Liquidators, Disclaimers and Leases: the High Court Rules

The High Court of Australia handed down its decision in Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed) (In Liquidation) [2013] HCA 51. This has been decision awaited with bated breath by insolvency practitioners around the land and deals with a previously confusion aspect of interpretation when it comes to the Corporations Act.

This appeal posed two statutory questions:
1. Does Div 7A (ss568 – 568F) of Pt 5.6 of the Corporations Act 2001 (Cth) (the “Act”) give the liquidator of a company power to disclaim the leases which the company granted?
2. If the Act gives that power, does disclaimer terminate the tenants’ rights arising under the lease?

Background:

Willmott Forests Limited (“WFL”) ran a forestry investment scheme under which it leased to participants in those schemes portions of land which it either owned or leased. Each lease was for a term of years, often with an option for a further term and provided that rent was to be paid either up front or on an annual basis.

In September 2010, WFL went into voluntary administration whilst receivers and managers were appointed to property within the WFL group which it had charged. Certain freehold land was not charged. In March 2011, the creditors of WFL voted to wind up it up.

The liquidators and receivers and managers sought to the sell the assets of WFL, including its freehold land and its interests as lessee of certain land. The sale was said to have been run on the basis that parties could either purchase the relevant assets unencumbered by the investment schemes or so encumbered with the ability to take over as manager of the schemes. No party sought to purchase the assets on an encumbered basis but 54 binding offers were made to acquire the assets on an encumbered basis.

Procedural History:

Having received the offers noted above, the liquidators applied to the Supreme Court of Victoria for a direction pursuant to section 511 of the Act for directions and orders about the sale process. The judge at first instance ordered separate determination of this question:

“Are the liquidators able to disclaim the Growers’ leases with the effect of extinguishing the Growers’ leasehold estate or interest in the subject land?”

Justice Davies (at first instance) answered this question in the negative. The liquidators appealed and the Court of Appeal of Victoria reversed Justice Davies. The Growers’ appealed on special leave to the High Court.

Decision:

In a 4-1 decision (French CJ, Hayne, Kiefel and Gagelar JJ in the majority, Keane J in the minority) the Growers’ appeal was dismissed and the questions posed above where both answered in the affirmative.

Joint Reasons of French CJ and Hayne and Kiefel JJ:

The key points to arise from the binding joint judgment are as follows:

1. Their honours concluded that the term “Property” in section 568 (1) does not just deal with the ownership of land but that is it a “compendious” description of legal relationships amounting to ownership of objects of property (both tangible and intangible).
2. That being the case, the reference in section 568(1)(f) to “a contract” must be understood as identifying, as the disclaimer property, the rights and duties which arise under the contract.
3. The rights and duties which a landlord and tenant have under a lease are bundles of rights and duties which together can be identified as a species of property.
4. Further, the rights and duties of the landlord are a form of property; those rights and duties “consist of”, in the sense of derive from, the contract of lease.
5. That being the case, the leases to investors of which WFL was landlord were property of the company which may be disclaimed by the liquidator.
6. The effect of any disclaimer of the leases was that, because the company’s rights, interests and liabilities in respect of the leases cannot be brought to an end without bring to an end the correlative liabilities, interests and rights of the tenants, in order to release the company liability (as prescribed by section 568D(1)) it was necessary to terminate the tenants’ rights under the leases which operates to terminate the tenants’ estates or interests in the land.
7. The tenants are then left with the right to prove in the winding up as creditors for whatever damage is inflicted as a result of the disclaimer.

This case gives an important guidance to liquidator lessees and their tenants clearing up a previously uncertain area. The joint judgment notes that it has left a number of questions unanswered including:

1. Is the leave of the Court required for a disclaimer of a lease to be effective and, if so, what considerations would inform the Court’s decision as to whether to disclaim; and
2. How will the Court consider a scenario in which it is pleaded by the tenant that it has suffered gross prejudice as a result of the disclaimer (in the context of an application to set aside a disclaimer)?

The sooner these questions, for insolvency practitioners, are answered the better.

Once was a lawyer, always a law nerd … or am I?

For nearly two decades of my life I have been caught in the web that is the law.  For over a decade (if you include my articles of clerkship) I was a practitioner of the law and whilst I no longer am a practitioner to this day I love the law, or at least I think I do. 

My love of the law sees me continue to this day to read the transcripts of hearings in the High Court of Australia and the Supreme Court of the United States; it see me read every judgement word for word that these Courts hand down; and it sees me read everything I can about the history of these establishments and the Justices who grace their benches.  My love of the law has seen me, unilateral of my former work responsibilities as a litigator, visit the Supreme Court of the United States and the High Court of Australia just for the purposes of visiting and taking in the aura of each place.  

