Australia and New Zealand Banking Group Limited v State of Queensland

(Revised From Transcript) LOGAN J: 1 On 20 January 2016, Mr Martin Bruce Bates became bankrupt upon the lodgement of a debtor's petition under the Bankruptcy Act 1966 (Cth) (Bankruptcy Act). At the time, he was the registered proprietor of an estate in fee simple in a property situated at 76 Fort Street, Maryborough, in Queensland, being that land more particularly described as Lot 3 on Registered Plan 115943, title reference 14174226 (the property). At the time, there was a registered mortgage, Number 712943607, granted by Mr Bates to the applicant, Australia and New Zealand Banking Group Limited (the bank) in respect of the property to secure funds advanced to him by the bank. 2 On or about 6 November 2009, Mr Bates entered into a credit contract with the bank. Under that contract, the bank agreed to extend credit to Mr Bates on terms more particularly described in that contract. The mortgage incorporated standard terms as found in standard terms document number 707489998. Pursuant to its contract with Mr Bates, and on 15 December 2009, the bank loaned to him the sum of $108,857.46. On 8 December 2015, the solicitors' firm, Kemp Strang Lawyers, which, then as now, acts on behalf of the bank, sent a default notice to Mr Bates in accordance with s 88 of the National Credit Code (National Credit Code) and s 84 of the Property Law Act 1974 (Qld) (Property Law Act). That notice was sent prior to Mr Bates' bankruptcy. He did not comply with that default notice. 3 On 15 February 2016, relying upon its mortgage security, the bank commenced proceedings against Mr Bates in the District Court of Queensland, claiming possession of the property. It obtained from that court a judgment for possession of the property on 17 May 2016. Later on 7 March 2017, it obtained a warrant for possession of the property. It obtained that possession on 2 May 2017. In a practical sense, the bank still remains in possession of the property. It is necessary to say in a practical sense, because on 17 May 2017, pursuant to s 133 of the Bankruptcy Act, Mr Bates' trustee in bankruptcy disclaimed the property as onerous. I shall return shortly to the effect of that disclaimer. 4 Thereafter, on 11 January 2018, again in the exercise of rights conferred on it under the mortgage, the bank entered into a contract for the sale of the property. Settlement in respect of that sale was due on 22 January 2018, subject to an option to extend that settlement date for up to four months after the contract date. The purchase price under the contract for the property is $140,000. As at 25 January 2018, the debt secured by the mortgage was $214,831.10. Obviously enough, there will be a deficiency in the event that the contract is completed. Even so, I accept that the bank will prepare and serve a notice in a form substantially similar to that prescribed in s 85(2) of the Property Law Act on the bankruptcy trustee. 5 The bankruptcy trustee carried the disclaimer decision into effect by giving notice of that disclaimer to the Registrar of Titles at Queensland's Land Titles Office, as required by s 133(3) of the Bankruptcy Act. The effect of such disclaimer is set out in s 133(2) of the Bankruptcy Act. Subject to s 133, and that is an important qualification in the circumstances of the present case, the effect of the disclaimer was to determine forthwith the bankrupt's rights, interests and liabilities in or in respect of the property. Further, it discharged the bankruptcy trustee from all personal liability in respect of the disclaimed property as from the date when the property vested in him. 6 The disclaimer did not, except so far as necessary for the purpose of releasing the bankrupt and his property and the trustee from liability, affect the rights of any other person. There is, nonetheless, an apparent tension between the language s 133(2) in relation to what is terminated by disclaimer, and the continued existence of rights or liabilities of other persons, in particular a person such as the bank, which, prior to disclaimer, had the benefit of a registered mortgage over the property. 7 A question very similar to that raised by the present case arose before Needham J in the context of a corporate insolvency and analogous provision in respect of disclaimer, found in the then s 296(2) of the Companies Act 1991 (NSW), in Re Tulloch Limited (in liq) (1978) 3 ACLR 808 (Re Tulloch). His Honour observed in respect of that statutory provision, that it was "not easy to give an entirely satisfactory meaning to section 296(2)" at [813]. In that case also, there existed a registered mortgage. His Honour further observed at [813]: 813. The next question is what remains to the mortgagee in order to release "the company and the property of the company" from liability. It is certainly necessary to hold that the contractual provisions of the mortgage cease to apply. There can remain no personal covenant, and as the Crown would take not as a successor to the company but by operation of law, the various provisions of the mortgage would not apply to it, there being no obligation on the company to comply with the contractual covenants, there could be, it would seem, no default in complying with them, which would permit the mortgagee to exercise its powers of sale. When, however, the default already exists, it would follow, in my opinion, that the right to sell vested in the mortgagee is one of the rights not affected by the disclaimer. 8 It will be recalled that, here, there was prior to bankruptcy, a default. A like conclusion in the context of personal insolvency to that reached by Needham J in Re Tulloch was reached by Heenan J, in Rams Mortgage Corporation Ltd v Skipworth (No 2) [2007] WASC 75 at [15]. Needham J's view in Re Tulloch has been followed in a number of subsequent cases in this court: see Re Wu, National Australia Bank Ltd v Leroy [2003] FCA 862 at [5] - [7]; National Australia Bank v State of Victoria [2010] FCA 1230; and National Australia Bank Ltd v State of New South Wales [2014] FCA 298 at [11]. 