Vol 11 (2014) - Issue 2

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Willmott Forests: Australian High Court Upholds Disclaimer by Liquidators of Insolvent Lessor

Introduction
On 4 December 2013, the High Court of Australia (the highest court in the Australian judicial system) held that a liquidator of an insolvent landlord may disclaim a lease with the effect of extinguishing the tenant’s leasehold estate or interest in the subject land.
The High Court decision in Willmott Forests, and the Victorian Court of Appeal and first instance judgments which preceded it, have engendered significant interest across the Australian insolvency, real estate and property finance markets, and prompted extensive legal commentary.
Although the High Court judgment resolves an area of controversy on which there had been no judicial consensus, it leaves open a number of related subsidiary issues on which no determination was made. It is to be anticipated that further litigation will be required for those issues to be determined.
The judgment of the High Court majority – that the effect of a liquidator’s disclaimer is to terminate the tenant’s contractual and proprietary interest in the leased land, leaving the tenant with (only) a right to prove as a creditor in the winding up – has been said to undermine a fundamental tenet of property law: the concept of security of tenure. This, in turn, has prompted concern in the property finance market that disclaimer of leased property will have the effect of extinguishing security interests over long-term leases.
Further afield, dicta of the English and New Zealand Courts have potentially paved the way for similar outcomes should disclaimer by the liquidator of an insolvent landlord be the subject of direct judicial consideration in those jurisdictions.
Although a similar outcome could conceivably be possible in other jurisdictions whose disclaimer regime has the same statutory genesis as Australia’s, the concerns expressed about the High Court judgment may be more acute in Australia because of the significant market exposure to managed investment schemes or commercial investment trusts, a number of which, including Willmott Forests Limited, have collapsed in recent years.

Key findings in Willmott Forests:
– a liquidator of an insolvent corporate lessor has the power to disclaim a lease agreement under section 568(1) of the Australian Corporations Act 2001 (Cth) ('Corporations Act');
– the effect of such disclaimer will be to extinguish the leasehold estate or interest in the subject land, impacting upon the accrued rights of lessees/ tenants;
– remedies available to the lessee include the ability to apply for the disclaimer to be set aside before it takes effect, to apply to the Court for leave to challenge the disclaimer after it has taken effect and/or to lodge a proof of debt as an unsecured creditor in the winding up.

Facts
The landlord (Willmott) was the responsible entity and manager of a number of managed investment schemes involving forestry plantations and operations. Willmott leased to investors in those schemes (Growers) portions of land which it owned or leased, on which trees were to be grown.