Commonwealth Bank of Australia v State of Queensland, in the matter of Hewton

Federal Court of Australia|2021-01-29|Before: Mr P, Derrington J

Pursuant to s 133(9) of the Bankruptcy Act 1966 (Cth) the estate in fee simple in the property described as Lot 3 on Survey Plan 252044, Title Reference 50927936, being the land situated at Unit 3, 37-39 Daisy Street (also known as Unit 3, Lot 2 Daisy Street), Miles in the State of Queensland (the Property), vest in the Applicant for the purpose of the Applicant exercising its powers as mortgagee under the Land Title Act 1994 (Qld), the Property Law Act 1974 (Qld) and registered mortgage number 715448443 (the Mortgage).
On the vesting of the Property in the Applicant pursuant to s 133(9) of the Bankruptcy Act 1966 (Cth) the Applicant: (a) may, but is not bound to, deal with the Property as if it were exercising its powers as mortgagee in possession under the Land Title Act 1994 (Qld), the Property Law Act 1974 (Qld) and the Mortgage, including exercising the right to sell the estate in fee simple in the Property in exercise of its power of sale and all of its other rights under the Mortgage; (b) for the purpose of selling the estate in fee simple of the Property in exercise of its power of sale, is not required to serve: (i) a notice of default or demand whether under s 88 of the National Credit Code, being Schedule 1 to the National Consumer Credit Protection Act 2009 (Cth) or otherwise; and (ii) a notice pursuant to s 84 of the Property Law Act 1974 (Qld); (c) is entitled to calculate the entirety of the debt secured and owing pursuant to the Mortgage as including all monies that would have been secured by the Mortgage had the trustee of the bankrupt estates of Bradley Robert Hewton and Melanie Anne Hewton not disclaimed the Property and to deduct and retain for its own absolute use and property such amount from any proceeds of sale of the Property as if it were money secured by the Mortgage (including costs of this application and all costs properly incurred in selling, and incidental to the sale of, the Property); (d) shall apply the proceeds of sale from the Property as follows: (i) first, in payment of any statutory charges affecting the property, which the relevant statute provides are payable in priority to the Applicant; (ii) second, in payment of all costs, charges and expenses properly incurred by the Applicant as incidental to the sale, or any attempted sale, or otherwise; (iii) third, in discharge of the debt owed to the Applicant by Mr Hewton and Ms Hewton as secured by the Mortgage; (iv) fourth, in payment of any subsequent mortgages (if any); (e) must, after sale of the Property, provide an account of its payments and receipts to: (i) Stuart George Reid of Rodgers Reidy as trustee in bankruptcy of the bankrupt estates of Mr Hewton and Ms Hewton; (ii) Mr Hewton and Ms Hewton; (iii) the Registrar of the Court; and (iv) the Respondent; and (f) must pay into Court the surplus, if any, arising from the sale of the Property.

INTRODUCTION 1 This is an application for the vesting of the title to certain real property in the Applicant, the Commonwealth Bank of Australia (the Bank), which held a registered security over the fee simple interest in the property, in circumstances where the trustee in bankruptcy of the erstwhile registered proprietors of the land has disclaimed any interest in it. The effect of such disclaimer is that, save as a consequence of a vesting order made by this Court, the property would permanently vest by escheat in the Crown in the right of the State of Queensland. 2 For the reasons which follow, the Bank is entitled to the orders which it seeks and, given the careful and complete manner in which the application was made, it is entitled to the orders it seeks on the first return date of the application.

