Abstract
This article uses interview data, collected from ‘elite’ banking respondents, to examine how secured lenders use insolvency practitioners as a form of post-loan due diligence. It is concerned with how effective insolvency practitioners are at obviating the risks that may be incurred where insolvency proceedings are caused or impeded by environment-related issues. It shows how the unique relationship between lenders and insolvency practitioners greatly reduces the likelihood of direct liability from environmental regulations transferring to the lender during the liquidation process. Two regimes are analysed in this article: the contaminated land regime, and the waste licensing system. Statutory provisions and judicial decisions have limited the power of environmental regulators. At the same time, however, this is good for secured lenders who are principally concerned with repaying the debt that is owed to them by a defaulting borrower. A more significant concern for lenders during borrowers’ insolvencies are the indirect risks (that is, credit and security risks). Environmental issues arising during a borrower’s insolvency may reduce the likelihood of the lender being repaid and, in the case of contaminated land, could severely limit the lender’s ability to exercise its security.
Keywords
Introduction
This article concerns the risks posed to secured lenders (for example, a creditor that has a charge over the borrower’s property) during borrowers’ corporate insolvencies. The central research question analyses why banks appoint insolvency practitioners (IPs), 1 and ultimately, explores how effective IPs are as a post-loan due diligence technique to obviate the environmental issues with a moribund borrower. The fact that the environment and economy are ‘inevitably inter-related’ 2 can be gauged by examining the effect that the increased promulgation of environmental regulation in recent years has had to the lending process. 3 In consequence of increased environmental regulation, the vast majority of lenders have incorporated environmental risks into their day-to-day risk management frameworks. 4
Empirical data collected by the author show that when it comes to repaying the loan following a borrower’s insolvency, the lenders’ main priority is to repay the debt that is owed by the debtor. 5 The need for continued environmental compliance following a borrower’s insolvency is seen as a risk for lenders, 6 and this is more so for unsecured creditors who take the assets of the company pari passu. 7 Where there are issues during the liquidation of a borrower, it is usually de rigueur for the lender to appoint an IP to manage the company’s affairs. 8 This post-loan due diligence technique is also used to effectively limit a creditor’s likelihood of incurring environmental risks. 9 It is submitted in this article that lenders share a unique relationship with IPs because, when appointed, the IP acts as the agent of the insolvent borrower and not the bank. 10 As long as the lender does not attempt to control the IP during proceedings, there is very little opportunity for liability to pass by way of an agency relationship. That being said, if the lender has too much control, or indeed exercises its security, it may be described as a ‘mortgagee in possession’ and is thereafter liable for any existing, contingent or future environmental liabilities. 11
While direct liability is highly unlikely, the indirect risks (that is, credit risk and security risk) during a borrower’s insolvency are more difficult to predict and manage, and are therefore more contentious. 12 Not only are the indirect risks difficult to foresee and account for, 13 but environment-related issues may have led to the insolvent company’s assets depreciating to such an extent that the defaulted loan is incapable of being repaid. 14 An example of this is where the lender has a secured charge over real estate (i.e. the land) and contamination issues leave the land worthless and with high remediation costs attached to it. 15 Even though the secured creditor has the right to foreclose the property, 16 this may lead to remediation liability and is not to be advised. 17
This article has been inspired by data collected from semi-structured interviews with banking professionals together with published literature, and most notably from the writings of Mamutse and Fogleman. 18 However, the basis of this article is different from previous writings because it examines the issues purely from the secured creditors’ perspective and uses empirical data as an analytical basis. The data show that the lenders’ general outlook is one based heavily on repaying the loan in default. In several papers, Mamutse and Fogleman have examined liabilities for debtors under environmental law. 19 Within their work they have focused on, inter alia, the contaminated land regime and the former system of licensing waste facilities’ operations. 20 This article also looks at these regimes to expand upon and assist in explaining the data findings.
Methodology
The data used in this article were collected through semi-structured interviews with banking professionals working in the environmental risk management teams of UK banks. In total, fifteen ‘elite’ interviews were held, transcribed and analysed for themes. The interview transcripts were analysed ‘manually’, without the use of computer-aided software; this process consisted of using different coloured highlighters to mark themes in the data. The manual approach was the preferred option because it allowed the researcher to become highly familiar with the data. It is important to note that the instant research population – made up of elite banking professionals – is very small, and the number of interviews conducted wholly represents the limited size of the research population being approached. In fact, there are possibly only 20 (something) people in the UK that could have undertaken an interview.
