Bank of Queensland Limited v State of Western Australia

MCKERRACHER J: 1 The Applicant, the Bank of Queensland Limited applies pursuant to s 133(9) of the Bankruptcy Act 1966 (Cth), for orders for delivery up and vesting in the Bank, of the real property which currently vests in the State of Western Australia after being disclaimed by the Trustees in bankruptcy of the Second and Third Respondents (Mr Abrams and Mrs Abrams respectively).

THE EVIDENCE 2 The evidence produced by the Bank in support of this application reveals that between 9 May 2005 and 17 August 2015, Mr Abrams was the sole director and secretary of Baseline Holdings Pty Ltd (ACN 114 180 166) (deregistered). 3 Mr Abrams and Mrs Abrams, (collectively referred to as 'the Guarantors') agreed to personally guarantee the obligations of Baseline in respect of three loan agreements between Baseline, as trustee of the Abrams Family Trust, and the Bank. 4 By written agreements, dated on or about 2 January 2012, the Bank and Baseline entered into the following loan agreements, pursuant to which the Bank loaned moneys to Baseline: (a) Variable Rate Home Loan Privileges Package Discount Variable Rate Investment Home Loan Schedule (Variable Loan), in an amount of $552,749.90; (b) Business Term Loan (Business Loan) in an amount of $73,000; and (c) Residential Business Overdraft (Overdraft) in an amount of $10,000. 5 Pursuant to the Variable Loan, Business Loan and Overdraft, Baseline agreed to be bound by the following terms and conditions: (a) Consumer Lending General Conditions with respect to the Variable Loan (Variable Conditions); (b) Business Term Loan General Conditions with respect to the Business Loan (Business Conditions); and (c) Business Overdraft General Conditions with respect to the Overdraft (Overdraft Conditions). 6 As security for the Variable Loan, Business Loan and Overdraft, the Guarantors each agreed to enter into an unregulated guarantee and indemnity each dated on or about 3 February 2012 (Guarantees). 7 Both the Unregulated Guarantee and the Indemnity Guarantee imposed a number of conditions (Guarantee Conditions) which the Guarantors were required to meet. The Guarantors relevantly agreed: (a) that guaranteed moneys (as that term was defined) means all moneys owing, or which become owing, by Baseline or any related party (as that term was defined) whether alone or in conjunction with any other person in any manner or any account whatsoever, including any money Baseline owes under any agreement, whether provided before or after the guarantee was signed, and includes costs, fees and charges (Pt 29 of the Guarantee Conditions); (b) to guarantee the payment of the guaranteed moneys up to a limit of $628,000, plus interest, charges and costs (Pt 2(a) of the Guarantee Conditions); (c) that the guaranteed moneys were payable to the Bank on demand in writing by the Bank (Pt 2(b) of the Guarantee Conditions); (d) that the Bank could make demand on the Guarantors at any time (Pt 2(c) of the Guarantee Conditions) and need not have made a demand on Baseline before making demand on the Guarantors (Pt 2(d) of the Guarantee Conditions); (e) to indemnify the Bank against any loss and to pay the amount of that loss as principal debtor, in the event that Baseline or the Guarantors did not pay the guaranteed moneys on the due date for payment including without limitation, because any agreement between the Bank and Baseline was void or unenforceable (Pt 3 of the Guarantee Conditions); (f) to pay all costs and expenses of whatever nature incurred by the Bank and any attorney in connection with, amongst other things: (i) any attempt to enforce the Guarantees or any other security interest in connection with the guaranteed moneys; and (ii) any dispute or litigation the Bank becomes involved in because of the Guarantees, on a full indemnity basis for the amount actually incurred (Pt 24(a) and Pt 24(d) of the Guarantee Conditions); (g) the Guarantees would survive the insolvency or incapacity of Baseline or the Guarantors (Pt 4(c) of the Guarantee Conditions); and (h) to grant a Mortgage over 3 Ashton Close, Mount Tarcoola, Western Australia (the Property) in favour of the Bank. 8 The Guarantors secured repayment of all money payable under the Guarantees to the Bank by a first registered mortgage over the Property granted by the Guarantors in favour of the Bank and registered on the title of the Property. 