Willmott Growers Group Inc v Willmott Forests Ltd (Receivers and Managers appointed) (In Liquidation) [2013] HCA 51

Overview

Section 568 of the Corporations Act 2001 (Cth) (Act) gives liquidators broad powers to disclaim onerous property.

Until the High Court’s decision, it was unclear whether this power entitled a liquidator of an insolvent landlord to disclaim a lease, such that the solvent tenant no longer has any proprietary interest in the land.

Although a lease is a contract, it also grants a proprietary interest in the land to the tenant. The question which this case considers was whether s.568 could be used to terminate the proprietary interest of the tenant, notwithstanding that the tenant was solvent and not in breach of any terms of the lease.

On 4 December 2013, the High Court, by majority, confirmed that liquidators of a landlord have the power to disclaim leases and thereby extinguish the proprietary rights of tenants. The High Court concluded that a lease was a “contract” within the meaning of s.568(1) and that the effect of a disclaimer under that section had the effect of bringing the solvent tenant’s interest to an end.

Background

In this case, a company leased land to tenants pursuant to a managed investment scheme for the tenants to grow and harvest trees. The company later became insolvent and was being wound up. The question arose as to whether s.568 gave the company’s liquidators power to disclaim the leases which the company had granted.

At first instance, the Victorian Supreme Court found that the tenants’ proprietary rights in the land created under the contract would continue after a disclaimer of the contract, with the effect that the liquidators were not able to extinguish the tenant’s interests in order to effect an unencumbered sale of the land.

This decision was overturned on appeal. The Victorian Court of Appeal construed s.568 widely such that a liquidator of an insolvent landlord could disclaim a lease contract and relieve the insolvent landlord of its liability to provide quiet enjoyment and exclusive possession to the tenant, thereby necessarily extinguishing the tenant’s reciprocal proprietary interests in the property.

High Court’s decision

The majority in the High Court (French CJ, Hayne J, Kiefel J in a joint judgment and Gageler J separately) dismissed the appeal by the tenants and confirmed that:

  • Liquidators are able to disclaim a lease with the effect of terminating a tenant’s proprietary interest in the land.
  • Leases are 'contracts' for the purpose of s.568(1)(f). The liabilities of a landlord, which include its obligations to provide quiet enjoyment and allow exclusive possession, would terminate from the date which the disclaimer takes effect. As a necessary consequence of the disclaimer, the tenant’s reciprocal rights to quiet enjoyment and exclusive possession of the land are necessarily extinguished.
  • If a tenant suffers loss, it may prove for that loss in a winding up pursuant to s.568D(2).
  • Significantly, the majority specifically noted that the question of whether the ability to prove in the liquidation of the landlord provides adequate compensation is an open question which was not addressed in this case.

Keane J, dissenting, held that, whilst a disclaimer under s 568(1)(f) of the Act is effective to relieve a liquidator from obligations under a contract, it would not divest rights already accrued to the counterparty.

Comment

The High Court’s decision provides clear guidance for liquidators of an insolvent landlord regarding their ability to disclaim leases under s.568(1). Liquidators can now disclaim a lease knowing that this will terminate all of the tenant’s proprietary interests. This may be important for liquidators who are faced with a lease which:

  • renders the land unsaleable or reduces the prospects of sale (e.g. if prospective purchasers desire vacant possession), or
  • is detrimental to the value of the land (e.g. the existing lease may be below current market rates).

Obviously, the decision has negative implications for tenants, who are now at risk of being ejected in the event that their landlord becomes insolvent and the liquidator decides to disclaim. Prospective tenants considering long-term leases might want to take the solvency of their landlord into consideration before entering into such contracts.

As noted above, the majority appeared conscious of the problems that the decision may have for tenants, in so far as they noted that a tenant may consider that the ability to prove as an unsecured creditor may not provide adequate compensation. Likewise, they also stated that it had not been considered in this case whether a liquidator of an insolvent landlord would need leave before disclaiming a lease, and if so, what considerations would inform a Court’s decision.

These comments clearly leave open the possibility for a Court to determine that it is not appropriate to allow a liquidator to disclaim, particularly in circumstances where:

  • the disclaimer would cause significant prejudice to the tenant (e.g. in terms of loss and damage), and in turn burden the insolvent estate with a large proof of debt, and
  • relatively little prejudice to the insolvent landlord (e.g. where the land could be sold subject to the lease at little or no detriment to value).

Indeed, the majority expressly referred to the fact that s.568B(3) provides a mechanism for aggrieved tenants to apply to the Court to have a disclaimer set aside, provided that the Court is satisfied that the prejudice to the tenant would be “grossly out of proportion” to the prejudice that setting aside the disclaimer would cause the creditors of the insolvent landlord. Accordingly, whilst the decision appears on its face to have drastic consequences for tenants, liquidators may in practice decide:

  • not to utilise this disclaimer power very often, particularly where the lease is at or around market rates (i.e. to avoid having the disclaimer challenged); and
  • to only use the disclaimer power in circumstances such as where the land is unsaleable if the lease is allowed to remain on foot.

Kenneth Lee