A major Australian recycling company says hundreds of thousands of tonnes of recyclables are destined for landfill if it collapses, warning of a "major crisis" if China stops recycling Australian waste.

Key points: In a submission to the Victorian Government, SKM Recycling said it needed more government support

In a submission to the Victorian Government, SKM Recycling said it needed more government support It said 400,000 metric tonnes of waste could end up in landfill every year if the company folds

It said 400,000 metric tonnes of waste could end up in landfill every year if the company folds It called for more onshore recycling to prevent a "major crisis"

SKM Recycling, which is contracted to more than 30 Victorian councils, is facing liquidation as creditors claim they are owed millions of dollars.

Logistics company Tasman has taken the recycler to court, claiming SKM owes it $3.35 million.

Its action, which seeks to wind the company up due to insolvency, has been joined by five other companies, which are all seeking hundreds of thousands of dollars.

The case will be heard on July 24.

A 2017 fire at SKM's Coolaroo plant led to a crackdown by the Environmental Protection Authority (EPA), and the temporary closure of two of its sites in February forced councils to send tonnes of waste into landfill.

SKM has not responded to ABC requests for comment, but has now warned in a submission to the Government there is the potential for an additional 400,000 metric tonnes of recyclables to be sent to landfill each year if a major recycler like SKM ceases business.

The huge increase would "impact on existing landfill capacity", the company said in a submission to the state's parliamentary inquiry into recycling and waste management.

The company also runs facilities in Tasmania, South Australia and New South Wales. ( ABC News: James Dunlevie )

It said there was "market volatility" affecting recyclers, and it blamed the Government for an uncertain regulatory framework.

"The recyclers effectively have 100 per cent responsibility and accountability for the system which is not a fair or accurate reflection on how the industry is overseen and regulated," the submission said.

"If the Victorian Government believes that an effective recycling system is critical to the Victorian community, then financial, regulatory and education support needs to be provided to the industry."

Treasurer Tim Pallas hit back at SKM, saying they had a business model that "doesn't appear to be particularly robust".

He ruled out bailing out the company if it did go under, and said the industry would ultimately adjust to losing it from the market.

"We've consistently said that if they don't smarten up their act, then ultimately people should seriously consider whether or not this is an appropriate repository of these materials," he said.

Court documents show the company could have a lifeline after it signed a "highly confidential and commercially sensitive" term sheet with a proposed purchaser on June 28.

The documents show SKM is fighting the action and is arguing it will be able to pay its debts "within a reasonable time".

China-US trade war threatens industry: SKM

The submission said SKM supports up to 600 jobs across Australia through direct employment and its supply chain, with most of those in Victoria.

It flagged ongoing uncertainty with China's apparent plans to stop importing solid waste by the end of next year and said the industry was left shouldering the risk.

In January 2018, China banned the importation of 24 types of recyclable materials, sparking warnings it could be the end of kerbside recycling.

"If China [determines] not to accept any product in the future, this will be a major crisis," the submission said.

"This issue is further complicated by the trade war currently threatened between USA and China."

Dirty nappies have been among contaminated waste sent to Indonesia from Australia. ( ABC News: David Lipson )

Beijing has tightened restrictions on the level of "acceptable contamination" on recyclable paper it accepts, which SKM said had "flooded" other Asian countries with paper and cardboard.

Indonesia, Malaysia and other South-East Asian nations have begun sending waste back to Australia and other developed countries, arguing they "will not be a dumping ground to the world".

'Please keep recycling,' council urges

The submission pushed for Victoria to work towards "a form of circular economy in Australia", which would depend on the capacity to create "economically viable markets for recyclable products".

The company said new, local pulp mills could be part of the solution to the state's recycling crisis, but only if commercial conditions supported it.

Unless there was better education for householders about what could and could not go into recycling bins, councils would face increased costs for the contaminants to be removed on-site, the submission said.

The Deputy Lord Mayor of the City of Melbourne, which recycles waste through SKM, said recyclables going to landfill was a "worst-case scenario".

Arron Wood said governments were working on solutions.

"Critically at this time, we just want to send the message that: please keep recycling," he said.

The state Labor Government yesterday announced a new paper recycling facility would be opened in Melbourne's west to process 39,000 tonnes of paper a year.

The EPA recently allowed SKM to keep accepting recyclables at its Laverton North facility and found its Coolaroo facility was compliant after earlier stockpiling fears.