The company at the centre of Victoria's recycling crisis will be wound up after it was declared insolvent in the Supreme Court of Victoria.

Key points: SKM earlier warned 400,000 tonnes of material could end up in landfill if it went under

SKM earlier warned 400,000 tonnes of material could end up in landfill if it went under An Australian Workers' Union representative said the company was "too big to fail"

An Australian Workers' Union representative said the company was "too big to fail" But the State Government has said it will not bail SKM out

SKM owes 16 creditors more than $5.5 million and after being given an extension to pay the money back, its lawyers today told the court it could not come up with the cash.

A liquidator will now be appointed to refund the creditors.

The case was led by logistics company Tasman, which claimed it was owed $3.35 million.

A further 15 creditors were chasing smaller debts, totalling about $2.2 million.

The lawyer representing Tasman, Arnie Vijayakumar, told the court SKM had done nothing to indicate it could afford to pay the creditors back without going into insolvency.

He also noted that affidavits provided to the court from SKM did not outline the company's financial situation.

When pressed on whether the company would oppose the creditors' application to have it wound up, SKM's lawyer Reegan Morrison said she "had nothing to add".

Creditors were chasing the money from SKM Corporate, which is part of an enterprise that also contains SKM Recycling.

In court, lawyers for the company said that if the corporate arm of SKM became insolvent it could have dire effects on the recycling operation.

'Too big to fail'

In assessing whether the company should become insolvent, Judicial Registrar Julian Hetyey acknowledged that the company was a critical component to the state's recycling industry.

He said more than 30 councils could have to send their recyclables to landfill.

But he said the company had done nothing to satisfy the court that it should not be made insolvent.

The court heard SKM played a critical role in Victoria's recycling industry. ( ABC Radio Canberra: Jolene Laverty, file )

A spokesman for SKM said the full impact of the insolvency would be determined early next week and that they were notifying councils.

SKM had argued during earlier court proceedings it was in the public interest that the company be given the chance to survive.

Lawyer Michael Gronow QC told last week's court proceedings it was "likely creditors would get zero" if the company was wound up.

The recycler employs 300 people and the court earlier heard another 300 people were given jobs through its supply chain.

The Australian Workers' Union's Victorian branch secretary, Ben Davis, said the State Government should intervene to make sure the liquidator could keep the company running in the short term.

"Given the impact of this on the industry, because they are 40 percent of the industry… they're too big to fail," he told ABC Radio Melbourne.

The State Government had previously ruled out bailing out SKM, labelling it a "rogue operator".

Today, Victorian Environment Minister Lily D'Ambrosio said the implications of the insolvency were yet to be made clear, but she would continue to work with local governments to ensure material could be recycled.

"We know that there are too few players in the market. If something goes wrong with one of them, it is a great challenge to know what the back-up is," she said.

Late today, the City of Boroondara in Melbourne's eastern suburbs announced a new arrangement with Visy to process all the city's kerbside recycling collections, replacing SKM.

The deal means the municipality's recyclable material will not be sent to landfill.

Recycler has warned of landfill 'crisis'

Until recently, SKM Recycling was contracted to 33 local Victorian councils and is one of only three major waste contractors in the state.

It told all the councils last week that it would stop accepting their waste, prompting fears of a recycling crisis in the state.

The company earlier warned 400,000 tonnes of recyclables would be sent to landfill each year if fears of the company's demise were realised.

The Coolaroo fire burned through piles of paper waste. ( ABC News )

The court decision caps off years of controversy for the recycler.

In 2017, a massive rubbish fire at its Coolaroo processing facility burned for days, spewing toxic smoke over Melbourne's north.

The fire prompted a crackdown on waste stockpiles by Victoria's environmental regulator, which led to multiple temporary closures of SKM's sites.

Today's decision comes just a day after SKM reached a $1.2 million settlement with residents who were affected by the 2017 fire.