The Facts 3 On or about 9 October 2013, Mr Bradley Hewton and Ms Melanie Hewton entered into a loan agreement with the Bank which carried the eponymous title of, "Standard Variable Rate Investment Home Loan", pursuant to which the Bank agreed to advance by way of loan the sum of $336,000. 4 For the purposes of securing the performance of the obligations in the loan agreement, on 8 October 2013, Mr and Ms Hewton also executed a mortgage granting security over the title to land properly described as all that land on Lot 3 on Survey Plan 252044, Title Reference 50927936 (the Property). That parcel of land is also known as Unit 3, 37-39 Daisy Street, Miles in the State of Queensland. 5 The loan facility was fully drawn down on 15 November 2013, when the Bank advanced the funds to Mr Hewton and Ms Hewton, presumably to assist them in the purchase of the Property. 6 The title to the Property was transferred into the name of Mr and Ms Hewton on 25 November 2013 with the mortgage being duly registered pursuant to the Land Title Act 1994 (Qld) (Land Title Act) on the same day and given the registration number 715448443. 7 For some time thereafter, Ms Hewton made regular repayments pursuant to the terms of the facility. For reasons which are not explained, those repayments ceased in late 2019 and Mr and Ms Hewton fell into default with respect to their loan obligations. 8 The evidence before the Court reveals that Mr Hewton was made bankrupt on 31 January 2020 as was Ms Hewton on 20 April 2020. Mr Stuart George Reid was made the trustee in bankruptcy in respect of their respective estates. 9 The certificate of title relating to the Property discloses that legal title to the land has not been transferred to the trustee in bankruptcy pursuant to the Land Title Act. Accordingly, at least at all times up until the disclaimer by the trustee, the legal interest in fee simple in it remained with Mr and Ms Hewton: s 58(2) of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act). 10 Letters of Demand and Notices of Default under the provisions of the Property Law Act 1974 (Qld) (Property Law Act) were sent by the Bank to Mr and Ms Hewton in respect of their obligations under the loan agreement and the mortgage. By mid-2020, the entirety of the loan had become repayable and the amount then owing and secured by the mortgage was in excess of $338,000. As at the date of the making of the application, the amount owing under the loan facility and the mortgage was in excess of $341,000, the last payment having been made on the mortgage on 7 January 2020 in an amount of $100. 11 The material adduced by the Bank includes a property report which provides some indication of the value of the Property as being between $77,000 and $126,000, and probably at $100,000. The report refers to a number of recent sales of properties similar to the subject land where a sale price of around that value was achieved. It also demonstrates that there has been a substantial decline in house prices in the Miles area in the last five years. 12 By a letter of 6 May 2020 to the Bank, Mr Reid, in his capacity as the trustee of the estates of Mr and Ms Hewton, formally disclaimed any interest in the land. In it he indicated that he had formed the view that it was not commercially viable for him to realise the property which only held a negative equity for the estates which he was administering. He also indicated that he would notify the Registrar of Titles under the Land Title Act of his disclaimer. 13 A title search of the land undertaken on 16 December 2020 reveals the existence of an administrative noting on the title which was made on 12 August 2020. The documents obtained from the Land Titles office show that the noting relates to the receipt of a notice of disclaimer received by the Registrar of Titles from Mr Reid in respect of the property.

