11 Nov 2021

Third time lucky? Decision upheld to set aside disclaimer of contaminated property where liquidators hold indemnity

By Nick Poole, Anthony Burke and Michael Damevski

Victoria's Court of Appeal has reaffirmed the risk that a disclaimer of property may be set aside where the liquidators are indemnified, and the need for liquidators to be mindful where the company holds contaminated property.

A liquidator may disclaim a company's property where it is unsaleable, if it gives rise to onerous obligations, or where the costs to realise the property exceed the proceeds of realising the property. The 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.

Liquidators, at times, have used disclaimers as a means to deal with contaminated property. This position is no longer clear-cut following a decision of the Supreme Court of Victoria in 2020, which the Court of Appeal recently reaffirmed in The Australian Sawmilling Company Pty Ltd (in liq) & Ors v EPA & Anor [2021] VSCA 294.

The liquidation, the unsaleable land, and the disclaimer

The Environmental Protection Authority (EPA) and the State of Victoria applied to the Victorian Supreme Court to set aside a disclaimer made by the liquidators of The Australian Sawmilling Company Pty Ltd (in liquidation) (TASCO).

The liquidators were appointed by way of a creditors' voluntary liquidation and had disclaimed TASCO's interest in land that contained large stockpiles of industrial waste and remained unsaleable at the time of the hearing. Dongwha Australia Pty Ltd (Dongwha), the sole shareholder of TASCO from 2012 to 2018 and a creditor, agreed to indemnify the liquidators against any shortfall in available assets to meet environmental liabilities to induce them to accept the appointment.

The primary judge held in favour of the EPA and State, on the basis that setting aside the disclaimer would cause prejudice to the EPA and State (being liable for clean-up costs) grossly out of proportion to the prejudice suffered by TASCO's creditors (delay in finalising the liquidation). The primary judge exercised his discretion and set aside the disclaimer.

TASCO recently appealed this decision to the Victorian Court of Appeal arguing, among other things, that:

  • the primary judge erred in finding that the disclaimer would cause prejudice to the EPA and State;
  • the primary judge considered irrelevant matters when determining whether to set aside the disclaimer; and
  • the EPA and State's prejudice claim should fall away because section 62 of the Environmental Protection Act 1970 (Vic) is invalidated.

Did the disclaimer cause prejudice?

The Court had to decide whether the primary judge erred in holding that the liquidators' disclaimer "would cause" prejudice to the EPA and State that would have an "immediate effect" (rather than "future potentialities or indirect consequences").

The Court held that the disclaimer "would cause" prejudice, as the EPA had already incurred costs in cleaning up waste stockpiles. The Court also dismissed TASCO's argument that the State could not suffer prejudice because it did not have the power to recover clean-up costs under the Environment Protection Act, noting that section 62(2) made provision for any recovered costs to be paid into a consolidated fund.

Further, the Court rejected TASCO's argument that there was only a "future potentiality" that Dongwha would honour the indemnity. This is because the indemnity was a condition of the liquidators accepting appointment, and financial statements established that Dongwha had substantial assets.

Were the environmental considerations irrelevant?

The Court also considered whether the primary judge allowed irrelevant matters to affect his decision to set aside the disclaimer. His Honour had relied on principles of environmental protection, under which a disclaimer should not be used as a device to avoid environmental responsibilities, nor to impose unwanted burdens on taxpayers.

The Court held that there were no specific criteria under the Corporations Act to determine whether a disclaimer should be set aside. The Corporations Act only required the parties to establish "prejudice", which the EPA and State demonstrated by a failure to recover costs properly under the Environment Protection Act.

Is Victoria's Environment Protection Act invalid?

TASCO also argued that section 62(2) of the Environment Protection Act should be invalidated, as it is inconsistent with a Commonwealth law, namely section 545 of the Corporations Act.

The Environment Protection Act imposes unlimited liability on liquidators by allowing the EPA to recover reasonable costs, while the Corporations Act limits liability to winding up expenses. TASCO argued that this invalidity meant that the EPA and State had no power to recover clean-up costs from the liquidators, with the result that their prejudice claim fell away.

The Court did not consider TASCO's constitutional argument, as it found liability under section 62(2) of the Environment Protection Act did not trigger the application of section 545 of the Corporations Act.

Key takeaways for liquidators

Firstly, the EPA and State were found to be likely to suffer "immediate" prejudice where liquidators have disclaimed land with contamination issues in circumstances where the company's liquidators have been indemnified.

Secondly, the case confirms that courts may consider principles of environmental protection when determining whether a disclaimer should be set aside, notwithstanding that such principles are not prescribed under the Corporations Act.

TASCO may appeal the decision to the High Court, as the Court of Appeal did not consider it necessary to evaluate TASCO's constitutional argument that section 62(2) of the Environment Protection Act should be invalidated. Clayton Utz will continue to monitor this case for any appeal.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.