04 December 2013
[2013] HCA 51
High Court of Australia (French CJ, Hayne J, Kiefel J and Gageler J; Keane J dissenting)

The High Court of Australia held that liquidators of an insolvent lessor could disclaim a lease, and that this would terminate the lessee’s proprietary interest.

Willmott Forests (WFL) had granted long-term leases of forestry land at a premium to investors, who generally then contracted with other companies in the Willmott group to plant, maintain and harvest the trees on the land.  WFL went into liquidation and its liquidators sought a declaration from the Supreme Court of Victoria that they were entitled to disclaim the leases.  Various investors, whose arguments were advanced by Willmott Growers Group (WGG), objected.  The Judge held that disclaimer would not have the effect of extinguishing the investors’ estate in the land.  The Court of Appeal of Victoria allowed the appeal.  The matter was then further appealed to the Australian High Court, the ultimate court of appeal in Australia.

The majority of the Australian High Court upheld the decision of the Court of Appeal.  There were two issues for consideration: whether the liquidators could disclaim their obligations as lessor under s.568(1) of the Corporations Act 2001, and what effects such disclaimer had on the rights of the lessee.  S.568(1) provides that a liquidator may disclaim certain property of the company including rights under contracts, but s.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.  The provision is very similar to s.178 of the English Insolvency Act 1986.  The majority in the High Court decided that the reference to a 'lease of land' permits the liquidators not only to disclaim an insolvent company’s obligations as a lessee but also their obligations as a lessor (Bastable [1901] 2 KB 518 distinguished).

Considering the effects of a disclaimer, the High Court noted that 'the company's rights, interests [and] liabilities…’ in the disclaimed property are terminated but the disclaimer 'does not affect any other person's rights or liabilities except so far as necessary in order to release the company and its property from liability'.  The majority ruled that WFL’s obligations under the lease were inexorably linked to the investors’ proprietary rights as tenants.  As the former was terminated, so necessarily was the latter.  Consequently the disclaimer had brought the tenants’ leases to an end.  The court noted that tenants could attempt to recover consequent losses in the winding-up, and that a disclaimer could be set aside if it caused disproportionate prejudice to the tenant.

Keane J dissented, focussing on policy considerations and arguing that accrued property rights were unaffected.

This case uncovered tensions which exist between the law of insolvency and the law of property. It could be said that the majority decision impermissibly erodes the concept of security of tenure insofar as it allows a liquidator unilaterally to determine accrued property rights. Effectively leases are then treated as nothing more than contracts. As a matter of commercial analysis, it seems that the property rights in this case were merely incidents of a pure investment scheme, but nevertheless as a matter of law the tenants had acquired property rights which were then stripped away in the insolvency, leaving them with mere money claims. It will be interesting to see whether and how the reasoning in this case, which was based on underlying and familiar common law principles, is extended in other jurisdictions.