Upon appointment, a liquidator will generally exercise control of as much of the company’s property as is available, so that it can be realised for the benefit of creditors.  However, in some cases, a liquidator may not wish to retain certain property if it is unlikely that such property will provide a return to the liquidation.

Pursuant to section 568(1) of the Corporations Act, a liquidator may disclaim property of the company if it is onerous, worth little or unsaleable.  It is common for liquidators of lessee companies to disclaim a lease if the lease is of no value to the company.  In that case, the lessor would rank as an unsecured creditor in the winding-up of the company for any loss suffered as a result of the disclaimer.

The disclaimer procedure does not allow a liquidator to disclaim a contract entered into by the company to sell land because that would deprive the buyer of its equitable ownership obtained upon exchange of contracts: Re Bastable: ex parte Trustee (1901) 2 KB 518.  This principle has traditionally also been applied to liquidators of lessor companies, preventing them from disclaiming a lease as a landlord, given such disclaimer would deprive the tenant of its leasehold interest.

The principle was recently tested in the Supreme Court of Victoria case of Re Willmott Forests Ltd [2012] VSC 29, which is considered below. 

At first instance

The liquidators of the lessor company sought an order that they be entitled to disclaim certain leases.  The Supreme Court of Victoria followed the traditional position and held that the liquidators could not disclaim the leases.  Davies J took the view that the tenant’s proprietary rights in the land will continue to subsist, even though the effect of the disclaimer is that the landlord’s interest and liabilities under the lease contract have been terminated. 

Appeal to the Court of Appeal

The liquidators appealed the decision, arguing that disclaimer of the lease agreements would have the effect of extinguishing the leasehold interest of the tenants under section 568D, as this was “necessary to release the company and its property from liability”.

Counsel for the tenants argued that the rights of the tenants as lessee would have accrued or become vested at the time of any disclaimer and would therefore be preserved.  However, the Court of Appeal disagreed and found that the liquidators were entitled to disclaim the contract and terminate the interests of the lessees.

The Court of Appeal then considered whether, notwithstanding the termination of the interests of the lessees under the disclaimed contract, the asserted leasehold interest remains.  At first instance, Davies J found that it did.  However, the Court of Appeal held that it did not and concluded:

”For the reasons given, any leasehold interest cannot survive the termination of the very contract that created it and regulated the tenure of the [lessees].  It is this tenure which creates, and is the basis of, the obligation or liability on the part of [the lessor] to provide quiet enjoyment.  Section 568D(1) allows the liquidator to terminate this obligation or liability despite its intrusion into the property rights of an innocent third party.”

Appeal to the High Court

On 26 September 2012, the lessees filed an application in the High Court seeking special leave to appeal the Court of Appeal’s decision.  The special leave question set out in the lessee’s summary of argument was:

  • Did Parliament intend the liquidator of a land-owning company to have power under s568(l) of the Corporations Act 2001 (Act) to extinguish the property rights of the company’s tenant?

The lessee’s summary of argument included the following:

  • The disclaimer power has not hitherto enabled a liquidator to improve the value of an asset of the company by extinguishing the property rights of an arm’s-length party.
  • The Court of Appeal should have rejected both the identification and the submission.  The relevant property of the company ought to have been found to consist of “land burdened with onerous covenants”.
  • The property in the lease, in the sense required by the statute, vests in the tenant and does not vest in the landlord company.  The landlord holds only a reversion, being the freehold burdened by covenants.
  • A disclaimer by a landlord’s liquidator does not necessitate the extinguishment of the tenant’s rights in land or to quiet enjoyment.

The lessee’s summary of argument also set out certain implications of the Court of Appeal’s decision as follows:

  • If the Court of Appeal’s decision is correct, then it means every tenant assumes a risk in respect of the landlord’s solvency in circumstances where:
    • landlords often have strict, and at times absolute, control over the tenant’s ability to assign leases;
    • on the other hand, usually have no control over a landlord’s ability to assign the reversion; and
    • tenants, particularly retails shop tenants, typically invest substantial sums into the goodwill and fitout of their lease premises.  Much of this expenditure is lost if the tenant is forced to relocate.
  • The Court of Appeal’s decision also erodes the security of tenure under a lease, which may impact upon willingness to grant finance on the security of a lease.
  • The consequences for lessees, in particular retail lessees, are significant.  The Court of Appeal has provided a clear indication that the implications of its decision extended to “shopping centre leases”.
  • The Court of Appeal’s construction of section 568(1), insofar as it permits a liquidator to disclaim a whole contract rather than the property of the company in the contract, creates the potential for use of statutory disclaimer in respect of mortgages and charges, or at the least, equitable mortgages and charges.  If the Court of Appeal is correct, it is conceivable that a contract creating an equitable mortgage or charge against a company, which later goes into liquidation, could be disclaimed by a liquidator of the company, with the effect that the mortgagee or chargee would be an unsecured creditor.

On 10 May 2013, the High Court granted special leave to the lessees to appeal the Court of Appeal’s decision.  The High Court hearing is likely to take place in August 2013.  Stay tuned for an update after judgment has been delivered.