KEANE J. Section 568(1) of the Corporations Act 2001 (Cth) ("the Act") authorises a liquidator of a company to disclaim specified categories of property of the company. The question tendered by the parties in this case is whether s 568(1) authorises a liquidator to disclaim a lease granted by the company with the effect of extinguishing the rights of the lessees in respect of the land leased to them.
The question so presented conflates two issues: first, whether s 568(1) contemplates the disclaimer of a lease by the liquidator of the lessor, bearing in mind that the leasehold interest created by the lease is the property, not of the lessor but of the lessee; and secondly, whether the effect of the disclaimer is to divest the lessee of its leasehold interest in the land leaving the lessee to prove as an unsecured creditor in the winding up of the lessor.
The primary judge concluded that the disclaimer did not extinguish the rights of the lessees to possession of the land leased to them. The Court of Appeal of Victoria reversed that decision, determining both issues in the affirmative.
For the reasons which follow, I would resolve both issues in the negative.
The proceedings
The first respondent ("Willmott") was the manager of a number of forestry investment schemes, which included 15 unregistered investment schemes described as the "Contractual and Partnership Schemes". Willmott owned the freehold estate in the land, which was leased to participants in the Contractual and Partnership Schemes ("the Growers").
On 22 March 2011, Willmott was put into liquidation, and the second and third respondents were appointed its liquidators ("the Liquidators").
In the course of the winding up, the Liquidators applied to the Supreme Court of Victoria for directions in relation to the sale of Willmott's assets. The Liquidators had entered into a contract for the sale of land near Bombala. The contract was conditional on the land being free of encumbrances.
The primary judge, Davies J, was asked to determine whether the Liquidators were able to disclaim the Growers' leases with the effect of extinguishing their leasehold interest in the Bombala land.
The appellant was given leave to intervene in this application as representative of the Growers in four of the Contractual and Partnership Schemes operated on the land.
"Exemplar" leases were tendered to the Supreme Court as part of a statement of agreed facts for the purpose of determination of the question. The leases granted the Growers, represented by the appellant, exclusive possession of their respective parcels of the Bombala land for a term of 25 years. The total rent payable to Willmott under these leases was paid in advance by the Growers. The position in relation to other leases is different; in particular, the terms are shorter and the position as to payment of rent is not clear.
There are some aspects of the exemplar leases which might suggest some want of clarity of intention on the part of those responsible for their drafting; but none of the parties sought to make anything of the specific provisions of the leases. In particular, the first to third respondents were content to accept that the Growers' interests should be regarded as leases of land.
In order to understand the conclusions of the primary judge and the Court of Appeal, and the arguments of the parties in this Court, it is necessary to refer to the relevant provisions of the Act.
The Act
Section 568 of the Act provides relevantly as follows:
"(1) Subject to this section, a liquidator of a company may at any time, on the company's behalf, by signed writing disclaim property[] of the company that consists of:
(a) land burdened with onerous covenants; or
(b) shares; or
(c) property that is unsaleable or is not readily saleable; or
(d) property that may give rise to a liability to pay money or some other onerous obligation; or
(e) property where it is reasonable to expect that the costs, charges and expenses that would be incurred in realising the property would exceed the proceeds of realising the property; or
(f) a contract;
whether or not:
(g) except in the case of a contract - the liquidator has tried to sell the property, has taken possession of it or exercised an act of ownership in relation to it; or
(h) in the case of a contract - the company or the liquidator has tried to assign, or has exercised rights in relation to, the contract or any property to which it relates.
…
(1A) A liquidator cannot disclaim a contract (other than an unprofitable contract or a lease of land) except with the leave of the Court.
(1B) On an application for leave under subsection (1A), the Court may:
(a) grant leave subject to such conditions; and
(b) make such orders in connection with matters arising under, or relating to, the contract;
as the Court considers just and equitable.
(8) Where:
(a) an application in writing has been made to the liquidator by a person interested in property requiring the liquidator to decide whether he or she will disclaim the property; and
(b) the liquidator has, for the period of 28 days after the receipt of the application, or for such extended period as is allowed by the Court, declined or neglected to disclaim the property;
the liquidator is not entitled to disclaim the property under this section and, in the case of a contract, he or she is taken to have adopted it.
(9) The Court may, on the application of a person who is, as against the company, entitled to the benefit or subject to the burden of a contract made with the company, make an order:
(a) discharging the contract on such terms as to payment by or to either party of damages for the non-performance of the contract, or otherwise, as the Court thinks proper; or
(b) rescinding the contract on such terms as to restitution by or to either party, or otherwise, as the Court thinks proper.
(10) Amounts payable pursuant to an order under subsection (9) may be proved as a debt in the winding up.
(13) For the purpose of determining whether property of a company is of a kind to which subsection (1) applies, the liquidator may, by notice served on a person claiming to have an interest in the property, require the person to give to the liquidator within such period, not being less than 14 days, as is specified in the notice, a statement of the interest claimed by the person and the person must comply with the requirement."
It was common ground between the parties that the reference in s 568(1)(a) to "land" is a reference to any estate or interest in land.
