Vol 11 (2014) - Issue 2

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Joint Liquidators of The Scottish Coal Company Limited: Note for Directions

This case raises issues of insolvency law, property law, environmental law and constitutional law. This article will concentrate on the insolvency aspects of the case and specifically s178 of the Insolvency Act 1986 in relation to the ability of a liquidator to disclaim onerous property. It will highlight the differences between England and Scotland.

Background
Blair Carnegie Nimmo and Gerard Anthony (Tony) Friar are well known Scottish Insolvency Practitioners at KPMG. They were appointed on 19 April 2013 as provisional liquidators of The Scottish Coal Company Ltd ('SCC'). On 29 April 2013 the Court of Session ordered the winding up of SCC and appointed them as interim liquidators. At a meeting of creditors on 3 June 2013 they were appointed liquidators. They sought directions from the court in relation to the performance of their duties. A liquidator as an officer of court has the right to apply to the court for directions which relate to his duties and which are needed to allow him to perform those duties. The immediate issue was whether the liquidators could by disclaimer relieve themselves (and thus the creditors of SCC) of the cost of complying with their obligations under various environmental regulations. SCC carried on several businesses including the operation of open-cast mining on seven sites in Scotland.
Following their appointment the liquidators ceased mining operations but continued to secure the safety of the sites. They sold several sites but retained other disused open cast sites. Mining operations are subject to various statutory obligations, several enacted to implement directives of the European Union. The costs of complying with the statutory obligations are significant. The obligations include the protection of the environment from the discharge of polluted water from the sites and the obligations under planning legislation to restore the sites.
The principal regulatory provisions are the Water Environment (Controlled Activities) (Scotland) Regulations 2005 and 2011 ('CAR') which protect the water environment for which the Scottish Environment Protection Agency ('SEPA') is responsible.
SCC granted the Bank of Scotland plc a first ranking floating charge. SCC’s directors applied for the company to be wound up rather than appoint an administrator because it was insolvent and did not wish the cost of performing its environmental obligations to use up the funds realised from the sale of its assets. The liquidators estimated that they would have funds of roughly GBP 10 million. They calculated that they would spend about GBP 478,000 per month on maintaining the sites that remained in their control. The liquidators wished to protect SCC’s unsecured creditors and the bank, as holder of the floating charge, from the dissipation of the proceeds of disposal of SCC’s assets which continued performance of the statutory obligations would entail. It was estimated that the costs of restoring in accordance with the planning conditions governing the sites and the planning agreements into which SCC had entered would be about GBP 73 million. The issue was whether SCC’s insolvent estate was liable to meet the costs of measures which SEPA would require to accept the surrender of its licences. If the liquidators were required to comply with the statutory provisions to surrender the CAR licences, this would cost several million pounds. If the costs of compliance were to be treated as an expense of the liquidation, it was unlikely that SCC’s creditors would receive any dividend upon dissolution. The liquidators argued that the winding up of SCC created a statutory trust over the company’s assets in favour of its ordinary creditors and that they must apply the proceeds of the realisation of those assets on the basis of ranking the unsecured creditors of the company pari passu. They asserted that the continued expenditure on meeting SCC’s environmental obligations would give a preference to the costs of performing those obligations which was contrary to the statutory pari passu ranking.

Directions sought
They therefore sought directions from the court as to: (i) whether they could abandon or disclaim the sites and former sites, thereby transferring ownership to the Crown;