Scottish Coal appeal: liquidators cannot abandon land or environmental licences

In its judgment, the appeal court overturned the Lord Ordinary's decision in July that the Water Environment (Controlled Activities) (Scotland) Regulations (the CARs) could not force liquidators to comply with certain permits granted by the Scottish Environment Protection Agency (SEPA) because to do so would go beyond the powers of the Scottish Parliament. The Inner House ruled that the legislation was within the power of the Parliament.

"In summary, this judgment rules that in the war of environment vs. insolvency principles, under the water environment protection regime, in Scotland, environment wins. Previous English authority - In re Celtic Extraction - went the other way: but that was considering a different environmental regime, under a different statute, in a different jurisdiction, in the context of a statutory power of liquidators - to disclaim onerous property - that this judgment rules simply doesn't apply to property ownership in Scotland," said planning and environmental expert Gordon McCreath of Pinsent Masons, the law firm behind Out-Law.com.

"There is a lot to take from the judgment aside from this: confirmation of no personal liability for liquidators under the CARs beyond the insolvent estate; liabilities to comply with CARs authorisations will have priority ranking as liquidation expenses rather than ordinary debts; and SEPA will likely struggle to rank in a liquidation for liabilities incurred as a result of failure to comply with a CARs licence. Fundamentally it is a clear, closely argued judgment that has clearly benefited from the luxury of thinking time, which the judge at first instance did not enjoy," he said.

Mining operations in Scotland are subject to various statutory obligations including protecting the environment from the discharge of polluted water from the sites, obligations under planning legislation to restore the sites, protection of habitats and birds and ensuring the safety of the public by fencing disused mines and quarries. Some of these are governed by the CARs and by EU legislation, and can carry significant compliance costs. 

SCC operated several businesses on its insolvency, including the operation of open-cast mining at seven sites across Scotland. The court ordered that the business be wound up in April, and liquidators were appointed in June. Since their appointment, mining operations have ceased at the sites but pumping and safety operations in compliance with the environmental permits have continued. In addition, several sites and parts of other sites have been sold off to a third party. Petitioning the court for permission to abandon the land, the liquidators said that they would run out of money with which to maintain the remaining sites in between 20 and 22 months, without paying back any of the company's creditors.

In the initial ruling in July, Lord Hodge found difficulties in reconciling environmental law – a devolved Scottish matter – with insolvency law, which is reserved to the UK Government. Unlike some of the English environmental permitting regimes, the CARs regime specifically provides that liquidators are 'responsible persons' that must ensure that a relevant licence is complied with.

"By virtue of it having applied for and been granted a CARs licence, SCC incurred onerous obligations to avoid the risk of adverse impact on the water environment and to leave it in such a state that it complies with the relevant environmental legislation. These obligations subsist notwithstanding the cessation of any or all activity on the part of SCC and, in particular, any controlled activity ... these obligations are incumbent upon the liquidators," he said.

"The CARs have an effect on the practicalities of insolvency," he said. "However, more than that is required in order to place them beyond the devolved competence of the Scottish Parliament. If, contrary to the views expressed above, the CARs have modified the law on reserved matters ... it remains the case that any such modifications are incidental to, and consequential on, provisions in the CARs relating to environmental matters, which are not reserved, and only to an extent that is necessary to give effect to the environmental purpose of the CARs," he said.

Planning and environmental law expert Gordon McCreath said that although the judgment focused on the CARs regime, rather than of environmental law in general, the "wholesale reform of environmental law in Scotland" that would be brought about by the Regulatory Reform (Scotland) Bill would likely extend this principle.

"It seems unlikely that MSPs will want to reverse the judgment," he said. "It seems more likely that they will apply the successful formula not just in water regulation but across environmental regulation generally.  It also seems clear that if the judgment remains, companies with potential significant liabilities can expect to be required to provide more in the way of security to their creditors."

The second important issue considered by the Inner House was whether Scottish liquidators have a right to hand back, or 'disclaim', land owned by the insolvent company that is onerous or burdensome. Whilst English liquidators have an express statutory power to do so, a similar express right is not afforded to Scottish liquidators. Nevertheless in the initial ruling in July, Lord Hodge considered that such a right was available. The Inner House however disagreed.

"The distinction drawn by the Inner House between a 'right to acquire land' and a 'right of ownership in land' is an important step," said property and environmental expert Ross McDowall of Pinsent Masons. "The result is that a liquidator of whatever jurisdiction is only able to dispose of Scottish land owned by the insolvent company via the normal methods of transfer (e.g. sale to a third party). This means that land which is subject to restoration liability cannot simply be 'handed back' in insolvency so that it becomes the responsibility of the Crown."