It is necessary to refer as well to s 568D of the Act, which concerns the effect of disclaimer. It provides relevantly:
"(1) A disclaimer is taken to have terminated … the company's rights, interests, liabilities and property in or in respect of the disclaimer property, but does not affect any other person's rights or liabilities except so far as necessary in order to release the company and its property from liability.
(2) A person aggrieved by the operation of a disclaimer is taken to be a creditor of the company to the extent of any loss suffered by the person because of the disclaimer and may prove such a loss as a debt in the winding up."
It is also necessary to refer to s 568B of the Act, which provides:
"(1) A person who has, or claims to have, an interest in disclaimed property may apply to the Court for an order setting aside the disclaimer before it takes effect, but may only do so within 14 days after:
(a) if the liquidator gives to the person notice of the disclaimer, because of paragraph 568A(1)(b), before the end of 14 days after the liquidator lodges such notice - the liquidator gives such notice to the person; or
(b) if paragraph (a) does not apply but notice of the disclaimer is published under subsection 568A(2) before the end of the 14 days referred to in that paragraph - the last such notice to be so published is so published; or
(c) otherwise - the liquidator lodges notice of the disclaimer.
(2) On an application under subsection (1), the Court:
(a) may by order set aside the disclaimer; and
(b) if it does so - may make such further orders as it thinks appropriate.
(3) However, the Court may set aside a disclaimer under this section 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."
The decision of the primary judge
The primary judge accepted that the Liquidators could disclaim the leases, but reasoned that an affirmative answer to the question posed by the Liquidators failed to "give due regard to the position in law that a lease creates both contractual and proprietary rights."
Her Honour held that a disclaimer by a liquidator under s 568(1) of the Act was not apt to "bring the tenant's proprietary interest in the land to an end."
The decision of the Court of Appeal
All members of the Court of Appeal accepted both limbs of the argument advanced for the Liquidators. As to the first limb (which concerned the first issue posed for determination by this Court), their Honours focused upon the reference in s 568D(1) of the Act to the termination of, among other things, the company's "liabilities", and proceeded to characterise Willmott's ongoing obligation under the Growers' leases to provide quiet enjoyment as a "liability" susceptible of disclaimer under s 568(1). That liability, once disclaimed, brought the Growers' rights to an end. This argument was also advanced in this Court.
As to the second limb (which concerned the second issue posed for determination by this Court), the Court of Appeal held that, once the lease contracts were disclaimed by the Liquidators, each Grower's leasehold interest was extinguished.
Warren CJ and Sifris AJA regarded the decision of this Court in Progressive Mailing House Pty Ltd v Tabali Pty Ltd as establishing that, once Willmott was relieved of its contractual liabilities under each lease to provide the Grower with exclusive possession and quiet enjoyment, each Grower automatically lost its entitlement to exclusive possession under the lease: once "the contract is disclaimed, the leasehold interest is also extinguished."
Similarly, Redlich JA held that the effect of the disclaimer on each lease considered as a contract was decisive, in that "[w]here the estate in land is one which has come into existence by virtue of a lease contract the disclaimer of the contract involves a direct repudiation of the relation of landlord and tenant which, once accepted, brings the estate to an end."
In the view of the Court of Appeal, the Growers would remain entitled to prove in the winding up under s 568D(2) as "a creditor of the company to the extent of any loss suffered by [them] because of the disclaimer".
The appellant's submissions
In this Court, the appellant's first submission was that the power of disclaimer engaged here is to be found in par (a) or par (c) of s 568(1) rather than in par (f). But even if s 568(1)(f) were regarded as a relevant source of power, s 568(1) empowers a liquidator to disclaim property of the company, and the leases were not Willmott's property to disclaim. Even if a lease be regarded as a contract within s 568(1)(f), the leases in question here were the property of the Growers not Willmott.
The appellant's second submission was that, even if the disclaimable property of the company was Willmott's contracts to lease the land to the Growers, the rights vested in the Growers are not susceptible to extinguishment by the termination of those contracts in terms of s 568D(1) of the Act.
The appellant argued that Tabali does not stand in the way of its second submission. First, Tabali was concerned with the termination of a lease as a result of the acceptance by the lessor of a repudiation by the lessee. In the present case, there was neither repudiation by the Growers, nor acceptance by Willmott. And secondly, Tabali does not support the proposition that accrued rights are divested upon termination of a contract.
The first to third respondents' submissions
The first to third respondents submitted that s 568(1)(f) is the source of the Liquidators' power to disclaim a contract of the company as property capable of being disclaimed in toto. The Court of Appeal was correct to proceed on the basis that the reference to a "contract" in s 568(1)(f) is to the contract in toto so that, under s 568D(1), the effect of the disclaimer is to terminate "the company's rights, interests, liabilities and property in or in respect of" the contract. Once Willmott's rights, powers and liabilities in respect of the leases were terminated, as the Court of Appeal held, the leasehold interest necessarily fell away. The leasehold estate cannot exist, so it was said, following the termination of the rights and liabilities which govern its existence, and the leasehold estate cannot survive where neither lessor nor lessee is any longer bound to perform the obligations or covenants in the lease.
