Australia and New Zealand Banking Group Limited v State of Queensland, in the matter of McFarlane

DERRINGTON J: 1 The application before the court today by Australia and New Zealand Banking Group Limited (the ANZ Bank) is for various orders pursuant to s 133(9) of the Bankruptcy Act 1966 (Cth) (the Act). In particular, orders are sought that certain real property be vested in the ANZ Bank and that it be permitted to sell the real property to meet certain claims which it has against the present owners of that land. 2 For the reasons which follow it is appropriate to make orders vesting the land in the ANZ Bank and ancillary orders permitted it to sell the land. 3 This matter concerns two parcels of land both owned by Robert Gloyns McFarlane and Beverly Christine McFarlane (together referred to as Mr and Mrs McFarlane). The first parcel of land has the real property description of Lot 382 on RP156682, County of March, Parish of Gutchy, Title Reference 15749104 (the First Property). Mr and Mrs McFarlane became the owners of the First Property on or about 31 January 2007. The second parcel of land has the real property description of Lot 462 on RP156932, County of March, Parish of Gutchy, Title Reference 15692232 (the Second Property). This property was acquired by Mr and Mrs McFarlane on or about 23 October 2007. Both parcels of land are located in Glenwood in the State of Queensland which is a rural-residential community located between the major townships of Gympie and Maryborough. 4 The evidence shows that in 2008, Mr and Mrs McFarlane desired to refinance the acquisition of those two parcels of land and 15 December 2008 they entered into a loan agreement with the ANZ Bank pursuant to which they borrowed the sum of $282,000. The loan was for a duration of 30 years at a variable rate of interest commencing at 7.04% per annum. Pursuant to the agreement Mr and Mrs McFarlane agreed to make monthly repayments of $1,884.48 per month for the duration of the loan. No doubt that figure would alter as and when changes in the variable interest rate occurred. Mr and Mrs McFarlane also agreed to grant the ANZ Bank security for the loan in the form of registered real property mortgages over the two properties. The mortgages were granted by separate bills of mortgage and were registered pursuant to the provisions of the Land Title Act 1994 (Qld) (the Land Title Act) in the Queensland Land Registry. Each of the mortgages were granted on the ANZ Bank's standard terms found in registered document number 707489998 which had previously been registered in the Land Registry. The Certificates of Title for the First and the Second Property which are in evidence before the Court disclose that the mortgages were registered on 7 January 2009. It is noted that the current title searches with respect to the First and the Second Property reveal the existence of a caveat lodged by J. Daniels and Associates Pty Ltd on 4 October 2016 on each of the titles. 5 The evidence before the Court tends to establish that the loan was drawn down on or about 5 January 2009. Thereafter, Mr and Mrs McFarlane met their monthly repayment obligations until about April 2015, at which point the regular monthly repayments ceased although some amounts were paid by them from time to time. 6 In or around early 2009 that Mr and Mrs McFarlane made an application to the ANZ Bank for additional finance in the amount of $10,770.12. On 4 April 2009 a further loan agreement was entered into pursuant to which the ANZ Bank agreed to advance Mr and Mrs McFarlane that amount. The purpose of the loan is identified as being for "refinance & debt consolidation". This second loan was also for a period of 30 years and the security for the loan was that already held by the ANZ Bank over the properties. The evidence before the Court discloses that, from the inception of the loan until about August 2015, the repayments on that loan account were regularly made, albeit in erratic amounts. Thereafter, the loan repayments became far less regular and it is apparent that the minimum monthly repayment requirements of the second loan