Disclaimer Of Property By A Liquidator

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Section 568 of the Corporations Act 2001 (Cth) (Act) allows a liquidator to disclaim certain property owned by a company to which the liquidator is appointed. The disclaimer has the effect of extinguishing...
Australia Corporate/Commercial Law
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Section 568 of the Corporations Act 2001 (Cth) (Act) allows a liquidator to disclaim certain property owned by a company to which the liquidator is appointed. The disclaimer has the effect of extinguishing the company's interest in the property but does not otherwise affect any interests attaching to the property.

Reasons for disclaimer

Section 568 allows a liquidator to disclaim the following property:

  1. land burdened with onerous covenants;
  3. property that is unsaleable or is not readily saleable; or
  4. property that may give rise to a liability to pay money or some other onerous obligation;
  5. property where it is reasonable to expect that the costs, charges and expenses that would be incurred in realising the property would exceed the proceeds of realising the property;
  6. a contract;

whether or not:

  1. except in the case of a contract—the liquidator has tried to sell the property, has taken possession of it or exercised an act of ownership in relation to it; or
  2. in the case of a contract—the company or the liquidator has tried to assign, or has exercised rights in relation to, the contract or any property to which it relates.

Generally, a liquidator can disclaim property which could expose the liquidator to significant liability or will otherwise cost a liquidator more to deal with than what the property is worth. Specific examples of the kinds of property that a liquidator may disclaim includes land contaminated with asbestos or a lease where the company does not require the leased premises anymore.

Effect of a disclaimer

Unless the disclaimer is set aside, a liquidator's disclaimer is taken to have terminated the company's rights, interests, liabilities and property in or in respect of the disclaimer property: section 568D of the Act. The liquidator ceases to be able to deal with the property.

However, the 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. For example, if a liquidator disclaims land owned by the company, the company ceases to be the owner of the land but any person with a mortgage, caveat or other interest registered against the title of the land has their interest(s) preserved. Ownership of the land is then vested in the State in which the land is situated in accordance with the law of escheat. The State can then deal with the land as it sees fit subject to the existing mortgages, caveats, etc.

Vesting application

Once property has been disclaimed, third parties with a legal interest in the property can lay claim to the property by making a vesting application under section 568F of the Act. The vesting application is made to the Court.

In making a vesting application, the interested party bears the onus of proving their interest and why the Court should vest the property in their name rather than any other interested party. The interested party is also required to notify every other interested party of their application so that any other interested party can make submissions to the Court or bring their own application under section 568F if they want to.

Importantly, the property remains subject to all existing interests even if a vesting order is granted. So a caveator in whom disclaimed land is vested must still deal with any mortgagee registered against the title of the land. This may reduce the utility of a vesting application for some interested third parties.

Key takeaway

A liquidator can disclaim property of a company to avoid being stuck dealing with onerous property which is risky, is likely to require significant time, money or effort to sell and/or unlikely to provide a return for creditors.

The benefit of a disclaimer is that it extracts the company in liquidation without disturbing any other party's interest in the property. If an interested party would like the property, the interested party can make a vesting application to the Court in order to have the disclaimed property vested in them. However, a vesting order does not "wash" the property of any previous interests. A person in whom the land is vested takes the disclaimed property as they find it, warts and all.

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.

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