The first to third respondents relied upon the decision in Tabali to support the propositions that a lease is essentially a contractual interest, dependent on the continued subsistence of the contract between lessor and lessee, and that as such it is susceptible of annihilation upon the termination of the contract. In this regard, they invoked the statement of Deane J in Tabali:
"[O]nce it is accepted that the principles of the law of contract governing termination for fundamental breach are, as a matter of theory, applicable to leases generally, there is no difficulty in applying them in the present case in much the same fashion as to an ordinary executory contract: '[i]f the contract is avoided or dissolved ... the estate in land falls with it'".
The scope of s 568(1)
As to the first issue for determination, it may be accepted that neither par (a) nor par (c) of s 568(1) is an exclusive source of power to disclaim a lease, and that s 568(1)(f) does empower a liquidator to disclaim the property of a company consisting of a lease. But considerations of text, context, policy, legislative history and authority support the view that the power to disclaim property of the company consisting of "a lease of land" is concerned with the property of the lessee.
Textual considerations
Section 568(1) confers upon a liquidator of a company power to "disclaim property of the company that consists of" the various species of property itemised in pars (a) to (f). In relation to s 568(1)(f), what may be disclaimed is property of the company which consists of "a contract". By virtue of s 568(1A) property of a company which consists of a contract "other than an unprofitable contract or a lease of land" may be disclaimed under s 568(1), but only with the leave of the court.
One may accept that, as the first to third respondents argued, the inclusion of "a lease of land" in s 568(1A) is an indication by the legislature that a lease of land is included as a species of "contract" referred to in s 568(1)(f). But if one reads s 568(1)(f) exegetically with s 568(1A), it reads relevantly: "a liquidator … may … disclaim property of the company that consists of … a contract [but a] liquidator cannot disclaim a contract (other than ... a lease of land) except with the leave of the Court." That is to say, the liquidator is empowered to disclaim, without leave of the court, property consisting of a contract that is a lease of land. And as a matter of ordinary parlance, to speak of property consisting of a lease of land is to speak of the property of the lessee.
To read s 568(1)(f) exegetically with s 568(1A) in this way is not to read down the express words of the provision "by making implications or imposing limitations which are not found in the express words." Rather, it is to give effect to all the words of sub‑ss (1) and (1A) of s 568.
Section 568(1)(f) proceeds on the express footing that the power to disclaim operates upon a contract which is property of the company. A contract usually confers rights and obligations upon each party to it. The postulate on which s 568(1)(f) proceeds looks to the rights conferred on the company rather than the obligations assumed by it. It is the rights conferred by a contract which make it sensible to speak of the contract as "property of the company". It is the right to possession of land conferred on the lessee which attracts the description of "a contract" to a lease of land. As a matter of ordinary parlance, "to disclaim" is to renounce or repudiate a right which the person disclaiming might otherwise enjoy. In ordinary parlance, the word "disclaimer" is primarily concerned with the disowning of rights rather than the repudiation of an obligation.
According to the Macquarie Dictionary, "disclaim" means:
"1. to repudiate or deny interest in or connection with; disavow; disown: disclaiming all participation. 2. Law to renounce a claim or right to. 3. to reject the claims or authority of. … 4. Law to renounce or repudiate a legal claim or right."
To the extent that "disclaim" has a technical legal meaning, that meaning is also concerned with the renunciation of a right which might otherwise be claimed by the person disclaiming. In Jowitt's Dictionary of English Law, it is said:
"To disclaim a right, interest or office is to renounce all claim to it or refuse to accept it. … Under the practice of the Court of Chancery before the Judicature Acts 1873‑75, if a bill claiming relief was filed against a person who had no interest in the subject-matter of the suit, his proper course was to file a disclaimer, alleging that he had not any right or title, and that he did not and never did claim any title to the subject-matter of the suit."
An understanding of the power to disclaim as primarily concerned with the renunciation of rights, rather than the repudiation of liabilities, is confirmed by the history of "disclaimer" as a concept in the law of insolvency. The disclaimer of property entered the law of insolvency in England to allow a trustee in bankruptcy to decline to accept, as part of the insolvent estate to be administered, property the realisation of which was likely to be more trouble than it was worth in terms of the due administration of the estate of the bankrupt. Disclaimer was not, and has never been, regarded as a device whereby a trustee in bankruptcy or liquidator may effect a unilateral discharge of the liabilities of the insolvent estate: that would have been antithetical to the due administration of the estate of the insolvent person. Rather, the scope of the power to disclaim, as distinct from the consequences of its exercise, was, and has remained, limited by its focus upon the rights of the insolvent company.
While a liquidator of a lessor may disclaim the lessor's property consisting of a contract to lease land, that would not be a disclaimer of the lessor's property consisting of "a lease of land". By virtue of s 568(1A) of the Act, it would be necessary for a liquidator to seek leave of the court to disclaim the lessor's contract to lease land. The Liquidators have not sought leave of the court in that regard.
Contextual considerations
Section 568(1) authorises a liquidator to disclaim "property of the company". Section 568D(1) provides that the effect of the disclaimer is to terminate the company's "rights, interests, liabilities and property", as well as counterparties' "rights or liabilities". It may be noted that s 568D(1) does not provide for an adverse effect upon the "property" of a counterparty. This tends to confirm that it is the rights of the company with which disclaimer is immediately or directly concerned.