9 Recognising the effect of the doctrine of escheat, that the effect of the doctrine of escheat was to vest the property in the Crown in right of Queensland, the State of Queensland has been joined, in my view, correctly, by the bank as a respondent. Both the State and the bankruptcy trustee have filed submitting appearances. The effect of the escheat of the property to the Crown is that the property is held in fee simple, with the interest of the hitherto registered proprietor going out of existence: see Sandhurst Trustees Ltd v 72 Seventh Street Nominees Pty Ltd (in liq) (1998) 45 NSWLR 556 at [563], and National Australia Bank Ltd v State of New South Wales (2009) 182 FCR 52 at [22]. That though is subject to any operation of the Bankruptcy Act. 10 The effect of the doctrine of escheat, absent that Act, is that because there is no personal covenant upon which the bank as mortgagee could take action against the Crown. The Crown has unqualified title. In like circumstances to the present, it has been recognised that in the absence of a vesting order, under s 133(9) of the Bankruptcy Act, a mortgagee is precluded from taking action to realise its security by the sale of the property concerned after a disclaimer has occurred: see, for example, Rams Mortgage Corporation Ltd v Skipworth (No 2) [2007] WASC 75 at [28] - [30]. 11 Absent authority, I should have thought that because the authority for the disclaimer is found in the Bankruptcy Act, whatever effect the disclaimer might have under the doctrine of escheat must necessarily be subject to what is otherwise the operation of the Bankruptcy Act. As it happens, I have the benefit of the consideration by Rares J on that very same point in National Australia Bank Ltd v State of New South Wales (2009) 182 FCR 52 (National Australia Bank v State of New South Wales), where his Honour stated at [23]: 23. I think that the better view may be that by force of a disclaimer under the Bankruptcy Act (or Div 7A of Pt 5.6 of the Corporations Act) the title to the fee simple or other property does not escheat absolutely to the Crown in right of the State because the Court can make an order vesting that title in someone else. The Court's power to make such a vesting order is created by a law of the Commonwealth (s 133(9) of the Bankruptcy Act or s 568F(1) of the Corporations Act). By force of s 109 of the Constitution that law supplants any inconsistent automatic operation of a law of a State to the extent that some form of immediate and indefeasible escheat to the Crown in right of the State would otherwise have occurred. As I have observed, the ordinary incidents of an escheat are not readily seen as conformable with its suggested application to disclaimers. However, it is not necessary to express a final view, since this matter was not argued and I do not need to decide it. 12 His Honour's considered view accords with my initial impression. That view, I note, was also adopted by Bennett J in National Australia Bank Ltd v Victoria [2010] FCA 1230 at [12]. Her Honour's observation at [15], that the land concerned, "does not escheat absolutely to the Crown", such as to preclude the court's ability to make an order vesting the title in someone else, pursuant to s 133(9), is completely congruent with the views expressed by Rares J in National Australia Bank v State of New South Wales. 13 In order for the court to vest the property in the bank under s 133, the following, on the authorities, needs to be established: (1) that a disclaimer of the property concerned occurred within the meaning of s 133; (2) that the applicant, in this case, the bank, has an interest in the disclaimed property, within the meaning of s 133(9); and (3) that the applicant is entitled to the disclaimed property, or that this court considers it just and equitable, and it should be so vested. 14 As to these, the disclaimer notice has been given. There is authority that a person such as the bank who holds as mortgagee, an interest in Torrens system land, such as the property, is a person with an interest in the disclaimed property: see, for example Re Tulloch. The bank holds such a mortgage. Against that background, a further statement by Rares J in National Australia Bank Ltd v State of New South Wales at [29], is pertinent: 29. Here, by force of s 133(2) the effect of the trustee's disclaimer on 29 October 2008 appears to have determined any ongoing charge on the land for subsequent liabilities that would otherwise have continued to accrue, such as future (unpaid) interest on the debt secured by the mortgage. I agree with Needham J's conclusion that a mortgagee of Torrens title land is entitled to be granted a vesting order: Re Tulloch Ltd 8 ACLR at 814. I am of opinion that the land should be vested under s 133(9) in the bank for the purpose for which it originally was mortgaged, namely to secure payment to the bank of all principal, interest and other moneys due to it notwithstanding the effect of the disclaimer. If, after a sale, there is a shortfall the bank will be able to prove for it as an unsecured creditor in the bankrupts' estate. 15 What follows from the foregoing is that the bank meets the criteria in s 133(9) of the Bankruptcy Act for a vesting order in respect of the property. Absent such a vesting order, the bank will be unable to complete the sale of the property, pursuant to the contract noted. 16 I consider that the bank is entitled to a vesting order in the circumstances, and, for the avoidance of any doubt, also that it is just and equitable in those circumstances, that such an order should be made. I note that, in earlier cases, the vesting order has been made on conditions, which include that for the purpose of dealing with the property, a mortgagee such as the bank, may, but is not bound to act, as if it were exercising powers as mortgagee under, in this case, the Land Title Act 1994 (Qld), the Property Law Act, and under the mortgage, save that it is not required to serve notices of default under s 88 of the National Credit Code or the Property Law Act, or a notice to vacate, under the Residential Tenancies and Rooming Accommodation Act 2008 (Qld). I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan.