In The Australian Sawmilling Company Pty Ltd (in liq) v Environment Protection Authority  VSCA 294 (Australian Sawmilling), the Victorian Supreme Court of Appeal (VSCA) dismissed an appeal by the liquidators of The Australian Sawmilling Company Pty Ltd (TASCO) against a decision of Garde J of the Victorian Supreme Court (VSC) setting aside the liquidators’ disclaimer of land subject to significant environmental ‘clean up’ costs (Primary Judgment).
In Australian Sawmilling the liquidators were potentially personally liable for clean up costs as “occupiers” of the land under section 62 of the Environment Protection Act 1970 (Vic) (the Environment Protection Act), and had an indemnity in respect of such liabilities from TASCO’s parent company.
A disclaimer of the land by the liquidators would bring to an end the ability of the State of Victoria (State) and the Victorian Environment Protection Authority (EPA) to claim against the liquidators under the Environment Protection Act. If the liquidators were not primarily liable there would be no basis to claim on the indemnity, and therefore the State and EPA would lose access to this source of recovery for their claims, to their prejudice. The liquidators’ disclaimer was therefore set aside.
This decision has significant implications for insolvency practitioners and persons indemnifying them in respect of environmental liabilities. In particular:
- liquidators can be personally liable as “occupiers” of land subject to environmental obligations under various State and Territory statutory regimes;
- section 545 of the Corporations Act 2001 (Cth) (the Corporations Act), which limits the liability of liquidators for expenses “incurred in relation to the winding up of a company”, does not apply to clean up costs unilaterally imposed on liquidators by a State or Territory environmental agency;
- an indemnity given to a liquidator that covers environmental liabilities is a potential source of recovery for environmental agencies (where the liquidator is personally liable), and may be a reason for a court to set aside a disclaimer. Caution should therefore be taken before granting indemnities in such cases; and
- it is important for insolvency practitioners to consider these risks prior to appointment, take advice where appropriate and engage with environmental agencies proactively so as to have certainty in relation to the risk of personal liability.
We discuss the case and its implications in more detail in this article.
Background to the decision
TASCO was the registered proprietor of land in Lara, Victoria. Another company (the Former Tenant) had previously leased (and then licensed) the land from TASCO and operated a materials recycling business on it that generated significant stockpiles of construction and demolition waste.
The waste had remained on the land since 2016 and posed a significant fire risk. As a result, the Former Tenant breached its permit conditions numerous times and received pollution abatement notices from the EPA. The Victorian Civil and Administrative Tribunal made an enforcement order against the Former Tenant, a director of the Former Tenant and TASCO, requiring the development and implementation of fire management and rehabilitation plans.
In August 2018, the Former Tenant went into liquidation, and ceased to occupy the land. Its liquidators also disclaimed its licence to occupy the land.
The appointment of the liquidators and the shareholder indemnity
On 14 March 2019, liquidators were appointed to TASCO.
The liquidators were aware of (and presumably concerned by) the potential environmental liabilities associated with the site. Accordingly, prior to their appointment, TASCO’s sole shareholder, Dongwha Australia Holdings Pty Ltd (Dongwha) entered into a deed of indemnity in favour of the liquidators (the Indemnity) under which Dongwha provided the liquidators with (among other things) an indemnity in an unlimited amount in respect of ‘Environmental Liabilities’ incurred by the liquidators arising out of, or in connection with the liquidation of TASCO. This indemnity was intended to induce the liquidators to accept the appointment as liquidators.
The disclaimer of the land
Upon their appointment, the liquidators took various steps in respect of the waste on the land, including by undertaking fire management and remediation plans. However, TASCO’s funds were quickly exhausted.
On 29 April 2019, the EPA notified the liquidators that it would exercise its power to enter the land under section 55(1) of the Environment Protection Act and conduct a clean up under section 62 of that Act, and that it may recover any reasonable costs incurred by it in connection with that clean up from TASCO or the liquidators.