Section 568D(1) states the consequences of a valid disclaimer: it provides that the disclaimer of a company's rights automatically operates to release the company from its ongoing correlative liabilities; but it does not confer the power to disclaim or fix its scope. That work is done by s 568(1) of the Act. The circumstance that s 568D(1) refers expressly to the termination of the company's "liabilities" is itself an indication that they are not the focus of the power conferred by s 568(1), a provision in which that term is not used.
The termination of the liabilities of the disclaiming party is the automatic legal consequence of the disclaimer of that party's rights. As Lord Nicholls of Birkenhead explained in Hindcastle Ltd v Barbara Attenborough Associates Ltd, speaking of the effect of a statutory disclaimer by the liquidator of a lessee:
"In order to determine these [scil the lessee's] rights and obligations it is necessary, in the nature of things, that the landlord's obligations and rights, which are the reverse side of the tenant's rights and obligations, must also be determined."
In the Court of Appeal, and in this Court, the first to third respondents identified the ongoing obligation of Willmott to provide quiet possession to the Growers as an ongoing liability of the kind that might be terminated by a disclaimer. This argument treats the provision of the Act which states the consequences of a disclaimer as controlling the scope of the power to disclaim and mistakes the true orientation of s 568(1), which is directed at the company's rights.
The judges of the Court of Appeal focused upon the statement in s 568D(1) of the consequences of a disclaimer under s 568(1) for the "liabilities" of the company, and proceeded to the conclusion that Willmott's ongoing obligation as lessor to give quiet enjoyment to the Growers for the term of the leases was a "liability" of the company and, therefore, susceptible of disclaimer. The argument accepted by their Honours fixed upon the view reflected in the decision of Hodgson J in Rothwells Ltd (In Liquidation) v Spedley Securities Ltd (In Liquidation) that:
"obligations which have already accrued in the past are not liabilities which can be terminated. Liabilities which can be terminated could be such things as an obligation to arise in the future to pay money or transfer property or provide goods or services … Where an obligation has arisen but the time for performance has not arrived, or where the obligation is subject to conditions which are not yet performed, then it may be … that that is a liability which can be terminated. In some cases … a question of degree may arise whether in substance this is a fully accrued obligation which cannot be terminated, or in substance an obligation in relation to the future which can be."
The Court of Appeal then concluded that because Willmott was subject to ongoing obligations to provide quiet enjoyment, that liability was sufficient to allow the Liquidators to disclaim the leases.
But Hodgson J was speaking of the consequences of disclaimer rather than the scope of its operation. To use the statement in s 568D(1) of the consequences of an effective disclaimer of a company's rights or property as controlling the availability of the power to disclaim conferred by s 568(1) is to obscure the point that the power conferred by s 568(1) acts primarily or directly upon the property (or rights) of Willmott and only consequentially upon its liabilities.
Policy considerations
In Re Middle Harbour Investments Ltd (In Liq) and the Companies Act Bowen CJ in Eq (as his Honour then was) traced the history of the liquidator's power of disclaimer from its origins in s 23 of the Bankruptcy Act 1869 (UK), and explained that the purpose of providing a liquidator with the power to disclaim is to enable the liquidator "to rid … the company … of burdensome financial obligations which might otherwise continue to the detriment of those interested in the administration; it is given to enable … the liquidator to advance the prompt, orderly and beneficial administration … of the winding up of its affairs". This understanding of the purpose of the disclaimer provisions applies in relation to the Act.
Three points may be made here. First, the policy of prompt realisation of the company's assets is consistent with the view that what may be disclaimed is property of the company, whether real or personal, the continued enjoyment of which depends on meeting ongoing obligations. Secondly, the policy which informs s 568(1), as explained above, is to expedite the realisation of the money value of the company's assets in the course of the efficient administration of the insolvent estate. It is distinctly not to expand the pool of assets available to creditors by clawing back property previously disposed of by the company. Since the introduction of the statutory power of disclaimer in 1869, neither judicial exegesis nor academic commentary has attributed to the power of disclaimer the potential to enhance the value of the estate of a company in liquidation, much less to alter the position of those who have dealt with the insolvent by divesting them of rights vested in them.
Thirdly, the policy which informs s 568 is not impeded by recognising that the power does not extend to the setting aside of a lease on the initiative of the liquidator of a lessor. The liquidator is at liberty to sell the reversion for whatever it may bring. That may not be much. The present is a case in point. The Growers have already paid the total rent payable by them for a term of 25 years; and the price obtainable for the reversion will reflect the circumstance that a leasehold interest of long duration has been created and no further rent can be expected for the balance of the term. To say that is simply to recognise that the Growers have paid Willmott for rights vested in them.
Recent legislative history
Section 568(1)(f) was introduced by the Corporate Law Reform Act 1992 (Cth). The Explanatory Memorandum to the Bill for that Act made reference to the Harmer Report on Insolvency. In the Harmer Report, the following was said in relation to the topic of "Disclaimer":
"The issues
Trustees in bankruptcy and liquidators have a power to disclaim property where the property is, at the very least, of no benefit to the insolvent estate. The power is not frequently used, but should nevertheless exist. It is desirable that the provisions for disclaimer in individual and corporate insolvency be the same where possible. The provisions are already largely similar, but there are three issues in relation to which a greater degree of uniformity could be achieved:
. property which may be disclaimed
. time limits for disclaiming property and
. the time from which a disclaimer operates.
