Wednesday, December 4, 2013

High Court upholds liquidator's power to disclaim leases

Willmott Forests was the manager of forestry investment schemes associated with a group of companies known as the Willmott group. Willmott Forests owned or leased land which was then leased (or sub-leased) to participants in the investment schemes. 

In March 2011, the creditors of Willmott Forests resolved that the company should be wound up. The appointed liquidators concluded that the schemes could not continue to operate and attempted to sell the assets of Willmott Forests.  No one expressed interest in purchasing any of the assets encumbered by the schemes or in becoming the responsible entity or manager of any of the schemes.  When sale contracts were concluded, each contract provided that title to the assets the subject of the contract was to pass to the purchaser free from the encumbrances arising out of the schemes. 

The liquidators applied to the Supreme Court of Victoria for directions and orders about the sales that had been negotiated.  In dispute was whether or not the liquidator had the power to disclaim the leases separately from the land, and whether such a disclaimer would operate to extinguish the tenants’ estate or interest in the land.

By majority (French CJ, Hayne and Kiefel JJ, and Gageler J) the High Court held that s 568(1) of the Corporations Act gave the liquidator of a company power to disclaim a lease granted by the company to a tenant, separately from disclaiming the reversionary interest in the land.  The power to disclaim “and burdened by onerous covenants” under s 568(1)(a) did not limit the power to disclaim “a contract” under s 568(1)(f).  A lease granted by the company to a tenant was a contract within the meaning of that provision.  The effect of s 568D(1) was that, from the effective date of the disclaimer, the tenant's rights arising under the lease and the company’s obligations under the lease were terminated.  It was the existence of these rights and obligations that gave rise to the tenants estate or interest in the land.  As a result, the liquidators had the power to disclaim the leases to investors, with the effect of terminating the tenants estates or interests in the land.

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