The High Court has ruled that liquidators of lessors can disclaim leases, thus terminating the leasehold interests of tenants.
However, yesterday's High Court decision in Willmott Growers Group Inc. v Willmott Forests Limited (Receivers and Managers Appointed) (In Liquidation)  HCA 51 leaves open another issue: do liquidators need to get Court approval before exercising this power, and, if so, how easy or difficult would it be to get that approval?
- a liquidator of an insolvent lessor company has the ability to disclaim a lease agreement under section 568(1) of the Corporations Act 2001 (Cth);
- the effect of such disclaimer will be to extinguish the leasehold estate or interest in the subject land, impacting upon the accrued rights of lessees/tenants;
- remedies available to the lessee include the ability to apply for the disclaimer to be set aside before it takes effect and/or to lodge a proof of debt as an unsecured creditor in the winding up; and
- it may be prudent for a liquidator to seek the leave of the Court under section 568(1A) of the Act before exercising this power.
Willmott Forests Ltd (Willmott) was the responsible entity of a number of forestry managed investment schemes. Willmott leased to participants in those schemes (Growers) portions of land which it owned or leased, on which trees were to be grown. The leases and sub-leases were generally for terms of 25 years (with options to extend). Upon Willmott's liquidation, its liquidators sought expressions of interest from parties interested in acquiring the land subject to the schemes with the ability to take over as the RE and manager of those schemes, or in acquiring both the land and the trees unencumbered by the schemes. Bids were only received for the land and trees unencumbered by the schemes. The sale contracts entered into were conditional upon the ability of the liquidators to give clear title to the land and trees, unencumbered. The liquidators sought directions that they were justified in disclaiming the scheme contracts as onerous and unprofitable pursuant to section 568(1) of the Act. If made, those directions would extinguish the Growers' interests in the land.
The Supreme Court of Victoria was asked to consider whether the liquidator of a landlord could disclaim a lease under section 568(1) of the Act with the effect of extinguishing the leasehold estate or interest in the subject land.
At first instance the Court held that the effect of a disclaimer can be inherently limited by other legal regimes, such as property law. It held that a landlord can disclaim a lease, but that does not affect the tenant's leasehold interest in the land which was created when the lease was executed (the Court freely admitted that this would render section 568 largely futile for liquidators of lessors).
This decision was then reversed on appeal, and ultimately went to the High Court.
Yesterday, the High Court, by majority, dismissed the appeal. It held that a section 568(1) disclaimer of a lease by a liquidator of the landlord will terminate the tenant's estates and interests in the land. The tenant's only remedy is to prove for damages in the liquidation (mirroring the first Court's comments, the High Court acknowledged that tenants might regard this as inadequate compensation).
The majority took the view that the liquidator's power to disclaim a contract (section 568(1)(f)) is coloured by the fact that the opening words of section 568 refer to the liquidator's power to disclaim "property of the company". In their view, "property" in this context refers to "the company's possession of any of a wide variety of legal rights against others in respect of some tangible or intangible property of the company" and concluded:
"Once it is understood, as it must be, that 'property' in the chapeau to s 568(1) is a compendious description of legal relationships amounting to 'ownership' of objects of property (both tangible and intangible), the reference in par (f) to 'a contract' must be understood as identifying, as the disclaimer property, the rights and duties which arise under the contract. The contract is the source of those rights and duties."
It then stated that a lease is a species of contract. From this, it followed that the power to disclaim a lease included the power to disclaim the landlord's "rights and duties" which arise under the lease/contract.
The effect of disclaimer, provided for and governed by section 568D, is to terminate the insolvent company's rights and liabilities. The High Court majority said that, in the case of a lease, the tenant's "rights and duties" are correlative to the "liabilities and rights" of the landlord. Therefore, the effect of disclaiming/terminating the landlord's rights, interests and liabilities is necessarily the termination of the tenant's correlative "rights" under the lease, which would include both the tenant's right to quiet enjoyment and any interest or estate in the land.
The dissenting judge, Justice Keane, held that a landlord's disclaimer of a lease would not deprive tenants of their right to possession of the land for the remainder of the term of the lease.
Did the liquidators require Court approval?
Section 568(1A) 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.
In this case, the liquidators had exercised the power to disclaim without seeking that approval.
Justice Keane held that "as a matter of ordinary parlance, to speak of property consisting of a contract that is a lease of land is to speak of property of the lessee" [emphasis added] whereas section 568(1)(f) proceeds on the footing that the power to disclaim operates upon a contract which is the "property of the company". Justice Keane held that a liquidator of a lessor cannot disclaim a lease of land (that is, the tenant's property, as opposed to a contract to lease, which is the lessor's property) without the leave of the Court under section 568(1A). Accordingly, the purported disclaimer in this case was, in his view, ineffective.
The majority held that section 568(1A) was not an issue in this case:
"[There has not been] any occasion to consider in this case whether the liquidators require the leave of the 'Court' before disclaiming the investors' leases or, if they do require leave, what considerations would inform the decision to grant or refuse leave."
Although the majority was not prepared to speculate on the factors relevant to a section 568(1A) application, it appeared to suggest that tenants might struggle to convince the Court to refuse approval:
"It may be noted that the Act does provide expressly, in s 568B(3), that the 'Court', on application, may set aside a disclaimer 'only if satisfied that the disclaimer would cause, to persons who have, or claim to have, interests in the property, prejudice that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company's creditors." [emphasis added]
One possible interpretation of this statement is that it is an indication that the same "grossly out of proportion" test might apply to an application by a liquidator for leave of the Court under section 568(1A).