On 30 April 2019, the liquidators lodged with the Australian Securities and Investments Commission (ASIC) a notice of disclaimer of property in relation to the land pursuant to sections 568 and 568A of the Corporations Act. The grounds for the disclaimer were that:
- the land was unsaleable or not readily saleable;
- the land gave rise to a liability to pay money or some other onerous obligation; and
- it was reasonable to expect that the costs, charges and expenses that would be incurred in realising the land would exceed the proceeds realised.
This disclaimer was presumably intended to insulate both TASCO and the liquidators from the prospect of any liability for the environmental clean up costs being incurred by the EPA.
The application to set aside the disclaimer
On 14 May 2019, the EPA and the State filed an application to set aside the disclaimer under section 568B(2) of the Corporations Act.
Pursuant to section 568B(3) of the Corporations Act, a court may only set aside a liquidator’s disclaimer if it is “satisfied that the disclaimer … would cause, to persons who have, or claim to have, interests in the property, prejudice that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company’s creditors”.
The EPA and the State argued that the disclaimer of the land would prejudice them, as it would in substance prevent them from accessing funds under the Indemnity to meet the clean up costs.
Clean up liability under the Environment Protection Act
Under section 62(2) of the Environment Protection Act, the EPA was entitled to conduct a clean up in certain circumstances and recover any reasonable costs incurred by it from “the occupier of the premises”.
Under section 4(1) of the Environment Protection Act, an “occupier” was defined as (emphasis added):
occupier in relation to any premises includes a person who is in occupation or control of the premises whether or not that person is the owner of the premises and in relation to premises different parts of which are occupied by different persons means the respective persons in occupation or control of each part.
Sections 4(3) and 4(3A) of the Environment Protection Act excluded certain persons, such as financial institutions acting as or appointing mortgagees in possession or controllers, from the definition of “occupier”.
The EPA and the State argued that the liquidators of TASCO were “occupiers” of the land for these purposes, and therefore the liquidators could be personally liable under section 62(2) for the costs of the clean up. Furthermore, they argued that the liquidators had the benefit of the Indemnity from Dongwha that would be a source of funding for the liquidators to meet that liability.
However, it appears to have been accepted by the parties that if the disclaimer took effect, the EPA could not claim against the liquidators. This was presumably on the basis that the disclaimer would result in neither TASCO nor its liquidators being in occupation or control of the land, and therefore ceasing to be “occupiers” for the purposes of section 62(2).
The EPA and State argued that the Indemnity had “real value” and loss of access to it (as a result of the disclaimer) would therefore cause prejudice to EPA and the State.
The Primary Judgment
At the initial hearing before the VSC, the liquidators made various arguments as to why the disclaimer should not be set aside.
These arguments included that:
- the liquidators were not “occupiers” of the land for the purposes of section 62(2) of the Environment Protection Act, for example because TASCO was the sole “occupier” or because the EPA became the “occupier” when it entered the land to conduct a clean up;
- the liquidators were protected from liability under section 62(2) by section 545(1) of the Corporations Act, which states that “a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property”. In this case the liquidators argued that TASCO had no assets to meet such liability;
- neither the EPA nor the State had standing to bring an application to the set aside a disclaimer under sections 568B(1) and 568B(3) of the Corporations Act on the basis that the interest of the person seeking to set aside the disclaimer should be proprietary in nature;
- the EPA and the State would not suffer prejudice if recourse to the Indemnity was lost, and Dongwha was a creditor of TASCO in an amount over $1.5 million such that creditors (ie Dongwha) would be prejudiced if the disclaimer was set aside; and
- the VSC should not exercise its discretion to set aside the disclaimer for various reasons, including that the liquidators were not responsible for the contamination of the land and that the exercise of discretion against the liquidators would “create uncertainty and risk for liquidators generally and may engender reluctance among practitioners to take on a liquidation” of this kind.
