Re Willmott Forests Limited [2012] VSCA 202 is a very important decision in insolvency jurisprudence. The Victorian Court of Appeal upheld an appeal from a finding of a trial judge that the disclaimer of a lease agreement by the liquidator did not have the effect of extinguishing the leasehold interests in land [19]. In doing so the court undertook a detailed analysis of section 568 of the Corporations Act.

FACTS

The majority defined the question as, at [1]:

whether a leasehold interest in land is extinguished by the disclaimer of the lease agreement by the liquidator of the lessor, pursuant to s 568(1) of the Corporations Act 2001 (Cth) (‘the Act’)

Willmott Forests Ltd (“WFL”) owned leases from third parties freehold properties. It entered into 25 year leases. The liquidators of WFL sought to sell the interest in the properties unencumbered by the leases and seek to disclaim the lease agreement.  They applied to the court for approval of such disclaimers [2]. Sale contracts for the sale of the land contained conditions precedent to their completion of the liquidators obtaining orders and directions from a court authorising the liquidators, at [9]:

a) to exercise the powers to terminate, relinquish or surrender the project documents of the registered MIS and Professional Investor MIS; and

(b) to disclaim the project documents of the contractual and partnership MIS as onerous pursuant to s 568(1) of the Act.

The liquidators made application under section 511 of the Act and 477 (2B) for approval of their entry into contracts.

 DECISION

Warren CJ and Sifris AJA

Regarding the operation of section 568 their honours stated:

1. liquidators have the power to disclaim property of a company in liquidation or contracts entered into by the company [15]
2. it is to enable a liquidator to relieve the company of obligations or liabilities which would prevent a prompt and efficient winding up of the affairs of a company
3. there is a wide scope of ‘property of a company’ that a liquidator may disclaim under s 568 [17].
4. a contract for the lease of land is ‘property’ that a liquidator may disclaim under s 568 [17].
5. under section 568D(1) the effect of a disclaimer is to terminate the company’s rights, interests, liabilities and property ‘for or in respect of’ the disclaimed property, but that third party rights or liabilities are not affected by the disclaimer ‘except so far as is necessary in order to release the company or its property from liability’ [18].

In disclaiming the contract (see [25]):

1. WFL no longer has any contractual rights or liabilities under the contract.
2. WFL is not required to perform its part of the contractual bargain.
3. WFL does not have to provide the lessee with possession and quiet enjoyment.
4. the lessee, as the other contracting party, loses its rights and is no longer required to fulfil its obligations because the rights and duties of WFL as lessor and the lessee are reciprocal and interdependent.
5. the other parties’ interests or property is affected only to the extent necessary to release WFL from liability.

In determining the liability of the lessor:

1. “the continuing and prospective obligation to provide possession and quiet enjoyment is not a fully accrued obligation or liability that cannot be terminated”[32]
2. the obligation to provide quiet enjoyment to a lessee was a liability of the lessor [33]
3. the word ‘liability’ in s 568D(1) should be given the widest possible meaning and include the obligation to provide possession and quiet enjoyment because the section  is specifically designed to enable a liquidator ‘to cease performing obligations [37].
4. it is necessary to affect the tenure in order to release WFL from its liability [37]

Their Honours found that if the contract is disclaimed, the leasehold interest is also extinguished because any leasehold interest is governed by the contract of lease. The contract regulates the substance and termination of the leasehold interest [39].  In their review of the law they stated:

1. the doctrines of frustration and repudiation apply to leases [41] 
2. although the event bringing about the termination of the contract of lease was a repudiation accepted by the non-defaulting party the consequences of such termination should not be treated differently from disclaiming a contract of lease [47]
3. lease agreements of the kind in evidence should be put in their proper commercial context. They were but one type of document in a suite of inter-related documents that regulate the rights and liabilities of various parties in a managed investment scheme that were tax driven. As with shopping centre leases the grower or investor does not a leasehold interest or estate. There is no demise of the kind that would survive any termination of the very contract that created the tenure [51].
4. the development in the law is such that a commercial lease is not a demise that confers an interest in land and survives the termination of the contract creating the demise [52]
5. reference to “liquidator” in section 568(1A) is not confined to a liquidator of the lessee. ” Lease of land” in a contractual context includes the leasehold interest [53]

Their Honours said in summary, at [58]:

any leasehold interest cannot survive the termination of the very contract that created it and regulated the tenure of the Grower. It is this tenure which creates, and is the basis of, the obligation or liability on the part of WFL to provide quiet enjoyment. Section 586D(1) allows the liquidator to terminate this obligation or liability despite its intrusion into the property rights of an innocent party. The evident policy is to permit the loss of these rights in order to enable the company in liquidation to be free of obligations so that it can be wound up without delay for the benefit of its creditors. To compensate, the rights of the affected parties are transmuted into various statutory rights and claims.

Redlich JA

His Honour stated that the legislative intent of Division 7A of the Act is to enable insolvency administrators to relieve themselves of ongoing liabilities which would prolong the administration and delay the dividend to creditors [63].

In his analysis  on the contractual basis of leases ( [67] ff) his Honour found that:

1. a lease creates rights in rem being an estate or interest in the land demised with the right to possession giving rise to the interest in the land [72]
2. the demise of an estate for a term of years is so intertwined with the covenant and contractual provisions relating to it that they must be viewed as constituting one legal transaction. The disclaimer of a lease contract involves a direct repudiation of the relation of landlord and tenant which, once accepted, brings the estate to an end [72]

His Honour, at [73], found that a disclaimer in the exercise of the statutory power is different from that under contract law where the act of disclaimer or repudiation does not of itself determine the tenancy. The statutory disclaimer does not require acceptance of the act of repudiation as the exercise of a power conferred by statute of itself determines the tenancy.

Regarding the issue of quiet enjoyment, which both parties agreed was the only arguable continuing liability under the lease his Honour stated:

1. The implied covenant for quiet enjoyment is not dependant on the terms of the lease.  It arises from the relationship of landlord and tenant [80]
2. ‘liability’ in the context of s 568D is not confined to a financial obligation or immediate financial detriment. The term ‘liability’ has a broad meaning covering executory obligations in relation to the quiet possession, use and enjoyment of the land into the future [82].
3. it was necessary to extinguish the respondents’ estates or interests in the leased lands at the same time as the contracts to release the appellants from these obligations [82]

ISSUE

The Court of Appeal has adopted a broad interpretation of the liquidators power under section 568 and its consequences. This gives liquidators a commensurately broad discretion and power when liquidating companies who have leasehold interests.  In considering the scope of the statutory power of disclaimer the court also undertook a very useful review of the contractual basis of leases.  It has had almost immediate effect in my experience and in decisions (for example see Grant v Harlgate Pty Ltd & Anor [2012] VSC 464).