agreement were not met. 7 As at 8 October 2015 Mr and Mrs McFarlane were in default of the terms of both loan agreements and, consequently, of the terms of the mortgages. The cause of the defaults was the failure to make the required monthly repayments on each loan. As a consequence, under cover of letter of 8 October 2015, the ANZ Bank by its solicitors, Gadens, sent to Mr and Mrs McFarlane notices of default pursuant to s 88 of the National Credit Code and s 84 of the Property Law Act 1974 (Qld) (Property Law Act) and s 78 of the Land Title Act. The notices identified the amount in respect of which the borrowers were in default and required payment by no later than 16 November 2015. The notices were sent to the address of the First Property and to the address of the Second Property. These notices met the requirements of s 84 of the Property Law Act which required a mortgagee, before exercising a power of sale, to afford the borrower an opportunity to remedy any default. 8 The breaches of the loan agreements and mortgages were not rectified by Mr and Mrs McFarlane and, upon that failure, the ANZ Bank became entitled to exercise its powers of sale under the mortgages. For reasons which are not explained, it appears that the ANZ Bank did not take action at that time and, indeed, it did not further pursue the matter for some time thereafter. Presumably interest on the outstanding loan continued to accrue and any equity in either the First Property or the Second Property which had been created by Mrs and Mrs McFarlane's payments over a number of years has been eroded. There is nothing pejorative in this observation and it may be that the delay in taking enforcement action was entirely justified in the circumstances. 9 On 18 November 2016 Mr and Mrs McFarlane each presented a debtor's petition and they were made bankrupt. Mr John William Cunningham and Mr Paul Eric Nogueira were each appointed as the trustees in bankruptcy of their estates. The trustees in bankruptcy have ascertained that neither the First Property nor the Second Property has any "equity" in them such that the accruing liabilities under the mortgages of the property would only add to the burdens of the estate. Consequently, on 12 January 2017 the bankruptcy trustees sent to the Title Registry Office a Notice of Disclaimer of onerous property pursuant to s 133(1) of the Bankruptcy Act in respect of both the First Property and the Second Property. It is apparent from the current titles search of each of the two properties that at no time prior to the delivery of the Notice of Disclaimer did the bankruptcy trustees cause title to either of the properties to be transferred into their names. It is also apparent that the Registrar of Titles has not noted the Notices of Disclaimer on the Certificates of Title of either property. That is inconsistent with the procedures identified in paragraph [52-0280] of the Land Title Practice Manual (Queensland) which is published by the Department of Natural Resources and Mines (Qld). 10 By reason of s 58(1)(a) of the Act, the effect of the making of the bankruptcy orders in respect of Mr and Mrs McFarlane was that all of the right, title and interest in their estates vested in the bankruptcy trustees. However, the bankrupts' interest in the First Property and the Second Property were fee simple interests in Torrens System land which had been created and registered under the Land Title Act. The effect of s 58(2) of the Bankruptcy Act is that legal title to those fee simple interests would not vest in the bankruptcy trustees on the making of the bankruptcy orders. In order for the bankruptcy trustees to secure legal title to those interests it would have been necessary for them to cause the land to be registered in their own names. The requirements of the Land Title Act needed to be complied with and, until that time, the trustees only obtained equitable title to the properties. Until the trustees in bankruptcy caused the legal title to vest in themselves by lodging a Request for Transfer with the Registrar of Titles, the legal title remained with Mr and Mrs McFarlane.