9 The terms of the Mortgage (and the incorporated memorandum) provided that the Guarantors: (a) would be in default of the Mortgage if they did not pay on time the total amount owing (as that term was defined in the Mortgage) to the Bank (cl 22(a) of the Mortgage memorandum); (b) would be in default if in the reasonable opinion of the Bank, an event had occurred which affected the ability of the Guarantors to pay the total amount owing (cl 22(j) of the Mortgage memorandum); (c) agreed to pay the Bank any costs (as that term was defined in the Mortgage) the Bank reasonably incurred in enforcing the Mortgage after the Guarantors were in default (cl 19.2 of the Mortgage memorandum); (d) to indemnify the Bank against, and pay on demand for liability, loss or costs (including consequential or economic loss) the Bank suffered or incurred because the Guarantors were in default under the Mortgage (cl 19.4 of the Mortgage memorandum). 10 It was a further term of the Mortgage (and the incorporated memorandum) that: (a) in the event the Guarantors were in default and the Bank chose to enforce the Mortgage, the Bank had to issue the Guarantors with a notice stating the Guarantors were in default and which specified any grace period required by law (cl 23.1 of the Mortgage memorandum); (b) in the event the Guarantors remained in default following the issuance of the default notice pleaded in [10(a)] above, and following the expiration of the relevant grace period the Bank was entitled to among other things: (i) sue the Guarantors for the total amount owing; and (ii) take possession of the property (as that term was defined in the Mortgage) (cl 23.3 of the Mortgage memorandum). 11 As at 17 August 2015, each of the Guarantors was an undischarged bankrupt. 12 Messrs Maris Andris Rudaks and Allan Geoffrey Scott were the appointed joint and several Trustees of the bankrupt estates of the Guarantors (the Trustees). 13 On 7 October 2015, shortly after their appointment, the Trustees registered their interest in the Property by lodgement of caveat N141303. 14 On 19 June 2018, by order of Registrar Trott made in the Federal Court of Australia, Western Australia Registry, Baseline was wound up in insolvency and on 25 August 2019, the company was deregistered. 15 The Variable Conditions included terms that Baseline would be in default of the Variable Loan if it became insolvent or if it was deregistered (cl 14.2(f) and cl 14.2(g) of the Variable Conditions). 16 Additionally, it was a term of the Business Terms and Overdraft Terms that Baseline would be in default if anything happened which in the Bank's reasonable opinion affected Baseline's ability to pay the Bank the money owing (as that term was defined) or to keep any agreement or security (as that term was defined) or the Bank's rights under any security or the Bank's ability to recover the money owing (Pt 11(a) of the Business Conditions and Pt 12(a) of the Overdraft Conditions). 17 It was also a term of the Mortgage memorandum that the Guarantors would be in default if Baseline, as 'another person' (as that term was defined) under an agreement covered by the Mortgage, became insolvent or was deregistered (cl 22(c) of the Mortgage memorandum). 18 On 21 January 2019, the Trustees disclaimed their interest in the Property pursuant to s 133 of the Act, on the basis that the Property 'is burdened with onerous covenants'. It was clear by this time that defaults had arisen in respect of the Mortgage that could not be rectified. 19 On 23 January 2019, the Registrar of Titles registered caveat O076567 over the Property. 20 By 27 May 2019, Baseline had failed to pay the following amounts then due and owing to the Bank: (a) $32,248.12 in relation to the Variable loan; (b) $9,995.93 in relation to the Business Loan; and (c) $7,990.05 in relation to the Overdraft. 21 It was a term of the Terms and Conditions that Baseline would be in default if Baseline failed to pay on time any amount due under the Variable Loan, Business, Loan or Overdraft (cl 14.2(a) of the Variable Conditions, Pt 12(a) of the Business Conditions and Pt 11(a) of the Overdraft Conditions). 22 Although Baseline had not yet been deregistered, on 13 June 2019 the Bank served the Guarantors with a notice on account of the other defaults and in order to realise the Property pursuant to s 106 of the Transfer of Land Act 1893 (WA) (the Notices). 23 As a result of the Guarantors' failure to comply with the Notices referred to, the Variable Loan, Business Loan and Overdraft were accelerated, and the total amount owing by the Guarantors to the Bank pursuant to the Variable Loan, Business Loan, Overdraft and Mortgage became due and payable. 24 Mr Abrams advised in October 2019 that: (a) his elderly mother and brother with a long term illness (Family) would be arriving in Australia from Zimbabwe to stay with him on 1 December 2019; (b) his daughters were paying to get his Family to Australia and would cover the cost of the Family expenses once in Australia; and (c) he would house and care for his Family during their stay. 25 Later in that month Mr Abrams advised: (a) he had been contacted by an investor who was interested in purchasing the Property; (b) the investor would allow Mr and Mrs Abrams to stay at the Property following the sale and settlement of the Property; and (c) settlement could be completed by January 2020. 