It's a Risky Business
SOURCE: SCOTTISH BANKER, JUNE / JULY 2006
Lending involves risk, and the first skill required is to identify the risk. However, some risks are less easy to identify, and an unexpected risk is usually more expensive, as it will not have been managed. Environmental liability risk is one of the most common and expensive “hidden” risks, much increased in these days of intense EU regulation.
As a law firm with an unusually in-depth specialist UK and EU environment practice, we tend to be called in to deal with many of the “casualties”. A common theme – not only was risk ignored, it was not even thought to exist. Contrary to some uninformed opinion, lenders are not free from this risk.
What price would you be willing to pay to know, in advance, whether an investment opportunity carries with it a pollution risk which ought to be addressed?
Being so often on the other side of the fence, trying to sort risk situations which have become liabilities, our specialists decided it was time to address this. Therefore, we have created a new service called Riskaware, the precise purpose of which is to identify these risks and to provide clear and precise practical recommendations on how these can and should be addressed within the commercial and contractual context of the deal. This is a fixed price, fast turnaround service from experts in the field, which very quickly confirms whether there is a latent risk at all, how that risk specifically is likely to materialise and, most importantly, what specifically can be done to sort it.
This is especially relevant to the Corporate Finance community. The Americans developed the notion of “deep pocket liability” in the 1990s, to reflect the tendency of the US courts to target big business, including banks, for corporate environmental failures. Although European legal systems have not yet formally gone down that road, the potential practical effect of our legislation could be lender liability - that is, direct legal liability for banks, and even insolvency practitioners, quite apart from the commercial fallout of borrower insolvency. How can this be?
Well, there are two broad explanations, and they both relate to “control”.
Firstly, it has been the law for years now that a bank’s influence on a customer’s activities can reach the stage where there is “shadow directorship”. Granted, these incidents are few and far between, but the principle is now given statutory recognition under UK environmental legislation, by imposing personal liability for corporate pollution on persons exercising controlling influence over corporate activity, even where they do so indirectly as equity holders.
Secondly, and more specifically, UK contaminated land legislation impliedly does two things – (i) it puts banks into the shoes of the owners of contaminated land (and therefore in the “front line”) by the exercise of step-in rights or the enforce fixed or floating charges, and (ii) it creates personal liability for insolvency practitioners if contamination occurs under their stewardship in circumstances where the court thinks they have not acted “reasonably”.
There have already been a number of serious liability situations across the UK, some of which we have been called in to help out on. The sad truth is that absolutely all of these situations were avoidable, and for very little cost. In almost all cases, there was not the slightest awareness of the risk, or else the extent of it was seriously underestimated. One cannot always be free of the risk – indeed, that is most unusual. However, it is foolhardy not even to be aware of the existence or the proper extent of the risk. Armed with that information, it becomes easy to adapt one’s commercial and contractual dealings accordingly, and therefore manage your risk.
AUTHOR: ALEX INNES