Heritage disowned

In July 2013, the liquidators of Scottish Coal asked the Court of Session for guidance in respect of seven opencast sites at which mining operations had ceased on their appointment. The sites were subject to onerous statutory obligations for their operation and restoration. Restoration alone was estimated to cost £73 million.

The liquidators asked the court if they could abandon (disclaim) the sites and their statutory obligations.

Disclaimer is a broad statutory right for liquidators in England. Under the Insolvency Act 1986, such a liquidator “may, by the giving of the prescribed notice, disclaim any onerous property and may do so notwithstanding that he has taken possession of it, endeavoured to sell it, or otherwise exercised rights of ownership in relation to it” (s 178).

Liquidators appointed to wind up companies in Scotland have no similar express right. As a result there is a question mark over a Scottish liquidator’s right to disclaim.

The petitioners believed the cost of complying with the environmental obligations to which the sites were subject, an estimated £500,000 per month, would significantly reduce any money available to Scottish Coal’s creditors. They applied to the court for confirmation that they could abandon or disclaim Scottish Coal’s heritable property and/or the various environmental permits held by it (the permits being the instruments by which environmental obligations were imposed).

Disclaiming heritable property

In ruling ([2013] CSOH 120) that a liquidator can disclaim heritable property subject to any statutory permits applying to that property, Lord Hodge held that as a matter of common law a liquidator has a general right to disclaim (it is established that a liquidator can choose not to adopt contracts or leases, and the court saw no reason for this right not to apply to heritable property). The court also compared a liquidator’s position with a trustee in sequestration.

Section 169(2) of the 1986 Act provides that on a winding up by the courts in Scotland, a liquidator has the same powers as those bestowed on a trustee of a bankrupt estate. While heritable property automatically vests in a trustee by statute, the trustee may refuse it, leaving the property with the bankrupt. It means that the trustee can protect the bankrupt’s creditors against the costs of performing obligations relating to that property by effectively abandoning it.

The court recognised that applying this concept to liquidation was problematic – property of a company in liquidation does not automatically vest in its liquidators. Instead, ownership remains with the insolvent company. As there is no vesting for the liquidator to decline, there is no immediately apparent mechanism for setting aside heritable property owned by a company in liquidation. However, the court believed this should not prevent disclaimer and, although unprecedented, a liquidator could disclaim either by abandoning property or by declining to use funds in respect of that property. This would give a liquidator the ability to protect funds in the same way that a trustee could.

Disclaiming environmental permits

The liquidators’ argument to disclaim Scottish Coal’s environmental obligations centred on permits obtained by the company in terms of the Water Environment (Controlled Activities) (Scotland) Regulations 2005 and 2011 (“CAR”).

Under CAR, parties carrying out certain controlled activities are required to obtain permits. While CAR sets out a procedure for applying to the Scottish Environmental Protection Agency to surrender a permit, it also provides that SEPA can impose such conditions on the responsible person as it considers necessary to minimise the impact on the environment.

Regulation 2 of CAR states that where a responsible person is a corporate entity that enters insolvency, its receiver, administrator or liquidator will also fall within the definition of “responsible person” and will be liable for complying with the terms of the permit and any surrender conditions imposed.

The court decided that in seeking to make a liquidator responsible for complying with permit and surrender conditions, on its natural reading reg 2 created an obligation on a liquidator which would have to be met in priority to payment of preferential debts. However, as creating preferred or preferential debts in a corporate insolvency is a reserved matter of the UK Government, this would be incompetent to the Scottish ministers, and reg 2 had to be read so as to avoid that result.
Accordingly, the liquidators could not be held to be a party responsible for compliance and were entitled to disclaim the permits, without condition.

Process for disclaimer

The court was asked by the liquidators if it could provide guidance as to how a disclaimer should work in practice.

The liquidators suggested that they should prepare and execute a notice, serving copies on all interested parties. While not setting down a formal procedure for disclaimer, the court indicated agreement with this approach. It also suggested that where abandonment of heritable property was likely to cause safety issues, it would be prudent to give notice of the abandonment in the press to raise public awareness. Discussions would also need to be held with the Keeper of the Registers as to how disclaimer should be noted in the land registration system.

The court ruling will be welcomed by liquidators. However, the same cannot be said for local authorities, as they are likely to carry the burden of dealing with disclaimed sites, along with the estimated £72 million cost of restoring them. As a result, it is likely this decision will be challenged.