On Thursday (9 February), Davies J of the Victorian Supreme Court handed down her decision on a preliminary question which she was asked to decide on application by the liquidators of Willmott Forests Ltd (WFL), supported by the receivers and both Grower group intervenors.

The preliminary question was this:

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

Her Honour Justice Davies concluded that the answer to the question was “No“.

As many of you will know, Willmott Forests is one of the more recent large agribusiness managed investment schemes to collapse, following in the steps of Great Southern, Timbercorp and Environinvest. Receivers and managers (Mark Korda, Mark Mentha and Bryan Webster of KordaMentha) were appointed by the Willmott Group’s banking syndicate on 6 September 2010, the same day the Willmott Group was placed into voluntary administration and Avitus Fernandez of Fernandez Partners was appointed administrator. Ian Carson and Craig Crosbie of PPB Advisory were appointed administrators of the Willmott Group by order of the Federal Court on 26 October 2010, replacing Mr Fernandez. Mr Carson and Mr Crosbie then became the liquidators of the Willmott Group when the companies were all placed into liquidation on 22 March 2011.

WFL was the responsible entity and/or manager of 8 registered MIS, 6 unregistered “professional investor” MIS, 11 unregistered contractual MIS, and 5 unregistered partnership MIS. These MIS were forestry operations conducted on land either owned by WFL or leased by WFL from third parties. The MIS members or “Growers” had rights to grow and harvest trees on that land under project documents that included lease and licence agreements with WFL for the use and occupation of the land.

After their appointment, WFL’s liquidators had entered into 6 sale contracts for the sale of part of the freehold land, unencumbered by Growers’ rights, including Growers’ rights under leases and licences. A transfer of clear title to the land could not be effected unless Growers’ rights were terminated or extinguished.

On 29 June 2011, the liquidators of WFL sought and obtained directions from Dodds-Streeton J of the Federal Court that they were justified in –

(a) amending the constitutions of the registered MIS and certain investment deeds to confer on WFL a power to terminate Growers’ rights, on condition that Court approval is obtained before doing so; and

(b) disclaiming the project documents of other MIS as onerous pursuant to s 568(1) of the Corporations Act 2001 (Cth), on condition that the Court’s consent is obtained before doing so.

The Federal Court had expressly left the above-described preliminary question open in making the orders and directions of 29 June 2011.

It was a condition precedent of the sale contracts that by 31 January 2012, the liquidators obtain that approval and consent from the Court. (That date was later extended to 15 February 2012.)

The liquidators applied to the Court to obtain those orders, directions under s 511, and approval of their entry into the sale contracts under s 477(2B). The receivers of WFL support the liquidators’ application for those orders, directions and approval, but the Willmott Growers Group Inc and the Willmott Action Group Inc – who both had leave to intervene as contradictors – oppose it. All parties did, however, support the hearing and determination of this preliminary question as to whether the liquidators can disclaim the Growers’ leases with the effect of extinguishing their leasehold estate or interest in the subject land.

Relevantly, s 568 of the Act gives liquidators power to disclaim certain “property of the company”, including land burdened with onerous covenants, shares, property that is difficult to sell, property where the costs of selling it would exceed the proceeds of sale, and contracts. S 568(1A) provides that a liquidator cannot disclaim a contract (other than an unprofitable contract or a lease of land)  except with leave of the Court. S 568(1B) provides for the Court’s power on such an application, and states that the Court may grant such leave subject to conditions, or may make orders about the contract as it considers to be just and equitable.

Section 568D(1) makes it clear that the effect of disclaimer is to terminate the company’s rights, interests, liabilities and property “for or in respect of” the disclaimed property, but that third party rights or liabilities are not affected by the disclaimer “except so far as is necessary in order to release the company or its property from liability”. Her Honour discussed the legislative intent and the authorities as to how the disclaimer provisions operate, including this remark by Lord Nicholls of Birkenhead in Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70 at 87 about the UK disclaimer provisions:.

“Disclaimer will, inevitably, have an adverse impact on others: those with whom the contracts were made, and those who have rights and liabilities in respect of the property. The rights and obligations of these other persons are to be affected as little as possible. They are to be affected only to the extent necessary to achieve the primary object: the release of the company from all liability. Those who are prejudiced by the loss of their rights are entitled to prove in the winding up of the company as though they were creditors.”

The liquidators submitted that as with the reverse position in Hindcastle Ltd v Barbara Attenborough Associates Ltd (disclaimer by the tenant) when a lease is disclaimed by the liquidator of the landlord, the leasehold estate also ceases to exist – the tenant’s rights are extinguished. Davies J disagreed.

Her Honour took the view that the tenant’s proprietary rights in the land will continue to subsist, even though the effect of the disclaimer is that the landlord’s interests and liabilities under the lease contract have been terminated [11]. She was supported in her conclusion by –

• Re Bastable; Ex parte The Trustee [1901] 2 KB 518 – Romer LJ held that where a trustee in bankruptcy of the vendor of a contract of sale of land disclaims the contract, he does not put himself in the position of owner of the estate, freed altogether from the purchaser’s equitable interest in the land;

• Dekala Pty Ltd (in liq) v Perth Land & Leisure Ltd (1987) 17 NSWLR 664 – Young J held that a disclaimer by a liquidator of an option agreement the company had entered into in respect of land it owned could not have the effect of divesting any equitable interest of the option holder, if held to exist (although the case was decided on the basis that the option holder did not hold any interest in the land).

Her Honour held that the statement of principle in Hindcastle Ltd v Barbara Attenborough Associates Ltd was expressly confined to disclaimer of a lease by the liquidator of the tenant, and the reasoning was inapposite to the disclaimer of a lease by the liquidator of the landlord, with respect to the impact on the tenant’s leasehold interest [13].

Davies J acknowledged that a disclaimer nonetheless will impact on the rights and liabilities of the tenant to the extent necessary to release the company or its property from liability. The liquidators pointed out that the Growers’ rights as lessees to occupy the land is interdependent with the rights and liabilities of the landlord to lease the land, such that a disclaimer of the lease by the landlord must mean the termination of the Growers’ leasehold estate in the leased property. Otherwise, so the liquidators argued, the disclaimer of the lease would be inutile. Her Honour said that this can be accepted, however it does not provide the answer.

Davies J returned attention to the language of the section (s 568D(1)): Is the termination of the Growers’ leasehold estates necessary to release WFL or its property from liability?

Her Honour held that it was not. Her Honour held that a tenant has different legal rights in the subject property than the rights attaching to the landlord’s reversionary interest. She noted that the property proposed to be disclaimed was the contract for lease, under which WFL had already leased the land to the Growers. Thus, so her Honour reasoned, it was unnecessary to interfere with the Growers’ property rights in order to release WFL from its liability to lease, because the leases had already been effected. The judgment can be read in full here.