Property which may be disclaimed
Differences between corporate and individual insolvency. There are two main differences between individual and corporate insolvency in this area:
. a trustee in bankruptcy can disclaim any contract (although the leave of the court must be obtained for disclaiming a contract other than an unprofitable contract), whereas a liquidator can only disclaim unprofitable contracts and
. a liquidator can disclaim shares in corporations whereas a trustee in bankruptcy cannot disclaim shares unless they constitute property that is unsaleable or not readily saleable.
Disclaimer of contracts. The power under the Bankruptcy Act to disclaim any contract was introduced in 1980. The explanatory memorandum to the amending Act stated that the new provisions would include contracts which were not actually unprofitable at the time of the disclaimer but the profitability of which may be in doubt because the property is unsaleable or not readily saleable. It also stated that the provisions would assist the trustee (subject to the control of the court whose leave would have to be sought to disclaim a contract other than an unprofitable contract) in dealing with contracts which involve difficulties and risks that would render their completion inadvisable. The Commission recommends that a similar expanded power of disclaimer should apply in the case of corporate insolvency."
Further, in relation to disclaimer of leases, the Harmer Report said:
"Existing law. Special provision is made in both individual and corporate insolvency for disclaimer of a lease. A trustee in bankruptcy or a liquidator is not entitled to disclaim a lease without the leave of the court unless 28 days' notice of the intention to disclaim has been given to the lessor and any sub‑lessee, and such person has not within that time required the trustee or the liquidator to apply for leave. It is difficult to discover why those affected by the disclaimer of a lease are placed in a more favourable position than others. Any person who suffers damage by reason of a disclaimer may have an admissible claim in the insolvency. Although it is essential that persons affected by the disclaimer of a lease, such as the lessor, a sub‑lessee or a mortgagee of a lease be entitled to notice that the lease is being disclaimed, it does not appear justifiable to permit such persons alone to be able to require the insolvency administrator to seek the leave of the court before disclaiming. The Insolvency Act 1967 (NZ) does not place leases in a special category.
Recommendation. The Commission recommends that no distinction should be drawn between the disclaimer of a lease and disclaimer of other onerous property. The Commission's recommendation for notice to be given to a person affected by a disclaimer should provide adequate protection to a person affected by the disclaimer of a lease. Such persons would still be able to protect their interests, but the trustee or liquidator would not be obliged to apply for leave as a matter of course." (footnotes omitted)
These aspects of the legislative history are of some significance in relation to both aspects of the question presented to the Court. In relation to the first issue in the appeal, the first paragraph of the last passage cited above tends to confirm that, as a matter of ordinary language, to speak of "disclaiming a lease" is to speak of disclaiming a contract which is the property of the lessee. Further, in the discussion in the Explanatory Memorandum and the Harmer Report there is no revision of the basic understanding of disclaimer as a renunciation by a trustee in bankruptcy or liquidator of property as an asset of the insolvent estate to be administered by the trustee or liquidator.
As to the second issue, the recent legislative history does not suggest dissent from, or dissatisfaction with, the settled understanding that the disclaimer provisions terminate executory obligations as distinct from discharging vested rights. Neither do the Explanatory Memorandum or the Harmer Report identify any mischief which would warrant an expansion of the effect of an exercise of a disclaimer to extinguish accrued rights. Nor do they recommend the adoption of any measure which would have the effect of exposing parties who have accrued rights against a company to the loss of those rights by the exercise of the power to disclaim the property of the company.
The authorities
In no case has it been decided that s 568(1), or any of its earlier analogues, authorises the disclaimer of a lease by the liquidator of the lessor. In a small number of cases it has been said to be arguable that a liquidator of an insolvent landlord may disclaim the lease; but in those cases the point was not argued or decided. Thus, in Re Real Investments Pty Ltd Chesterman J said:
"The parties are united in arguing that what is involved is whether the agreement is an unprofitable contract. Neither contends it is a lease. It may have been possible to regard the agreement as equivalent to a lease ... See the discussion of In Re Maughan; Ex parte Monkhouse (1885) 14 QBD 956 found in Disclaimer of Contracts in Bankruptcy by Melville, (1952) 15 MLR 28 at 29. Support for this view might be found in the terms of s 568(1A) which allows a liquidator to disclaim two types of contracts without the leave of the court - unprofitable contracts and leases of land. Ordinarily one might think that a 'lease of land' would constitute land which can only be disclaimed if burdened with onerous covenants (see s 568(1)(a)) but the draftsman seems to have regarded leases as a species of contract, not an interest in land, and permitted that species and one other to be disclaimed without leave. This curiosity need not detain me for the parties are content to limit their arguments to the question whether the agreement is an unprofitable contract."