The limitations of this study are important to address in this section. From the 15 interviews that were conducted, only two respondents discussed insolvency in any great detail. It goes without saying that the results of the research findings are limited because of the small number of interview participants who talked about insolvency and environmental law in any detail. While the discussion of insolvency with the two respondents was both interesting and thought provoking, it is nonetheless acknowledged here that the empirical nature of this study can be by no means called ‘significant’. On that note, too, readers of this article must bear in mind that the extent to which the opinions of the two interviewees are wholly representative of others that have knowledge of this area can be brought into question. These are the significant limitations of this article. Therefore this work should be viewed more as a reflection of what was said by the two respondents, and particularly by Respondent 3, rather than an empirical study which has produced a good data set in regard to environmental law and insolvency law.
It is noteworthy that interviewee anonymity remains assured. As part of the research project’s ethical approval, anonymity has been given to all interview participants, and thus interviewees cannot be identified in any literature or other materials.
The role of the insolvency practitioner in proceedings
‘Insolvency’ is defined in section 123 of the Insolvency Act (IA) 1986. 21 There are two types: (i) cashflow insolvency; 22 and (ii) balance sheet insolvency. 23 The likelihood of borrowers’ defaulting on the loan and becoming insolvent under section 123 can be easily escalated by the inability to repay debts, both future and current, because of environmental compliance issues. 24
‘The big one is that the client, or the borrower, attracting some sort of liability which means that, in extremis, the business fails, and the bank loses some money, or an environmental incident will impact on the value of the collateral…So, there are two main ones which pose a risk. There’s (a) an issue which impacts on the business model and means that the company can’t service its debt, or (b) there’s an issue which impacts on the value of the asset which are put on the table as collateral.’ 25
In such a case, the IP’s role in proceedings is crucial for creditors, who must limit their control and reduce their likelihood of incurring risks, including environment-related risks.
26
A borrower’s inability to repay the loan inevitably creates several risks for its creditors,
27
but credit risk is particularly problematic at the instance of the defaulter’s liquidation. Credit risk was described by one respondent as: ‘The credit risk is, really, the ability of a company to repay its loan. So, much like the homeowner, you do the due diligence to make sure that they have enough income to repay the mortgage. When we look at companies borrowing hundreds of millions of dollars, we look at the credit risk. And, of course, the specific part of the analysis would be – Are there any material liabilities associated with this company or the products that they intend to purchase? Will it floor them?’
28
In this situation, it is averred in this article that lenders view loan repayment as the most important objective. However, the lender cannot exercise too much control over affairs (see section below) without exposing itself to direct liability. Thus, the IP is used by lenders as a de facto agent to avoid any liability under regulatory mechanisms and, most importantly, to repay the loan it is owed. One interviewee, for instance, agreed that the IP’s role is to act as a ‘middleman’ between the lender and its insolvent borrower: ‘Do banks often use the practitioners, then, as a sort of middleman?’ ‘Well, yeah. I mean the banks often end up having to appoint insolvency practitioners.’