I have spent a long period of time reflecting on my time as a lawyer and my continued love of the law pondering why I still love something that, it could be said, has caused me no small amount of mental anguish.

Initially I thought that my love for the law had its nexus in the fact that I love an argument.  I recall my parents coming home from a Grade 11 parent teaching night to pose to me “what have you been doing to Ms Goldsworthy?”  Apparently my English teacher had exclaimed that she was frustrated with me because “every time I say something Stephen argues the opposite; sometimes I think he could argue that the sky is green and win”.  Equally I am prepared to declare that my happiest times in the practice of the law were when I was preparing for and arguing about issues at Court.  For me there was no greater experience than standing up in open court to argue my client’s case.  The fact is though, my love of arguing can not be at the root of my love the law because I loved arguing about anything and everything long before I discovered the law.

My thoughts then moved to whether I was in love with the traditions of the law.  By this I mean the history of the law combined with the conventions they create.  Such as calling the presiding judge “your honour” or “your worship”, bowing anytime you enter or leave a court room, the annual opening of the Court Year ecumenical service and the procedures around becoming admitted to practice.  However, as I pondered the law and its traditions it became abundantly obvious to me that over my time in practice the traditionalist nature of the law has dissipated over time.  No longer to Counsel where wigs (in most jurisdictions), disclosure and hearings can now be done electronically and training times for lawyers are becoming progressively shorter. As a traditionalist in most senses I can not confess to be enamoured with changes to the traditions of the law and thus conclude that it cannot be those traditions that keep my love strong.

Today, however, I had an epiphany.  As I sat over my lunchtime lasagna in the office reading the latest offering from the High Court of Australia, it struck that the basis of my ongoing obsession with the law rests not in being a pugnacious litigator or a staunch traditionalist but from the joy that reading the spoken word used to explain, and more particularly, craft that the laws that affect everyone on a daily basis has given, and continues to give, me. 

It struck me that my opening introduction to the law was in reading the judgements made by long gone judges in some of the seminal cases that structured our laws as we know them today.  Stories of snails in the bottom of bottles of ginger beer (Donoghue v Stevenson), a spectator being struck in the head while watching a cricket game (Bolton v Stone) and writing on the back of a train ticket leading to a contract (Parker v South Eastern Railway) entranced me as I hid away in the law section of Griffith University Library waiting for my next class or for the time to tick over for me to head home for a shift at Bundamba Tenpin Bowl.

The judges in those cases, beset with some fairly unique facts, where making the law as they wrote their judgements and wrote their judgments in such a way that they have stood the test of time.  Throughout my time as a student, I always enjoyed reading the cases of the Courts of England and Australia.  Often I was awestruck with how smart the judges must have been to be able to come up with the judgment they had and to be able to write in the way they did.   

As I became a practitioner of the law, I still found the judgments of the Courts entrancing now that I was reading them to try to find results for my clients and to have points to argue when I did appear as an advocate.  Equally I was still in awe of the writing of the judges: both in the cases I was reading and cases I was involved in in which judgments were written. 

These days I don’t read the judgments of the courts for meaning or to try to find an advantage for a client.  I simply have no reason to and yet I am still drawn to read them.  Reading a case from the Supreme Court of the United States about the status of the employees of a pharmaceutical company in the US (Christopher v SmithKline Beecham) or about a constitutional challenge to chaplaincy programs in Australian schools (Williams v Commonwealth of Australia) has nothing to do with what I am engaged with in my current career. 

So why do I read these judgments: it all comes back to the writing.  I do not agree with their views often but the judgements of Justice Antonin Scalia (Supreme Court of the United States) and Justice Dyson Heydon (High Court of Australia) are just so well crafted that they are a pleasure to read.  Often in dissent, both of these two judges have a writing style that means that you find yourself convinced that they just must be correct despite, often, no one agreeing with them.  Both judges also pull no punches when it comes to writing about the work of their colleagues which also makes their judgments enjoyable to read.

To quote Justice Scalia in Wabaunsee County v Umbehr:

The Court must be living in another world. Day by day, case by case, it is busy designing a Constitution for a country I do not recognize”

That is a fair statement of ones disdain for his colleagues if ever I saw one.

Reading Justice Heydon’s dissent today in Williams v Commonwealth of Australia it struck me that it is actually not really the law anymore that keeps me coming back to reading judgements.  It is in fact the use of the written word by the judges that does.  I know this tags me as a nerd (like you did not know that I was already) but I love reading good writing and judgments from the highest Courts in the land are some of the best writing around.

Does this mean I am not a law nerd anymore though? I am not reading the judgments for any other reason than I enjoy the writing.  On reflection though, the judgments of yesteryear and today still have as their nexus the laws that the judges are being asked to interpret, and sometimes create, on a daily basis.  So with that in mind I will continue to be self-proclaimed law nerd and state openly that I still love the law.