In his Honour’s decision of 2 September 2020, Garde J of the VSC was satisfied that the disclaimer should be set aside (subject to the Undertaking discussed below). The VSC rejected the liquidators’ arguments and found that:
- the liquidators were “occupiers” of the land for the purposes of section 62 of the Environment Protection Act, and did not cease to be “occupiers” when the EPA entered the land;
- section 545(1) of the Corporations Act did not bar the EPA’s claim for clean up costs where TASCO had insufficient available property to meet those costs but the liquidators otherwise had the protection of the Indemnity;
- the EPA and the State of Victoria were both persons who had an interest in the land within the meaning of sections 568B(1) and 568B(3) of the Corporations Act;
- the liquidators’ disclaimer caused prejudice to the EPA and the State that was grossly out of proportion to the prejudice that setting aside the disclaimer would cause to TASCO’s creditors; and
- the VSC should exercise its discretion to set aside the disclaimer under section 568B(2) of the Corporations Act.
The VSC made orders setting aside the disclaimer (subject to the Undertaking) in November 2020.
Importantly however, the VSC’s order setting aside the disclaimer was made subject to the EPA and the State providing an undertaking that the liquidators’ liability would be limited to the amount recovered by them under the Indemnity (the Undertaking). This meant that although the liquidators may be personally liable for clean up costs under section 62(2), they would not need to pay such liabilities from their personal assets.
The liquidators appealed the VSC decision to the VSCA.
The key issues raised on appeal were whether:
- the liquidators were “occupiers” of the land;
- the disclaimer would cause prejudice to the State and/or the EPA;
- the VSC should have exercised its discretion to set aside the disclaimer; and
- section 62(2) of the Environment Protection Act was invalid due to an inconsistency with section 545(1) of the Corporations Act.
Were the liquidators “occupiers” of the land?
The liquidators argued (among other things) that:
- the definition of “occupier” only permitted a single, exclusive occupier of the land (which in this case was TASCO, as the owner of the land, rather than the liquidators, who were merely agents of TASCO akin to directors);
- in relation to the definition of “occupier”, the VSC should not have isolated the word “control” from the phrase “in occupation or control” on the basis that the composite phrase “comprehended immediate and direct relationships, not an agent without a personal relationship to the premises”; and
- the VSC should not have “elevated” environmental considerations in interpreting the Environment Protection Act “by, among other things, imposing liability on innocent liquidators … environmental factors were simply not specific enough to deal with the relevant point of construction”.
The VSCA wholly rejected these arguments. It considered the functions, powers and obligations of liquidators under the Corporations Act and determined that “a liquidator exercises a very specific statutory function that entails more direct control of company property [than a director] … [that] takes the liquidator’s direct relationship with property beyond that of a director”.
The VSCA noted the inclusive definition of “occupier” in section 4(1) of the Environment Protection Act, which provided that “occupier includes a person who is in occupation or control of the premises whether or not that person is the owner of the premises”.
The VSCA also accepted the respondents’ submission that section 4(3) of the Environment Protection Act, which carved out mortgagees in possession and controllers from the definition of “occupier”, supported the inclusion of liquidators in that definition. It would have been unnecessary to carve out such persons if liquidators were not intended to fall within the scope of the definition.
The VSCA was therefore satisfied that the liquidators “controlled” the premises, having both physical and legal control, despite not otherwise being owners nor in occupation of the premises.
The VSCA also considered whether section 66B of the Environment Protection Act, upon which the liquidators placed significant reliance, suggested the meaning of “occupier” should be constrained on the basis that agents of a corporation such as liquidators would already be liable as occupiers under s 62 (thereby rendering section 66B redundant). The VSCA rejected the liquidators’ arguments on this point, finding that “the fundamental problem with the applicants’ submission” was that it ignored “the different functions served by different provisions of the [Environment Protection Act]”. That is, the contravention provisions in the Environment Protection Act imposed direct liability on persons responsible for a contravention, whereas section 66B imposed liability on persons such as directors who otherwise might not be directly responsible for a contravention. There was nothing inconsistent with a liquidator potentially being directly liable as an occupier and indirectly liable as a person with management of a contravening corporation.
Would disclaimer of the land cause relevant prejudice to the EPA and the State?
