a waste management business at a number of locations before it was placed into liquidation on 8 January 2015. The Scottish Environment Protection Agency (SEPA) claimed that between 2010 and the liquidation date the company deposited waste at one of its sites without a licence. To deal with this SEPA issued two notices to the company under s59(1) of the Environmental Protection Act 1990, one in 2012 and one in 2015, requiring the company to remove the waste from the site. The company failed to do so. This was prior to the liquidation.

The liquidators appointed to the company valued the cost of removing the waste at somewhere between £2.3 million and £3.7m. The company had funds of £635,000 and so clearly the liquidators would be unable to comply fully with the s59(1) notices.

Because of this the liquidators lodged a note at the Court of Session in April 2018 asking the court how the obligations under the s59(1) notices should be dealt with. The liquidators asked the court to answer three main questions:

  • were the obligations a "contingent debt" allowing SEPA to rank in the liquidation?
  • if not, were the liquidators obliged to ensure that the obligations under the s59(1) notices were met?
  • would the cost to remove the waste be classed as a liquidation expense?

The court ruled that the costs of complying with the s59(1) notices should be classed as a liquidation expense. The costs were not considered to be a contingent debt as SEPA had no plans to carry out the work itself and the company would not therefore be required to reimburse SEPA.

The judge interpreted s59(1) in accordance with EU law but it is clear that the judge also considered environmental protection policy. The judge said that the "polluter pays" principle should be upheld otherwise insolvent polluters could escape liability for environmental damage they have caused.

The liquidators argued that treating s59(1) liabilities as a liquidation expense created a risk that insolvency practitioners would not accept insolvency appointments. This is because the payment of the s59(1) liabilities would be prioritised over their remuneration, unless the court ordered otherwise. However, the judge was not concerned with this, saying that there is no real risk that a court would refuse to order that the liquidators be remunerated before the s59(1) liabilities are paid.

This is the first time the ranking of environmental liabilities in a liquidation has been considered by a UK court. Given that the principles of environmental protection are generally applied consistently throughout the UK, it is likely that this case will be considered persuasive by the English courts.

As a result of this decision, insolvency practitioners should consider pre-appointment whether the relevant business has any environmental liabilities that will now be classed as an expense of the insolvency process. They should also factor in the costs of applying for a court order to confirm that they can be remunerated ahead of the environmental liabilities being paid. Unsecured creditors should also be aware that environmental liabilities will now take priority over their claims.

It is possible that this decision could be considered by the Supreme Court, and it is also likely that the issue will be raised in the English courts in the near future.

Ainslie Benzie is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com