How to avoid contaminating an insolvency appointment: when a disclaimer of land may be set aside

In March 2019, Liquidators were appointed to The Australian Sawmilling Company Pty Ltd (TASCO) by way of a creditors’ voluntary winding up. TASCO owned a large lot of contaminated land – there were stockpiles of construction and demolition waste resulting from a former licensee conducting a materials recycling business.

Close to a year before this, VCAT made enforcement orders to address fire risks, pollution and environmental issues relating to the land. Despite being given an unlimited indemnity in relation to ‘environmental liabilities’ as a condition of their appointment, the Liquidators disclaimed the land due to onerous costs of environmental remediation and rehabilitation (Disclaimer).

The Environment Protection Authority (EPA) undertook clean up and remediation of the land and was entitled to recover reasonable costs of clean up from TASCO or the Liquidators. EPA and the State of Victoria (State) successfully applied to the Supreme Court of Victoria to set aside the Disclaimer however, the Liquidators sought leave to appeal in the decision of The Australian Sawmilling Company Pty Ltd (in liq) & ors v Environment Protection Authority & anor.[1]

In seeking leave to appeal, the Liquidators relied on three main grounds:

1. the Liquidators were not the ‘occupier’ within the meaning of s 4(1) and 62(2) of the Environmental Protection Act 1970 (VIC) (Environmental Act);
2. the Disclaimer would not cause prejudice to EPA and the State within the meaning of s 568B(3) of the Corporations Act 2001 (Cth) (Corporations Act); and
3. the primary Judge should not have exercised his discretion to set aside the Disclaimer.

Were the Liquidators an ‘occupier’?

Under s 62 of the Environmental Act, EPA is entitled to recover clean-up costs from the ‘occupier of the premises’. Although not fully quantified, the parties had agreed that the costs of clean up exceeded the estimated value of the land, even if the clean-up work was completed. As is, the land was unsaleable and the Liquidators disclaimed the land and argued they were not liable as an ‘occupier’ for EPA’s clean-up costs.

The Court found that the definition of ‘occupier’ at s 4(1) of the Environmental Act was broad and included a person in occupation or control of premises whether or not they own the premises.

The Court contrasted the roles of director and liquidator. It observed that a director’s core function is the control and management of a company’s business (not its assets), whilst a liquidator’s core statutory function to collect, apply and distribute assets resulted in a direct relationship with, and control of, a company’s assets.

It was further found that the concept of ‘control’ was not restricted to control as a matter of fact or matter of law. In their position as Liquidators, they were found to be in control of the land even if they were not the owner or had not also been in occupation of the land. As a result of this control over the land, the Liquidators were ‘occupiers’ within the meaning of the Environmental Act and therefore a party that EPA were entitled to recover clean-up costs from.

Was EPA’s prejudice grossly out of proportion to that of TASCO’s creditors if the Disclaimer is set aside?

The test for setting aside the Disclaimer under section 568B(3) of the Corporations Act required the Court to be satisfied that the Disclaimer would cause, to persons who have, or claim to have, interests in the land (such as EPA), prejudice that is grossly out of proportion to the prejudice that setting aside the Disclaimer would cause to TASCO’s creditors.

The primary Judge noted that the two primary creditors were a current and former shareholder of TASCO, with the only other creditors being the State Revenue Office and the Australian Taxation Office.

It was common ground that TASCO’s creditors would receive no dividend whether or not the Disclaimer was set aside. The primary Judge was therefore tasked with weighing up the ‘immediate and direct effect’ of the Disclaimer on EPA and on TASCO’s creditors, rather than ‘future potentialities or indirect consequences’.

The Disclaimer meant that the Liquidators would not be able to avail themselves of the unlimited indemnity for ‘environmental liabilities’ which in turn, prevented the EPA from successfully recovering clean-up costs from the Liquidators. Such prejudice to EPA’s position compared to TASCO’s creditors’ position which remained unchanged, satisfied the primary Judge that the Disclaimer should be set aside.

Two key factors relevant to the primary Judge’s decision were that:

1. the unlimited indemnity was an inducement and condition of the Liquidators’ appointment and could not be called upon unless the Disclaimer was set aside; and
2. the party that indemnified the Liquidators had substantial assets with no indication that the indemnity would not be met if EPA sought to recover clean-up costs from the Liquidators.

Exercise of discretion to set aside Disclaimer

The Court of Appeal noted that there is no specific criteria limiting the exercise of discretion under s 568B of the Corporations Act.

The primary Judge had considered the principles of environmental protection, the Liquidators’ statutory function and the protection of their legal and financial position under the Corporations Act. The Liquidators had failed to satisfy the Court of Appeal that those considerations amounted to the primary Judge acting on a wrong principle, considering irrelevant matters, mistaking the facts or failing to consider relevant matters in the exercise of his discretion.

Whilst the Court of Appeal granted leave for the Liquidators to appeal on all three grounds, ultimately, the Liquidators were unsuccessful on appeal and the decision to set aside the Disclaimer was upheld.

Key takeaway

Even though this case considered Victoria’s previous Environmental Act, the current Act in Victoria also appears to contemplate a broad application of ‘occupier’. Similarly in Queensland, the Environmental Protection Act 1994 (QLD) has a broad definition of ‘occupier’ and there are similar rights to recover clean-up costs from occupiers.

Liquidators should carefully consider their position and whether to seek an appropriate and effective indemnity before accepting an appointment which involves contaminated land. This case demonstrates any disclaimer of contaminated land may be challenged by an interested party and the liquidators may be found to be personally liable for remediation and clean-up costs under environmental laws.

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Authored by:

Barbara-Ann Sim, Partner
Cameron Jones, Graduate

[1] [2021] VSCA 294 – Ferguson CJ, Sifris & Kennedy JJA