Environmental liabilities in insolvency – an area ripe for reform?

• Author: Blanca Mamutse
• Position: Aston Business School, Aston University, Birmingham, UK
• Pages: 243-268

Environmental liabilities in

insolvency – an area

ripe for reform?

Blanca Mamutse

Aston Business School, Aston University, Birmingham, UK

Abstract

Purpose – The paper aims to examine the question whether legislative reform is the silver bullet for

the problems generated by the failure of a company which is exposed to claims arising from the

non-fullment of its environmental obligations. The limited capacity of the UK insolvency regime to

facilitate the fullment of a debtor company’s environmental obligations is often illustrated with

reference to some signicant judicial decisions. However, no real picture has emerged of the frequency

with which these issues arise, based on which rm proposals for reform could be advanced. This paper

argues that greater regard should be paid to existing mechanisms which provide a means of enabling

insolvency risks to be managed or minimised because these point towards the scope for these issues to

be resolved through the environmental protection framework rather than through reliance on company

and/or insolvency law.

Design/methodology/approach – Research was conducted into the statutory and non-statutory

regulations (such as statutory guidance) and case law principles, which underpin the treatment of the

claims against an insolvent (or potentially insolvent) company resulting from its environmental

activities. This included research into policies which have a bearing on this area, developed through

governmental and civic consultations and studies.

Findings – The paper concludes that the likelihood of a case for legislative reform being made out is

weak, and the focus should accordingly shift to strengthening the effectiveness of existing law, policy

and practice.

Originality/value – This paper is the rst (in the UK context) to challenge the perceived need for

reform in this area, engaging with recent examples of such corporate failures and the impact of recent

legislative and policy developments.

Keywords Insolvency, Bankruptcy, Corporate law, Debt debtor creditor, Disclaimer,

Environmental liabilities environmental obligations, Company law

Paper type Research paper

1. Introduction

This paper probes the perception that the law enables companies to shed their

environmental liabilities through entry into insolvency proceedings. United Kingdom

(“UK”) company and insolvency law explicitly acknowledge the relevance of wider

interests to a company’s long-term growth and the effects of its failure. For example,

s.172 Companies Act 2006 mandates a director, in promoting the company’s success, to

have regard to matters, including “the impact of the company’s operations on the

The author is deeply grateful to Dr David Salmons, Professor Valerie Fogleman and Professor

David Milman for helpful advice on previous drafts of this paper. The author acknowledges

responsibility for any errors or omissions.

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1756-1450.htm

Environmental

liabilities

243

Received 13 June 2016

Accepted 19 August 2016

InternationalJournal of Law in the

BuiltEnvironment

Vol.8 No. 3, 2016

pp.243-268

©Emerald Group Publishing Limited

1756-1450

DOI 10.1108/IJLBE-06-2016-0007

community and the environment”[1]. The Report of the Review Committee on Insolvency

Law and Practice[2] (“Cork Report”) notes that the community has always been regarded

as having “an important interest” in insolvency proceedings[3]. It accordingly includes,

among the objectives of a good modern insolvency law, the need to recognise and

safeguard the interests “of society or […] groups in society [that] are vitally affected by

insolvency and its outcome”[4].

The practical difculty of achieving a balance between these community/social

interests and the success or survival of companies, when it comes to promoting

environmental interests is however illustrated by a range of judicial decisions. This

includes the attempt by People and Planet, an organisation campaigning for action on

climate change and respect for human rights to ensure that the UK government

exercised its power as a majority shareholder of the Royal Bank of Scotland (“RBS”), in

a way which compelled RBS’ board of directors to pursue policies which promoted

environmental and human rights considerations in accordance with the s.172(1)(d)

Companies Act 2006 duty[5]. This application for permission to bring judicial review

proceedings failed on the basis that the imposition of the government’s own policies

regarding combating climate change and promoting human rights would interfere with

the RBS board of directors’ ability to manage the company for the benet of its

shareholders as a whole. In rejecting the interventionist policy proposed by People and

Planet, the court upheld the “commercial approach”[6] that the government had adopted

in respect of its investment in RBS (made as a result of the “major nancial support”[7]

extended to the bank in 2008).

Likewise, in the absence of any special status for environmental claims in insolvency

law, academic interest has centred on cases involving the use of the disclaimer provision

s.178 Insolvency Act 1986 (“IA 1986”). This empowers a liquidator to disclaim onerous

property (dened as “any unprotable contract” or property which is unsaleable or

capable of giving rise to nancial or other onerous obligations[8]), thereby terminating

the company’s rights, interests and obligations in respect of such property and leaving

anyone who has sustained loss or damage in consequence of the disclaimer to prove a

claim as a creditor in the winding-up[9]. Case law has highlighted the tension between

the use of this power in liquidation to achieve the “orderly and expeditious winding up

of a company’s affairs”[10] and the “considerable public interest in the maintenance of a

healthy environment” denoted by the polluter pays principle[11]. This latter objective is

enforced for example through the existence of the statutory regime aimed at ensuring

that:

the disposal of controlled waste does not give rise to: pollution of the environment; harm to

human health and; serious detriment to the amenities of the locality […] collectively known in

the waste management industry as “the three evils”[12 ].

This tension has been settled in favour of the former interest, meaning that the costs of

compliance with a waste management licence could not take priority over the debts

owed by a company nor could the company’s assets be “set aside to pay for future

compliance with the terms of the licence”[13]. Thus, in the absence of clear words

preventing s.178 from being applied to specic items of property or specic types of

debtors, liquidators have been held to be entitled to disclaim waste management licences

as onerous property[14].

IJLBE

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