Liquidator Disclaimer of Lease Powers
To the concern of many practitioners practising in leasing law, the High Court has recently determined that a landlord’s liquidator is entitled to disclaim, or extinguish, a lease. It has been common practice for a liquidator’s disclaimer power to be used by liquidators appointed to tenant companies to disclaim that company’s interest in a lease as a tenant, but not by liquidators appointed to landlord companies.
A recent High Court decision has determined, amongst other things, that a liquidator appointed to a landlord company is entitled to exercise the disclaimer power under the Corporation Act to extinguish leases over land.
This has potentially devastating consequences for tenants (and financiers). If a tenant’s lease is disclaimed then the tenant can prove as an unsecured creditor in the landlord’s winding up or the tenant can:
- If the liquidator serves a disclaimer notice, the tenant may apply to the Courts to set aside the disclaimer; or
- Oppose an application by the liquidator for leave to disclaim a lease.
There are some significant problems with each of the above, but in particular in seeking to set aside a disclaimer, the tenant faces the prospect of significant costs in relation to that application. If unsuccessful, the tenant faces an adverse cost order. This is particularly problematic given that the tenant’s rights under the Corporations Act seeking to set aside a disclaimer are in this regard untested. The Corporations Act allows the Court to set aside a disclaimer only if “satisfied that the disclaimer would cause, to persons who have, or claim to have, interests in the property, prejudice that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company’s creditors”.
Unfortunately at this stage there is no real guidance as to how the Courts will determine whether the prejudice to the tenant is “grossly out of proportion” to the prejudice that would be caused to the company’s creditors.
Author: Cathy Drake
Published: 3 July 2014