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“Trump Card” – environmental liabilities take precedence over creditors of a company in liquidation

Wheelie_Bins Print publication

06/01/2020

In Ratten v Natural Resource Body for Wales [2019] EWHC 2904 (Ch), His Honour Judge Halliwell has provided another example of the remediation of environmental damage taking priority over the claims of the creditors of a company in liquidation. It was held that the High Court did not have jurisdiction to stay criminal proceedings brought in respect of environmental offences against such a company and even if it did, it would not have granted a stay.

The judgment comes after Lord Doherty in the Court of Session (Outer House) held in Joint Liquidators of Doonin Plant Ltd, noters [2018] CSOH 89 that the cost of a company in liquidation’s compliance with environmental notices is a liquidation expense and therefore has priority over all other claims to the company’s assets, including those of secured creditors.

The Facts

Paperback Collection and Recycling Limited is a waste treatment and disposal company (in liquidation) with environmental permits allowing storage of up to 500 tonnes of waste for no more than 12 months at two of its leasehold sites. In breach of this storage exemption, the Natural Resource Body for Wales (“NRW”) – the equivalent of the Environment Agency for Wales and the Respondent in these proceedings – gave evidence that over 23,000 tonnes had been unlawfully deposited across the two sites with a clean-up bill totalling approximately £3 million. NRW brought criminal proceedings against the company and its two directors. The company’s liquidators (“the Applicants”) applied to the High Court to stay those criminal proceedings.

Whether the court had jurisdiction to stay the proceedings

The Applicants’ contended that the Court’s jurisdiction to stay the criminal proceedings derived from Section 112(2) of the Insolvency Act 1986 (“the 1986 Act”). The judge confirmed that Section 112(2) of the 1986 Act ‘confers on the Court the same jurisdiction and powers in respect of a company in voluntary liquidation as it has in respect of a company being wound up. This includes the statutory powers in Section 126(1) [of the 1986 Act] to stay or restrain court proceedings … [and] “proceedings” is to be construed so as to include criminal proceedings’[1].

However, the judge identified that Section 126(1) only gives the High Court the jurisdiction to stay the proceedings if the action or proceedings is pending in that court. He went on to conclude that ‘I was not referred to any case in which the High Court has stayed proceedings in other courts in the exercise of its insolvency jurisdiction. … In the absence of binding authority, I am not satisfied I have jurisdiction … to make an order in this Court staying the Criminal Proceedings’[2].

Discretion

Despite forming the view that he had no jurisdiction to order the stay, the judge concluded that even if he did, he would have declined to stay the criminal proceedings. A stay of the criminal proceedings would not have fulfilled what he perceived to be the proper purpose of ordering a stay; NRW had not brought the criminal proceedings ‘to advance the interests of one or more creditors at the expense of other creditors … [or thereby] raise[d] issues more suitable for the convenient determination of the liquidators themselves’[3].

Furthermore, the judge found ‘compelling public interest grounds to allow the Criminal Proceedings to continue … [which] substantially outweigh[ed] the attendant disadvantage to the creditors’ of the company’s assets being depleted by any costs incurred in defending the criminal proceedings and any subsequent financial penalty imposed[4]. These public interest grounds included the fact that serious offences should be prosecuted; that the regulatory regime had been significantly undermined; the prosecution was brought under an open policy the company should have been aware of; and if the company is convicted, its directors could be precluded from holding environmental permits in the future, which could prove to be of great benefit to the environment[5].

The Applicants did not bring the claim under the second limb of Section 126(1) of the 1986 Act which Justice Halliwell confirmed permits the High Court to restrain (rather than stay) proceedings in another court[6]. This has been used in the past to curtail proceedings brought by creditors in the criminal courts[7]. As such, Justice Halliwell considered it ‘inappropriate … to reach a definitive conclusion on the merits of such an order’[8]. Despite this, he indicated that his preliminary conclusions on restraining the criminal proceedings were ‘closely aligned with my views in relation to the correct exercise of my discretion on the application for a stay’[9].

Practical Considerations

The principle underpinning the judgments in both Ratten and Doonin Plant is the notion that a company’s compliance with its environmental duties and any sanctions that flow from non-compliance are of greater importance than, and therefore should have priority over, the creditors of the company. Even if the jurisdiction aspect of the case is disputed, or a challenge to restrain rather than stay proceedings is brought, the policy basis driving the Court’s decision on discretion would still seem to require the company in liquidation’s environmental damage to be remedied first, whatever the impact on its creditors. This is a major shift which recognises and reflects the increasing importance being afforded to securing corporate compliance with environmental requirements and the willingness of the courts to take the steps necessary to restrict a company’s ability to avoid the consequences of failing to do so.

 

[1] Paragraphs 19-20 of the Judgment

[2] Paragraph 24 of the Judgment

[3] Paragraph 33 of the Judgment

[4] Paragraph 34 of the Judgment

[5] Paragraphs 35-38 of the Judgment

[6] See paragraphs 21-23 of the Judgment

[7] e.g., see Re Briton Medical and General Life Assurance Association (1886) 32 Ch D 503

[8] Paragraph 25 of the Judgment

[9] Paragraph 25 of the Judgment

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