The liquidators argued that the VSC had not articulated the prejudice the disclaimer would case to the EPA or the State. In particular, the liquidators argued that:
- in relation to the State, there could be no prejudice since the State had no power to recover clean up costs; and
- in relation to the EPA, there was no evidence that the EPA had yet sought to recover its clean up costs from the liquidators or TASCO, the EPA was not a party to the Indemnity and there was no certainty that the Indemnity would be satisfied by Dongwha.
The VSCA rejected the liquidators’ arguments.
In respect of the impact of the disclaimer on the EPA, the VSCA noted:
The EPA has already incurred costs in cleaning up the waste stockpiles, and it is inconceivable that the EPA would not seek to recover its costs from the Liquidators as provided by section 62(2), if it is able to do so. The fact that it was not a party to the Indemnity is also not to the point. If the disclaimer was not set aside, the EPA could not claim against the Liquidators who had asked for, had the benefit of, and could call upon the Indemnity, which was granted specifically in respect of their potential environmental liabilities. In all practical respects, the Liquidators provide the means to access the indemnity. This is reinforced by the terms of the Undertaking.
Consequently, as identified by the Respondents, the real issue is whether it was open to the judge to be satisfied that the Indemnity has real value that would be lost if the disclaimer was not set aside.
The VSCA considered that it was clearly open to the VSC to consider that the Indemnity had real value given that:
- the Indemnity was an inducement and condition to the liquidators’ appointment; and
- ASIC filings showed that Dongwha had substantial assets.
The VSCA also considered that the disclaimer prejudiced the State on the basis that section 62(2) of the Environment Protection Act provided that any costs recovered were to be paid into the State’s Consolidated Fund.
Should the VSC have exercised its discretion to set aside the disclaimer?
The liquidators also argued that “[t]he trial judge’s exercise of discretion to set aside the disclaimer … miscarried.” In particular, they argued that in considering whether to set aside the disclaimer:
- the VSC should not have had reference to the principles of environmental protection in the Environment Protection Act, as the principles were not “germane to the facts, nor did they suggest that the Liquidators should be exposed to personal liability”; and
- the VSC failed to consider the public function of liquidators, and that the decision to set aside the disclaimer would create uncertainty and risks for liquidators who may not be indemnified or may be unable to disclaim property. This could engender reluctance to take on liquidations, which is not in the public interest.
The VSCA found that environmental factors (such as the “polluter pays” and “intergenerational equity” principles) were “clearly relevant” to the exercise of discretion in circumstances where section 568B(3) of the Corporations Act focuses on “prejudice” and the prejudice caused to the EPA and the State “was constituted by a failure to recover costs properly recoverable under the” Environment Protection Act and environmental factors “underpinned such entitlement”.
The VSCA also found that the VSC “clearly considered” the public function of liquidators, noting that “the judge expressly considered that the exercise of his discretion to enable the EPA and State to recover clean up costs would not have an impact on the willingness of liquidators to accept appointments”.
In this regard, the VSC’s exercise of discretion relied on the receipt by the liquidators of the Indemnity and the Undertaking:
It is unlikely that the liquidators will suffer any material prejudice. They are protected by the [Indemnity], which extends to their remuneration charged on a time cost basis. They are also prevented from personal liability by s 545 of the Corporations Act, which limits their liability for expenses in the winding up, and by the [Undertaking].
As to the position of insolvency practitioners generally, I do not consider that the exercise of my discretion to permit the EPA and the State to recover clean up costs to the extent of the [Indemnity] would have any impact on their willingness to accept liquidation appointment. Their legal and financial position is well protected by the Corporations Act.
The VSC considered that section 545(1) of the Corporations Act limited the personal liability of the liquidators to the extent of the assets available in TASCO’s liquidation. However, as discussed below, the VSCA ultimately considered that section 545(1) had no application in this case and therefore would not in fact protect the liquidators from liability in these circumstances.
Accordingly (and notwithstanding the VSCA’s differing view on section 545), the VSCA rejected the liquidators’ argument that the VSC’s exercise of discretion “miscarried”.
Did section 545(1) of the Corporations Act override section 62(2) of the Environment Protection Act?
