Investigating the problem of environmental liabilities in

insolvency

Blanca Mamutse

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Introduction• Exploring whether companies use insolvency law

to shed environmental liabilitieso 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

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‘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’

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Resonance with English law…

• No special status for environmental claims in insolvency

• Disclaimer cases –e.g. Re Celtic Extraction Ltdo ‘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 Ltdo Calls for legislature to resolve conflict between

Insolvency Act 1986 and Environmental Protection Act 1990

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Is there a need for reform?• Calls not based on perception of strategic

use of insolvencyo legislative reform preferable to judicial

resolution• Absence of information regarding scale of

problemo data collection issues

• Are empirical studies influential in shaping legislative policy?

• How reflective would results be of scale of problem?

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Relevant environmental aspects –role of enforcement

undertakings • Regulatory and Enforcement Sanctions Act

2008, Environmental Civil Sanctions Order 2010o Civil sanctions regimeo 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’

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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 closureo take account of any relevant policy assisting

enterprise /promoting economic development

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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 insolvencyo geographic/industrial• refine existing data

o effect on certain types of company/business• e.g. small companies

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Assessment• Potentially big resource investment to deal

with rare/minor problem• Enforcement perspective:

o ‘polluter pays’ not applied in absolute wayo question whether insolvency issues manageable

within environmental lawo 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)