TGIF 10 July 2026 – Royalty rights survive attempted liquidation disclaimer

This week’s TGIF considers the recent NSW Supreme Court’s decision in In the matter of Tahmoor Coal Pty Ltd (in liq) [2026] NSWSC 773, rejecting a liquidator’s attempt to disclaim a royalty deed.

Key takeaways

• Liquidators may not be able to disclaim a royalty contract if it contains a negative covenant restricting sale without the royalty holder’s consent, even if it confers no proprietary interest in the mining tenement.
   
• In that case, a royalty holder may be able to obtain an injunction requiring liquidators to preserve the royalty arrangement in the hands of a purchaser, rather than claiming as an unsecured creditor for the present value of the royalties.
   
• A counterparty can narrow or abandon certain contractual rights to avoid its contract being disclaimed by a liquidator as an onerous and otherwise ‘unprofitable contract’.

What happened?

In March this year, the Court appointed liquidators to Tahmoor Coal Pty Ltd, the operator of an underground coal mine in the Southern Highlands. The liquidators were then appointed to Tahmoor’s subsidiary. The mining operations had been suspended since 2025.

Tahmoor and its subsidiary held mining tenements subject to a Royalty Deed in favour of Glencore Coal Pty Ltd, which had been entered when Tahmoor’s parent company was sold by a subsidiary of Glencore to a GFG Alliance entity. Around the time of sale, the royalty was valued at USD$21.6 million.

The Royalty Deed prohibited Tahmoor from transferring, encumbering or otherwise dealing with the mining tenements without Glencore's prior written consent. That consent was to be given if: 

(a) the transferee acceded to the Royalty Deed; and 

(b) Glencore was satisfied as to the transferee's financial, technical and operational capacity.

Following appointment, the Liquidators expressed concerns with the continuation of the Royalty Deed being contrary to the interests of Tahmoor’s creditors. They were also concerned that it would impede the sale process. In response, Glencore agreed to relax the consent requirement by giving pre-emptive consent to prospective purchasers to facilitate a sale process.

The Liquidators applied to the Court seeking:

• a declaration that the Royalty Deed was an unprofitable contract capable of being disclaimed under s 568(1A) of the Corporations Act 2001 (Cth) (Act); or 
   
• leave to disclaim the Royalty Deed; or 
   
• a direction under s 90-15 of the Insolvency Practice Schedule that they were justified in selling the mine without Glencore’s consent under s 477 of the Act. 

Glencore cross-claimed, seeking an injunction to restrain any dealing with the tenements in breach of the consent requirement.

Decision

The Court rejected the Liquidators’ application with the effect that the Royalty Deed was preserved. The legal issues were resolved as discussed below.

Was the Royalty Deed capable of disclaimer?

A threshold issue was raised by Glencore as to whether the Royalty Deed was ‘property’ capable of a disclaimer. Glencore argued that the Royalty Deed conferred no material or valuable rights on Tahmoor. However, the Court found that Tahmoor did have substantive rights under the document. It found that, in principle, it was a contract capable of disclaimer (if it were an ‘unprofitable contract’ or if leave were given).

Was the Royalty Deed an ‘unprofitable contract’?

The Court considered the threshold principles for ‘unprofitability’ as follows: 

• a contract is not unprofitable because a company could have made a better bargain or because the contract is financially unprofitable in the sense of having onerous financial terms; and 
   
• an unprofitable contract must be a contract incompatible with the proper and expedient conduct of the liquidation. 

The Court found that the Royalty Deed did not meet the ‘unprofitability’ threshold of unprofitable for two main reasons:

• the Court acknowledged that the Royalty Deed would reduce the price Tahmoor received from a sale of assets and the ultimate sale of the mine (as it had for the original sale to GFG referred to above). However, this was insufficient to make it an ‘unprofitable’ contract; and
   
• while the Court accepted that the consent requirement would ordinarily have made the Royalty Deed unprofitable by restricting the Liquidators’ ability to sell the mine, the statutory test is directed to the actual operation of the contract. The Court held that Glencore’s pre-emptive consent to prospective purchasers removed that practical burden and was therefore not an ‘unprofitable’ contract.

The Court noted that it may seem odd, on one view, that a counterparty could abandon all or most of its obligations so as to avoid disclaimer of a contract that was otherwise onerous and plainly an ‘unprofitable contract’. However, this was nevertheless consistent with case law that unprofitability looks to the actual operation of the contract (including narrowing or abandonment by a counterparty of its obligations). In principle, this promoted the statutory purpose by avoiding the need for liquidators to rely on disclaimer. 

Could leave to disclaim be granted?

The Court also declined to grant leave to disclaim the Royalty Deed on the basis that this: 

• would defeat the rights that Glencore obtained in a proper commercial transaction; 
   
• could potentially undermine commercial certainty in royalty arrangements generally; and 
   
• would, in substance, amount to a wealth transfer from Glencore to unsecured creditors.

Direction as to the Liquidators’ power of sale

For the same reasons, the Court refused to give a direction justifying a sale without consent for the same reasons it declined leave to disclaim. To the extent necessary, it instead directed that the Liquidators would be justified in causing Tahmoor to comply with the consent requirement.

Cross-claim and injunction

The Court indicated that an injunction to restrain a breach of the consent requirement was available unless the Liquidators could cause Tahmoor to comply with the Royalty Deed.

The Court reasoned that, although the Royalty Deed did not create any legal or equitable interest or security interest in the mining tenements, a negative covenant like the consent requirement should ordinarily be enforced unless there are good reasons to the contrary. 

The Liquidators first argued that Glencore had given no consideration. The Court disagreed, holding that Glencore’s own obligations under the Deed were sufficient. 

Second, the Liquidators argued that relief should be refused because Glencore ranked equally with other unsecured creditors and an injunction would fetter the sale power in s 477. The Court disagreed, holding that the s 477 power does not allow a liquidator to deal with assets free of the terms on which they were acquired. 

The Court therefore indicated it would grant the injunction, but expected the Liquidators to comply without it. 

Comment

As a general matter, this case is a reminder of the potential for negative covenants to bind a company in liquidation, despite the counterparty having no security or proprietary interest in the estate. It also demonstrates that counterparties to contracts that might otherwise be disclaimed as unprofitable may consider abandoning or narrowing their rights so as to keep the contract on foot.

Commercially, the case is also of special interest for royalty arrangements generally. It provides royalty holders in distressed mining assets with an example as to how they may preserve royalty rights though the liquidation, rather than proving for the present value of the royalties as an unsecured creditor.