Member Article

The Court has now issued its written decision. This provides further analysis and confirms the position that we previously reported.

Parties represented

The Scottish Environment Protection Agency, Scottish Natural Heritage, East Ayrshire and South Lanarkshire Councils and the Lord Advocate on behalf of the Scottish Ministers were all represented at the hearing. This was largely due to the potential for serious environmental damage if the sites and former sites held by the Scottish Coal Company Limited (the Company) were not properly maintained, and the resultant remediation costs falling to the public purse, if the Court found that the liquidators of the Company did have the power to disclaim statutory licences and property owned by the Company.

The written decision

The written decision confirms that the powers of a liquidator of a company being wound up in Scotland stem from s169 of the Insolvency Act 1986 (the Act), which gives a Scottish liquidator the same rights as a trustee in sequestration. This includes the ability to abandon pre-insolvency contracts, heritable property and statutory licences owned or held by the debtor. The written decision makes clear that the Court has not reached this view in an attempt to align the powers of a liquidator of a Scottish company with those of his English counterpart under s178 of the Act, but on the basis of the powers of a trustee in sequestration and an analysis of s169.

Not for the Court to consider the effect of the disclaimer

The Court notes a number of relevant factors in reaching its decision. In particular, the Court did not think it appropriate to attach weight to the effect that confirmation of a liquidator's power to disclaim would have. In the Company's case, this included the negative environmental impact that the disclaimer of land and statutory licences could have, and the resultant tighter controls that might be imposed on future commercial ventures if the relevant public bodies and government agencies perceive disclaimer to be a real risk going forward. The Court is concerned with the interpretation of the law as it is, rather than what it should be.

Subordinate legislation of the Scottish Parliament

It should be noted however that the Court's decision on disclaimer of the Company's statutory licences turned on its interpretation of the Water Environment (Controlled Activities) (Scotland) Regulations 2005 (CAR), under which those licenses were issued. The licenses related to the protection of the environment from polluted water and contained obligations to restore the mined sites once mining operations were complete. CAR is subordinate legislation issued by the Scottish Parliament.

The Scotland Act 1998 (the Scotland Act) provides that the Court must seek an interpretation of subordinate legislation that is within the powers of the Scotland Act. In particular, subordinate legislation will not be considered law if it affects 'reserved matters'. Reserved matters include the general legal effect of winding up and the ranking of debts in winding up. If the Court were to interpret CAR to remove the right of disclaim and to effectively create a new expense in the liquidation in the form of the costs of compliance with the license requirements that would likely exhaust the funds of the Company and deprive other creditors of any return, then reserved matters would be affected. The Court therefore found that the liquidators of the Company may disclaim the statutory licenses issued under CAR, and in doing so interpreted CAR in a way that did not affect reserved matters and was not therefore outside devolved competence.

It remains to be seen if a similar conclusion would have been reached if the statutory licences had been issued under legislation originating in Westminster that would not be subject to similar limitations.

Appeal

We understand that the Court's decision is to be appealed and that the position is therefore not yet final. However, as the law stands today, a liquidator of a Scottish company has the right to disclaim both owned land and statutory licences, at least to the extent that these have been issued under CAR.Conclusion. It may seem odd that the effect of this decision is that an asset owned by an insolvent company or individual may be abandoned, thereby avoiding related liabilities. However, it would appear that the decision maintains the equality of ranking of creditors by halting the accrual of continuing liabilities connected to that asset which, in the view of the liquidator, do not benefit the creditors as a whole, but which would rank ahead of or otherwise dilute the claims of those creditors. Instead, in the absence of specific provisions to the contrary, those liabilities will cease to accumulate at the date of disclaimer. 

We recently reported on the Court of Session's decision that a liquidator of a company being wound up in Scotland may abandon both heritable property and statutory licences. A full copy of that article can be accessed here.