29
A ‘middleman’ is the correct way to define the IPs role in proceedings. Throughout this article, it is shown in the analysed laws that direct liability is only likely to attach to a lender if it is a mortgagee in possession or, indeed, if it has exercised a considerable amount of control over a company’s business affairs. 30 Therefore, using an IP as a middle man breaks the chain of liability to the lenders; this is discussed further below. It is the indirect risks that should be noted. These are more problematic because credit risk is often accentuated by property devaluation relating to environmental issues. 31
Taking security
In the event of a default, foreclosure is an option that is open to secured creditors. 32 More peaceably perhaps, the bank may seek the collection of rents from the borrower. 33 In either case, a prudent lender will appoint an IP to manage the defaulter’s business. 34 The IP can exercise the lender’s power of sale, 35 however this is not compulsory. 36 Once appointed, the IP is ‘deemed to be the company’s agent’ and thereby acts for the debtor. 37 One respondent talked about the business of taking security and the risks for the bank:
‘So, companies often put forward different types of collateral as security, you know, commonly a loan will be secured on the assets of the bank to enforce its security. So, if the business goes bust, theoretically, the bank should assess that asset to get its money back. If that asset is worth less, or could be a negative value in some cases, then obviously that’s going to have an impact on the bank’s ability to cover its bad debt.’ 38
The lender-IP relationship has been described as ‘something of a fiction’. 39 Hood suggests that the IP’s ‘primary duty is to try to bring about the situation where the secured debt is repaid’. 40 This fiction ensures that lender liability will not be transferred by an agency relationship during the defaulter’s sequestration. 41 That is, not unless the bank attempts to control or otherwise directs the IP’s activities. 42 For instance, Standard Chartered Bank v Walker [1982] 43 ruled that interference may lead to the bank being ‘liable for the receiver’s conduct’. 44 Following the reasoning of Standard Chartered Bank, it is important that lenders limit their control to avoid liability. Egede and Lee, for example, suggest that the likelihood of personal liability attaching to the IP should be noted as this may create problems for lenders. 45
The acme of environmental issues during insolvency can be seen in a series of disputes relating to the waste licensing regime and the ability to declare such licences as ‘onerous property’. This is discussed in further detail in a later section. Nevertheless, a licence that survives the licensee and remains attached to property is likely to depreciate the property’s value. This makes debt recovery more difficult, and consequently increases the bank’s credit risk. One respondent made a clear-cut statement that they were, at times, shocked by the banks’ lack of empathy for environmental concerns during insolvency proceedings and suggested that loan repayment was the principal objective: ‘Yeah, but they, frankly – not here – but my experience with other banks is that they would prefer that no money be spent on stuff that wasn’t flowing back to them. What the banks want in insolvency is to get paid as much as possible, and I never got the sense that the banks which appointed us were ever interested in protecting people or the environment. It was often that our insolvency practitioner would say, “Look, I’m personally liable here. I have to do this because I am the officer of the court, and I have to protect myself, etc. etc.…But I know that the banks…wanted as much money as they could get for themselves as possible. In those cases, I didn’t get the sense that the banks were particularly accepting, you know. They didn’t really acknowledge those types of responsibilities. Without mentioning any names, but yeah, it was a bit of an eye-opener at times.’
46
The above interview extract highlights one of the principal arguments that is set out in this article – the notion that the lending community is, first and foremost, concerned about credit risk during borrowers’ insolvencies. This is largely unsurprising given the financial nature of lending institutions. However, in a world where environmental issues are becoming increasingly problematic and inescapable, it may be urged that the old, purely financial, perception that some banks have needs to change.
Remediating contaminated land
In the 1990s it was decided, after consultation, that the UK required a regime specifically designed to identify and remediate ‘contaminated land’. 47 In 1995, Part IIA was inserted into the Environmental Protection Act 1990 (EPA). 48 Based on statutory nuisance, Part IIA was promulgated to enforce a statutory regime for remediating contaminated land; it was brought into force in England and Wales in 2000 and 2001 respectively.
Part IIA is important because it had a significant impact on lenders when it was first introduced and, as such, was one of the main legislative drivers for the development of the UK lending community’s environmental due diligence, pre and post the provision of loan finance. 49 This section evaluates how the contaminated land regime under Part IIA is now dealt with in the lenders’ post-loan due diligence by using IPs to manage the insolvency risks that may arise.
