2020-04-02
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How insolvency practitioners can be adversely affected by environmental liabilities

Home / Knowledge base / How insolvency practitioners can be adversely affected by environmental liabilities

Posted by Keri Harwood on 02 April 2020

Environmental law covers a wide spectrum of areas such as waste disposal, contaminated land, emissions and water pollution.  The legislation also provides for the issuing of numerous permits and licences, the status of which is an important consideration for an insolvency practitioner following the start of a formal insolvency process, bearing in mind that a breach can result in civil and criminal liability.  Furthermore, the Environment Agency can even apply for a company to be restored to the register so they can investigate and potentially prosecute if appropriate.

Given the heightened focus on the climate emergency it is likely that enforcement agencies will be keen to enforce the legislation and as such office holders should at an early stage following their appointment establish whether a company has the benefit of any permits, licenses or enforcement notices and whether any potential liability for breach of these or other environmental damage has arisen as at the date of appointment or may do so in the future.

Pollution

Under EU law, a number of environmental principles have been established; including the “Prevention Principle”, “Precautionary Principle” and the “Polluter Pays Principle”. The latest iteration of the Environment Bill was put before Parliament on 30 January 2020. This provides that the environmental principles established under EU law will be carried into UK law. It is therefore likely that the starting point, when considering environmental liability for pollution, will continue to be the “Polluter Pays Principle” which, as the name suggests, provides that the cost of rectification and remediation of the pollution is the responsibility of whoever caused the pollution.

The Environment Agency, as the UK body is responsible for enforcing remediation of contaminated land, administers the current regime for pollution. Whoever is responsible for the pollution is known as the “appropriate person”, which is split into two categories. A ‘Class A’ person is deemed to be someone who “causes or knowingly permits the polluting substance to be in, on or under their land” and will be held responsible for the pollution.

If a ‘Class A’ person, i.e. the original polluter, cannot be identified then the responsibility will pass to any ‘Class B’ persons. A Class B person is classified as the current owner or occupier of the polluted land. An insolvency practitioner could potentially fall into either of these categories.

The Environment Bill also refers to the establishment of a new environmental watchdog, the Office of Environmental Protection. It may be that, as the post-Brexit, regulatory world settles down, there are changes to the enforcement of pollution incidents; however, for now we remain within the current framework and it is a “watch this space” area on the future governance.

Licensing

Environmental licences and permits can be issued to a Company or specific individual(s). As with other contracts or permits, these should be reviewed upon appointment so that it is clear what the obligations and responsibilities are. Environmental licences are often transferrable and so, particularly where business activities are continuing, you should contact the relevant permit provider to discuss this.

Recent cases

There have been a number of cases in the last couple of years that have looked at the issues of insolvency and environmental liability.

Doonin Plant Ltd [2018] was a Scottish case which dealt with Waste Removal Notices issued before the company went into liquidation.  A liquidator is not personally liable for the cost of remedial works for which the company would have been liable unless the contamination is as a result of any unreasonable act or omission on the part of the liquidator.  In this case, the court held that liability for compliance with the Notice continued notwithstanding the liquidation and that the costs should be paid by the liquidator as a liquidation expense ahead of the liquidator’s own remuneration.  In England and Wales, the liquidator’s remuneration would have had priority but the costs would still have wiped out any prospect of a dividend for unsecured creditors.  However, it is worth noting that under section 156 of the Insolvency Act 1986 the court has power to vary the prescribed order of priority of liquidation expenses.   Sadly, for the liquidator in Doonin, the costs of remediation significantly exceeded the available assets which reinforces the importance of undertaking due diligence before accepting the appointment.

In 2019, Paperback Collection and Recycling Ltd, the question was posed as to whether the High Court had power, under the Insolvency Act 1986 to stay criminal proceedings that were being brought against a company in liquidation, for environmental offences. The company in question had been served with a statutory notice to remove waste that was unlawfully stored in its premises. The notices were served prior to the company going into liquidation, although the prosecution had not concluded when the liquidators were instructed.

A claim was brought by the liquidators to stay the proceedings in light of the company going in to liquidation. However, it was concluded by the Judge that the High Court did not have jurisdiction to stay those criminal proceedings. It was further stated that, even if it did have jurisdiction, the Judge would not have been minded to stay the proceedings because the public interest of prosecuting serious environmental offences outweighed the disadvantage to the company’s creditors of defending the case and paying the fines. Unhelpfully, the court did not express any view as to whether the fine would be payable as an expense of the liquidation or be treated as a provable debt.

In addition to the Company being prosecuted, the company’s directors were being prosecuted as well. A continuing prosecution would mean that the directors may have a conviction against them which would prevent them obtaining licences in the future.

Due diligence is critical before accepting an appointment.

The potential impact of environmental liabilities for insolvency practitioners are significant and should be considered prior to accepting an appointment. In addition, if there has been significant contamination by the company, or a large infestation of an invasive species such as Japanese Knotweed, then the true value of land and property may be significantly less after taking into account any remediation required by a purchaser.

Some top tips and considerations from the outset of an appointment are:

  • When considering taking the appointment, what evaluation do you need to undertake in order to ascertain if there any environmental issues affecting the company’s assets.
  • To what extent will these affect the value of the company’s assets?
  • Has there been any history of investigations by the Environment Agency or any prosecutions brought?
  • Who is responsible for any remediation work?

The proper identification of potential liability is important to protect yourself from future investigations and to avoid being unable to draw any remuneration. Our team is always happy to help, so do give us a call if you are concerned about any existing or potential appointment.

About the author

Keri Harwood

Solicitor

Keri is a solicitor in our agricultural sector. Having converted to law, after first completing a Masters in Environmental Sciences she has a particular interest in specialising in agricultural and environmental disputes.

Keri Harwood

Keri is a solicitor in our agricultural sector. Having converted to law, after first completing a Masters in Environmental Sciences she has a particular interest in specialising in agricultural and environmental disputes.

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