With the UK suffering at the hands of the recession, rates of insolvency look set to continue to grow. In the first quarter of 2009, 4,941 companies were declared insolvent, representing a 7.1% increase on the previous quarter and an increase of 56.0% over the same period in 2008. Environmental liabilities will inevitably have some impact on insolvency rates, as the ever increasing laws and liabilities that a company must account for affect corporate balance sheets. Further, the insolvency of a company will also have an impact in terms of the company’s liability and the liability of those who are involved with the company, such as directors, lenders and, ultimately, insolvency practitioners.
This article will consider both:
- how environmental liabilities can contribute to a company’s insolvency and what provisions can be made, or are required, to minimise this risk; and
- following insolvency, what remains of a company’s liability and to whom might this transfer.
Environmental Factors Leading to Insolvency
As the array of environmental issues that are addressed through legislation and case law has increased, there has been an escalation in the range of, and exposure to, environmental liabilities for which a company may be accountable.1
In the UK, a company’s solvency is measured on one of two bases; whether it is able to pay its debts as they fall due and/or whether its assets are greater than its liabilities. Clearly, as the extent of a company’s liabilities increases, so too does the risk of its assets no longer being sufficient to meet its liabilities.
This will be of concern to directors who, under the provisions of s214 of the Insolvency Act (IA) 1986, may be personally liable if they ‘knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation’ and, under s123, may be liable for any transactions entered into by an insolvent company to defraud its creditors.
Making provision
It is now advisable that companies review all of their environmental liabilities. Failure to do so will not only inhibit their ability to manage and respond to such liabilities, but will also restrict their ability to monitor their prospective solvency. In addition to such voluntary measures, there is environmental legislation that expressly requires companies to make provision to cover their liabilities in the event of insolvency.
For example, the environmental permitting regime requires companies to demonstrate that they have made sufficient financial provision to cover the obligations of the permit for which they are applying.2 In the predecessor legislation (the Pollution Prevention and Control (England and Wales) Regulations 2000 and the Waste Management Licensing Regulations 1994) this was a statutory requirement. The Environmental Permitting Regulations 2007 do not include any such specific provision but at Schedule 5, paragraph 13, they require an operator to ‘operate the facility in accordance with the environmental permit’. Guidance issued by Defra and the Environment Agency (EA) on these regulations states that ‘operators must maintain competence’, highlighting in particular financial competence.3 Paragraphs 6.1 of the EA’s guidance and 8.19 of Defra’s guidance state that companies will only be granted a permit if they ‘will be capable of meeting the financial obligations under the permit’ and, in practice, this requirement is likely to be given the same effect as under the predecessor legislation.
Defra’s guidance also indicates: ‘Regulators should only consider financial solvency explicitly in cases where running costs are high relative to the profitability of the activity or if they have any other reason to doubt the financial viability of the activity.’This guidance covers all categories of facility apart from landfill, for which the Landfill Directive requires operators to make financial provision prior to the operation of the facility. In practice, this is usually covered by bonds.
As a result, although the EA is only obliged to consider financial solvency in certain circumstances, they are required to ensure that a company has made financial provision for its obligations under any environmental permit before it is granted.
Position on Insolvency
The company’s position
Once a company becomes insolvent there are several insolvency procedures that may be followed and, although some of these have as their intention the dissolution of a company, several others are intended to rescue the company and ensure the greatest return is realised for the creditors. A detailed examination of all of these procedures is beyond the scope of this article but certain issues are of general relevance.
When a company becomes insolvent, its liabilities (including environmental liabilities) will continue until it is dissolved. Generally, there is little benefit for the authorities or other parties to make a civil claim against an insolvent company because there will be insufficient funds to satisfy any judgment. However, there are other parties who can pick up liabilities and certain circumstances where the company’s liabilities will continue to be of relevance. These are dealt with below.
An insolvent company can still be prosecuted for its criminal liabilities. This will, of course, depend on all of the circumstances and, in particular, whether it would be in the public interest to commence such a prosecution. The EA is prepared to take such action, as shown by its ongoing prosecution of Motherwell Control Systems 2003 Ltd (in liquidation) in the aftermath of the Buncefield inquiry.
Further, even if a company has been dissolved, the enforcing authorities, or indeed other third parties, can apply to have it restored for the purpose of prosecuting it. Section 1029 of the Companies Act 2006 provides that any creditor, person with a potential legal claim against or any other person with an interest in the company may apply to the court within six years of the company’s dissolution to have it restored. Whether the prosecuting authorities do pursue a dissolved company will depend on the circumstances of the case.