Part IIA of the EPA 1990
One of the aims of Part IIA, EPA 1990 is to, ‘identify and remove unacceptable risks to human health and the environment’. 50 The primary way to achieve this aim is to allocate liability to any ‘appropriate persons’ 51 who are deemed responsible for the remediation of the land. 52 Local authorities, as the statutory regulators of the regime, are under a statutory duty to inspect their areas ‘from time to time’ and determine liability. 53 Where a determination of liability has been made, the local authority will serve a remediation notice 54 on each appropriate person. 55 The statutory provision that enforces Part IIA liability is section 78F of the EPA 1990. 56 Pursuant to section 78F(2), liability is to be allocated to:
‘any person, or any of the persons, who caused or knowingly permitted the substances, or any of the substances…to be in, on or under that land’. 57
Part IIA’s Statutory Guidance describes the above form of liability as ‘Class A liability’. 58 The lender, acting in its capacity as a creditor, is unlikely to be found liable under this class. 59 It is possible, however, for a lender to obtain enough knowledge of a borrower’s polluting (or potentially polluting) activities through the loan application for it to be a knowing permitter. 60 Much more of a concern, however, is EPA 1990, section 78F(4) which states:
‘If no person has, after reasonable inquiry, been found who is by virtue of subsection (2) above an appropriate person to bear responsibility for the things which are to be done by way of remediation, the owner or occupier for the time being of the contaminated land in question is an appropriate person.’ 61
The owner or occupier liability in the above section is described as ‘Class B liability’ by the Statutory Guidance. 62 In many ways section 78F(2) is essential for Part IIA’s operation. Under the regime it is likely that the original polluters, the people who caused or knowingly permitted the pollution, cannot be found. Therefore, this provision allows liability to attach to the current owner or occupier of the land. Positively, lenders are, to an extent, protected by Part IIA in its definition of an ‘owner’ of contaminated land. This may be found in section 78A(9) of the EPA 1990:
‘a person (other than a mortgagee not in possession) who, whether in his own right or as a trustee for any other person, is entitled to receive the rack rent of the land, or where the land is not let at a rack rent, would be so entitled if it were so let.’ 63
The above provision was created to protect banks, but it was important for the wider economy that the contaminated land regime did not impede the banks’ appetite to lend. That being said, section 78A(9) does not represent a legally binding exemption; 64 while having a registered charge over property will not ‘confer ownership’, 65 there may be some lending activities that do not fall within the definition’s exception. Hood suggests that: ‘Under English law, a difference between a charge and a mortgage is that the former does not require possession.’ 66 He goes on to say:
‘Whilst a floating charge under English law has been described as “a floating mortgage”, it is suggested that the exception created in the definition of “owner” for a person other than a mortgagee not in possession, is not, on the face of it, wide enough to include a floating charge.’ 67
Hood demonstrates that banks are not totally free from Class B liability. It follows that there are some forms of ownership that do not fall within the meaning of a ‘mortgagee not in possession’. This is why the use of IPs during a borrower’s insolvency is an imperative post-loan due diligence technique.
There is also the issue of occupier liability under section 78F(4) which should be noted. 68 The word ‘occupier’ is undefined in Part IIA. However, its definition can be gauged from case precedents (for example, contained within the tort of nuisance) and statutory sources (for example, the Occupiers’ Liability Act 1957) in other areas of the law. 69 It is generally held that occupation is denoted by a person’s degree of lawful assertion over premises. 70 For instance, Harris v Birkenhead [1976] held that possession can be found by showing that a person has a legal title to the property. 71 This approach is also seen in Lord Mustill’s judgment in Southern Water Authority v Nature Conservancy Council [1992]. 72 Therefore, the IP is essential for limiting the bank’s possession and control over affairs during corporate insolvency.
How do IPs protect banks from Part IIA liability?
‘I’m not aware of any instance where a bank has been forced to pay for clean-up. That just, as far as I know, hasn’t happened.’ 73
Part IIA has not generated the liability that was first predicted,
74
and the few cases that have been brought have publicly demonstrated its limited reach. This was most recently seen in Powys County Council v Price and Hardwick [2017] which, following Transco,
75
held that the defendant council was not liable for its predecessor’s liabilities.
76
Yet, despite the limited Part IIA liability, remediation costs have proved to be expensive.
77
In consequence, lenders are clearly concerned about debt recovery where a borrower has contaminated land: ‘There’s also the value of the collateral, as the property may be worth much less from the appraisal value, or it may be so contaminated that the collateral is worth nothing at all. We’ve seen that on a couple of occasions.’
78
And, ‘There’s also then, from contaminated land, the risk that they will be left with something on their books, if a customer defaults on it, and the ability to sell on that land.’
79
The use of IPs should be seen as an essential post-loan due diligence technique. By acting as the agent of the insolvent borrower, the IP acts as a bulwark for direct liability transfer and helps to reduce the amount of control or possession that the bank has over the insolvent’s property. Ultimately, this reduces the likelihood of the bank being found liable as a mortgagee in possession. Unlike lenders, IPs are protected, to an extent, by Part IIA as they are considered ‘a person acting in a relevant capacity’. 80 The relevant provision is section 78X(3) of the EPA 1990, which states:
‘(3) A person acting in a relevant capacity – Shall not thereby be personally liable, under this Part, to bear the whole or any part of the cost of doing anything by way of remediation…’ 81
However, such a person may still be liable for any:
‘…substances whose presence in, on or under the contaminated land in question is a result of any act done or omission made by him which it was unreasonable for a person acting in that capacity to do or make;’ 82
The above provision shows how lenders can use IPs as part of their due diligence. However, section 78X of the EPA 1990 fires a shot across the bow by stating that the IP can still be personally liable under the regime. What is more, a bank which tries to establish a large degree of control over the insolvency proceedings may end up being liable by way of agency for any act or omission that is made by the IP. 83
Lenders are afforded a great deal of protection from direct liability if they appoint an IP. It follows, however, that the indirect risks are much more of a concern as, being borrower dependent, they are difficult to measure (for example, foreclosure is not an option when the land is contaminated). High remediation costs may mean that there is little capital left in the insolvent company to repay the loan that is owed to the bank, resulting in a credit risk. The improbability, in this situation, of the loan being repaid may also be exaggerated by security risk (for example, the secured real estate’s value is diminished by contamination). It follows that if the secured property is worth less than its appraisal estimate or, indeed submits a negative return, there is little the IP can do. It may be best for the bank to walk away and take a loss on the transaction.
The system of environmental permitting
The interview data have revealed how environmental law has come into conflict with insolvency law in the licensing of waste facilities and operations. Yet, despite this, the data show that lenders are sometimes willing to take risks to make a loan transaction profitable. Again, the primary concern for lenders during a borrower’s insolvency is reducing credit risk. Respondent 3, for example, said the following in their interview:
‘I suppose the law sometimes conflicts.’
‘Yes, with insolvency! We get involved when they disclaim it [e.g. licences] as onerous. That’s a big issue in insolvency, a big environmental issue!’
‘Yes, there are a couple of cases with waste management licences, and whether they can disclaim them as onerous property.’
‘Yes, waste management is quite tricky because of its nature. You’ve got to be fit and proper, and you’ve got to be able to hold a licence. So, yes, it’s a difficult one. What we do in the banks is put environmental risk into practice. And because we take a non-technical view, we are able to sign a lot of cases off. And because I work in recoveries, we know where we lose money.’
‘So, even high risk can be profitable?’
‘Exactly!’ 84
Furthermore: ‘There’s conflict between the Enterprise Act [sic: respondent meant Insolvency Act here] which controls corporate insolvency and environmental protection legislation. A company can go bust and disclaim its permit as onerous property and say, “We’re bust! We don’t need to do all of the stuff that it says in the permit!” And the Agency goes mad when that happens because it means that they end up having to manage these sites.’
85
It is important to show how insolvency proceedings may be burdened with a licence that survives the licensee. Thus, an exposition of the law governing waste management licensing is provided to show that an environmental licence, while unlikely to create direct liability, heightens credit risk because of the inevitable depreciation in the property’s value by having a remaining licence attached. Ultimately, the financial return from selling the property is likely to be less than the lender estimated in its pre-loan evaluation. Another possibility – albeit much more unlikely – is that the lender becomes a mortgagee in possession, and in so doing, adopts the licence as the owner or occupier of the licenced facility. In that situation, should any of the terms of the licence be breached while the lender is the holder of the licence, it will be responsible.
Appointing an IP, again, affords lenders the opportunity to reduce risks during insolvency proceedings. IPs have the power to disclaim licences as ‘onerous property’. 86 However, the law dealing with the system for issuing waste management licences under the EPA 1990 has been repealed. Licensing waste activities is now enforced under the Environmental Permitting (England and Wales) Regulations 2016, 87 as amended 88 (the ‘EPR’). However, it is still necessary to assess the old licensing system under Part II of the EPA 1990, since it generated several important judicial decisions.
Part II, Environmental Protection Act 1990
A ‘waste management licence’ was defined according to section 35(1) of the EPA 1990. 89 Succinctly, such a licence was granted by the waste regulation authority, and was used to authorise ‘the treatment, keeping or disposal…of controlled waste’. 90 However, the power of the regulator under Part II has directly collided 91 with the IP’s power to disclaim under the Insolvency Act 1986. Section 35(11) of the EPA 1990 held:
‘(11) A licence shall continue in force until…it is revoked entirely by the waste regulation authority under section 38 below or it is surrendered, or its surrender is accepted under section 39 below.’ 92
Under the above section, if the regulatory authority believed that the licensee was no longer ‘fit and proper’, revocation of the licence was an option. 93 Moreover, section 35(11) affirmed that it was for the regulator to revoke or accept the surrender of the waste licence. 94 Pursuant to the old system of licensing waste activities, the bank that takes security while a licence remains attached to the land may adopt the licence and all of its responsibilities. It follows that if a breach of a licence condition should occur while the bank is in possession, liability will attach to the bank as the licensee; caveat emptor.
The environmental permitting regulations
Under the EPR an ‘operator’ 95 of a ‘regulated facility’ 96 is required to attain an ‘environmental permit’. 97 The permit is issued by the ‘regulator’. 98 This new system has replaced the previous waste licensing regime under Part II of the EPA 1990. Interestingly, the operator of a regulated facility is the person who has or will have control over the operation or the holder of the permit. 99 This definition demonstrates that lenders may incur liability through exercising control or by becoming a mortgagee in possession. If the regulator finds that an operator ‘has contravened, is contravening, or is likely to contravene’ a permit, it has the option to serve an enforcement notice 100 or suspension notice. 101 Such a person may also be guilty of an offence and liable to a penalty. 102 However, a defence can be availed if the contravention was committed in an emergency to avoid harm to human health. 103 Alternatively, remediation costs can be recovered from the operator 104 where the regulator thinks that there is a risk of ‘serious pollution’ and consequently takes action to prevent an incident. 105
The new system is different from the old; the environmental permitting system allows for one environmental permit to authorise several licenced activities. 106 While this promotes the efficacy of environmental permitting, it remains largely uncertain how the case law which was generated by waste management licences applies to the new system. The case law is discussed below; it shows how the courts have taken a broad definition of property to allow IPs to disclaim licences that are attached to the property of an insolvent. The EPR, having defined an operator as a person with control or the permit’s holder, has made the use of IPs essential for lenders to limit their control. While the degree of control that is necessary to adopt a permit is uncertain, it would seem that foreclosure is enough to make the lender liable. Given that there is evidently a continued risk regarding licensing, the section below discusses how IPs protect banks from liability by using the precedent case law.
How do IPs protect lenders from surviving licences?
IPs can protect lenders where a licence (or permit) survives the borrower through their power to disclaim licences as ‘onerous property’. 107 Somewhat unfortunately, the insolvency law’s ability to protect creditors and permit the efficacy of insolvency administration often means that the environmental regulator’s powers are largely undermined. This is shown in the data: for example, Respondent 3 spoke about a case concerning the power to disclaim environmental permits as onerous property, and how this has conflicted with the statutory authority granted to the Environmental Agency. 108
‘Well, there was some test case where the Environment Agency went after the insolvency practitioner. It was like the administrator tried to get the company to pay. So, they won the first case and then it was appealed, and I think they lost it on the second hearing, or whatever. So, I think the Agency didn’t come out on top of that one either. But, essentially, I think the decision was that the Enterprise Act, or insolvency legislation, trumps the Environmental Protection Act. I think that appears to be the case at the moment.’ 109
The case Respondent 3 describes above (that is, Environment Agency v Hillridge Ltd [2003]) 110 is discussed in this section. The case law is used to show how parity between the insolvency and environmental law regimes has not been achieved in all areas. However, it is necessary to discuss the statutory provision at the heart of the debate: s. 178(2)of IA 1986, the source of the IP’s power to disclaim. 111 Section 178(2) of the IA 1986 states the following:
‘(2) Subject as follows, the liquidator may, by the giving of the prescribed notice, disclaim any onerous property and may do so notwithstanding that he has taken possession of it, endeavoured to sell it, or otherwise exercised rights of ownership in relation to it.’ 112
To be disclaimed, a licence must qualify as ‘property’ under section 436 of the IA 1986. 113 Fortunately for lenders, the case law shows that a licence is capable of being defined as property under section 436; 114 however, the Environment Agency has, at times, been incalcitrant to this interpretation. 115 Through the use of this power, the IP can reduce the amount of post-loan risk for the bank. For example, the ability to disclaim a licence that remains with the property may make foreclosure a more prosperous endeavour. If a lender takes security with a licence attached to the land, it is possible for it to adopt the terms under the licence as a person in possession and bear the responsibility; such a licence does not exist in personam.