It is apparent that Chesterman J had s 568(1A) in mind when he spoke of a lease as one of the two species of contract that may be disclaimed without leave. It is also evident that, absent s 568(1A), his Honour would not have taken such an expansive view of the scope of s 568(1)(f) of the Act. Finally, it is also evident that his Honour did not stay to consider the operation of s 568(1A).
It may well be that the absence of any judicial decision to the broad effect for which the first to third respondents contended is a reflection of the circumstance that a lease will normally be beneficial to the lessor by reason of the rent which it generates. That may be so, but that might also explain the legislature's choice in s 568(1A) to treat "an unprofitable contract or a lease of land" as the specific exceptions to the rule that a contract may be disclaimed under s 568(1)(f) only with the leave of the court. It might suggest that the legislature has been content to proceed on the practical assumption that a lessor's contract to lease is beneficial to the lessor company so that leave should be required to enable leases to be disclaimed.
The effect of disclaimer
If the Liquidators applied to the court under s 568(1A) for leave to disclaim the contracts to lease and leave were granted, that would mean that Willmott's ongoing obligations to the Growers would be terminated; it would not mean that the Liquidators could seize possession of the leased land contrary to the rights which have accrued to each of the Growers.
Termination not extinguishment
Section 568D(1) speaks of the "termination" of rights and liabilities, that is to say, the bringing to an end of rights and liabilities for the future. Section 568D(1) provides that disclaimer effects a "termination", rather than an extinguishment, of rights and liabilities. It may also be noted that pars (a) and (b) of s 568(9) refer respectively to "discharging" and "rescinding", presumably to differentiate their operation from that of s 568D(1) by allowing a wider remedial discretion to the court.
The authorities have consistently held that the exercise of the power to disclaim does not undo a completed transaction or divest rights which have accrued. Thus in Hindcastle it was expressly acknowledged that the effect of a disclaimer is to release both parties from executory obligations, but not to undo accrued rights.
The view that accrued rights are not affected by the exercise of the power to disclaim is consistent with the historical function of disclaimer in English insolvency law, which was to free the insolvent individual or company from the performance of ongoing obligations in relation to an item of property where the ongoing enjoyment of the rights attaching to that item of property required that performance. The statutory regime relating to winding up in Pt 5.6 of the Act, within which s 568 appears, is concerned with the getting in of the assets of a company with a view to the payment of its debts. Section 568 provides a means to that end. In this context, s 568 does not contemplate that debts owed to creditors of the company might be extinguished, or that other completed transactions between the company and other persons might be reopened, by the exercise of the power of disclaimer.
It has never been suggested that the power to disclaim authorises the annihilation by a mortgagor of the charge given in favour of the mortgagee to leave the mortgagee an unsecured creditor in the winding up. On the other hand, it has been held that it does not authorise the setting aside of an equitable interest in land.
In re Bastable; Ex parte The Trustee is a case in point. Bastable, prior to his bankruptcy, was the lessee of a house for a term of 99 years. He executed a mortgage of the house and later agreed to sell the equity of redemption subject to the mortgage. The purchaser paid a deposit, but Bastable became bankrupt before the balance of the purchase price had been paid. Pursuant to the Bankruptcy Act 1883 (UK) ("the Bankruptcy Act"), the trustee in bankruptcy purported to disclaim the sale contract.
The Court of Appeal held that the contract of sale was not an "unprofitable contract" and therefore was not disclaimable property. Importantly for present purposes, the Court of Appeal also held that the purchaser had an equitable interest in the land as purchaser which would remain intact notwithstanding the disclaimer. Collins LJ said that s 55 of the Bankruptcy Act operated within the established principle that "the trustee in bankruptcy is bound by all the equities which affect a bankrupt or a liquidating debtor" and that there is nothing in the terms of the statute whereby "the effect of a disclaimer of the contract now would be not to relieve the trustee from a burden, but to divest and take out of the purchaser the property which is already vested in him."
Similarly, Romer LJ said:
"A disclaimer of a contract … cannot operate to destroy a third person's interest in property which existed before the disclaimer. No disclaimer … could … take away the equitable interest in the land which the purchaser had acquired under his contract."
The first to third respondents submitted that this part of the Court of Appeal's reasoning was not necessary for its decision and that Bastable is distinguishable on the basis that it concerned a contract for the sale of land and not a lease. Finally, it was argued that the Bankruptcy Act only allowed for disclaimer of "unprofitable contracts".
None of these considerations lessens the force of the point made by the Court of Appeal in Bastable that the materially indistinguishable terms of the predecessor of s 568(1) could not be invoked to take away from a purchaser of land the interest which a court of equity was prepared to protect.
That the power to disclaim a contract (without leave of the court) is confined to "unprofitable contract[s] or a lease of land" has a bearing on the scope of the power to disclaim, but does not elucidate the effect of the disclaimer permitted by s 568(1) of the Act.
The first to third respondents also referred to sub‑ss (8) and (9) of s 568 of the Act. These sub‑sections are not apt to have altered the position established by Bastable: the precursors of these provisions were sub‑ss (4) and (5) of s 55 of the Bankruptcy Act considered in Bastable.
