In a recent decision of Willmott Growers Group Inc v Willmott Forests Limited (In Liquidation) the High Court found that a Liquidator of a Company has power under the Corporations Act to disclaim the Company’s interest in a Lease where the Company is the Landlord. The Liquidator’s right to disclaim the Lease in circumstances where the Company in liquidation was the Tenant was well established.
The facts in Willmott Growers Group Inc, were that a Company leased land to Tenants for the Tenants to grow and harvest trees. The term of the Lease was 25 years. The rent was paid in advance for the duration of the term. The Company became insolvent and was being wound up.
The High Court found that Section 568 of the Corporations Act gave the Liquidator of the Company power to disclaim the Lease on the basis that the Lease was a Contract. The High Court further found that the disclaimer is taken to terminate, from the effective date of the disclaimer, the Company’s rights, interest, liabilities and property in or in respect of the disclaimed property.
The High Court found that notwithstanding that the Lease created an interest in land held by the Tenant, the operation of the Legislation was that the Tenant’s interest in the land was brought to an end by the disclaimer. The Court held that it necessarily followed that the Tenant’s right to continued occupation was terminated by the disclaimer of the Lease and that the Tenant’s interest in the land was brought to an end. This left the Tenant only with the right to prove in the winding up for whatever damages the Tenant may suffer.
Although the decision does not record if the Lease in question was registered, the analysis undertaken by the High Court would seem to have the effect that even an interest under a registered Lease would be terminated by a Liquidators disclaimer.
This decision is likely to be of some concern to Tenants, particularly in the case of longer term Leases. There may be many examples of Lease terms of duration of 10 to 20 years where Liquidators might perceive a considerable advantage in disclaiming the Lease so that they can proceed to sell the freehold unencumbered. Long term leases of Hotels spring to mind as an example where a Liquidator of a Landlord Company might perceive a significant benefit in disclaiming the lease.
It is possible for an Application to be made to the Court to set aside the disclaimer. The Court may only set aside a disclaimer if satisfied that the disclaimer would cause prejudice that it is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the Company’s Creditors. In longer term Leases the Tenant’s interest is often subject to a Mortgage in favour of the Tenant’s financier. It is unclear following the High Court’s Decision in Willmott Growers Group Inc whether the disclaimer of the Lease would also terminate the financier’s security over the Tenant’s interest in the Lease. On one view the logical result of the High Court’s decision is that the financier’s interest would also come to an end. Section 568D provides that 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. In the case of a Mortgage over the Tenant’s interest that provision is unlikely to save the Mortgage as release of the Mortgage would be necessary in order to release the Company from liability under the Lease.
There are a number of issues that remain unresolved following the High Court’s Decision. The only certainty is that Liquidators will seek to use the power in circumstances where they perceive a benefit to the Company. There will almost certainly be a considerable number of cases that go before the Court for determination as to whether the Court should set aside the disclaimer.
