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Focus: High Court upholds Willmott decision – liquidators may disclaim leases

5 December 2013

In brief: The High Court has held that a liquidator may disclaim a lease that a company had granted to a tenant, leaving the tenant to prove for any loss in the winding up. This decision clarifies the scope of the liquidators' statutory power of disclaimer. It highlights risks for tenants and for financiers taking security over tenants' interests in leasehold property, and may have wider implications for parties relying on property rights against a company in liquidation. Partner Matthew Whittle (view CV) and Senior Associate Rebecca Collins report on the decision and its potential implications.

How does it affect you?

  • The High Court has held in Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed) (In Liquidation) that the liquidators appointed to the manager of various forestry investment schemes could disclaim leases that had been granted to investors (in some cases, with the whole of the rent paid in advance), leaving the tenants to prove for their losses in the winding up.
  • A tenant's leasehold estate will not survive the disclaimer of the lease by the landlord company. In the Willmott decision, the tenants lost any right to maintain and harvest trees that had been planted on the leased property.
  • The facts of the Willmott case reflected the particular circumstances of agribusiness managed investment schemes, where multiple long-term (and often low-rent) leases can encumber properties, causing those properties to become difficult or impossible to sell. Nevertheless, the High Court's decision may have broader implications for more common types of leasehold arrangements, particularly in situations where the liquidator of a landlord forms the view that a property may be more readily saleable, or sell for a higher price, without the existing leasehold arrangements in place.
  • The Willmott decision highlights risks both for tenants and for financiers with security over tenants' interests in leasehold property where the landlord has the potential to enter liquidation during the term of the lease.
  • The decision also raises broader questions about the possible implications of a liquidator's power of disclaimer on other types of proprietary rights held by third parties in relation to the property of companies in liquidation.

Background


Willmott Forests Limited (Willmott) managed a number of forestry investment schemes. Under these schemes, Willmott leased portions of land to scheme participants (the growers) to grow and harvest trees. Most of the leases were for a term of 25 years and some of the leases provided for the whole of the rent for the term to be paid in advance.

Willmott was placed into administration and, subsequently, liquidation. Following a sale campaign, the liquidators entered into contracts with a purchaser, providing that title to the assets was to pass to the purchaser free from encumbrances arising out of the Willmott schemes and, in particular, that title to the trees on the land was to pass to the purchaser at settlement.

The liquidators applied to the Supreme Court of Victoria for directions about the sales that had been negotiated.

At first instance, Justice Davies decided that the liquidators could not disclaim the growers' leases and that, accordingly, the growers' leasehold estate could not be extinguished.2 On appeal, the Victorian Court of Appeal (Chief Justice Warren, Judge of Appeal Redlich and Justice Sifris) set aside that decision and decided that the liquidators could disclaim the growers' leases.3 The growers appealed to the High Court.

The High Court decision

On 4 December 2013, the majority of the High Court upheld the decision of the Victorian Court of Appeal.

The High Court focused on two key issues:

  • Does section 568(1) of the Corporations Act 2001 (Cth) (the Act) give the liquidator of a company the power to disclaim a lease that the company granted to a tenant?
  • If a liquidator has the power to disclaim such a lease, what is the effect of the disclaimer?
Can the liquidator of a landlord disclaim a lease?

Section 568(1) of the Act provides that a liquidator may disclaim certain property of a company, including property that consists of a contract. However, s568(1A) of the Act 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 critical question therefore was whether the reference to 'a lease of land' in s568(1A) extended to any lease to which the company was a party or was restricted to leases where the company was a tenant.

The growers argued, in effect, that the leases for which the company was the landlord were not 'property of the company' for the purposes of s568(1). Relying on Bastable4, they argued that the only property of the company the liquidators could disclaim was Willmott's reversionary interest in the land. 

This was rejected by the majority of the High Court (Chief Justice French, Justice Hayne and Justice Kiefel), who considered that 'property of the company' extended to a landlord's rights and duties under a lease. Accordingly, they found that each lease between Willmott and the growers was property of the company, consisting of a contract under s568(1)(f) of the Act that could be disclaimed.

What is the effect of the disclaimer?

On the second issue, s568D(1) provides that the effect of a disclaimer is to terminate 'the company's rights, interest, liabilities and property' in the disclaimed property but '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 growers argued that the termination of Willmott's rights, interests, liabilities and property in, or in respect of, the disclaimed leases did not bring their rights as tenants to an end. That is, the release of Willmott from liability did not compel the termination of the growers' interests in the land.

The majority of the High Court did not accept that argument. They held that Willmott's liabilities that would be terminated by disclaimer of the leases included its obligations to provide quiet enjoyment and not to derogate from the grant of exclusive possession of the land. It necessarily followed from this that the growers' correlative rights to quiet enjoyment and non-derogation were terminated by the disclaimer of the leases, with the consequence that the growers' rights as tenants were brought to an end.

The court also observed that it may set aside a disclaimer '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': s568B(3). This provision was not raised by the parties and was therefore not considered by the High Court. However, this may be an avenue for tenants to explore in future cases.

Comment

The joint judgment of the majority adopted a strict interpretation of the relevant provisions of the Act. In contrast, the minority dissenting judgment of Justice Keane focused on the historical and policy considerations underlying the disclaimer provisions. Justice Keane said that the disclaimer could not affect accrued property rights, among other things, on the basis that equity could specifically enforce proprietary rights accrued under rescinded contracts.

The High Court decision provides important clarification on liquidators' powers to extinguish proprietary rights of other parties arising under a lease. It highlights risks both for tenants and for financiers with security over tenants' interests in leasehold property where the landlord has the potential to enter liquidation during the term of the lease. In view of the risk for tenants and the potential effect upon the integrity of leaseholds generally, it is expected that in future cases tenants may seek to rely on s568B of the Act, which allows the court to set aside disclaimers in certain circumstances.  It also remains to be seen how a liquidator's disclaimer of a lease will be effected in practice in those States where leases have to be registered (which does not include Victoria).

The High Court decision may have wider  implications. In practice, many interests in property arise out of contracts. In particular, many equitable interests rely on specifically enforceable contracts. The majority's reasoning suggests those interests are at risk in the grantor's liquidation. If the contract is disclaimed, the proprietary interest may cease. Accordingly, the decision raises broader questions about the possible implications of a liquidator's power of disclaimer on other types of proprietary rights held by third parties in relation to the property of companies in liquidation.  

Footnotes
  1. [2013] HCA 51 (4 December 2013).
  2. Re Willmott Forests Ltd (2012) 258 FLR 160.
  3. Re Willmott Forests Ltd (2012) 91 ACSR 182.
  4. In re Bastable; Ex parte The Trustee [1901] 2 KB 518. 

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