Are all parties before the Court 11 The existence of the caveats identified on the Certificates of Title create some potential difficulties to the making of the orders sought in this application. The existence of the caveats on the Certificates of Title give rise to the possibility that a third party claims an interest in the land the subject of the application. Miss Sim for the ANZ Bank submitted that the caveats identified would have lapsed. She did so upon the basis that it can be inferred that no proceedings were taken by J. Daniels & Associates Pty Ltd within the period of three months after the lodgement of the caveat such that they would have lapsed by reason of the effect of s 126(4) of the Land Title Act. Whilst there is force in that submission the difficulty which arose was the absence of any evidence that those proceedings had not been commenced. Miss Sim pointed to the fact that the Certificate of Title contains the words: "ADMINISTRATIVE ADVICES - NIL" and Miss Sim submitted that this indicates that the Registrar of Titles has not received notification as is required under s 126(4)(b) that a proceeding has been started. Again, there is some force in that submission. The difficulty is that there appears to be nothing in the Land Title Act requiring the Registrar of Titles to enter on the Certificate of Title any notice of action lodged by a caveator. Moreover, if it were the case that no notification had been received by the Registrar of Titles one wonders why the caveats remain identified on the Certificate of Title under the heading "Easements, Encumbrances and Interests". 12 I have been referred to the Land Title Practice Manual (Queensland) which has been produced for the purpose of providing "information and guidance to industry practitioners conducting business with the Titles Registry". In that publication there is some suggestion that in the ordinary practice of the Registry a notification of action to support a caveat which is lodged under s 126(4) would be identified under the heading "Administrative Advices" on a Certificate of Title. See paragraph [52-0010]. However, the requirements of the manual are, at best, ambiguous. 13 Miss Sim also correctly identified that even if the caveator had commenced proceedings its interest would be subservient to the interest of the registered mortgagee who would be entitled to sell the property "through that caveat". Again, there is some force in that submission. However, concern must remain as to the impact of the vesting of the fee simple in the mortgagee upon any existing caveatable interest. It may be that s 133(2) preserves the rights of the caveator when the property is disclaimed. However, that says nothing of the impact on the rights of the caveator if the property is sold pursuant to an order made under s 133(9). Ultimately, after a brief adjournment, the ANZ Bank provided additional evidence in the form of an affidavit which discloses that no proceedings have been taken in either the District Court of Queensland or the Supreme Court of Queensland by J. Daniels & Associates Pty Ltd against Mr and Mrs McFarlane. This evidence is sufficient to allow this Court to reach the conclusion that the caveats previously lodged by J. Daniels & Associates Pty Ltd on 4 October 2016 have lapsed.

The efficacy of the disclaimer 14 Section 133(1) of the Bankruptcy Act affords bankruptcy trustees the opportunity to disclaim the burden of onerous property. That section provides: (1) Subject to this section, the trustee may, notwithstanding that he or she has endeavoured to sell or has taken possession of the property or exercised any act of ownership in relation to it and notwithstanding, in the case of property the transfer of which is required by a law of the Commonwealth or of a State or Territory of the Commonwealth to be registered, that he or she has not become the registered owner of that property, by writing signed by him or her, at any time disclaim the property. 15 The reference in that section to "property" includes a reference to any land which is burdened with "onerous covenants" (s 133(1AA) of the Bankruptcy Act). The concept of land being burdened with "onerous covenants" includes land which is subject to financial obligations which can be enforced against it (see Re Tulloch Ltd (1977) 3 ACLR 808, 812-813). Consequently, both the First Property and the Second Property were within the scope of s 133(1) and the bankruptcy trustees were entitled to disclaim any interest in them. 16 The Notices of Disclaimer referred to above were effective compliance with the requirements of s 133(1) with the consequence that they "determined the rights, interests and liabilities of the bankrupts and the bankruptcy trustees in, or in respect of the property as from the date on which the disclaimer was made" (see s 133(2) of the Bankruptcy Act). 