Key points

In the course of selling a NSW mine, liquidators applied to the Supreme Court of New South Wales seeking to disclaim a royalty deed that reduced its saleable value.

The Court refused the application, ruling that:

• the deed was not an ‘unprofitable contract’ within the meaning of section 568 of the Corporations Act
• leave to disclaim should not be granted.

The decision highlights that the disclaimer provisions are directed at facilitating the expediency of a liquidation and not merely improving creditor returns by unwinding commercial bargains struck prior to insolvency.

Background

The mine was originally purchased from a Glencore Group-related vendor by Tahmoor Coal Pty Ltd (Tahmoor) and Bargo Collieries Pty Ltd (Bargo) under a transaction structure involving a discounted upfront purchase price in return for Glencore Coal Pty Ltd (Glencore) receiving an ongoing royalty linked to future coal production from the mine (Royalty Obligation).

To give effect to that arrangement, Tahmoor, Bargo and Glencore entered into a royalty deed in April 2018 (Royalty Deed) which formed part of the overall commercial consideration for the purchase.

The arrangement included a consent requirement preventing the transfer of the mine and associated tenements unless an incoming purchaser agreed to assume and perform the obligations under the Royalty Deed (Consent Requirement).

Liquidators were appointed to Tahmoor and Bargo in March and April 2026, respectively, and commenced a sale process for the mine, whose operations had been suspended and on a ‘care and maintenance’ basis since May 2025. In arguing that the Royalty Deed was an ‘unprofitable contract’ justifying disclaimer under section 568(1A) of the Corporations Act, the liquidators contended that the Royalty Deed (in particular, the Consent Requirement) was an onerous fetter on an urgent sale process and substantially diminished the value of the mine.

The decision

Black J accepted that the Royalty Deed reduced the sale price achievable for the mine and therefore reduced the likely return to creditors. However, his Honour held that this consequence did not make the Royalty Deed an ‘unprofitable contract’.

The Court emphasised that a contract is not ‘unprofitable’ merely because it is financially disadvantageous or because creditors would receive a greater return if the contract ceased to exist. His Honour stated that “it is also necessary that the contract is incompatible with the proper and expedient conduct of the liquidation”.

Although the Court accepted that the Consent Requirement’s express terms would have constrained the sale process to such an extent as to render the Royalty Deed unprofitable, Glencore had materially reduced that burden during the liquidation by providing pre-emptive consent to any purchaser selected by the liquidators, provided that the purchaser agreed to assume the obligations under the Royalty Deed. Given Glencore’s pragmatic accommodations, any reduction in the achievable sale price caused by the Royalty Deed was insufficient to render it an ‘unprofitable contract’ under section 568(1A) of the Corporations Act.

Relevantly, the Court rejected the liquidators’ argument that Glencore could not transform an otherwise unprofitable contract via selective abandonment of some of its rights under the Royalty Deed. In making this finding, the Court observed that:

• the unprofitability of a contract is determined by its actual operation in the relevant commercial circumstances, including the counterparty’s narrowing of the contract’s obligations
• the statutory purpose of section 568 was promoted by permitting a counterparty to mitigate a contract’s onerous effects to avoid the need for disclaimer.

Leave to disclaim refused

The Court also declined to grant leave to disclaim the Royalty Deed.

Black J recognised that the Royalty Deed formed part of the arrangements by which Tahmoor and Bargo acquired the right to operate the mine. The continuing rights held by Glencore were not an incidental burden imposed after the transaction, as they were part of the consideration for the reduced purchase price paid when the mine was acquired.

His Honour held that permitting disclaimer would effectively strip Glencore of the benefit of that arm’s length commercial bargain and siphon wealth from Glencore to Bargo and Tahmoor’s unsecured creditors. The Court observed that this outcome was inconsistent with the purpose of section 568 and potentially prejudicial to commercial certainty in royalty arrangements generally.

In addition, as part of a related consideration of Glencore’s application for an injunction restraining the liquidators from proceeding with any sale unless the purchaser assumed the Royalty Deed’s obligations, the Court further observed:

• even if Glencore’s rights under the Royalty Deed were merely unsecured claims, this was not a bar to injunctive relief, as the obligations assumed by Glencore under the Royalty Deed in respect of the Consent Requirement, confidentiality and other matters, constituted sufficient consideration in the Court’s equitable jurisdiction for Glencore’s rights under the Royalty Deed.
• a liquidator’s power to deal with assets (under section 477 of the Corporations Act) is not an unconstrained power to deal with them free of the terms on which they were acquired, or in breach of a restraint or negative covenant on dealings with property that binds the company in liquidation. Accordingly, the disclaimer mechanism could not be utilised to perpetuate an outcome beyond the purpose of section 568, namely, delivery of an unwarranted windfall to unsecured creditors via an effective rewrite of pre-liquidation commercial arrangements and an arbitrary expropriation of assets previously acquired by third parties.

Why it matters

The decision highlights the limits of a liquidator’s power of disclaimer.

Even in circumstances where a contractual arrangement reduces the value of assets and diminishes creditor recoveries, a liquidator’s ability to disclaim such a contract as ‘unprofitable’ may nonetheless be limited, particularly in cases involving analogous facts and similar asset types. This in turn suggests potentially significant implications for formal restructures of distressed Australian mining operations, in particular, mining tenements subject to extant royalty rights.

Assuming that the judgment is not reversed by any appeal (which has been filed, but at the time of writing, is yet to be heard), the decision may assist in materially augmenting the commercial leverage of royalty rights holders in similar restructuring scenarios.