26 Mr Abrams stated, amongst other things, in late October 2019 that: (a) his Family would be staying with him from 1 December 2019, for a period of three months; (b) he would like to stay at the Property until at least 1 March 2020 so that his Family had somewhere to stay during their time in Australia; and (c) the potential investor was still interested in purchasing the Property. (Email confirmation exchanges ensued.) 27 On 31 October 2019, the Department of Planning, Lands and Heritage (the State) was put on notice of the Bank's application pursuant to s 133(9) of the Act by the Bank's solicitors. 28 The Bank and the State cooperated with the Guarantors in seeking the orders now made. 29 As at 25 February 2020, the total amount owing by the Guarantors to the Bank under the Variable Loan, Business Loan, Overdraft and Mortgage is as follows: (a) $551,307.34 with respect to the Home Loan, which sum continues to accrue interest at the rate of 5.16% per annum in accordance with the terms of the Variable Loan and Mortgage and as otherwise pleaded; (b) $42,478.68 with respect to the Business Loan, which sum continues to accrue interest at the rate of 7.02% per annum in accordance with the terms of the Business Loan and Mortgage and as otherwise pleaded; (c) $8,618.18 with respect to the Overdraft, which sum continues to accrue interest at the rate of 8.01% per annum in accordance with the terms of the Overdraft and Mortgage, and as otherwise pleaded. 30 The Bank argues that in these circumstances it is entitled to immediate possession of the Property. 31 As the Property, having been disclaimed pursuant to s 133(1) of the Act vests in the State, the Bank seeks an order pursuant to s 133(9), as against the State, to vest the Property in the Bank in order that the Bank can enforce its mortgage over the Property. 32 As the Guarantors remain in occupation of the Property vesting in the State, the Bank also seeks an order pursuant to s 133(9) of the Act for the delivery up of the Property, as against Mr and Mrs Abrams.

CONSIDERATION 33 Section 133 of the Act provides: 133 Disclaimer of onerous property (1AA) Where any part of the property of the bankrupt consists of: (a) land of any tenure burdened with onerous covenants; or (b) property (including land) that is unsaleable or is not readily saleable; subsection (1) applies. … (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. … (2) A disclaimer under subsection (1) or (1A) operates to determine forthwith the rights, interests and liabilities of the bankrupt and his or her property in or in respect of the property disclaimed, and discharges the trustee from all personal liability in respect of the property disclaimed as from the date when the property vested in him or her, but does not, except so far as is necessary for the purpose of releasing the bankrupt and his or her property and the trustee from liability, affect the rights or liabilities of any other person. (3) If a trustee disclaims property whose transfer must be registered under a law of the Commonwealth or of a State or Territory of the Commonwealth, the trustee must give notice of the disclaimer as soon as practicable to the officer who has the function of registering the transfer. … (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. (10) Subject to subsection (11), where an order vesting property in a person is made under subsection (9), the property to which it relates vests forthwith in the person named in the order for that purpose without any conveyance, transfer or assignment. (11) Where: (a) the property to which such an order relates is 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; and (b) that law enables the registration of such an order; the property, notwithstanding that it vests in equity in the person named in the order, does not vest in that person at law until the requirements of that law have been complied with. 34 Mr and Mrs Abrams are undischarged bankrupts and may presently reside at the Property. They have consented to the orders proposed by the Bank. 35 Having registered their interest in the Property by caveat N141303, the Trustees later disclaimed the Property on 21 January 2019, pursuant to s 133(1) of the Act (Disclaimer) on the basis that the Property was burdened with onerous covenants. 36 The consequence of the Disclaimer is that the title to the Property vests in the State. In Halsbury's Laws of Australia (LexisNexis Australia, 2015) at [295-7220] the legal position is explained as follows: After the disclaimer there is no personal covenant upon which the mortgagee can take action against the Crown because the Crown has no obligation under the mortgage. The mortgagee's rights following the disclaimer include the rights of a mortgagee accrued from the mortgagor's default under the relevant security and the doctrine of escheat does not preclude those rights of the mortgagee. The effect of the disclaimer is that, in the absence of a vesting order, the mortgagee will be precluded from taking any action to realise the security. see also RAMS Mortgage Corporation Ltd v Skipworth (No 2) (2007) 239 ALR 799 per Heenan J (at [28]-[30]). 37 Section 133(9) of the Act empowers the Court to grant relief to a person claiming an interest in, or being under a liability not discharged by the Act in respect of, the disclaimed property. The Court can 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 it seems to the Court to be just and equitable for it to be vested or delivered. 38 A mortgagee of land under the Torrens system has been held to be entitled to make an application for a vesting order and to receive such an order by reason of its interest in disclaimed property: see Re Tulloch Ltd (No 2) (1978) 3 ACLR 808 per Needham J (at 814); National Australia Bank Ltd v Leroy [2003] FCA 862 per Madgwick J (at [7]). 39 The test for whether a vesting order should be granted is set out in Australia and New Zealand Banking Group Ltd v Queensland [2016] FCA 1221 (ANZ) per Rangiah J (at [9]). The following must be established: (a) there has been a disclaimer of the relevant property pursuant to s 133(1); (b) the applicant claims an interest in the disclaimed property within s 133(9); and (c) the applicant is entitled to the disclaimed property, or the Court considers it to be just or equitable that it should be vested. 40 The Bank meets each of the prerequisites in the ANZ test above. In these circumstances, and where Mr and Mrs Abrams consent to the orders proposed, the Bank is entitled to, and it is just and equitable, to make the orders sought. 41 Absent such orders, the Bank has no ability to realise the Property. 42 Importantly, in light of the Coronavirus outbreak and the policies implemented by the Federal and State Government to manage this, the Bank has confirmed that if this impacts timing relating to vacation of the property, the Bank will consider proposals put forward by Mr and Mrs Abrams to address this matter including potentially an extension of time to vacate. All parties will have liberty to apply.

Proceeds of sale and accounting 43 Disclaimed real property vests in the Crown by operation of the doctrine of escheat: see Australia and New Zealand Banking Group Limited v Queensland [2017] FCA 696 per Derrington J (at [17]), recently cited with approval by Banks-Smith J in St George v Western Australia [2020] FCA 397 (at [20]). 44 Trustees in bankruptcy disclaim properties for a variety of reasons and there are occasions where the proceeds of sale of disclaimed property are surplus to the rights of a party in whom an order pursuant to s 133(9) of the Act is made. Consideration must therefore be given to how any surplus proceeds of sale will be dealt with. 45 Had the Property not been disclaimed, proceeds from its sale would be available to the Trustees for distribution to creditors. 46 In previous cases, some Courts have ordered that surplus proceeds should be paid to the Registrar of the Court: see for example, Australia and New Zealand Banking Group Ltd v Queensland [2016] FCA 1566; Commonwealth Bank of Australia v Queensland [2016] FCA 1337; and St George. 47 Surplus proceeds from the sale of the Property that are paid into Court will remain there in the absence of further application, requiring Court resources to manage them and depriving creditors of their benefit. 48 In AMP Bank Ltd v New South Wales [2014] FCA 1437, Rares J (at [6]-[7]) ordered that surplus proceeds be paid to the trustee (in bankruptcy) to be included in the 'bankrupt's estate for distribution to his creditors or other persons entitled, as was intended in the mortgage originally'. 49 Noting that parties with an interest in the Property have received notice of its disclaimer pursuant to s 133(1) of the Act, surplus proceeds from the sale of the Property should: (a) pursuant to s 61 of the Property Law Act 1969 (WA) be paid to the Trustees of the bankrupt estate as if the Trustees had exercised the power of sale pursuant to the Mortgage; and (b) if the Trustees have ceased to be appointed over the bankrupt's estate when any surplus proceeds become available, be paid to the Crown, to whom the Property escheats. 50 As the Property escheats to the Crown in right of the State it should receive an accounting of the proceeds of the sale of the Property by the Bank.

CONCLUSION 51 For these reasons, the orders set out herein are made. I certify that the preceding fifty-one (51) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.