Effect of the disclaimer by the trustee 14 The effect of the trustee in Bankruptcy disclaiming any interest in the land was to cause the title previously held by the bankrupts to vest in the Crown in the right of the State of Queensland. In this respect, s 133 of the Bankruptcy Act relevantly 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. … 15 The nature of the operation of s 133 has been the subject of a number of decisions in this Court in recent years and the principles which have emerged in relation to it can be summarised as follows: (1) The reference to "property" in the section includes a reference to any land which is burdened with "onerous covenants", and that includes any financial obligations which can be enforced against the land: Re Tulloch Ltd (in liq) and the Companies Act (1977) 3 ACLR 808, 812; ING Bank (Australia) Limited v State of Queensland, in the matter of Watson [2017] FCA 411 (ING v Queensland) [15]; (2) A disclaimer operates immediately to determine the rights, interests and liabilities of the bankrupt and their trustee in respect of the property: s 133(2) of the Bankruptcy Act: and its effect is not dependent upon the registration of a notice of the disclaimer by the trustee: Commonwealth Bank of Australia v State of Western Australia, in the matter of Arbidans (a Bankrupt) [2020] FCA 1514 (CBA v WA) [19]; Commonwealth Bank of Australia v State of Queensland [2019] FCA 1362 [4]; (3) Where a trustee, who only holds an equitable title in a bankrupt's land because the bankrupt remains the registered owner, disclaims under s 133, the effect is to disclaim both that equitable interest and any legal interest of the bankrupt who remains registered under the relevant Torrens system legislation: Westpac Banking Corporation v State of Queensland [2016] FCA 269 [31]; Commonwealth Bank of Australia v State of Queensland, in the matter of Ginn [2016] FCA 1337 (Ginn) [15]; ING v Queensland [17] - [20]; Australia and New Zealand Banking Group Limited v State of Queensland, in the matter of McFarlane (a Bankrupt) [2017] FCA 696 (ANZ v Queensland) [17]; Australia and New Zealand Banking Group Limited v State of Queensland [2016] FCA 1566 [11] - [14]; CBA v WA [14]; (4) The primary consequence of disclaiming the fee simple interest is to cause of the process of statutory escheat to take effect with the consequence that full and complete title to the land vests in the Crown. Any existing mortgage over the fee simple interest is not enforceable against the Crown which has given no covenants to repay any money: Bank of Queensland Limited v State of Western Australia [2020] FCA 442 [36]. (5) However, it is now accepted that the erstwhile legal and equitable interests in the fee simple are not dissolved, and nor do they merge in the superior title; cf Purefoy v Rogers (1669) 85 ER 1181; with the consequence that the fee simple, which is taken to vest in the Crown, remains subject to any securities attaching to that interest: ING v Queensland [22] - [26]; National Australia Bank Limited v State of New South Wales [2014] FCA 298 [8] - [9]; ANZ v Queensland [17]; Stacks Managed Investments Ltd v State of New South Wales [2016] NSWSC 1349 [11] - [13]; National Australia Bank Limited v State of Queensland [2019] FCA 1780 (NAB v Queensland) 16; (6) It follows that subsequent to the making of the disclaimer by the trustee, a person with an interest in the fee simple, such as mortgagee, may make an application under s 133(9) of the Bankruptcy Act for the vesting of the property in them: National Australia Bank Ltd v Victoria (2010) 118 ALD 527, 530 [9] - [12]. It is possible that in the absence of the making of an order under this section the mortgagee will not be able to enforce their security: NAB v Queensland 16; (7) Prima facie, it is just and equitable to vest title to the disclaimed fee simple interest in land in an unsatisfied security holder whose security exists over that interest because the making of an order removes all doubt as to the veracity of any other action by a security holder to recover their debt (ANZ v Queensland [23]), to refuse to make the order would diminish the value of securities including registered securities, the disclaiming by the trustee strongly indicates that the security holder's claim exceeds the land's value, and the security holder has an interest to realise the land for the highest value: ING v Queensland [31] - [ 33]; (8) It is usually the case, and especially so in circumstances where the debt of the security holder exceeds the value of the land, that a Court will make orders liberalising the holder's ability to sell the land so that it may do so without compliance with statutory obligations relating to the exercise of the power of sale by security holders. That, is subject to the making of orders, such as the requiring of the making of an account, which ensure the security holder does not receive more than the amount to which it is entitled: Australia and New Zealand Banking Group Limited v State of Queensland [2016] FCA 1221; Ginn [19]; ING v Queensland [38]; ANZ v Queensland [25]; NAB v Queensland [25]. The orders sought and made in the present case are what have become the standard suite of orders giving effect to these matters.

Who are the proper parties to an application under s 133? 16 In order for any application under s 133 to be dealt with expeditiously it is appropriate that all persons with a relevant interest in the litigation, in that their interests may be affected by the outcome, should be served with the proceedings. As s 133(9) provides that the Court may exercise the power "after hearing such persons as it thinks fit", it is apparent that it may direct persons who might not be necessary parties to the proceedings to be given notice of the application. 17 It is necessary to make the Crown in the right of the State in which the real property is located a respondent to the proceedings as, on the facts on which the application is based, the making of the order will deprive the State of an interest in the property disclaimed. In CBA v WA, the applicant had also joined the registrar of titles under the relevant Torrens legislation, although it was not immediately obvious that was required. 18 Any person who has an interest in the property identified on the certificate of title which might be relevantly affected by the making of an order, would also be a necessary party to the proceedings. That would include any person who has lodged a caveat on the title to the land; see ANZ v Queensland [11] - [13]; or possibly a person who is a tenant in common of the bankrupt in the relevant property: Commonwealth Bank of Australia v State of Queensland [2019] FCA 2217 [14] 19 A question arises as to whether the trustee in bankruptcy of the erstwhile owner of the real property must also be made a party to the proceedings. It is sometimes said that the trustee has no interest in the proceedings, having disclaimed all interest. However, whether that disclaimer has occurred or not and whether it is effective can be an issue in the proceedings, and it is not one which might necessarily be assumed for the purposes of properly constituting the action. It will often be the case that the trustee, having disclaimed the property, is desirous of having nothing to do with litigation as to whether a secured creditor is entitled to have a vesting order made in its favour, and the cost of responding to an action can be an unnecessary and unwelcome expense for the administration. It is probably for this reason that a general practice has emerged to the effect that the trustee is usually not made a party to the proceedings, although notice of it is given to them. At the very least the giving of such notice is regarded as a matter of prudence.

