Vol 11 (2014) - Issue 4

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The Law of Disclaimer

Background to disclaimer
The power to disclaim
In England and Wales a liquidator of a company may disclaim any onerous property. This is the case even where the liquidator has taken possession of it, endeavoured to sell it, or otherwise exercised rights of ownership in relation to it. There is no equivalent provision in relation to Scotland albeit a Scottish liquidator may decline to adopt an onerous personal private law obligation.

The rationale behind disclaimer
The rationale behind the power to disclaim onerous property is twofold. First, it protects unsecured creditors by enabling liquidators to avoid continuing liabilities in respect of onerous property and the adverse effect of such liabilities on the company's assets. Secondly, it allows liquidators to realise the company's property and pay a dividend to creditors at the earliest possible time.

The meaning of 'onerous property'
The word property is not a term of art but takes its meaning from its context. In the insolvency context, property is given a wide definition as including 'money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property'.
'Onerous property' is defined as any unprofitable contract and any other property which is unsaleable or not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act.
The meaning of 'onerous property' and 'unprofitable contract' was examined in detail in Re SSSL Realisations where a creditor company had entered into a bond on behalf of an insolvent company and its subsidiaries which allowed their liability to pay duty to Her Majesty's Revenue and Customs to be deferred. In part consideration for the creditor company entering into this bond, the insolvent company and its subsidiaries entered into a deed of indemnity which included a subordination clause. The effect of this clause was that the insolvent company was prevented from proving in the liquidation of one of its subsidiaries in competition with the creditor company or receiving, claiming or benefitting from any distribution in such liquidation until all the amounts payable under the indemnity had been paid to the creditor company. One of the questions to be determined on appeal was whether the liquidators of the insolvent company were entitled to disclaim the deed of indemnity as 'onerous property'.
The Court of Appeal agreed with the decision of the trial judge that the deed of indemnity did not fall within the definition of onerous property as 'any other property which was unsaleable or not readily saleable or such that it may give rise to a liability to pay money or perform any other onerous act' on the basis that, for something to qualify as property, it must involve some element of benefit or entitlement for the person holding it. Therefore, since the insolvent company had already had the benefit for which they entered into the deed, the deed did not fall within the definition of property. Furthermore, the Court held that the deed could not be described as unsaleable and did not give rise to a liability to pay money or perform an onerous act but rather imposed a negative obligation preventing the insolvent company from collecting an asset.