When a company enters into liquidation, the appointment of a Liquidator does not automatically bring a contract to an end.
A Liquidator has the power under section 568 of the Corporations Act 2001 to disclaim property that they do not wish to retain because it is too onerous, worth little or is unrealisable.
In disclaiming assets, a Liquidator would give formal notice to a party of his intention to be rid of any interest in the property. If loss is suffered as a consequence, the affected party must endeavour to mitigate their loss and may prove their claim in the liquidation in respect of the amount of that loss.
The common types of property that a Liquidator can disclaim include:
- Land burdened with onerous covenants;
- Shares;
- Unsaleable or not readily saleable property;
- Property which may give rise to a liability to pay or some other onerous obligation;
- Property where it is reasonable to expect that the costs incurred in selling it would be greater than the sale proceeds; or
- Contracts.
Simple practical examples include:
- Vehicle or equipment finance contracts where the realisable value of the assets is less than the payout figure of the finance agreement; and
- A leasehold interest in real property where the lessee company being wound up has ceased operations and by maintaining the lease, further costs would be incurred.
The above are examples where the company being wound up is the ‘borrower’ or ‘tenant’ – in others words, the user of the property, not the owner.
In Willmott Growers Group Inc v Willmott Forests Ltd [2013], the High Court held that a company in liquidation may disclaim a lease that it had entered into as lessor, which will terminate the tenant’s rights in the land – the right to quiet and exclusive possession.
The High Court held that a lease is a ‘contract’ within the meaning of section 568(1)(h).
The following key findings were made by the High Court:
- A landlord’s obligation to provide a lessee with possession and quiet enjoyment (tenure) is an ongoing liability which continues for the duration of the lease. Therefore, for the landlord to be relieved of that liability the proprietary interest of the lessee must come to an end.
- Leasehold interest is regulated by a lease contract and, like any other contract, is extinguished upon termination of the contract. A leasehold interest does not survive the termination of the contract that created it and regulated the tenant’s tenure.
- The purpose of section 568 of the Act is to allow a Liquidator to release the company in liquidation from obligations which would otherwise prevent a prompt and efficient winding up of the company’s affairs.
It should be noted that should a Liquidator disclaim a lease, the affected parties have the right to have the disclaimer set aside if they can establish that they will suffer prejudice that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the creditors of the company in liquidation.
About the author
Greg Quin is a Director at HLB Mann Judd Insolvency WA and has been with the team for 10 years. Greg oversees the daily operations of the many insolvency appointments managed by the HLB Insolvency team and looks after the operations of the practice.
If you have any queries about insolvency matters, please feel free to contact Greg on 08 9215 7900, 0402 943 091 or via email to gquin@hlbinsol.com.au.