17 The delivery of the Notice of Disclaimer to the Registrar of Titles had two separate but cumulative effects. First, the equitable title to the fee simple interests in the properties was divested from the bankruptcy trustees and became vested in the Crown via the doctrine of escheat. Second, the legal interest in the fee simple in the two properties divested from Mr and Mrs McFarlane and became vested in the Crown. Although the exact manner in which s 133(1) operates to divest both the equitable interest from the bankruptcy trustees and the legal title from the bankrupt is not entirely clear; (Westpac Banking Corporation v State of Queensland [2016] FCA 269; [30]-[31]; Commonwealth Bank of Australia v State of Queensland; In the matter of Ginn [2016] FCA 1337; ING Bank (Australia) Limited v State of Queensland [2017] FCA 411; [17]-[20]); the position appears to be now too well established for there to be any real doubt about it. Perhaps the most acceptable explanation is that s 133(1) enables a bankruptcy trustee to disclaim the totality of ownership, rights, titles and interests in relation to the Torrens System land owned by the bankrupt and that is so notwithstanding that legal title to that land has not vested in the bankruptcy trustee. 18 Although the effect of the complete disclaimer of all interest in the fee simple of the relevant properties might have been thought to have had the effect that the fee simple was extinguished by reason of the merger of a dominant and subservient interest; (Purefoy v Rogers (1671) 2 WmsSaund 380; 85 ER 118; ING Bank (Australia) Ltd v State of Queensland (2017) FCA 411; [22]); the currently prevailing view is that, despite the disclaimer, the fee simple which is subject to the mortgagee's charge, continues to exist. Support for this proposition can be found in the explanation of Perram J in National Australia Bank Limited v State of New South Wales [2014] FCA 298 where his Honour said: 8. Mr Hynes, of counsel, who appeared for the Bank, drew to my attention the apparent tension in the text of s 133 between the determination forthwith of the rights, interests and liabilities of the bankrupt, on the one hand, and the continued existence of the rights or liabilities of other persons, on the other. In a purely theoretical space there is a tension between extinguishing a set of rights which is attached to another set of rights which are not extinguished. The courts, however, have not been troubled by this anomaly. In a series of decisions it has been held that the rights of other persons, and in particular, the rights of mortgagees continue to have sufficient existence to ground an application such as the present one made by the Bank: see, for example, Re Tulloch Ltd (in liquidation) (1978) 3 ACLR 808 at 813 (sic), per Needham J. That reasoning is regarded as orthodox: see National Australia Bank Ltd v Leroy [2003] FCA 862 at [5]- [7]; Rams Mortgage Corp Ltd v Skipworth (No 2) (2007) ALR 799 at [15]-[19]; National Australia Bank Ltd v New South Wales [2009] FCA 1066; (2009) 182 FCR 52 at [29]; and National Australia Bank Ltd v Victoria [2010] FCA 1230; (2010) 118 ALD 527 at [10]- [12]. 9. The immediate consequence of the disclaimer of the onerous property by the Bank was that the Paruna Place property escheated to the Crown in right of New South Wales: see Re Tulloch; NAB v Leroy at [5]; Rams v Skipworth at [8]. It has been said of the operation of s 133 that the Crown holds the property in fee simple and that only the interest of the proprietor goes out of existence on the escheat. The immediate consequence of the escheatment is therefore that the Bank does not presently have the rights it would have had against Mr Elters but for his bankruptcy and presently has no right to enforce its security against the State of New South Wales. … 19 Consequently, it appears that despite the escheatment to the Crown, the preserving effect of s 133(2) has the result that the fee simple interest remains in existence albeit vested in the Crown, such that third party's security interests in the fee simple of the land remain unaffected. 20 It follows that the ANZ Bank's mortgage and the rights thereunder, remained unaffected by the disclaimer such that the bank is a party who is entitled to make an application to this court under s 133(9). That section provides: (9) The Court may, on application by a person either claiming an interest in, or being under a liability not discharged by this Act in respect of, disclaimed property, and after hearing such persons as it thinks fit, make an order, on such terms as the Court considers just and equitable, for the vesting of the property in, or delivery of the property to, a person entitled to it or a person in whom, or to whom, it seems to the Court to be just and equitable that it should be vested or delivered, or a trustee for that person.

