Recent Decision on a Liquidator's Ability to Disclaim Environmental Consents

Scotland

The recent Scottish Coal case has attracted widespread media attention. The Scottish Coal Company Ltd (Scottish Coal) carried out open-cast mining at seven sites across Scotland. However, in April 2013 the court ordered the winding up of Scottish Coal, and liquidators were subsequently appointed.

Several of the sites, and parts of some sites, had been sold to a third party and this concerned the liquidators seeking directions in relation to the performance of their duties in respect of the retained sites, including whether they can abandon or disclaim statutory licences or permits which imposed onerous statutory obligations.

The court also considered whether land can be abandoned or disclaimed, transferring ownership to the Crown. Its conclusion was that, as a matter of generality, a liquidator can disclaim land but, where the company's use of the land is governed by statutory permits, the ability to disclaim will depend upon the terms of the relevant statutory provisions and the permits.

Can statutory licences which impose onerous statutory obligations be disclaimed?

The licence in this case was a licence under the Water Environment (Controlled Activities) (Scotland) Regulations 2011 (CAR). CAR regulates activities which may affect the water environment, including abstraction of water and direct or indirect discharge into groundwater of any hazardous substances or other pollutant.

An insolvency practitioner is classed as a "responsible person" under CAR and is therefore responsible for ensuring compliance with a CAR licence. There are also provisions under CAR which allow a responsible person to apply for the surrender of a licence. Lord Hodge was satisfied that the CAR licence was an interest "arising out of, or incidental to property" and therefore fell within the liquidator's control.

This was the first case of its kind in Scotland but the court considered the leading English case, Celtic Extraction1. That case concerned a waste management licence which, under the legislation, remained in force until revoked by the authority or until a surrender was accepted. The Court of Appeal ruled that the waste management licence could be disclaimed for various reasons. One such reason was that there was a strong public policy requirement that the property of insolvents should be divided equally amongst unsecured creditors.

In the Scottish Coal case, the court highlighted that Celtic Extraction supported a wide power of disclaimer and that it required clear words to exclude the ability to disclaim. Lord Hodge stated that there were a number of factors which would have persuaded him that it was not correct to apply the reasoning in Celtic Extraction to the situation in the Scottish Coal case, including:

CAR is different to the waste management regime, particularly as CAR expressly imposes the surrender regime on insolvency practitioners; and
a broader interpretation of CAR, which would not allow a liquidator to bring their responsibilities to an end by disclaimer, would more effectively support the purpose of the Directive.

However, CAR is devolved legislation. If the liquidators were prevented from disclaiming, it would create a new liquidation expense which would have to be met before claims of preferential creditors. Lord Hodge said it would therefore result in the modification of the law on a reserved matter under the Scotland Act 1998.

Under the Scotland Act, when devolved legislation could be read in such a way as to be outside competence, it "is to be read as narrowly as is required for it to be within competence, if such reading is possible".

On that basis, Lord Hodge ruled that the liquidators were entitled to release themselves from the obligations of CAR and disclaim the sites.

Comment

Although the decision on statutory licences which impose onerous statutory obligations ultimately came down to the modification of an area of insolvency law being outside devolved competence, Lord Hodge helpfully gave an indication of factors that a court is likely to take into account.

For further details of the case, including discussion of the courts' reasoning in both the Celtic Extraction and Scottish Coal cases, click here.

It should be noted that the decision was specific to CAR and that, in other cases, it will be important to consider the statutory provisions which govern the licence in question as well the terms of the licence itself. The issue may also not be finally resolved as one of the local authorities and SEPA have indicated that they are likely to appeal.