The liquidators also made a submission on constitutional grounds — they argued that section 62(2) of the Environment Protection Act (a State law) was inconsistent with section 545(1) of the Corporations Act (a Commonwealth law) and therefore section 62(2) was invalid to the extent of that inconsistency pursuant to section 109 of the Commonwealth Constitution.
In response, the respondents asserted that the VSC erred in holding that the reasonable costs of the EPA recoverable from the liquidators pursuant to section 62(2) of the Environment Protection Act were or would be expenses incurred by the liquidators for the purposes of section 545(1) of the Corporations Act. In other words, the respondents’ position was that even if there was an inconsistency between the two provisions, that inconsistency was irrelevant in this case as section 545(1) was not applicable to any liability imposed on the liquidators for clean up costs.
The VSCA found that the meaning of section 545(1) of the Corporations Act was that:
[A] liquidator is not to come to be ‘under [a] legal obligation’ through ‘his own action’, unless there is sufficient available property. Such language does not extend to something that is imposed unilaterally, regardless of the liquidator’s own actions.
The language of s 545 is also concerned about what expense a liquidator is ‘liable to incur’, not with the making of a payment of a pre-existing liability or obligation.
[Section] 545 is concerned with active decisions made by liquidators as to whether it is appropriate to ‘incur’ a liability in the light of the available funds. It is not concerned with liabilities arising independently of the liquidator, and by operation of law.
In this case, the relevant debt arose because costs were incurred by the EPA in undertaking the clean up and were recoverable from the liquidators under section 62(2) of the Environment Protection Act. Accordingly, the liquidators had not “incurred an expense” for the purposes of section 545(1) of the Corporations Act, and the liquidators were not protected from liability by that section. Accordingly, the VSCA found it unnecessary to consider the liquidators’ constitutional submission in further detail.
Special leave application
The liquidators sought special leave to appeal to the High Court of Australia.
On 16 March 2022, leave was refused by Gageler and Steward JJ on the basis that the Environment Protection Act had been repealed and therefore the application did not raise an issue of significant public importance.
This decision has significant implications both for insolvency practitioners and anyone considering providing insolvency practitioners with an indemnity that could extend to environmental liabilities incurred by them.
It is a particularly important decision for liquidators operating within industries that are heavily governed by environmental regulations or that involve a high level of risk to the environment, such as mining and resources, forestry, agriculture and waste management.
The following issues raised by the decision are worthy of special consideration.
When are expenses “incurred” in a liquidation?
This decision provides useful guidance on the difference between:
- a liquidator “incurring an expense” for the purposes of section 545(1) of the Corporations Act, in which case their liability will be limited to the extent of the assets available in the liquidation; and
- obligations arising independently of the liquidator or by operation of law, in which case the liability of the liquidator will not be limited under section 545(1).
The VSCA found that the liquidators had not “incurred an expense” in relation to the clean up costs because the language of section 62(2) of the Environment Protection Act made clear that the EPA was entitled to recover reasonable clean up costs from “occupiers” unilaterally. That is, the liquidators played no part in the clean up costs becoming payable.
Going forwards, liquidators will need to be alert to the risk of liability being imposed on them by State or Commonwealth legislation.
It is noteworthy that, apart from the protection provided by the Indemnity and the Undertaking, the VSC considered that section 545(1) of the Corporations Act provided adequate protection for liquidators generally. The VSC therefore considered that its decision to set aside the disclaimer would not have an impact on the likelihood of liquidators taking appointments over companies exposed to environmental liabilities in future.
However, following the VSCA’s judgment, it is clear that section 545(1) does not provide such protection (and therefore that section had no relevance to the case). In the appeal judgment, the VSCA did not directly address the VSC’s reference to the apparent protection of section 545(1) when considering whether it erred in exercising its discretion to set aside the disclaimer (although it might be inferred that the VSCA considered that the Indemnity and Undertaking still provided the liquidators with sufficient protection in this case).
