Disclaiming contracts: a tale of caution

June, 2016

By Nirupa Manoharan, Special Counsel and Frances Navarro-Towan, Associate

Introduction

In a recent New South Wales Supreme Court decision, In the matter of Blue Sennar Air Pty Ltd (in liq); In the matter of Eye Plantain Pty Ltd (in liq) [2016] NSWSC 772, Justice Brereton delivered guidance on the parameters of a liquidator’s right to disclaim onerous property comprising of ‘unprofitable contracts” without leave of the Court pursuant to s 568(1A) Corporations Act 2001 (Cth) (Act).

Background

The plaintiff, AAPC Management Limited (AAPC) was the manager and operator of a conference centre and was party to, among other agreements, a Conference Facilities Agreement (Agreement) with Eye Plantain Pty Ltd (the Company).

The defendant liquidator was appointed administrator and subsequently liquidator of the Company and another entity, Blue Sennar Air Pty Ltd (Blue Sennar), which was the proprietor of an adjacent lot to the conference facility, not subject of the Agreement. Blue Sennar was otherwise not a party to the Agreement.

The liquidator, purportedly pursuant to s 568(1A) of the Act:

  1. in its capacity as liquidator of the Company, lodged, amongst other things, a notice of disclaimer with ASIC (which was also served on AAPC) disclaiming the Agreement as an “unprofitable contract”; and
  2. in its capacity as liquidator of Blue Sennar, lodged a notice of disclaimer in respect of the Agreement as an “unprofitable contract”.

Was the Agreement an “unprofitable contract” of the Company pursuant to s 568(1A)?

The term “unprofitable contract” is not defined in the Act.  Brereton J held that the determination of whether a contract was “unprofitable” was one of fact, considering the detriments and benefits that flow from the obligations and entitlements under the contract and having regard to the actual operation of the contract.

Although the Agreement had in practice consistently produced net benefits comprising significant net income  to the Company over the previous five years, the liquidator argued it was “unprofitable” on the basis that, among other things, the Agreement adversely impacted the saleability of certain conference centre lots whilst the Agreement remained on foot, on potential, but uncertain, liabilities imposed on the Company for maintenance expense contributions, and AAPC’s discretion relating to certain terms of the Agreement which might affect the remuneration payable to the Company.

Justice Brereton dismissed all of the liquidator’s arguments and held that the Agreement was not an unprofitable contract. He found that the liquidator was ultimately seeking to use his disclaimer powers not to rid himself of onerous property but to enhance the Company’s ability to sell and achieve a higher price for the conference centre but ridding himself of a profitable contract. This, Brereton J stated, could not be achieved without, at least, seeking leave of the Court.

Did the Agreement confer contractual rights and liabilities on Blue Sennar?

Justice Brereton found that the Agreement was not property of Blue Sennar amenable to a disclaimer. Specifically, in order for a contract to be amenable to a disclaimer, the insolvent company must have contractual rights under it. In this case, Brereton J found that the contract in question did not confer rights on Blue Sennar.  Accordingly there was no “property” of Blue Sennar capable of a disclaimer.

Accordingly, the purported disclaimers were held to be without effect and nullities.

Takeaway Points

Although the power to disclaim unprofitable contracts without leave of the Court appears to be broad due to its lack of definition and clarity, the case serves as a timely reminder that such power should be exercised with caution. Specifically, a liquidator should not seek to disclaim a contract unless, having regard to the actual operation of the contract and results its operation produces, that contract is clearly unprofitable.

In circumstances where it is uncertain whether or not a contract is unprofitable, a prudent course would be to seek legal advice and, if appropriate, then seek the leave of the Court. Otherwise, a liquidator potentially exposes himself or herself to the risk of a possible adverse costs order and further legal costs in defending an application brought by an affected party with an interest in the property the subject of a disputed disclaimer.

Contact Mills Oakley

 

Nirupa Manoharan |
Special Counsel
T: +61 3 9605 0808
E: nmanoharan@millsoakley.com.au

 

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