IPs can use the common law to help the bank when its borrower leaves a licence post-mortem. The case law shows that the IP’s power to disclaim property it considers onerous supercedes the regulator’s statutory authority to revoke or accept the surrender of licences. However, this was not the case in Re Mineral Resources [1999], 116 which held that where the IP’s ability to disclaim a licence conflicted with another ‘self-contained and exclusive code’, 117 it was incapable of being disclaimed. 118 More helpful for lenders is the case law following Re Mineral Resources [1999]. In Re Wilmott Trading (No. 2) [2000] 119 Neuberger J (as he was then) held that upon the liquidation of a company the waste management licence would cease to exist. 120 Further support for IPs came from the case of Celtic Extraction [2001] 121 where the Court of Appeal unanimously agreed that an environmental licence was marketable property, and could be transferred even where another ‘code’ existed. 122 In Celtic Extraction, Morris LJ says that the decision was based on public policy considerations for allowing the power to disclaim; 123 this reasoning is favourable for protecting lenders in their post-loan due diligence. Moreover, in Environment Agency v Hillridge Ltd [2003], 124 Blackburne J ruled that the action of disclaiming the licence effectually disclaimed the licensee’s interest to a fund set up for remediation. 125 The fund could not be used by the Environment Agency to remediate the site. The court held that the property should revert to the Crown as bona vacantia. 126
The courts have been largely in favour of the power to disclaim under insolvency law instead of supporting the regulator’s ability to revoke under the EPA 1990. Shelbourn suggests that this has indeed been a blow to the environmental regulator’s power. 127 However, the ability to disclaim alleviates the potential liability risk that lenders could incur through licence adoption. Additionally, the IP’s power prevents the inalienability and unmarketability of land; this reduces credit and security risks for lenders, but is client dependent and largely unforeseeable.
For the time being it is uncertain how the case law on waste management licences applies to the EPR. It must be intimated that the fact that the Regulations have consolidated many former licensing regimes into one may result in new decisions that are different from the current precedent. At the moment, lenders are afforded protection but at the regulator’s expense.
Conclusion
In sum, there are three general conclusions which may be drawn from this article. First, the main thing that lenders are concerned with during borrowers’ liquidation is getting the loan repaid. While lenders consider the environment, financial considerations come in first place during their business dealings. Second, lender liability is a low risk during a borrower’s insolvency as long as lenders are prudent in their post-loan due diligence and use IPs as a method for loan repayment. Using IPs is a useful due diligence technique because it reduces the lenders’ control and possession over their borrowers’ assets. This reduces direct liability exposure for the remediation of contaminated land or breaching the conditions of an environmental permit. Environmental law is generally favourable to IPs, which is why their appointment should be a requisite for lenders during the insolvency of a borrower that is burdened by environmental issues. Despite being beneficial for the lending process, the environmental regulators’ powers have been largely impugned, which is detrimental to the environment as a whole. Finally, the indirect risks (that is, credit and security risks) are much more problematic during borrowers’ insolvencies. For example, the ability of the borrower to repay the loan is client-centric, and is ultimately difficult to predict in the due diligence processes that are used by lenders.
From the top, during a borrower’s insolvency that has been created or affected by environmental issues, the principal goal for the lender is repaying the loan. This has driven lenders to consider the environment during their loan finance, and that, at least, should be viewed in a positive light.
Footnotes
Acknowledgements
I would like to thank Professor Robert Lee for his guidance and support throughout the writing of this article. My thanks, too, to the reviewers for their helpful and erudite feedback.
Declaration of conflicting interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.