The High Court last week upheld the decision of the Court of Appeal of the Supreme Court of Victoria in relation to the proposed disclaimer of leases by the liquidators of Willmott Forests Limited (Receivers and Managers Appointed)(In Liquidation) (“WFL”). Prior to the liquidators’ appointment, WFL had granted leases in forestry land to members (called “Growers”) in certain of WFL’s managed investment schemes.
The majority of the High Court stated the effect of the disclaimer was the extinguishment of the Growers’ leasehold estate or interests in the subject land.
The decision affords reassurance for liquidators regarding the breadth of their disclaimer powers and a liquidator’s ability to disclaim leases and move to realise land owned by a company to which they are appointed. It should be noted, however, that the High Court left open the question of whether the liquidators required the leave of the Court before disclaiming the Growers’ leases.
Willmott is an unusual case in that it is rare for liquidators of landlords to disclaim lease agreements. The High Court’s decision provides some certainty for liquidators in those unusual situations where they are appointed to companies subject to unprofitable long-term leases with tenants. Willmott provides that such leases can be disclaimed by liquidators and upon the disclaimer taking effect, any proprietary interests granted under the lease will also be brought to an end. In these circumstances, liquidators will be left free to realise the property without being restrained by third party leasehold interests.
The Willmott decision also raises real questions about the commercial value of leasehold interests and any mortgages granted over those interests. It will be interesting to see if Willmott will change the lending practices of financiers where leasehold interests are offered up as security.
The High Court’s decision focused on the operation of section 568 of the Corporation Act 2001 (Cth) (“Act”). Section 568(1A) of the Act provides that “[a] liquidator cannot disclaim a contract (other than an unprofitable contract or a lease of land) except with the leave of the Court”. Section 568D(1) of the Act then prescribes that the effect of the disclaimer is that it terminates, from the day it takes effect, “the company’s rights, interest, liabilities and property in or in respect of the disclaimer property, but does not affect any other person’s rights or liabilities except so far as necessary in order to release the company and its property from liability.”
The majority of the judges in the High Court found that each of the Growers’ leases was a “contract” and the rights and duties which WFL as landlord had under those leases were bundles of rights and duties which together constituted a species of property of the company which could be disclaimed. Given this, their Honours surmised, it necessarily followed that, from the effective date of the disclaimer, WFL’s liability to provide the Growers with quiet enjoyment of the leased land and the Growers’ rights to quiet enjoyment of the property were also terminated.
Their Honours further noted that a tenant in this scenario suffering loss because of the disclaimer had two options open to it. Firstly, pursuant to section 568D(2) of the Act, the tenant could prove for its loss in the winding up of the landlord company as a creditor of that company and secondly, pursuant to section 568B of the Act, the tenant could apply to the Court within a specified period of time for the disclaimer to be set aside provided the disclaimer caused it “prejudice that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company’s creditors.”
Keane J, in dissent to the majority finding of the High Court, stated that the word “disclaimer” was primarily concerned with disowning rights rather than repudiating an obligation. In addition, Keane J argued, the policy behind the disclaimer provisions in the Act was to expedite the realisation of the company’s assets in the administration of the insolvent estate and not to “expand the pool of assets available to creditors by clawing back property previously disposed of by the company.” Accordingly, whilst the liquidators of WFL may be entitled to disclaim the contracts to lease this “would not mean that the Liquidators could seize possession of the leased land contrary to the rights which have accrued to each of the Growers.”
For more information about this decision please contact: