Not everything a failed company owns is worth having. Section 319 of the Companies Act 1997 lets a liquidator walk away from what is a liability rather than an asset.
Section 319(1) — the power
Subject to section 320, a liquidator may disclaim onerous property even though the liquidator has taken possession of it, tried to sell it, or otherwise exercised rights of ownership in relation to it.
The closing words matter. A liquidator who has been running a leased site while trying to sell the business does not lose the right to disclaim the lease by having done so.
Section 319(2) — what “onerous property” means
(a) an unprofitable contract; or
(b) property of the company which is unsaleable, or not readily saleable, or which may give rise to a liability to pay money or perform an onerous act; or
(c) a litigation right that, in the opinion of the liquidator, has no reasonable prospect of success or cannot reasonably be funded from the assets of the company.
| Paragraph | Typical examples |
|---|---|
| (a) unprofitable contract | A long-term supply agreement at below cost; an onerous distribution or licence agreement; a contract requiring continued performance the company cannot fund |
| (b) unsaleable property or property carrying liability | A lease with continuing rent and repairing covenants; contaminated land carrying obligations under the Environment Act 2000; a mining or exploration tenement with rehabilitation obligations; shares in a company with unpaid calls |
| (c) a litigation right | A claim with no reasonable prospect of success, or a good claim the estate cannot afford to run |
A claim that cannot reasonably be funded from the assets may be disclaimed — but before doing so a liquidator should consider section 310A, which allows a right to sue conferred by the Act to be assigned with the Court’s prior approval. Selling the claim turns a worthless asset into a realisation; disclaiming it produces nothing.
Section 319(3) — the effect of a disclaimer
A disclaimer brings to an end, on and from the date of the disclaimer, the rights, interests, and liabilities of the company in relation to the property disclaimed, but does not, except so far as necessary to release the company from a liability, affect the rights or liabilities of any other person.
This is the crucial limit. Disclaiming a lease releases the company — it does not release a guarantor of the lease, or a surety, or a co-obligor. Those people remain liable to the landlord, and their claim for what they pay lies against the company as a creditor.
Nor does a disclaimer defeat a charge over the disclaimed property, or a third party’s proprietary interest in it. Section 319 disposes of the company’s position only.
Sections 319(4) to (6) — notice, claims, and vesting
(4) A liquidator who disclaims shall, within one month, give written notice of the disclaimer to every person whose rights are, to the knowledge of the liquidator, affected by it.
(5) A person suffering loss or damage as a result of a disclaimer may —
(a) claim as a creditor of the company for the amount of the loss or damage, taking account of the effect of any order under paragraph (b); or
(b) apply to the Court for an order that the disclaimed property be given to or vested in that person.
(6) The Court may make a vesting order where satisfied that it is just that the property should be vested in the applicant.
A landlord whose lease is disclaimed can prove for the loss — the value of the unexpired term, less what can be recovered by reletting — or ask for the lease to be vested in them so they can deal with the premises directly. A sub-tenant or a mortgagee of the lease may seek a vesting order to preserve their own position.
The words “taking account of the effect of an order made by the Court under paragraph (b)” prevent double recovery: a person who obtains the property cannot also claim the full loss as if they had not.
A claim under paragraph (a) is an ordinary unsecured claim, ranking after the Schedule 9 preferential claims.
Section 320 — forcing the liquidator to decide
Where a person whose rights would be affected by a disclaimer gives the liquidator written notice requiring the liquidator to elect, before the close of a date stated in the notice — not being a date less than one month after the notice is received — whether to disclaim, the liquidator is not entitled to disclaim unless he does so before the close of that date.
Without section 320 a counterparty could be left indefinitely uncertain whether a contract or lease survives. The notice must give the liquidator at least one month; a shorter deadline does not comply, and the liquidator’s power is not cut down.
The consequence of a valid notice is decisive: if the liquidator does not disclaim by the stated date, the power is gone and the company’s position in the property or contract continues. A landlord, a franchisor or a counterparty to a long-term contract should serve one early rather than wait.
Practical points
- Identify onerous items early. Rent accrues, and property that “may give rise to a liability” is exactly the kind that grows worse with time.
- Check for guarantees before disclaiming. A disclaimer that releases the company but leaves a director personally liable under a guarantee is not neutral for that director.
- Consider assignment instead for litigation rights — section 310A, with Court approval.
- Give the section 319(4) notices within the month, to every person known to be affected, not only the immediate counterparty.
- If you are affected, serve a section 320 notice with a date at least one month out, and be ready to seek a vesting order under section 319(5)(b).
- Remember statutory obligations attached to property — environmental and tenement obligations are owed under their own legislation, and disclaimer of the company’s interest does not answer regulatory duties owed by others.
Sources
- Companies Act 1997 — ss 310A, 319, 320, 351–361; Schedule 9
- Environment Act 2000
- Mining Act 1992
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.