Disclaimer of Onerous Property Flashcards
Insolvency Act 1986, ss. 315(1)(5) and 178(2)(6)
What is disclaimer?
“Subject as follows, the liquidator may, by the giving of the prescribed notice, disclaim any onerous property and may do so notwithstanding that he has taken possession of it, endeavoured to sell it, or otherwise exercised rights of ownership in relation to it.
…
Any person sustaining loss or damage in consequence of the operation of a disclaimer under this section is deemed to be a creditor of the bankrupt to the extent of the loss or damage and accordingly may prove for the loss or damage as a bankruptcy debt.”
Effect: Unilaterally terminates contracts so that liabilities do no accrue; this prevents the other party from rejecting repudiation and the breach becomes a provable claim.
Insolvency Act 1986, ss. 315(2)and 178(3)
What property may be disclaimed?
“The following is onerous property for the purposes of this section, that is to say—
(a) any unprofitable contract, and
(b) any other property comprised in the bankrupt’s estate 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.”
Re Bastable [1901] 2 KB 518 (CA)
Case: Debtor exchanged contracts to sell lease of house but went bankrupt before completion; trustee sought to disclaim contract of sale but purchaser sought specific performance.
Decision: Beneficial interest for land passes on contract so the purchaser won.
Rule: A property interest cannot be destroyed with disclaimer.
Willmott Growers Group Inc v Willmott Forests Ltd [2014] BPIR 785 (High Court of Australia)
Case: No purchaser would buy land from WF on liquidation due to management obligations over trees planted by lessees.
Decision: The liquidator could disclaim the leases despite being a proprietary interest.
Rule: No precedent as Australian case.
[See notes for further comment]
Re Nottingham General Cemetery Co [1955] 1 Ch 683
Case: A company incorporated by Act of Parliament in 1836 to establish and maintain a cemetery and act prohibited sale or disposal; company insolvent and wound up in 1953 and liquidator wished to disclaim cemetery and the implied contracts of grave holders and for the upkeep of graves.
Decision: The freehold could be disclaimed as the liquidator would only be able to keep up the estate with 2 years using the money that he had.
Rule: Onerous freeholds pass to the crown. Where a company ceases to exist they pass bona vicantia.
Scmlla Properties Ltd v Gesso Properties (BVI) Ltd [1995] BCC 793
Case: Company owned freehold land which it let to tenants and charged to bank as security; company wound up and liquidator disclaimed freehold.
Decision: The disclaimed of freeholds passing to the crown had no effect on the leases and they continued to bind.
Rule: Disclaiming freehold does not effect leases or charges over land.
Re Potters Oils Ltd [1985] BCLC
Pre-1986 Act
Case: Oil on company’s land was valueless and would cost £14,500 to remove.
Decision: Under CA 1948 s. 323 (liquidator can disclaim “property that is unsaleable, or not readily saleable, by reason of its binding the possessor thereof to the performance of any onerous act or to the payment of any sum of money”) the liquidator could not disclaim the oil as there was no ‘obligation’ to dispose of it
Rule: Under old law the liquidator could not disclaim of chemicals to avoid environmental liabilities
Tubbs v Futurity Investments Ltd [1998] 1 NZLR 471
Decision: In NZ, the liquidator has to pay to dispose of toxic chemicals, even though it is onerous property
Rule: Not precedent as NZ
Re Celtic Extraction Ltd [2001] Ch 475 (CA)
Case: Company in liquidation operated a landfill site which had the benefit of a Waste Management Licence; under Environmental Protection Act 1990 s.35(11) only the Environment Agency can terminate a WML; otherwise it is to “continue in force” per s.35(17); WMLs are transferable under s.40 but no one wished to acquire it; liquidator therefore sought to disclaim WML
Decision: The WML was property and it could be disclaimed (Neuberger dissenting) as CA believes it is sensible to prefer tax payer to clean up mess rather than creditors.
Rule: Property with onerous environmental liabilities can be disclaimed
Insolvency Act 1986, s. 315(4)
“A notice of disclaimer shall not be given under this section in respect of any property that has been claimed for the estate under section 307 (after-acquired property) or 308 (personal property of bankrupt exceeding reasonable replacement value) [F1or 308A], except with the leave of the court.”
Insolvency Act 1986, ss. 315(3)(a)(b) and 178(4)(a)
“A disclaimer under this section—
(a)operates so as to determine, as from the date of the disclaimer, the rights, interests and liabilities of the bankrupt and his estate in or in respect of the property disclaimed, and
[(b)discharges the trustee from all personal liability in respect of that property as from the commencement of his trusteeship,]
but does not, except so far as is necessary for the purpose of releasing the bankrupt, the bankrupt’s estate and the trustee from any liability, affect the rights or liabilities of any other person.”
Effect: Termination from the moment property is disclaimed and discharges trustee from vesting of lease. Furthermore, third parties such as guarantors will still be liable.
Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70
Rule: Confirms that a guarantor is still liable, even where tenant’s liability ceases to exist, overruling wrong decision in Stacey v Hill
Quote: (Concerning sub-tenant) “In order to free the tenant from liability, it is necessary to extinguish the landlord’s rights against the tenant and also the sub-tenant’s rights against the tenant. The tenant’s interest in the property is determined, but not so as to affect the interest of the sub-tenant. Determination of the sub-tenant’s interest in the property is not necessary to free the tenant from liability. Hence the sub-tenant’s interest continues… unaffected by the determination of the tenant’s interest. Accordingly the subtenant holds his estate on the same terms, and subject to the same rights and obligations, as would be applicable if the tenant’s interest had continued. If he pays the rent and performs the covenants in the descaled lease, the landlord cannot eject him. If he does not, the landlord can distrain upon his goods for the rent reserved by the disclaimed lease or bring forfeiture proceedings. In practice, matters are likely to be brought to a head by one of the parties making an application for a vesting order.” per Lord Nicholls
N.B. Commercial Rent Arrears Recovery - ST should pay rent under head lease or landlord can go onto property and take whatever to pay. See Park Air Services for how damages are calculated.
Shaw v Dolman [2009] 2 BCLC 123 (CA)
Case: Assignment creates a privity of estate between assignor/landlord, and since Landlord (Covenants) Act 1995 has also create privity of contract. The Landlord can require the tenant to guarantee (AGA) for the period of the assignment.
Rule: When the assignee goes bankrupt, the tenant is not release under AGA - s.315(3).
Schroder Exempt Property Unit Trust v Birmingham City Council [2014] BCC 690
Rule: If property is left vacant following disclaimer the landlord will be liable for rates under the Local Government Finance Act 1988 as “owner” (s. 45) defined as “person entitled to possession” (s. 65(1))
RVB Investments Ltd v Bibby [2013] EWHC 65
Decision: Landlord granted specific performance of promise by guarantor under AGA to take new lease, notwithstanding guarantor insolvent and term of disclaimed lease had expired by date of hearing.
Rule: Solution to LFFA 1988 is for landlord to require guarantor under AGA to take new lease for unexpired residue of the disclaimed lease.
