Fri 20 Dec 2013

Liquidators cannot disclaim title to land in Scotland or abandon environmental licences

In December 2013 the Inner House of the Scottish Court of Session overturned the July 2013 decision of its lower division on the question of whether the liquidators of The Scottish Coal Company Limited ("SCC"), a company registered in Scotland, could disclaim ownership of certain Scottish land owned by SCC and disclaim any liability to comply with licences and permits under certain environmental regimes. The lower division had said that the liquidators of such a Scottish registered company could so abandon or disclaim - but this decision was reversed on appeal, the challenge to the lower court's view having come from SEPA and others.

This case is very important from the point of view of whether the liability for the clean up of contaminated land and general compliance with environmental legislation can be avoided by insolvency of a company, for the benefit of other creditors but to the prejudice of SEPA (and therefore the wider public interest) - or, if liability only ceases if the relevant land owner has ceased to exist eg been struck off the register of companies following completion of a winding up of a company. It also comments on the different position that might apply depending on whether the company in liquidation was registered in Scotland or England.

Why did the liquidators try to disclaim liability?

The liquidators of SCC brought the matter to court to try to get judicial authority effectively to off load any liability firstly for land in various parts of Scotland (on which open cast mining operations were conducted) and secondly for compliance with the licences and permits that had been granted or issued to SCC under the Water Environment (Controlled Activities) Regulations ("CARs") and the Pollution Prevention and Control (Scotland) Regulations.

Although we understand that there are no now mining activities being carried out on the land, pumping and safety operations have continued, in order to comply with the requirements of the licences and permits. According to the judgement, the costs of such compliance are about £500,000 per month and surrender of the licences would cost several million pounds. It goes on to say that if the costs of compliance were treated as an expense of the liquidation then the SEPA entitlement would effectively wipe out all funds, leaving nothing available for ordinary creditors.

Why couldn't the liquidators disclaim title to the Land?

Although a liquidator of a Scottish company can refuse to implement a contract to which the company in liquidation was a party, this does not terminate the contract - it simply leaves the other party to that contract with no remedy other than to claim as a creditor in the liquidation for its losses resulting from the company's breach of contract. Such actions by liquidators can be described as "disclaiming" the contract.

Land ownership is not the same as the rights and liabilities under a contract. Title to land is registered in a public register and the owner of the land has a real right to it ie good against the world, not just a personal right. Whilst the liquidator of a company that owns land might abandon possession of the land and refuse to comply with obligations that apply to the land owner eg title conditions or (in this case) environmental liabilities, it cannot abandon ownership. So it cannot simply say that the company no longer owns the land. The liquidator does not own the land - his role is as custodian of the company's assets, unless he applies for an order to vest ownership of those assets in him (which is very rare).

Ownership can be transferred to someone else (voluntarily or by some legal process like compulsory purchase), but not abandoned. As the court says, there is no legal process by which a person can transfer land into oblivion.

If a company which owned land ceases to exist (as happens if it is struck off the register of companies following a winding up) then the land becomes what is known as "bona vacantia" and is essentially ownerless. All bona vacantia can be administered by the Crown for the benefit of the community - so the Crown effectively has a right to possess or occupy. The Crown is also entitled (if it chooses) to require the Scottish property register to grant it a Deed of Gift of the land, which the Crown can then use as a link in title when it disposes of the land to another person, but there is no obligation on the Crown to take ownership. If the Crown chooses, it can disclaim its rights and not take any Deed of Gift - which it might be inclined to do if the land comes with onerous obligations and is therefore not something that would be of benefit to the community or a valuable asset for disposal.

Is the position different if the land owning company is registered in England? - No and Yes

The Inner House accepted that Section 178 of the Insolvency Act 1986 allows a liquidator of an English company to disclaim onerous property, regardless of where in the world that property is located. (There is no equivalent provision for the liquidator of a Scottish company). However the court was clear that the liquidator of an English company was in no better position to off load (or disclaim) title to land in Scotland than would be the liquidator of a Scottish company - because such would conflict with Scottish property law, which provides no mechanism for such an abandonment.

That said, in practice the liquidator of an English company might still achieve its aim of preserving funds for ordinary creditors by making such a disclaimer - as, even although it could not divest the company of its title to the Scottish land, the disclaimer might still be effective in relation to the adjudication and ranking of creditor claims that relate to that land.

Why couldn't the liquidators disclaim the Licences and Permits?

The CARs rules are in place to protect the public interest in a clean environment. When a liquidator is appointed, he becomes the person who is responsible for securing compliance with any licences under the CARs - although only up to the value of the assets of the company, there being no personal liability on the liquidator himself.

Whilst CARs licences are assets (as they allow the carrying out of controlled activities to permit the exploitation of valuable resources) they also inevitably bring associated, and costly, liabilities. If the licensee fails to comply with its licence, SEPA has a number of remedies to protect the environment, including doing any required works itself and recovering the costs from the licensee.

In this case the liquidators of SCC were seeking permission to disclaim the licences because (consistent with their duties towards the company and its creditors) they wanted to extinguish or unilaterally terminate a potentially very large liability.

The court took the view that it could not have been the intention to permit unilateral disclaimer by the liquidator of a company when the CARs regime already set out a procedure for surrender of such licences (with associated liabilities on the licensee who applies for such surrender). It further noted that where legislation makes specific provision for a situation (eg the surrender of an authorisation) by way of a particular mechanism, then that specific mechanism is to be taken as superseding any more general alternative eg the S178 right to disclaim. The liquidators had argued that an interpretation of the CARs that would allow them to "trump" the S178 right to disclaim would result in the CARs being outwith matters devolved to the Scottish Parliament (ie straying beyond the environment into the rules on insolvency) - but that was rejected.

This judgement is particular to CARs licences and therefore this is not a general ban on any disclaimer of environmental liabilities by liquidators. The court was clear that the position might be different for a proposed disclaimer under other environmental regimes - it would depend on the legislation applicable to such regimes. There is case law in England that prefers the S178 power of disclaimer for certain other environmental liability. This decision does muddy the waters somewhat and if it is appealed to the Supreme Court (which is a possibility), their decision might touch on matters wider than CARs.

Pyrrhic victory for SEPA and uncertainty for insolvency practitioners?

Although this decision will be of some help to SEPA, the Inner House did comment that the debts of a company that may be enforced in the liquidation process are only those which were outstanding at the date of the winding up - and that this could present a difficulty for SEPA in ranking for any losses or costs incurred by them by reason of any post liquidation failure by SCC to meets its licence obligations.

Also, the decision cannot provide complete protection for the environment as any liability on any liquidators of a company holding a CARs licence will cease when the company is wound up and struck off the register. If the funds realised by the disposal of the assets of the company are insufficient to meet the compliance costs, then the environment (and the public interest in it) will still be the looser.

Finally, the uncertainty introduced by this decision (as regards liabilities under different environmental regimes and any differences between the rights of liquidators of Scottish or English companies) will not be welcomed by insolvency practitioners. Those appointed to English companies will also now have to consider the law of the land in which any property is situated, in addition to their powers under insolvency law.

Make an Enquiry

From our offices we serve the whole of Scotland, as well as clients around the world with interests in Scotland. Please complete the form below, and a member of our team will be in touch shortly.

Morton Fraser MacRoberts LLP will use the information you provide to contact you about your inquiry. The information is confidential. For more information on our privacy practices please see our Privacy Notice