In none of the extrinsic materials to which reference was made above has there been an expression of dissatisfaction with the view in Bastable that a party to a contract who has an entitlement in respect of property under the contract which is enforceable in equity is not vulnerable to the loss of that entitlement by reason of a disclaimer. Nor did the extrinsic materials suggest dissatisfaction with the view that the exercise of the power to disclaim a transaction has been understood to release, for the future, the bundle of rights and correlative obligations associated with an uncompleted transaction. In this way it facilitates the expeditious realisation of the company's assets and payment of its debts by freeing the company in liquidation from executory obligations to be performed by it over time while converting the correlative rights of the counterparty to a debt provable in the company's liquidation.
Even more strongly does that conclusion flow where, as here, the obligations of the lessee as to the payment of rent have been performed and the only ongoing obligation upon the company is the observance of the covenant for quiet enjoyment when realising the money value of the reversion.
Something was made in argument of the inconvenience of the present situation for the winding up. And to the suggestion that the Liquidators might solve that problem by disclaiming the reversion pursuant to s 568(1)(a), it was said that an escheat of the freehold to the Crown would be likely to be inconvenient. But that sort of inconvenience is inherent in the disclaimer of any interest in land pursuant to s 568(1)(a) of the Act.
Tabali
Tabali does not support a contrary view of the effect of a disclaimer. That case established that the principles relating to the termination of a contract by acceptance by one party of the other party's repudiation extend to leases. Tabali was followed in this regard by this Court in Chan v Cresdon Pty Ltd and Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd.
All these decisions support the view that, where a lessee repudiates its executory obligations under a lease, and that repudiation is accepted by the lessor, the contractual underpinning of the lease is brought to an end and that is sufficient to terminate the lease for the future.
In Tabali, however, Mason J, with whom Wilson and Dawson JJ agreed, expressly recognised the continuing relevance of considerations which may be peculiar to a lease:
"Repudiation or fundamental breach of a lease involves considerations which are not present in the case of an ordinary contract. First, the lease vests an estate or interest in land in the lessee and a complex relationship between the parties centres upon that interest in property. Secondly, this relationship has been shaped historically in very large measure by the law of property, though in recent times the relationship has been refined and developed by means of contractual arrangements. Thus, traditionally at common law a breach of a covenant by a lessee, even breach of the covenant to pay rent, conferred no right on the lessor to re-enter unless the lease reserved a right of re-entry: Lane v Dixon; Doe d Dixon v Roe. And in equity the proviso for re-entry was treated as a security for the payment of the rent (Howard v Fanshawe; Ezekiel v Orakpo), so that on payment of the rent equity would relieve against the forfeiture: Dendy v Evans. The object and effect of s 129 of the Conveyancing Act [1919 (NSW)] was to give further protection to the lessee and to preclude forfeiture of his interest in property within the sphere of the section's operation, except in accordance with its terms.
These incidents of the law of landlord and tenant indicate that mere breaches of covenant on the part of the lessee do not amount to a repudiation or fundamental breach. Indeed, it is of some significance that the instances in which courts have held that a lessee has repudiated his lease are cases in which the lessee has abandoned possession of the leased property. But too much should not be made of this as very few cases of repudiation by lessees have come before the courts. I would therefore specifically reject the appellant's submission that abandonment of possession is necessary to constitute a case of repudiation by a lessee. On the other hand, it should be acknowledged that it would be rare indeed that facts which fell short of abandonment would properly be seen as constituting repudiation by the lessee in the case of a long lease at a rental which was either nominal or but a fraction of the amount which could be obtained in the market place." (emphasis added)
The observations of Mason J apply a fortiori to the case where no future rent is payable by the lessee because the whole rent has been paid "up front".
In Tabali, Deane J also recognised that the ordinary contractual principles concerning termination for breach or repudiation operate only "in future" and may be subject to limitations in the case of leases. His Honour said:
"The actual application to leasehold interests of the common law doctrines of frustration and termination for fundamental breach involves some unresolved questions which are best left to be considered on a case by case basis whereby adequate attention can be focused on particular problems which might be overlooked in any effort at judicial codification. One cannot however ignore the fact that the clear trend of common law authority is to deny any general immunity of contractual leases from the operation of those doctrines of contract law … At first impression, that trend may appear to represent a step back towards the medieval days when the lessee's interest under a term of years was seen as a mere right in personam to sue the lessor for breach of covenant. Upon analysis however, it involves no more than recognition of the fact that the analogy between a leasehold and a freehold estate is an imperfect one and of the related fact that, except perhaps in the quite exceptional case of a completely unconditional demise for a long term with no rent reserved (cf Knight's Case), the leasehold estate cannot be divorced from its origins and basis in the law of contract (cf per Atkin LJ, Matthey v Curling): the lease should be seen as 'resting on covenant' (or contractual promise) and it is 'the contract ... and not the estate ... which is the determining factor': see per Isaacs J, Firth v Halloran quoting from Hallen v Spaeth. That trend should be followed in this Court and it should be accepted that, as a general matter and subject to one qualification, the ordinary principles of contract law are applicable to contractual leases. The qualification is that the further one moves away from the case where the rights of the parties are, as a matter of substance, essentially defined by executory covenant or contractual promise to the case where the tenant's rights are, as a matter of substance, more properly to be viewed by reference to their character as an estate (albeit a chattel one) in land with a root of title in the executed demise, the more difficult it will be to establish that the lease has been avoided or terminated pursuant to the operation of the ordinary principles of frustration or fundamental breach. Indeed, one may reach the case where it would be quite artificial to regard the tenant's rights as anything other than an estate or interest in land (eg, a ninety-nine year lease of unimproved land on payment of a premium and with no rent, or only a nominal rent, reserved). In such a case, it may be difficult to envisage circumstances in which conduct of the tenant short of actual abandonment would properly be held to constitute repudiation or fundamental breach or in which anything less than a cataclysmic event such as the 'vast convulsion' referred to by Viscount Simon LC in Cricklewood Property and Investment Trust Ltd v Leighton's Investment Trust Ltd would warrant a finding of frustration." (emphasis added)
Consistently with that view, Ormiston JA, in Apriaden Pty Ltd v Seacrest Pty Ltd, identified, as an exception to the general rule that the principles of contract law relating to termination for repudiation or fundamental breach apply to leases, those:
"cases where the lease by its very terms can be taken to have excluded conventional contractual remedies and leases of the kind where ordinary contractual remedies are effectively impossible to apply, for example, because the only consideration has been a premium and a nominal rent."
