Exploring a Liquidator's Power to Disclaim Arbitration Agreements

Abstract

Commencement of winding-up proceedings does not automatically terminate the affected company’s pre-insolvency contracts save in some exceptional cases. Some pre-insolvency contracts may be useful for the beneficial winding-up of the company. For instance, contracts for the supply of utilities and other basic services may be essential for an advantageous winding-up. It may also be cost-effective or time-saving for a liquidator to maintain existing contractual relationships rather than engage in new transactions. Not all pre-insolvency contracts may be beneficial to the company. Some transactions may be laced with burdensome obligations without appreciable or commensurate benefits. In other cases, a liquidator may realise that there are far cheaper alternatives with comparably less onerous obligations. In these instances, performing obligations under those contracts may injudiciously dissipate the company’s limited resources. Section 499(1) of the Companies and Allied Matters Act, 1990 (“CAMA”) empowers a liquidator to decline performing pre-insolvency contractual obligations which the liquidator views as being onerous. Under this provision, a liquidator may, subject to leave of court, disclaim property of the company consisting of (i) land of any tenure burdened with onerous covenants, (ii) shares or stock in companies, (iii) unprofitable contracts and (iv) any other property that is unsaleable or not readily saleable by reason of its binding the company to perform an onerous act or to the payment of any sum of money. The liquidator’s power to disclaim is one of the mechanisms with which corporate insolvency law furthers its assets-preservation objective for the benefit of the general body of creditors. Liabilities which arise from onerous or unprofitable contracts after the commencement of the winding-up proceedings will rank as expenses of the liquidation: Re Nottingham General Cemetery [1995] Ch 683. A disclaimer obviates the need to fritter the debtor’s assets in performing obligations under such unbeneficial contracts: In re Park Air Services Plc. [2000] 2 AC 172 at 184. In addition, the company is relieved of burdensome contractual obligations that may have contributed to its insolvency – albeit belatedly: Chattanooga Memorial Park v Still, 574 F.2d 349 at 350–351 (6th Cir.1978).