What to do about onerous property

It is perhaps easy to overlook the fact that just because a company is in liquidation it does not mean that its legal or contractual obligations are automatically extinguished. See for example Article 1 of this series in relation to employment contracts. The only thing that has changed is the company’s ability to perform its obligations (and in fact the reality is that the company may have been struggling to do so for some time prior to a formal winding up order).

Disclaimer

Disclaimer offers one route by which a company may relieve itself of property which is onerous and the duty to perform its obligations and thus protect the interests of its unsecured creditors.

s. 252(1) of Companies Act 1931 (act of Tynwald) provides:

“Where any part of the property of a company which is being wound up consists of land of any tenure burdened with onerous covenants, of shares or stock in companies, of unprofitable contracts, or of any other 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 of the company, notwithstanding that he has endeavoured to sell or has taken possession of the property, or exercised any act of ownership in relation thereto, may, with the leave of the court and subject to the provisions of this section, by writing signed by him, at any time within twelve months after the commencement of the winding up or such extended period as may be allowed by the court, disclaim the property.”.

Property which can be disclaimed is therefore fairly widely defined and includes money, land, shares and contracts. There must be some benefit to holding the property for it to be capable of being disclaimed however (see for example Re SSSL Realisations Ltd [2006] EWCA Civ 7) but the property does not have to be subject to onerous conditions; it can be disclaimed on the basis that it is not easily saleable.

The Manx statutory provision cited above differs from the English provision in the Insolvency Act 1986 (s.178) which does NOT require leave to disclaim. The current Manx legislation is therefore similar to the position in England per the Companies Act 1948 which was repealed in 1986. This is a reminder that the Manx insolvency system is substantially different from that of England and is much maligned by legal practitioners and the Judiciary alike.

Disclaimer in this jurisdiction is to be made in writing and signed by the liquidator. It should be made within 12 months of the commencement of the winding up. Making an application for leave to disclaim would not, on the face of it stop that clock, however there is nothing to prevent an application to extend time, and for leave, being made after the 12-month period has ended. It may also be possible to disclaim and to seek leave to disclaim retrospectively.

In considering an application for leave to disclaim when not made promptly then the Court is likely to regard any delay by Liquidators in bringing an application before it subjectively. It may take into account therefore the actions of third parties (for example in negotiations or dealings in relation to the “asset” to be disclaimed). It will also take into account any prejudice caused to a third party by any delay.

Rescission/voidance of contract

Another option, in relation to onerous contracts at least, is to look at whether rescission or voidance is possible. Broadly (and non-exhaustively) speaking contracts may be rescinded/avoided where:

1. Neither party has performed the whole of the obligations required and there is a mutual agreement to rescind; or
2. There has been a breach of contract by one party; or
3. There has been misrepresentation by one party.

The effect of rescission is that “the contract is treated in law as never having come into existence” (Snell's Equity 34th Ed. 15-019). This does not necessarily mean that everything done during the lifetime of the contract prior to rescission is also treated as never having existed however. For instance, a party in receipt of assets under an agreement which is later rescinded can transfer good title until the agreement is rescinded. Similarly therefore, if a party obtains shares under a voidable contract and is registered as a member of a company then they hold the rights granted by the shares and can exercise them until the agreement is rescinded at which time the shares must be transferred.

The rescission of a share transfer is only one element of expunging membership status, the other limb is rectification of the register of members. The effective date of rectification will be determined by the court (Palmer’s at 7.127). In these circumstances the member was validly registered under a valid contract and did agree to take shares, subject to the ability to revoke that agreement on the basis of a relevant vitiating factor.

Liquidators should think carefully about how to treat onerous property and what the effects of trying to disclaim/rescind might be and in particular, local advice taken in respect of Isle of Man insolvency issues.

Damian Molyneux is a director of M&P Legal specialising in, amongst other things, liquidations. He can be contacted on dpm@mplegal.im This article does not constitute legal advice, specific advice should be sought for individual circumstances.

Damian acknowledges (with thanks) the assistance of James Saunders of New Square Chambers.

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