The observations of Mason and Deane JJ in Tabali and those of Ormiston JA are all in accord with the fundamental principle stated by Dixon J in McDonald v Dennys Lascelles Ltd:
"When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected. When a contract is rescinded because of matters which affect its formation, as in the case of fraud, the parties are to be rehabilitated and restored, so far as may be, to the position they occupied before the contract was made. But when a contract, which is not void or voidable at law, or liable to be set aside in equity, is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only and the party in default is liable for damages for its breach."
Two points may be made here. First, the principles relating to termination of contract discussed in Tabali operate to release each party from the performance of its obligations for the future, rather than to rescind the contract from the beginning so as to restore each party to its pre‑contractual position. Secondly, the release of both parties arises in consequence of the election by the innocent party to accept the breach or repudiation by the other party as bringing the contract to an end: termination is not an outcome which can be forced on the innocent party. An effective exercise of the power to disclaim obviates any occasion for the counterparty to elect to accept the liquidator's statutorily authorised repudiation as bringing the disclaimed contract to an end. But the analogy with termination for breach does not afford any reason to treat a disclaimer as having an effect beyond releasing the parties from the future performance of obligations which remain executory.
Accordingly, while a disclaimer authorised by s 568(1)(f) of the Act would be effective to relieve the liquidator from ongoing obligations under the contract disclaimed, it would not divest rights already accrued to the counterparty. The Growers' right to their interest had been unconditionally acquired by them before the purported disclaimer. A termination of the contract in such a case could not have the consequence of expropriating from the Growers the accrued rights for which they had paid, at least to the extent that a court of equity would protect by injunction the vested property rights of the Growers who have paid in full for their interest in the leases for a term of 25 years.
In this regard, in National Trustees, Executors and Agency Co of Australasia Ltd v Boyd this Court held that a lease for a term of seven years, which was not registered as required by s 61 of the Transfer of Land Act 1915 (Vic), was effective to give the lessee an equitable lease for seven years, which was sufficient to defeat a claim by the successors in title of the lessor to recover possession of the premises. Knox CJ, Gavan Duffy and Rich JJ, rejecting the contention that the lease, for want of registration, could operate only as a contract and not as a lease binding the reversion, said that the lease "operates, not merely to create contractual rights and duties, but to create an equitable term of years". That proposition was expressly approved by Mason J in Tabali and by Mason CJ, Brennan, Deane and McHugh JJ in Chan.
In Chan their Honours reviewed the authorities and said:
"Although it has been stated sometimes that the equitable interest is commensurate with what a court of equity would decree to enforce the contract, whether by way of specific performance ..., the references in the earlier cases to specific performance should be understood in the sense of Sir Frederick Jordan's explanation adopted by Deane and Dawson JJ in Stern v McArthur:
'Specific performance in this sense means not merely specific performance in the primary sense of the enforcing of an executory contract by compelling the execution of an assurance to complete it, but also the protection by injunction or otherwise of rights acquired under a contract which defines the rights of the parties'".
In this case, no argument was directed to whether a court of equity might for some reason refuse to grant an injunction to protect the interests of the Growers. It is sufficient for present purposes to say that, prima facie, the Growers' interests under their leases are sufficient to support the grant of an injunction to prevent the Liquidators taking possession of the land leased to them.
Conclusion and orders
The two issues posed for determination should be answered as follows:
(a) without the leave of the court pursuant to s 568(1A), the Liquidators' disclaimers are not effective at all; and
(b) if the Liquidators were to disclaim Willmott's contracts to lease the parcels of land in question with the leave of the court, that disclaimer would free Willmott from further observance of its obligations under the leases, but it would not be effective to deprive the Growers of their right to possession for the balance of the term, to the extent that a court of equity would restrain an attempt to deprive the Growers of their right to possession.
The appeal must be allowed.
The orders of the Court of Appeal should be set aside and the orders of the primary judge restored.
The first to third respondents must pay the appellant's costs in the Court of Appeal and in this Court.