Personal liability under State environmental legislation
The Environment Protection Act that featured in this decision has now been superseded by the Environment Protection Act 2017 (Vic) (the New Act) in Victoria. Furthermore, the Environment Protection Act and the New Act have no application in the other Australian States and Territories.
Nevertheless, this decision continues to be highly relevant to insolvency practitioners across Australia contemplating appointments to companies with potential environmental issues.
In Victoria, the New Act continues to entitle the EPA to recover clean up costs from an “occupier”. Interestingly, in contrast to the previous Environment Protection Act, the term “occupier” is not defined in the New Act. It is possible that a court would allow the EPA to recover clean up costs from a liquidator under the New Act in future.
In addition, all of the Australian States and Territories outside of Victoria, with the exception of the Northern Territory, have similar “occupier” concepts in their environmental protection legislation. However, there are some differences across the States and Territories as to how “occupier” is defined and the precise circumstances in which an occupier may be held liable for clean up costs. Regardless, in many cases the statutory language appears potentially broad enough to include liquidators in the concept of “occupiers” under those various enactments if the reasoning in this decision is adopted (potentially giving rise to personal liability). Administrators, receivers and managers and receivers over the relevant land may also fall within these regimes and be at risk.
Treatment of environmental disclaimers going forwards
It is clear that the courts are reluctant to allow disclaimers to be used in a manner by which companies can shed their environmental obligations. As was said by Young CJ in Sullivan v Energy Services International Pty Ltd (in liq)  NSWSC 937,  (in the context of a voluntary liquidation):
The Court should be wary of disclaimers where environmental liabilities are to be passed onto taxpayers or innocent persons. The Court should discourage the use of voluntary liquidation as a device to avoid environmental responsibilities, or to impose unwanted or unexpected burdens on the taxpayer. When there are opportunities open to recover the costs of environmental clean up, they should be taken unless outweighed by other factors.
In Australian Sawmilling, the clean up costs vastly exceeded the value of the land, TASCO had no other assets, and any recovery of clean up costs depended on the existence of the Indemnity given to the liquidators.
However, an environmental agency may seek to set aside any disclaimer of land where the company in liquidation has funds or assets that could potentially be used to fund clean up costs, even if the liquidators do not have an indemnity relating to environmental liabilities. The comments of Young CJ above suggest that a court may also be inclined to set aside a disclaimer in such circumstances.
In either circumstance, if the land cannot be disclaimed, liquidators will likely wish to obtain some form of undertaking from the relevant environmental agency (similar to the Undertaking in this case) that the agency will not seek to recover from the liquidators any environmental liability exceeding the amount that the liquidator is indemnified from in respect of that liability, either from the assets of the company or under any separate indemnity agreement.
In contrast, where the company has no assets and the liquidators have no indemnity in respect of environmental liabilities, there would be no assets to meet any such claim (other than the personal assets of the liquidators). In such circumstances an environmental agency would presumably be less likely to seek to set aside any disclaimer of the land by the liquidators, as the environmental agency would not be losing a source of recovery of clean up costs (and would therefore not be prejudiced by the disclaimer).
This decision demonstrates the importance of insolvency practitioners, and those considering indemnifying them, obtaining legal advice in anticipation of potential liquidation appointments involving land that is likely to be subject to significant environmental liabilities.
Creditors, shareholders and other third parties contemplating offering indemnities to insolvency practitioners should exercise significant caution in doing so where the relevant company is exposed to known or potential environmental liabilities. If insolvency practitioners will not consent to act in the absence of an indemnity, the prospective indemnifier may need to consider whether any indemnity given could be capped at a defined amount or limited to certain defined costs, expenses and/or liabilities.
Insolvency practitioners and other parties should also consider what practical steps can be taken to obtain certainty as to exposure for environmental liabilities. It will often be appropriate to proactively engage with the relevant environmental agency as to the appropriate approach, potentially prior to appointment. As part of such engagement, it may be possible for insolvency practitioners to obtain the relevant agency’s agreement not to hold the insolvency practitioner personally liable to the extent of the amount he or she is indemnified from in respect of that liability.