This week’s TGIF considers In the matter of Blue Sennar Air Pty Ltd (in liq); In the matter of Eye Plantain Pty Ltd (in liq)  NSWSC 772 in which the Court clarified the rights of a liquidator to disclaim “unprofitable contracts” pursuant to section 568(1A) of the Corporations Act 2001 (Cth).
On 14 May 2015, the defendant liquidator was appointed administrator of Eye Plantain Pty Ltd (Eye Plantain). He became liquidator of Eye Plantain shortly thereafter.
On 21 August 2015, the liquidator lodged with the ASIC notices of disclaimer, made without leave, in reliance on a liquidator’s entitlement under s 568(1A) of the Corporations Act 2001 (Cth) to disclaim “unprofitable contracts”.
The purpose of this power is to enable a liquidator to relieve the company of obligations or liabilities which would prevent a prompt and efficient winding up of the affairs of a company.
The relevant contracts related to a conference centre of which the plaintiff was the manager and operator. Eye Plantain was the owner of the facility and had granted the plaintiff rights to use the centre.
The plaintiff sought, inter alia, declarations that leave was required to disclaim the contracts and that the disclaimers were null and void on the basis that the contracts were in fact profitable.
WHEN WILL A CONTRACT BE ‘UNPROFITABLE’?
The Court observed that an “unprofitable contract” is a contract under which the burden of a company’s obligations or liabilities exceed the benefits, and the performance of which will impede the liquidator’s ability to realise the assets and distribute the proceeds to creditors. Whether a contract is unprofitable is a question of fact, to be decided on the available evidence, and only after consideration of the contract’s actual operation and the effect it produces on the company.
WHAT WERE THE RELEVANT OBLIGATIONS IMPOSED UNDER THE CONTRACT?
The relevant contract entitled Eye Plantain to 70% of the gross revenue generated by the plaintiff from the conference centre. In return, Eye Plantain was obliged to pay for:
- utility services;
- maintenance materials;
- insurance; and
- an amount reasonably determined by the plaintiff to meet the costs of maintaining, replacing or redecorating the furniture, fittings and base contents (FF&E Contributions).
THE LIQUIDATOR’S ARGUMENTS
Notwithstanding the fact that the contract produced net benefits for the company in liquidation, the liquidator argued it was unprofitable for the following four reasons:
- the contract’s lengthy term – it was due to expire in 2086;
- the uncertain and indefinite liability for Eye Plantain if the plaintiff made a call for FF&E Contributions;
- as room rates were at the discretion of the plaintiff under the contract, future benefits to the company in liquidation were effectively at the discretion of the plaintiff; and
- the saleability of the property was negatively affected by a clause in the contract which obliged Eye Plantain to ensure any subsequent purchaser become a party to the agreement.
The Court dismissed all of these arguments, finding that the contract was not unprofitable and that the disclaimer was a nullity.
A contract under which a company is making a profit cannot be rendered ‘unprofitable’ by the length of its term. Furthermore, any calls for expenditure or room rate reductions to attract customers, would ultimately benefit the owner under the contract.
His Honour found that the liquidator was, in reality, seeking to use s 568(1A) not to rid himself of onerous property, but to enhance his ability to sell and achieve a higher price for the property by ridding himself of a profitable contract.
This could not be achieved without, at least, seeking leave of the Court.
This case provides guidance as to the approach taken by the court in assessing whether a contract is “unprofitable” within the terms of s 568(1A).
If a property can be sold more readily and at a higher price without the contract in place, that will not render the contract unprofitable. It is the detriments and benefits that in fact flow from the contract that will govern whether or not it is unprofitable.