The Environmental Protection Authority’s recent challenge to a liquidator’s decision to reject a $49 million proof of debt turned into to a disaster for the EPA. The decision of Acting Justice Young in Environment Protection Authority v Condon [2013] NSWSC 777 underlines the importance of obtaining proper legal advice in connection with the adjudication of proofs of debt that raise complex legal issues.

Facts

Orchards Holdings (NSW) Pty. Limited (in liquidation) was the registered proprietor of a quarry at Orchard Hills. It went into liquidation on 19 December 2007.

The company held an Environmental Protection Authority License which permitted the dumping of waste material excavated from within the quarry. However, the licence did not permit the company to bring in waste from outside the quarry. Nevertheless, the company had been allowing waste from outside the property to be brought in and dumped for a considerable time, and had not been keeping proper records of what waste was being brought in.

After the company was placed into liquidation, the EPA lodged a proof of debt in the liquidation in the amount of over $49 million. The proof was for a waste levy – essentially a fine – that the EPA asserted was payable in respect of the dumped waste.

The fine had been calculated directly by reference to the amount of waste present at the quarry. The EPA carried out an estimate by applying a formula prescribed in regulations to all of the waste at the quarry, including waste generated on-site. The regulations permitted this, in that the formula referred to any waste “at” the premises.

The Liquidator sought legal advice about this issue. It was eventually concluded that, although the regulations allowed the formula to be applied to the waste “at” the premises, the Act itself (under which the regulations were made) only permitted a levy to be imposed in respect of waste “received” at the premises. The Liquidator was advised that the regulation could not exceed the limitations imposed by the Act or, to describe it another way “the stream could not rise higher than its source”.

In light of that advice the Liquidator informed the EPA that the levy should be applied only in respect of waste that could be shown to have been “received at” the quarry from outside. He invited the EPA to lodge an amended proof of debt calculated on that basis.  That invitation was not accepted by the EPA. The Liquidator consequently rejected its proof of debt, and the EPA appealed.

Decision

The Court upheld the Liquidator’s decision and dismissed the EPA’s application with costs, finding that the Liquidator was justified in rejecting the Proof of Debt.

As a result of the court’s decision, the pool of assets available for distribution to the company’s unsecured creditors was significantly larger than it might otherwise have been had the EPA’s $49M proof of debt been admitted.

The decision highlights the importance of obtaining legal advice on the adjudication of complex proofs of debt from a legal firm with expertise in the interpretation of regulatory statutes and the application of conflicting laws. Had the Liquidator not sought and obtained that advice, and instead accepted the EPA’s position (supported by the wording of the regulations), the distribution to unsecured creditors of the company would have been significantly diminished.

ERA Legal regularly advise insolvency practitioners on the admissibility of complex proofs of debt, and it was ERA Legal that advised and represented the Liquidator in this matter. If confronted with a complex or problematic proof of debt, please do not hesitate to contact one of ERA Legal’s experienced insolvency lawyers.