National Australia Bank Limited v The State of Queensland

1. INTRODUCTION 1 Ben-Burt Jacobus Smit is the registered proprietor the land described as Lot 6 on survey plan 255635, being all of the land contained in title reference 50907494 and situated at 6 Rosella Court Moranbah (also known as 6 Bush Lark Grove Moranbah) in the state of Queensland (property). On 8 June 2013 he granted a mortgage registered number 715163423 over the property in favour of the applicant, the National Australia Bank Ltd (NAB). The mortgage secured Mr Smit's obligations under a NAB Choice Package Variable Rate Interest Only Home Loan (loan agreement) pursuant to which the NAB offered to extend credit to Mr Smit. 2 On 14 October 2017 the second respondent, Mr Frank Lo Pilato, was appointed trustee of the bankrupt estate of Mr Smit. On 14 December 2017, the trustee gave notice to the NAB of his disclaimer of any interest in the property (notice of disclaimer). Mr Smit's indebtedness to the NAB under the loan agreement and mortgage as at 12 October 2018 is $539,994.10 (debt). The evidence reveals that the most recent estimated value of the property, as at 14 August 2018, is $270,000. 3 By Originating Application dated 1 August 2018 filed pursuant to section 133(9) of the Bankruptcy Act 1966 (Cth), the NAB seeks an order that the disclaimed property vest in it, as a party interested in the subject property as registered mortgagee. 4 Section 133 concerns the disclaimer of onerous property. Subsection 133(9) provides that the court may, on application by a person claiming an interest in disclaimed property, make an order on such terms as the court considers just and equitable, for the vesting of the property in a person entitled to it or to whom it seems to the court to be just and equitable that it should be invested. 5 More specifically, the NAB seeks in its Originating Application: (a) a declaration that it is entitled to calculate the entirety of the debt secured and owing pursuant to the mortgage over the property as if there had been no disclaimer of the property by the trustee; (b) an order that the estate in fee simple in the property shall vest in the NAB for the purpose of exercising its powers as mortgagee under the Land Title Act 1994 (Qld), Property Law Act 1974 (Qld) and under the mortgage subject to 3 conditions that in broad terms first, relieve it of obligations to serve default notices under the National Consumer Credit Protection Act 2009 (Cth), Property Law Act 1974 (Qld) and Residential Tenancies and Rooming Accommodation Act 2008 (Qld), secondly provide that the proceeds of sale from the property be applied in a specified way (including the payment of any surplus to the trustee after the debt is paid), and thirdly that after any sale of the property the NAB must give certain notices to the respondents in substantially similar form to that prescribed in section 85(2) of the Property Law Act 1974 (Qld); and (c) an order that the costs of and incidental to the proceedings be treated as reasonable enforcement expenses under the mortgage and are to be payable from the proceeds of sale of the property pursuant to clause 13.2 of the mortgage. 6 The evidence discloses that personal service of the proceedings was made on the trustee, but he has not appeared. This is perhaps not surprising given that he has disclaimed the property, and the disparity between the amount of the debt and the value of the property. The effect of the disclaimer is that the property vests in the first respondent, the State of Queensland. It has filed a submitting appearance and has indicated in correspondence that was tendered in the proceedings that it will submit to any orders made, subject to costs.

