The decision of the Inner House of the Court of Session was released last week in the keenly awaited application by the liquidators of Scottish Coal who sought directions on whether a liquidator appointed to a Scottish company could:

  • abandon onerous property in Scotland; and
  • disclaim an onerous statutory licence.

As will be well known to readers, the case concerned a number of open cast coal mining sites situated in Scotland owned by Scottish Coal. Following the collapse of Scottish Coal the responsibility for these sites fell to its liquidators. Prior to liquidation, the company had entered into a number of statutory licences with the Scottish Environmental Protection Agency (SEPA) and it was a condition of these licences that the “responsible person” required to keep the sites safe and free of contaminated water. The costs of compliance with that obligation are substantial. The regulations under which the licences in question were granted specifically included a liquidator within the definition of “responsible person” where the company which had been granted the licence was wound up.

At first instance, Lord Hodge confirmed that both the heritable property, owned by the company and forming part of the liquidation assets, and the licences which were incidental to that property were able to be disclaimed. This would have achieved the same practical result as in England, where the liquidator has the express statutory power to “disclaim” onerous property. Our original bulletin reviewing the first instance decision can be accessed here. For our update thereafter please click here.

The Lord Ordinary’s decision has been reversed on appeal and the Court held:

  • That the liquidators of Scottish Coal do not have a power to abandon heritable property in which the Company has a real and registered right. The Court examined the ways in which ownership of the real right in heritable property could be terminated under Scots law and concluded that the present circumstances did not fit into any of those recognised categories.
  • On the same basis, the Court concluded that there is also no power available to a Scottish liquidator to disclaim statutory licences. Rather the rights which a liquidator has to bring statutory licences (and their onerous conditions) to an end will turn on the terms of the individual regulations under which the licences have been granted.

Practical Implications

The Appeal Court’s decision is a very detailed and useful legal analysis of the arguments put forward by the various interested parties who took part in the proceedings. From that perspective the decision is welcomed. But undoubtedly the decision leaves the practical issues in a somewhat unsatisfactory state:

  • The key practical issue for IPs and secured creditors, such as the banks, is how the compliance costs will rank in the liquidation and in particular whether those costs will rank as ordinary unsecured claims or whether they will be treated as liquidation expenses, thereby ranking ahead of the claims of all other creditors. The Court did not reach a view on this key question of the ranking of SEPA’s claim, instead referring to the approach taken in the recent Nortel case. Leaving aside the liquidation/administration distinction and the fact that the applicable rules are different north and south of the border, one imagines that in many instances ascertaining whether the Nortel test is met will be a complex exercise.
  • It is not at all clear how the statutory right provided by section 178 of the Insolvency Act can be applied by English liquidators appointed to companies whose assets include heritable property situated in Scotland. The Inner House rejected the argument that to refuse to recognise a right of disclaimer for a Scottish liquidator would result in an anomalous position. In their view, whatever the statutory powers available to an English liquidator, the legal effect will not be achieved unless the English liquidator can meet the requirements of the lex situs (the law of the jurisdiction where the land is situated). The decision therefore has potential implications beyond the Scottish/English issues in the present case and potentially impacts on an English liquidator’s ability to disclaim any onerous property situated outside that jurisdiction unless he can also satisfy all local law requirements. Local law advice would therefore be required in cases where an English liquidator seeks to exercise the power to disclaim a foreign asset.
  • While there may be local law issues to be dealt with, the exercise of the power of disclaimer under section 178 by an English liquidator might, nonetheless, be effective when it comes to the adjudication and ranking of claims by any creditor whose claim relates to the disclaimed property. This could result in the disclaimer of property located outside England under section 178 being recognised in England (for adjudication and ranking purposes) but not in the jurisdiction where the property is located (for local property law purposes).
  • The ability to terminate statutory licences, many of which will only be granted provided that the “responsible person” meets certain conditions, will now turn on the interpretation of the individual regulations under which the licences are granted. No assumptions can therefore be made and each regime will have its own rules and therefore potentially different results.
  • The decision may be subject to a further appeal to the Supreme Court where it should be noted that the current President is Lord Neuberger who gave the decision in the Mineral Resources case back in 1999 which concerned a similar situation involving a waste management licence. The then Justice Neuberger held that the specific provisions under the relevant regulations designed to protect the public interest in a clean environment prevailed over the general provision under section 178 permitting disclaimer and so a liquidator could not disclaim a waste management licence. That approach was rejected by the Court of Appeal in the Celtic Extraction case which is now the leading English authority which confirms the wide ranging power of disclaimer under English law. Any appeal to the Supreme Court therefore has the possibility of re-opening this issue for English IPs.