Tenants Beware

Liquidators’ Disclaimers

What comes of a tenant facing loss of possession of its business premises when the liquidator prefers to sell the property with vacant possession?

In the decision of Willmott Growers Group Inc. –v- Willmott Forest Limited (Receivers and Managers Appointed) (In Liquidation) [2013] HCA 51 the High Court considered the issue of whether a liquidator could terminate the proprietary interest of the tenant and disclaim the lease.

By Section 568 (1) of the Corporations Act 2001 (Cth) a liquidator may disclaim certain property of a company, including “land burdened with onerous covenants”; property giving rise to “a liability…or other onerous obligation”; or in respect of which the costs of realisation exceeded the foreseeable return; and property consisting of contractual rights and obligations.

Willmott Forest Limited (“Willmott”) was the manager of managed investment schemes associated with a group of forestry producing companies and leased to participants in the schemes areas of land upon which forests were cultivated for profit.

Following their appointment to Willmott, the company’s liquidators concluded that the schemes were not profitable going forward and could not continue to operate. With the cooperation of the receivers and managers the liquidators sought orders from the Court allowing for the sale of all assets at Willmott Forests. Sale contracts for these properties were subject of free title passing - in other words, for the properties to be unencumbered by any leases or other interests.

On appeal from the Victorian Supreme Court, a majority of the High Court found that it was necessary to extinguish the tenants’ rights under the leases in order to release the company from liability and so to enable realisation of those assets.

It was further held that:

A lease granted by the company under the lease was in the nature of a contract susceptible to being disclaimed by a liquidator.
Therefore the liquidators of the landlord had power under division 7A of Part 5.6 of the Corporations Act to disclaim leases granted by a company;
The disclaimer terminated the landlord’s obligations along with the tenants’ relevant rights arising under the leases;

Accordingly, the leases were taken to be terminated and the tenants’ interests in the land were correspondingly at an end with effect from the date of the disclaimer, pursuant to Section 568D (1) of the Corporations Act.

As a result, a tenant whose lease has been disclaimed by a liquidator of the tenant’s landlord is left merely to prove its interest as one of the landlord’s unsecured creditors in the winding up.

This provides little if any comfort - notwithstanding that the tenant may have made the point of registering on title to the land its interest in the lease. While the Court commented on this, it made no finding on this very significant point and it remains open for further examination.

What then is the state of affairs for a tenant facing loss of possession of its business premises when the liquidator prefers to sell the property with vacant possession? It appears that for the time being at least the only comfort provided to tenants who are unsecured creditors of a landlord subject of a winding up is the following.

By Section 568B (1) of the Corporations Act a person, such as a tenant, claiming an interest in the property apply to the Supreme Court for orders setting aside the liquidator’s disclaimer. However, the tenant must do so within 14 days of the liquidator giving notice of the disclaimer.

The Court may only set aside the liquidator’s disclaimer

“…if satisfied that the disclaimer would cause, to a person who have, or claim to have interest in the property, prejudice that is grossly out of proportion to the prejudice of setting aside a disclaimer would cause to the company’s creditors”..

It is therefore open to an unsecured tenant (as most tenants are) in an appropriate case and depending entirely upon the facts to raise an argument that by reason of liquidators attempt to disclaim the tenants’ interest, it will suffer so substantial a prejudice that it is grossly out of proportion to any prejudice that may be caused to the company’s creditors. –

Factors such as the burden of costs to the tenant in relocating; work-in-progress which cannot simply be relocated; loss of established customer base; and even goodwill which may attach to the tenant’s long established connection with the premises and area may reasonably be factored in here.

Trumble Szanto Lawyers

^{Please note:}^{This material is for general educational purposes and is not designed to be advice to any particular person in relation to their own affairs as it does not take into account the circumstances of you as an individual. We do not represent, warrant, undertake or guarantee that the use of guidance in this paper will lead to any particular outcome or result.}