Disclaiming property and contaminated land – increased risks for insolvency practitioners

Liquidators accepting a new appointment will have to think carefully if there's a possibility of disclaiming onerous property as part of that appointment.

Setting aside a disclaimer has received plenty of attention recently particularly in Victoria following the decisions of the Supreme Court of Victoria and Victorian Court of Appeal in the Australian Sawmilling matter.

The Victorian Court of Appeal in the decision of The Australian Sawmilling Company Pty Ltd (in liq) & Ors v EPA & Anor [2021] VSCA 294 held that a disclaimer of property could be set aside because:

  • the disclaimer would cause prejudice to the Victorian Environment Protection Authority (EPA) and State of Victoria given the costs incurred cleaning up the property; and
  • there was an indemnity given in favour of the liquidators against any shortfall in available assets to meet environmental liabilities.

Following this, the Environment Protection Act 2017 (Vic) was recently amended to extend EPA’s cost recovery powers, and two new provisions were inserted that seek to displace Chapter 5 of the Corporations Act 2001 (Cth) (Displacement Provisions). Liquidators should be on notice that their liability and risk of exposure is wider than ever before.

Disclaiming property: a refresher

Liquidators can disclaim property on the grounds specified in section 568(1) of the Corporations Act, including:

  • if the property is unsaleable;
  • if the property may give rise to a liability to pay money or some other onerous obligation; or
  • it is reasonable to expect that the costs, charges and expenses that would be incurred in realising the property would exceed the proceeds of realising the property.

A person that has, or claims to have, an interest in disclaimed property can apply to Court for an order setting aside the disclaimer before it takes effect (subject to timing limitations). A Court may set aside a disclaimer in limited circumstances, including where the disclaimer would cause prejudice to those with an interest in the property so grossly out of proportion to the prejudice that the creditors would suffer if the disclaimer was set aside.

Costs the EPA seeks to claw back from liquidators may not be statutorily limited to the company's available property.

Liability for remediating contaminated land in Victoria – liquidators’ rights are curbed

The amendments to the Environment Protection Act displace the entirety of Chapter 5 of the Corporations Act and, relevantly for liquidators, their right to disclaim onerous property via section 568. This is a significant curbing of liquidators’ rights of disclaimer under section 568 of the Corporations Act.

Under section 297 of the Environment Protection Act, the EPA may apply to Court to recover the costs of undertaking clean-up actions, issuing notices, or taking monitoring or enforcement action. It now also says that section 297 “applies despite anything to the contrary in Chapter 5 of the Corporations Act”.

This would likely only affect a disclaimer under section 568 if the EPA has had to clean up a disclaimed site. Although the EPA could seek to displace a disclaimer to recover the costs of issuing a notice or monitoring compliance, it cannot use the Displacement Provisions to make a liquidator remediate a site. As a result, the EPA is more likely to undertake the clean-up of a disclaimed site and then seek to claw back costs already incurred from the liquidator.

There are some limits to the EPA’s power to take this route. Under section 294 of the Environment Protection Act, the EPA can only use the clean-up powers if there is an immediate or serious risk of harm to human health or the environment, or they have been provided a financial assurance under section 227. Nonetheless, liquidators should still carefully consider taking on contaminated sites as the EPA can apply to claw back its costs from liquidators despite a valid disclaimer of property if the site begins to present a serious risk of harm.

This presents an extra concern for liquidators. Under section 545 of the Corporations Act, a liquidator is not liable to incur any expense in a winding up of a company unless there is sufficient available property (subject to a Court or ASIC having the ability to direct a liquidator to incur an expense on the application of a creditor or contributory). This might not protect a liquidator, given the new Displacement Provisions, and case law in Victoria holding that section 545 did not apply to liabilities incurred under the EPA’s cost recovery powers. That means liquidators should be mindful that costs the EPA seeks to claw back from them may not be statutorily limited to the available property of the liquidated company.

Practical implications and takeaways

The legislative amendments contained in the Displacement Provisions are currently unique to Victoria, but may be mirrored in other States and Territories under comparable legislation. For example, in New South Wales, the Protection of the Environment Operations Act 1997 (NSW) and the Contaminated Land Management Act 1997 have a very similar clean-up notice regime and adopt substantially the same definition of "occupier" as the EP Act 2017.

The operation of the Displacement Provisions in the context of disclaimer of onerous property create a number of considerations for liquidators in accepting a new appointment:

  • An indemnity, for example from the directors or a related party to the company, will need to be carefully considered, including whether it is of sufficient breadth in order to fully indemnify the liquidator from clean-up cost liability.
  • The scheme potentially discourages liquidators from accepting an appointment that involves contaminated land, or potentially contaminated land, and involves EPA oversight or the potential for the EPA to undertake clean-up work. Liquidators should engage at an early stage with the EPA (or any other equivalent regulator) regarding its attitude towards the site and its intention to undertake clean up works or to seek recovery of such costs.
  • The scheme under the Displacement Provisions creates an additional step of due diligence by liquidators prior to taking appointments. For example, in relation to the historical and current nature of the business carried out by the company and whether that poses a potential risk of contamination.
  • Liquidators may want to consider commissioning or seeking an environmental assessment be undertaken of any land owned or operated by the company, the costs of which may need to be factored into any indemnity provided.
  • Advice ought to be taken by liquidators as to seeking directions from the Court excusing the liquidator from personal liability.