In Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed) (In Liquidation) [2013] HCA 51, the High Court has confirmed that a liquidator of a landlord company has the power to disclaim a lease. The effect of the disclaimer is to terminate the leasehold interest of the lessee.

FACTS

Willmott Forests Limited (receivers and managers appointed) (in liquidation) (WFL) was the manager of a number of forestry managed investment schemes.  In part, those schemes involved a series of leases whereby participants in the scheme would lease land from WFL on which trees would then be grown and harvested on behalf of the participants under the management of WFL.

In 2010, WFL was placed into external administration.  The liquidators determined that it would not be viable to continue to run the forestry schemes and together with the receivers and managers, conducted a joint sale campaign for the land.  No potential buyer was interested in acquiring the land subject to the leases.

In order to effect a sale, the liquidators applied to Court for orders including a declaration that they were entitled to disclaim the leases between WFL and the various growers.  That order was opposed by the Willmott Growers Group (the Growers) and is the issue that was ultimately before the High Court.

The power to disclaim

The liquidator’s power to disclaim onerous property is a historic power intended to aid the liquidator in the administration of a winding up.

The disclaimer power is found in section 568 of the Corporations Act 2001 (Cth), which provides that that a liquidator may disclaim certain types of “property”, including:

  • land burdened with onerous covenants;
  • property that is unsaleable or is not readily saleable; and
  • contracts.

The effect of the disclaimer is governed by s 568D. It provides that the disclaimer terminates the company’s rights, interests,  and liabilities in the disclaimed property, but that it does not affect any other persons rights or liabilities except so far as is necessary to release the company in liquidation from liability.

The Court of Appeal found that the contract of lease was “property” that could be disclaimed and that it was necessary to terminate the Growers’ leasehold interest in order to release WFL from its obligation to provide quite enjoyment of the land.

The issues before the High Court

The issues before the High Court were as follows:

  1. Does s 568 give a liquidator the power to disclaim a lease which the company has granted to a tenant?
  2. If so, what is the effect of such a disclaimer?

With respect to the first question, the Growers’ position was effectively that the leases are not property of the company for the purpose of s 568(1) and accordingly, that s 568 provides no power for a liquidator to disclaim such property.  In contrast, the liquidator’s considered that the leases were simply contracts that were capable of disclaimer under the s 568(1).

With respect to the second question, the Growers’ argued that even if the leases could be disclaimed, the disclaimer could not adversely affect the property rights held by the Growers in the leased property because the grant of the lease by WFL had created a proprietary interest held  in the relevant land.

The Decision

The majority of the High Court (French CJ, Hayne J and Kiefel J (Gageler J agreeing in a separate judgment)) found against the Growers on both questions and confirmed that:

  • A lease is a type of contract to which the ordinary principles of contract law apply.  Accordingly, there is no reason why a lease cannot be disclaimed under the final limb of s 568(1).
  • Pursuant to s 568D(1), the effect of the disclaimer of leases was to extinguish WFL’s obligation to provide quiet enjoyment of the leased property to the Growers.
  • Any interest that the Growers may have had under the leases could not survive the disclaimer.  It was not possible to bring to an end WFL’s rights, interests and liabilities in relation to the leases without also bringing to an end the correlative liabilities, interests and rights of the Growers.

Accordingly, the Growers interest in the leases is distinguished and instead, they are left to prove as unsecured creditors in the winding up of WFL.

What does this mean for commercial tenants?

The High Court left open the question of whether it is possible for a tenant to challenge the disclaimer where it is prejudicial to the tenant under s 568B(3) of the Corporations Act.  However, such a challenge can only succeed where the prejudice suffered by the tenant is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the creditors of the company.

Comment

On its face, this decision appears to greatly expand the scope of the disclaimer power under the Corporations Act.  The decision is significant for tenants and their financiers and has potential to leave such stakeholders in a precarious position when their landlord goes into liquidation.