Legal News & Analysis – Asia Pacific – Australia – Insolvency & Restructuring

Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed) (In Liquidation) [2013] HCA 51

WHAT YOU NEED TO KNOW

• A liquidator of an insolvent lessor company has the ability to disclaim a lease agreement. Any security held by a financier in respect of the rights under the agreement will be extinguished if such a disclaimer takes effect.
• The lessee or financier has the ability to apply for the disclaimer to be set aside before it takes effect.

WHAT YOU NEED TO DO

When dealing with a borrower or guarantor who has given security over a lease agreement, you should ensure that the relevant facilities and securities:

• cover a diverse portfolio of security interests, including personal guarantees;
• require disclosure by the borrower or guarantor of an event of this nature; and
• provide for a security review and consequential facility and security adjustments if the benefit of a lease agreement is lost.

In Re Willmott Forests Ltd [2012] VSC 29, the Victorian Court of Appeal held that a leasehold interest in land is extinguished by a liquidator’s disclaimer of the lease agreement pursuant to s 568(1) of the Corporations Act 2001 (Cth). This decision may have important consequences for any financier with customers whose security profile includes an interest in real property as lessee under a lease agreement: if the interest in the land is extinguished, that aspect of the security becomes worthless.

Given the potentially significant consequences of this finding, the matter was appealed to the High Court, which delivered its judgment in Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed) (In Liquidation) [2013] HCA 51 yesterday.

Background Facts

The relevant factual circumstances which gave rise to this matter were that Willmott Forests Ltd (Willmott Forests) was the responsible entity of a number of managed investment schemes (both registered and unregistered) which consisted of forestry operations. Willmott Forests owned and leased of a number of properties for the purposes of conducting that scheme. The properties were leased or sub-leased to the members of the Willmott Growers Group (Willmott Growers) for 25 year terms. Willmott Forests went into liquidation, and the liquidators wanted to dispose of Willmott Forests’ interests in the properties unencumbered.

The Limited Effect Of Disclaimer On Third Party Rights

While a liquidator is entitled to disclaim property in certain circumstances prescribed by s 568 of the Corporations Act, s 568D(1) provides that such 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”.

As a result, the liquidators sought a declaration from the Victorian Supreme Court that it was entitled to disclaim the leases with the effect of extinguishing Willmott Growers’ interests in the subject properties.

The Lower Court Judgments

At first instance, the Victorian Supreme Court held that the disclaimer of a lease agreement by the liquidator of a lessor only operated to terminate the contractual relationship with the lessee. The disclaimer did not extinguish the associated proprietary interest of the lessee, nor was it necessary to extinguish Willmott Growers’ interests in order to release Willmott Forests’ property from a liability.

On appeal, the Victorian Court of Appeal held that Willmott Forests’ had an ongoing obligation under the lease to provide possession and quiet enjoyment to Willmott Growers, and termination of the lease agreements would relieve Willmott Forests from that liability. As the proprietary leasehold interest is governed by the contract of lease, it likewise falls away upon the disclaimer of the lease agreement.

The High Court’s View

Yesterday, the High Court held that disclaimer by the liquidator of a lessor company brings the rights and obligations of both parties under the lease to an end. If the tenant suffers loss as a result of the disclaimer, they may prove for that loss in the winding up of the lessor company.

The majority in the High Court (French CJ, Hayne and Kiefel JJ) held that:

• while each lease created a corresponding interest in the relevant land, the question to be determined was whether that proprietary interest was brought to an end by the operation of the Corporations Act;
• the rights, interests and liabilities of Willmott Growers could not be divorced or separated from the correlative rights, interests and liabilities of Willmott Forests; and
• it was necessary to terminate both Willmott Growers’ rights under the leases and their interests in the land in order to release Willmott Forests from its liabilities under the lease agreement.

In separate reasons, Gageler J held to the same effect, noting that the entirety of the arrangement is lost irrespective of whether a lease has been disclaimed by the lessor or lessee.

The majority nonetheless reiterated that a person affected by a proposed disclaimer has a right to apply for the disclaimer to be set aside where its impact upon them would be grossly out of proportion to the prejudice the company’s creditors would suffer without the disclaimer.

Keane J wrote a carefully considered dissenting judgment. In his Honour’s view:

• textual, contextual, historical and policy reasons suggested that a liquidator of an insolvent lessor could not disclaim a lease without the leave of the Court; and
• if leave were to be given, it would only release the lessor company from its future obligations, but would not extinguish the lessee’s previously accrued rights to exclusive possession of the land.

In the result, the High Court upheld the decision made by the Victorian Court of Appeal.

Implications For Financial Institutions

It is uncommon for a liquidator of a lessor company to wish to disclaim a lease, as often the continuation of the lease has a commercial benefit for any proposed purchaser. As a result, this situation is only likely to arise where:

• the term of the lease is lengthy, and would involve significant ongoing obligations on the part of the lessor company that would severely prejudice the company’s creditors; and/or
• the rent payable by the lessee is under market rates, or is otherwise uncommercial or not profitable.

As a result, when considering new facilities or reviewing security profiles, it is important that financiers turn their minds to this question. Where disclaimer of the customer’s lease is a potential risk, financiers should ensure that the relevant facilities and securities:

• cover a diverse portfolio of security interests, including personal guarantees;
• require disclosure by the borrower or guarantor of an event of this nature; and
• provide for a security review and consequential facility and security adjustments if the benefit of a lease agreement is lost.

For further information, please contact:

John Lobban, Partner, Ashurst
[email protected]

Ian Innes, Ashurst
[email protected]

Brianna Bell, Ashurst
[email protected]