Whether it is just and equitable for the properties to be transferred to the bank 21 The evidence before the court on today's application includes an affidavit of Ms Fiona Venuto, who is employed by the ANZ Bank as a Case Manager. Ms Venuto deposes as to the current status of the properties and, in particular, that the ANZ Bank is not in possession of the properties or either of them, however, nor are Mr and Mrs McFarlane. To her knowledge the properties are vacant and not presently occupied by any person. Ms Venuto also deposes to the fact that Mr and Mrs McFarlane have not remedied the breaches of their loan agreements and mortgages. It would appear that the last payments made on the accounts in respect of the two loan agreements occurred in September last year. The current indebtedness on the first loan agreement is $283,288.29 and on the second loan agreement it is $10,335.72. Naturally enough, interest continues to accrue on the total amount owing by the McFarlanes. 22 In those circumstances the bankruptcy of Mr and Mrs McFarlane ought not to hinder the recovery by the ANZ Bank of whatever it might recover by exercising rights against its securities. 23 Whilst on one view it might be thought that, as the secured creditor's rights are preserved by s 133(2) of the Act, there is no need to vest the properties in the applicant so that it might exercise its rights as mortgagee. However, given the uncertainty as to the manner in which the totality of the title to the property vests in the Crown under s 133(1) there remains sufficient doubt as to the rights of the secured creditor which warrant the making of an order vesting the property in it. The orders which are sought by the bank on this application will remove any residual uncertainty. 24 It should be mentioned, however, that the primary orders sought by the applicant bank are that the estate in fee simple in the properties vest in it such that it may exercise its powers as mortgagee under the Land Title Act, the Property Law Act and the mortgages. There is, of course, a tension between the terms of the orders sought and the effect of the vesting order under s 133(9). Once the vesting order is made the applicant bank will hold the fee simple in the land. There is nothing which prevents the bank from selling the land as the owner in fee simple as opposed to as a secured creditor. Indeed, one might query whether or not the mortgage can survive the vesting of the legal and beneficial title to the fee simple in the mortgagee. However, as this matter was not argued before the Court it is appropriate that it not be further considered on this occasion. Therefore, despite some misgivings, the order in the form sought by the ANZ Bank that the land be vested in it so that it might exercise its powers as mortgagee should be made. 25 A similar consideration arises in relation to the manner in which the bank might exercise its powers in the sale of the property. Paragraph 2 of the originating application seeks orders that the bank be entitled, but not bound, to deal with the property as if it were a mortgagee in possession exercising its right to sell the estate. The terms of this order are in greater conformity with the legal reality that the bank is the absolute owner of the land and they acknowledge the ANZ Bank's entitlement to the land on the making of a vesting order. 26 There is no evidence before the Court as to the value of the two properties when compared to the total indebtedness of the McFarlanes. However, had there been a belief that there would be excess proceeds from the sales of the two properties after the payment of the mortgaged debt, the properties would not have been disclaimed by the trustees. It ought also be recognised that the cost of obtaining valuations (even a kerbside valuation) might be an unnecessary cost in the circumstances where, it seems to be accepted, there shall be a deficiency of proceeds from the sale of the secured properties to meet the debts owed to the bank. It is also appropriate in the consideration of this issue to take into account the commercial standing of the applicant bank. For those reasons, and despite the absence of evidence of the value of the secured properties, it is not inappropriate to make the orders sought. In particular, it is not inappropriate to make the orders relieving the bank of the statutory obligation under s 85 of the Property Law Act 1974 (Qld) to take reasonable care to ensure that the property is sold at market value. 27 It follows that, the circumstances of this matter justify the making of orders vesting the fee simple of the properties in the ANZ Bank. Were the orders not to be made the secured interests of the lender would be rendered less efficacious and that is something which the legislation seeks to avoid. 28 The Crown has filed a submitting appearance in this matter and it does not oppose the making of the orders. If there were any excess of receipts from the sale of the properties above the amount required to meet the indebtedness to the ANZ Bank, it would seem likely that, in the absence of any other secured creditor, it is the Crown which would be beneficially interested in those proceeds. However, as that matter was not argued on this application there is no need to reach any final conclusion on it. There has been, in some of the authorities, some suggestion that any excess might revert to the trustees in bankruptcy. For present purposes it is not easy to discern how that might occur, but, that is a matter which ought be the subject of full argument with contradictors.

Orders 29 It follows from the above that orders substantially in accordance with those sought by the ANZ Bank should be made. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Derrington.