Australia: The Willmott decision on leases and liquidators - what comes next?

It comes as no surprise that only 48 hours after being handed down, there has already been much said about the High Court's far-reaching decision in Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers appointed) (In Liquidation) (Willmott).

Yes, the High Court has spoken and confirmed that:

1. A liquidator's power (under section 568(1) of the Corporations Act) to disclaim a lease of land applies not only where the liquidator's company is the tenant, but also where the company in liquidation is the landlord.
2. A disclaimer of lease by a liquidator for the landlord has the effect of terminating the tenant's rights and interest in the land.
3. The tenant in that situation is left with having to prove for any loss suffered as an unsecured creditor in the insolvent landlord's winding up.

In Willmott, the leases were long-term leases granted under numerous forestry investment schemes for the cultivation and harvesting of forestry plantations, all for the benefit of investors who had paid up 25 years of rent in advance.

Ultimately the High Court's decision turned on the finding that a lease is basically a contract (albeit one conferring property rights on the tenant) and, as such, falls under a liquidator's statutory power to disclaim contracts entered into by the company.

But what about the tenants' property rights?

By now devotees of that great iconic film, The Castle, might be wondering whatever happened to someone's property not being taken, except on "just terms" as mandated by s51(xxxi) of the Australian Constitution?

Yet in Willmott the Court found that a liquidator's power to disclaim a lease was not affected by the likely enhancement in value of the company's land through the extinguishment of the tenant's interest (per Gaegler J at 77).

Is fairness to the tenant a factor? After all, the lone remedy of proving as an unsecured creditor in the landlord's winding up hardly seems like "just terms".

Unfortunately for the Willmott scheme investors, the High Court has already answered these questions. In Commonwealth of Australia v WMC Resources Ltd (1998) 152 ALR 1, the Court said that:

...while the presence of s51(xxxi) limits the power of the Parliament of the Commonwealth to acquire property without paying just terms, it does not have the same effect as a true guarantee of property such as is found in the Fifth Amendment. As a result, property owners in Australia sometimes have no protection from Federal laws that take their property (per McHugh J at para [149])

Anyway, there's not much point in lawyers or legal academics anguishing over whether or not the High Court got it right in deciding that a lease is fundamentally a contract. Or whether the one dissenting judgment of Justice Keane was closer to the mark in stating that:

...the policy which informs s568(1) ... is to expedite the realisation of the money value of the company's assets in the course of the efficient administration of the insolvent estate ... [and] ... not to expand the pool of assets available to creditors by clawing back property previously disposed of by the company (at 125).

The bottom line is that the High Court has spoken and unless or until a future High Court or Parliament, reverses or overrides its decision, it is law.

What happens now?

Now that the High Court has said they can, it can be expected that the liquidators' next step will be to formally give notice disclaiming the leases. In this case, the liquidators had only sought directions about the proposed sale of the land subject to leases on the basis that the leases were disclaimed. Notices of disclaimer have not yet been issued.

However, the High Court expressly did not consider whether:

• The liquidators required leave of the court before disclaiming the investors' leases.
• If leave was required, what considerations would be relevant to whether the liquidator should be granted or refused leave.
• How the Court might have dealt with an application under s568B(3) of the Corporations Act to set aside the disclaimer.

So effectively the next Court round might be an application (as outlined in the last point above) on behalf of the investors to set aside any disclaimer.

Under s568B(3), a Court may set aside a disclaimer only if satisfied that the disclaimer would cause the party affected (in Willmott's case, being the investors) prejudice grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company's creditors.

Arguably the same test could be relevant to whether leave to disclaim (if required) should be granted or refused in the first place.

Also in Willmott, the "landlord" was in receivership as well as liquidation. As might be expected, the receivers were happy to support the liquidator's application at first instance to the Supreme Court of Victoria, as they stood to see the value of their security greatly enhanced through a disclaimer.

This begs the question whether in other cases a lender wishing to enforce their security from a company that owns tenanted land, might choose to appoint a liquidator instead of a receiver and manager, so that the statutory power of disclaimer reserved only for liquidators can be used to remove a commercially unwelcome tenant.

Whether or not such a tactically motivated appointment of liquidator by a secured creditor might factor in the exercise of a Court's discretion to grant or refuse leave to disclaim, or to set aside a disclaimer, possibly remains to be seen. However logically it shouldn't matter. It should be perfectly legitimate for a secured creditor to decide on appointing a liquidator (as opposed to a receiver) to better facilitate the enforcement, and maximise the value of, its security.

Conclusion

Given the High Court's decision, it may be that the appropriation or loss of a tenant's property rights under a disclaimed lease, on its own, will not count as sufficient prejudice to warrant a Court setting aside that disclaimer.

However, in Willmott, a disclaimer would mean that the investors stand to lose not only their opportunity for future returns, but also all capital that they have already outlaid.

What qualifies as grossly disproportionate prejudice in these circumstances? Then again, what did the drafters of our Constitution mean anyway when they came up with the phrase "just terms"? Perhaps, at the end of the day, it all comes down to "the vibe".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.