2. THE RELEVANT LEGISLATION AND PRINCIPLES 7 Section 133 of the 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. … (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. (12) A person aggrieved by the operation of a disclaimer under this section shall be deemed to be a creditor of the bankrupt to the extent of any loss he or she has suffered by reason of the disclaimer and may prove the loss as a debt in the bankruptcy. (13) In this section: mortgage includes charge. mortgagee includes the person entitled to the benefit of a charge. 8 Regulation 6.01 of the Bankruptcy Regulations 1996 (Cth) provides: 6.01 Priority payments under section 109 of the Act - prescribed matters (1) Payment of proceeds of the property of a bankrupt under paragraph 109(1)(a) of the Act is to be in the order set out in Schedule 3. (2) For the purposes of item 5 of Schedule 3: (a) a reference to the petitioning creditor is taken to include a reference to a petitioner whose petition has not been proceeded with because of the acceptance of the debtor's petition; and (b) paragraph (a) applies irrespective of whether the debtor's petition was referred to the Court under subsection 55(3B) of the Act or, if the petition was so referred, the outcome of the reference. 9 It is apparent from s 133(2) that the effect of a trustee's disclaimer will operate to "determine forthwith the rights, interests and liabilities of the bankrupt" in respect of the property disclaimed. It does so, however, without prejudice to the continuing existence of the rights of any other person. This follows from the words in the section that the disclaimer will not "affect the rights or liabilities of any other person"; National Australia Bank Limited v State of New South Wales [2014] FCA 298 (Perram J) (NAB Case) at [7]. 10 In the NAB case Perram J said this of the consequence of the disclaimer: [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. 11 After setting out the terms of s133(9) - (11) of the Act, his Honour continued: [10] It has been held that a mortgagee of Torrens title land is a person 'claiming an interest in' disclaimed property within the meaning of s 133(9): see Re Hopgood; ex parte Coveney (1957) 18 ABC 133 at 139-41; Re Tulloch at 814; NAB v Leroy at [7]. In NAB v New South Wales Rares J made the following statement at [29]: '[b]y force of s 133(2) the effect of the trustee's disclaimer...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 3 ACLR at 814. I am of [the] 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.' [11] A similar view was arrived at by Madgwick J in NAB v Leroy at [7]. It is apparent from the foregoing that on an application such as the present the Bank will be entitled to a vesting order if it is shown: (a) that a disclaimer to relevant property has occurred within the meaning of s 133; (b) that the applicant has an interest in the disclaimed property within the meaning of s 133(9); and (c) that the applicant is entitled to the disclaimed property or that the Court considers it to be just and equitable that it should be so vested or delivered. 12 I respectfully agree with the approach set out in the NAB case, and now turn to consider whether, on the evidence in the present case the NAB has satisfied each of the three requirements for a vesting order.

3. APPLICATION TO THE FACTS 13 In evidence is a notice of disclaimer executed by the trustee and dated 14 December 2017. It provides in terms that the trustee disclaims the property. 14 The NAB correctly submits that it is not clear from the terms of the notice of disclaimer the basis, pursuant to s 133(1AA), on which the property has been disclaimed. However, in the present case, an inference may be drawn, in my view, that the property has been disclaimed because it is 'unsaleable or is not readily saleable', see National Australia Bank Limited v State of South Australia (No 2) [2015] FCA 240 (Griffiths J) (NAB v South Australia (No 2)) at [20] and National Australia Bank Limited, in the matter of San Esteban (former bankrupt) v State of New South Wales [2015] FCA 289 (Flick J) at [16]. Accordingly, I am satisfied that a disclaimer has occurred within the meaning of s 133 of the Act. 15 Secondly, I am satisfied that the NAB has the requisite interest in the property within the meaning of s 133(9) of the Act. This arises from its first registered mortgage over the property, a copy of which has been put into evidence as an annexure to an affidavit sworn by Brigette Murphy, an associate, customer solutions, of the NAB. As a mortgagee of Torrens title land, the NAB is relevantly a person "claiming an interest in" disclaimed property; see NAB case at [10]. 16 Thirdly, in my view, the NAB is entitled to the disclaimed property, or it is just and equitable that it be vested in the NAB. As I have noted, the evidence indicates that Mr Smit's indebtedness to the NAB under the loan agreement and mortgage as at 12 October 2018 is $539,994.10. The most recent estimated value of the property, as at 14 August 2018, is $270,000. Unless a vesting order is made, the NAB will be deprived of the benefit of its security, for it has a total secured debt which is almost double the estimated value of the property. The making of a vesting order will enable it to be used for the purpose for which it was originally mortgaged, namely to secure payment to the bank of all principal interest and other monies due to it notwithstanding the effect of the disclaimer; see the NAB case at [11] and NAB v State of South Australia (No 2) at [22]. 17 Further, the orders sought allow for the prospect, as remote as it may seem given the shortfall between the value of the property and the amount of the debt, for any surplus to be paid to the trustee. 18 Finally, I note that the State of Queensland has filed a submitting appearance and chosen to file no submissions and that the trustee has no apparent interest in proceedings. A recent title search of the property tendered in evidence reveals that no other person has any interest in priority to NAB's interest by virtue of the mortgage, and no evidence suggests that any other person has an interest in the property. 19 Accordingly, in my view the NAB has established the preconditions necessary for the orders that it seeks to be made.

I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Burley.