Hearing of applications under s 133(9) 20 Applications for the vesting of property under s 133(9) of the Bankruptcy Act ought to be regarded as somewhat commonplace. Usually, they are unlikely to involve any difficult question of fact or law and are unopposed by any party. That being so, one might expect that such applications can and should be disposed of by the giving of judgment on the first return date. In order to ensure the granting of relief on that occasion an applicant should demonstrate: (a) the making of a valid application which has been brought against and served upon the relevant Crown entity and any other person with a relevant interest in the proceedings. It should also be shown that those parties have not sought to appear in the proceedings or, better still, that they do not oppose the making of the order; (b) the giving of notice to the trustee in bankruptcy. Again, it is useful and prudent to obtain the consent or, at least, the non-opposition to the making of the order from the trustee; (c) on the substantive application: (i) the existence of the land; (ii) the security holder's interest in the land and its entitlement to enforce its security, if any; (iii) the bankruptcy of the registered owner or owners of the land; (iv) that the trustee in bankruptcy has disclaimed of the relevant property pursuant to s 133(1) of the Bankruptcy Act and has given notice of it to the registrar of titles as required by s 133(3); (v) that the circumstances render it just and equitable that an order be made vesting the land in the security holder; and (vi) there are no unusual circumstances which might militate against the making of the orders. Whilst the application is not ex parte and the usual obligations associated with that do not apply, the Court is nevertheless somewhat dependent upon the security holder as to the scope of the evidence on which it is able to act. A court may be justifiably reluctant to make a vesting order in circumstances where something less than all the relevant facts are before it.

Circumstances of the present case 21 Here, the Bank has demonstrated that the Court should make the orders sought. The relevant parties have been served or notified of the application and no party opposes it. The Bank has also established that it is the holder of a security over the land which was owned by Mr and Ms Hewton, now bankrupt, and whose trustee in bankruptcy has disclaimed any interest in the property. Further, the evidence shows that the Registrar of Titles under the Land Titles Act was given notice of the disclaimer on or about 5 August 2020. 22 The Bank has also established that it is just and equitable that the vesting orders sought should be made. It held a valid security over the land for the purposes of the repayment of a loan made to the erstwhile registered proprietors and there is now doubt about whether it is able to enforce its security against the property. The Bank's claim in respect of the property is in an amount which greatly exceeds the current value of the property and it is unlikely to recover its debt or even a significant part of it even if an order is made. To refuse to make the order will diminish the value of real property securities generally. In general terms, the Courts should attempt to ensure that valid securities are given effect even after the process of escheat has vested the land in the Crown. To do otherwise would accord the Crown an unmerited windfall. 23 The orders sought by the Bank are of the standard kind which permit it to sell the land free of the burdens imposed on it by the National Credit Code, being Schedule 1 to the National Consumer Credit Protection Act 2009 (Cth), or by the Property Law Act. Such orders are appropriate in the circumstances where the fee simple title vests in it and the orders include obligations on the Bank to account for the receipt of the proceeds of sale. 24 The application should be allowed and the orders should be made vesting title to the Property in the Bank, facilitating the expeditious sale of the property, and requiring the provision of a proper account.

Post Script 25 It is necessary to record my appreciation to Mr Damnjanovic of Gadens Lawyers for his careful and fully referenced written submissions, which enabled the Court to dispose of the matter on the papers. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Derrington.

(Qld), the Property Law Act 1974(Qld)

Bankruptcy Act 1966(Cth)ss 58, 133

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