Today the High Court of Australia handed down a decision which confirms a liquidator has the green light to disclaim leasehold interests in land (Willmott Growers Group Inc v Willmott Forests Limited (receivers and managers appointed)(in liquidation)).

Due to the way in which the case came before the Courts, the High Court did not consider the application of s568B of the Corporations Act 2001 (Cth) (Act). 

This section allows tenants to challenge in Court the liquidator’s disclaimer.

Pursuant to this section, a challenge may be made on the basis that the prejudice caused to the tenant by the loss of the leasehold interest in the land is:

grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company’s creditors’.

The power to challenge under s568B of the Act may mean that liquidators are only able to effectively disclaim leasehold interests in exceptional circumstances.

The players

Willmott Forests Limited (Willmott) was the responsible entity of several managed investment schemes, comprised of forestry operations conducted on freehold land owned by Willmott or leased from third parties.

The members of the schemes (Growers) had rights to grow and harvest tress on that land pursuant to numerous lease agreements with Willmott for the use and occupation of the land.

Later, Willmott went into liquidation and the liquidators sought to sell the freehold land free from any encumbrances, including the leases with the Growers.

The liquidators’ application

On 29 June 2011, the liquidators filed an application with the Victorian Supreme Court pursuant to section 511 of the Act which provides a mechanism for a liquidator to apply to the Court to determine any question arising in the winding up of a company.

In these proceedings, the liquidators sought orders and directions in relation to whether they were able to disclaim the Growers’ leases with the effect of extinguishing the Growers’ leasehold estate or interests in the subject land.

The relevant provisions of the Act

Section 568(1) of the Act provides liquidators with the power to disclaim property of a company in liquidation or contracts entered into by the company. However, unless the contract is an unprofitable contract or a lease of land, a liquidator cannot disclaim a contract without the leave of the Court: section 568(1A) of the Act.

Section 568D(1) of the Act provides that a disclaimer is taken to have terminated the company’s rights, interests, liabilities and property in or in respect of the disclaimed property, but does not affect any other person’s rights or liabilities except so far as necessary to release the company and its property from liability.

Decision of the High Court

A majority of the High Court held that s568(1) of the Act gave the liquidator of a company power to disclaim a lease granted by the company to a tenant.  A lease granted by the company to a tenant was “a contract” within the meaning of that provision.  The effect of s568D(1) was that, from the effective date of the disclaimer, the tenant’s rights arising under the lease were terminated and the tenant’s estate or interest in the land was brought to an end.

Implications of the Decision

Once the lease is disclaimed, the landlord is entitled to possession of the property and may sell without regard to the interest which the tenant previously had in the property.  This would appear to be the position, regardless of whether a mortgagee has consented to the lease and is a substantial creditor / driving force behind the liquidator’s attempts to disclaim the lease.

Despite today’s judgment, what remains to be seen is whether tenants can resist having their leases disclaimed on the basis that the loss to the tenant (eg loss of profits) outweighs the benefits to creditors of a higher return from the real property being sold without a leasehold encumbrance.

The Act provides little guidance on how these competing interests are to be assessed.  It is expect that this area of the law will be further tested in the Courts over the coming months.

With its extensive experience in property and banking matters, Gadens Lawyers is well placed to assist clients understand the implications of today’s judgment.