Contaminated land
The insolvency and eventual dissolution of a company is particularly pertinent when considering liability under the contaminated land regime.4 In very basic terms, the contaminated land regime provides a system of determining and apportioning liability for the remediation of contaminated land. Liability for remediation can attach to:
- (Class A) persons who caused or knowingly permitted the land to become or remain contaminated; or, if they cannot be found,
- (Class B) persons who are the current owners or occupiers of the contaminated land.
When considering liability for remediation in a specified set of circumstances, regard can be had to contractual arrangements between potential Class A persons to transfer their liabilities. In these circumstances, providing certain tests are fulfilled, the enforcing authorities (the local authority or EA, depending on the site) will not pursue the transferor for remediation. However, paragraph 9.17 of Defra’s guidance to the contaminated land regime, Circular 01/2006, states that a party must be ‘in existence’ to be ‘found’. As such, where a company is dissolved and is no longer in existence, it can no longer be ‘found’ for the purpose of liability under the regime. As a result, companies that have agreed to transfer their liabilities to a company that has subsequently been dissolved (or that satisfy one of the other liability transfer tests) will be unable to benefit from that contractual arrangement and will remain liable under the regime.
Further, if the only Class A person is a dissolved company, the effect of the dissolution will be to push liability for remediation onto any Class B persons. These will be the owners or occupiers of contaminated land who were not responsible for its contamination but take on that liability merely as a result of their ownership or occupation.
Directors
Although directors’ liabilities arising from the insolvency itself have been discussed above, directors can also be held responsible for the environmental liabilities of their company.
Direct liability
Directors may, where the scope of the wording of any offence is sufficiently wide, be directly liable for the acts or omissions of their company. By way of an example, s85(1) of the Water Resources Act (WRA) 1991 makes it an offence to pollute controlled waters and liability attaches to ‘a person’ who: ‘Causes or knowingly permits any poisonous, noxious or polluting matter or any solid waste matter to enter any controlled waters.’5
The courts have interpreted ‘causing’ very widely and a director will be ‘knowingly permitting’ if they have knowledge of an issue and have the power and a reasonable opportunity to do something about it. Any director, therefore, who causes or knowingly permits pollution to occur will be directly liable for its occurrence. In practice, it is a high hurdle for the EA to establish that a director (as opposed to the company) has caused pollution in this way but it is possible.
Indirect liability
In addition to the above, there are circumstances in which directors may become indirectly liable for the acts of their companies.
There are environmental legislative regimes, for example s217(1) of the WRA 1991, that provide that directors are liable for all pollution committed by a company with their ‘consent or connivance’ or ‘attributable to [their] neglect’.6 These provisions can make a director liable for the actions of their company and are not contingent on an action being made against the company. Such actions are not common in practice. However, if the company is insolvent, and the EA considers that it could successfully prosecute a director, we can envisage that it might be considered appropriate to do so, even if the situation would not lead to action if the company was still in existence. Such prosecutions might increase in the current economic climate.
Civil liability
Directors should also be aware that s73(6) of the Environmental Protection Act (EPA) 1990 provides that anyone who is liable for an offence arising from the unlawful deposit of waste is also liable in a civil claim for any ‘damage’ caused by that deposit. This can apply equally to directors as to companies.
Insolvency Practitioners
As discussed above, there are several different procedures that may be followed in respect of an insolvent company and the rights and liabilities of the relevant insolvency practitioner may be different. Although these liabilities are beyond the scope of this article, we have considered a few key points below.
In the environmental context, one of the most important things to bear in mind is that s178 of the IA 1986 gives a liquidator the power to disclaim onerous property of the company. In Re Celtic Extraction Ltd (in liquidation) [2001] the Court of Appeal held that a liquidator could disclaim a waste management licence issued under the previous permitting regime, and discharge the liabilities for costs of remedial works required under the terms of the licence, without committing an offence or breach of duty. However, the Court also held that, if such a step had a polluting effect, the liquidator could nevertheless be personally liable.
Although this has not been tested in the courts, it is very likely that the reasoning in this case will also apply to an environmental permit. For those who are relying on the insolvent company’s performance of its obligations under the permit, the provision of adequate financial provision (as referred to above) becomes all the more important. For example, a landlord of a landfill site in which the tenant becomes insolvent could pick up liabilities for the restoration and aftercare of the site if such financial provision has not been made and the permit is disclaimed.
An insolvency practitioner’s personal liability will depend on their terms of appointment and, where their powers of management are sufficiently wide, they may be accountable for environmental issues caused by the company. An administrator or, where they can still be appointed, administrative receiver, can have wide-ranging powers of management that make them an agent of the company. As a result, they may be capable of causing or knowingly permitting pollution to occur or may be indirectly liable for any acts committed with their consent, connivance or neglect (as discussed above). This could make them criminally liable for those acts.
They will also need to closely review their actions to ensure that they avoid any personal liability for them during the course of the appointment. Further, the principles of the contaminated land regime (discussed above) can, in certain circumstances, transfer liability for contamination onto an insolvency practitioner.
It might be that, using the logic above, insolvency practitioners could become a Class A person if they ‘knowingly permit’ contamination or a Class B person as a result of occupation of a contaminated site. However, this only occurs in limited circumstances. Section 78x of the EPA 1990 has the effect of excluding them from personal liability for the cost of remediating contaminated land, except where it arises as a result of an act or omission it was unreasonable to make or where there was a personal obligation that was breached.
In practice, insolvency practitioners commonly seek to be indemnified by the appointing lender, thereby potentially making the lender liable indirectly. Whether they do or not, insolvency practitioners will need to understand the environmental obligations of a company (even those that are not immediately obvious) before accepting any appointment.
Lenders
As a consequence of the growth of the framework of environmental law in the UK, banks have been forced to consider environmental issues, both in regards to their lending policy and the conduct of their business. Although the obvious impact of a company’s increased environmental liabilities on the value of its assets is of concern to lenders, the possibility that such liabilities can transfer to the lender is potentially more concerning.
Direct and indirect liability
As a lender will not normally become involved in the formal management of a company, it is difficult to envisage a situation in which a lender might ‘cause’ an offence to be committed, despite the wide interpretation by the courts. However, depending on the amount of control exercised by the lender, it is possible that it could be found to have ‘knowingly permitted’ an offence. This could be the case if the lender had the relevant knowledge and the power to do something about it but failed to do so. Examples may include ongoing pollution of which the lender is aware but fails to take steps to prevent (perhaps by enforcing relevant covenants).
Again, depending on the amount of control exercised by a lender, there is also the possibility of indirect liability arising if it is considered to be a shadow director of the company, although case law indicates that this is a high hurdle to establish.7 In practice, both of these results are unlikely.
Contaminated land
Lenders will generally seek to manage their risk of lending to a company by putting in place security over its assets. Such security will often take the form of charges and/or mortgages and may result in the lender becoming an owner or occupier of the land. Although ‘mortgagees not in possession’ are exempted from the definition of owner under the contaminated land regime by s78A of the EPA 1990, they may be liable as a Class B person if such security is exercised and they take possession of the land and no Class A person can be found. As a result, a lender will need to consider its potential liability for remediation of contaminated land when deciding whether to enforce its security.
As a consequence of the potential environmental liabilities that lenders may attract, it is important that they carry out adequate environmental due diligence prior to taking security. Lenders should also revisit the position prior to enforcing any such security. There are examples of lenders being pursued in these circumstances. Midland Bank was served with a remediation notice, having taken possession of a site that had been contaminated by the disposal of tyres on it.
Conclusions
Responsibility for compliance with environmental laws rests with a company, despite its insolvency. However, there are many related parties who will need to identify their personal accountability in the event of a company heading towards insolvency or becoming insolvent.
The increasing pressure on companies may result in more cases of third parties, who would not normally be pursued, becoming accountable for their liabilities. In particular, directors, lenders and insolvency practitioners may become liable.
As such, it is vital that both companies and those third parties consider and review the impact that environmental law may have on them so that they can be aware of the risks that they face and can prepare for any such eventualities.
By Michael Barlow, partner, Burges Salmon LLP.
E-mail: michael.barlow@burges-salmon.com.
Notes
1) By way of example, the recent introduction of the Environmental Damage (Prevention and Remediation) Regulations 2009, which transposed the Environmental Liability Directive into UK law, is indicative of this growth and sits alongside other environmental issues as water, waste, permitting and contaminated land as considerations that companies must address.
2)Now arising out of the Environmental Permitting Regulations 2007.
3)Environment Agency Regulatory Guidance Series No EPR 5: Operator Competence and Environmental Permitting Core Guidance.
4)Implemented in Part IIA of the Environmental Protection Act 1990.
5)Section 33 of the Environmental Protection Act 1990 similarly makes it an offence to cause or knowingly permit controlled waste to be deposited in or on any land or submitted to an operation listed in Annexes IIA and IIB to the Waste Framework Directive (2006/12/EC).
6)Section 157 of the Environmental Protection Act 1990 makes similar provision in respect of attributing responsibility for offences committed by a body corporate under that Act to its directors. This includes the legislation in relation to waste.
7)For example Re Hydrodam (Corby) Ltd (in liquidation), The Times, 19 February 1994 and Triodos Bank NV v Dobbs & anor [2004] EWHC 845 (Ch).
Re Celtic Extraction Ltd (in liquidation) [2001] Ch 475
Burges Salmon LLP will be broadcasting a live webinar at 4pm on 2 July 2009 to expand on the issues highlighted in this article. If you wish to attend this free webinar, please go to: www.burges-salmon.com and follow the links from the homepage to complete the simple registration process.
