Investigating the problem of environmental liabilities in insolvency Blanca Mamutse

Introduction Exploring whether companies use insolvency law to shed environmental liabilities o should the law be reformed to ensure that debtors bear the full costs of their polluting activities? Assumptions premised on limited liability: o companies are incorporated to avoid substantial liability for environmental harms o this influences decisions regarding financing and business organisation, including use of group structures especially parent/subsidiary relationships o insolvency facilitates discharge of debts 2

‘Scary Stories and the Limited Liability Polluter in Chapter 11’ Lawton & Oswald (2008) Empirical study of ‘whether firms are indeed inappropriately using bankruptcy as a way to escape environmental liabilities on any sort of pervasive, wide-scale basis’ Environmental liabilities affected entry into Chapter 11 bankruptcy proceedings in 1% of cases Discharge of environmental debts occurred in < 2% of cases No evidence of extensive use of ‘shell subsidiary corporations with significant environmental liabilities’ Abandonment of contaminated property extremely rare, successful in < ⅟₁₀ of 1% of cases examined Without evidence of widespread abuse, calls for legal reform based on ‘scary stories’ 3

Resonance with English law… No special status for environmental claims in insolvency Disclaimer cases –e.g. Re Celtic Extraction Ltd o ‘Nothing … to suggest that the "polluter pays" principle is to be applied to cases where the polluter cannot pay so as to require that the unsecured creditors of the polluter should pay to the extent of the assets available for distribution among them.’ o Approved in Re Irish Ispat Ltd o Calls for legislature to resolve conflict between Insolvency Act 1986 and Environmental Protection Act

Is there a need for reform? Calls not based on perception of strategic use of insolvency o legislative reform preferable to judicial resolution Absence of information regarding scale of problem o data collection issues Are empirical studies influential in shaping legislative policy? How reflective would results be of scale of problem? 5

Relevant environmental aspects – role of enforcement undertakings Regulatory and Enforcement Sanctions Act 2008, Environmental Civil Sanctions Order 2010 o Civil sanctions regime o ECSO, Sch 4, 2(1), forms of EU include: ‘action (including the payment of a sum of money) to benefit any person affected by the offence’ where restoration not possible, action ‘that will secure equivalent benefit or improvement to the environment’ 6

Relevant environmental aspects – role of local authority enforcement dealing with contaminated land via planning regime role of charging notices application of hardship criteria with respect to recovery of LA’s remediation costs s.78(P) EPA: o waive/reduce recovery to extent appropriate/reasonable to avoid undue hardship o consider whether recovery would make SME insolvent, and cost of such a closure o take account of any relevant policy assisting enterprise /promoting economic development 7

Gains from empirical study Determining effectiveness of regulation o Empirical study by Blair in US – EPA does not pursue claims in a sufficiently aggressive manner Highlighting patterns/trends re environmental claims in insolvency o geographic/industrial refine existing data o effect on certain types of company/business e.g. small companies 8

Assessment Potentially big resource investment to deal with rare/minor problem Enforcement perspective: o ‘polluter pays’ not applied in absolute way o question whether insolvency issues manageable within environmental law o consultation on ‘growth duty’ for regulators Problem of ‘extraordinary obligations which do not fit neatly into bankruptcy system’ (Heidt) Problem of dealing with unusual assets, e.g. licences as ‘property’ (Re Wilmott Trading) 9