Challenging the rejection of a proof of debt: Strike 2 for the EPA

Articles, Restructuring + Insolvency

In a judgment that demonstrates that a statutory authority’s claim in a proof of debt should not necessarily be taken at face value, the Supreme Court New South Wales Court of Appeal has handed down a decision supporting a liquidator’s rejection of a proof of debt made by the Environmental Protection Authority. The decision of Environment Protection Authority v Schon G Condon as liquidator for Orchard Holdings (NSW) Pty Ltd (in liq) [2014] NSWCA 149 is a reminder that a statutory authority’s proof of debt should be properly investigated especially when based upon an Act or regulation, which may not have been the subject of the careful scrutiny expected when drafted or the subject of challenge in the courts.

Facts

The appeal was bought by the EPA against the respondent liquidator of Orchard Holdings (NSW) Pty Ltd (“the Company”), which had been the occupier of a waste facility for the purpose of the Protection of the Environment Operations Act 1997 (NSW) (“the Act”).  The facility, a quarry, contained both waste from the site itself and waste acquired from off-site.

Section 88(1) of the  Act requires the occupier of a waste facility to pay to the EPA such contribution as prescribed by the regulations in respect of “all waste received at the facility”.

The Protection of the Environment Operations (Waste) Regulation 2005 (“the Regulation”) made provision for the calculation of contributions by reference to the occupier’s records of tonnes of waste received at the site. Clause 6 of the Regulation applied where there were no records or inadequate records kept by the occupier.  The critical issue which arose revolved around the wording that appeared in clause 6 and specifically the reference to calculations involving “waste at” the facility in contrast to “waste received at” contained in section 88(1) of the Act.

The EPA lodged a proof of debt for an amount of over $49 million, calculated on the increase of waste at the site and not just waste “received at the site” for a period of time.  Such a claim having significant consequence for all remaining creditors seeking a distribution from the Company’s assets.

The proof of debt was rejected by the liquidator on the ground that it involved a levy calculated on waste not received at the site.

At first instance, the NSW Supreme Court affirmed the liquidator’s decision to reject the EPA’s proof of debt, agreeing with the liquidator that the Act did not permit the contribution to be calculated on the “waste at the site” as was referred to in the Regulation.

The Decision

Justice Leeming, in a detailed exploration of the issues that arise when a regulation goes outside the bounds provided by an original legislative instrument, confirmed the decision by the Court at first instance on two main grounds.

First, it was found that the interpretation of the Act and the Regulation employed by the EPA in calculating the contribution payable by reference to “all waste at the facility” rather than “all waste received at the facility” was invalid.

Second, the Court found that in the event the EPA’s interpretation was correct, then the Regulation would go beyond the regulation-making power of the Act and would be ultra vires.  Section 323(1) of the Act provided the source of the regulation-making power in the Act.  The section provided that the regulations be “not inconsistent with this Act”.

It was also affirmed that in circumstances when there are two available interpretations of a regulation, one within the power conferred by the Act and the other beyond power, the former should be preferred.

The Court of Appeal held that a regulation may not be used so as to construe, or expand, the terms of the act.  In this scenario, the Court found that there is clear conceptual difference between that of an estimate and that of a penalty. To allow the EPA to claim a punishment permitted by the Regulation was one that went beyond that which was considered by the Act. A regulation is unable to expand the terms of the Act from which it is gazetted.

Liquidators to Investigate a Statutory Authority’s Proof of Debt

The affirmation of the principles by the NSW Supreme Court of Appeal has a wide ranging consideration for practitioners in this area of law and insolvency.

Proof of debt claims by statutory authorities can be noticeably large when considering the assets left for a liquidator to distribute.  In this case an asset pool of $1.9 million was available to the liquidator, a figure dwarfed by the EPA’s claim.

If the liquidator in this case had not sought legal advice, and instead accepted the EPA’s claim, distribution to unsecured creditors of the Company would have been significantly curtailed.

When faced with a statutory authority’s proof of debt, it is vital that the regulations and legislation that underpin the respective claim is investigated properly.

The actions of the EPA in this case demonstrate that a statutory authority’s proof of claim debt is no more legitimate or dependable than any other creditor and should not simply be considered prima facie, a claim to be admitted.

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