St George - A Division of Westpac Banking Corporation v State of Western Australia

BANKS-SMITH J: 1 The applicant Bank seeks orders vesting title of two Properties (in Maylands and Port Hedland respectively) in it so that it can sell those Properties exercising its powers as mortgagee in possession and apply the proceeds against debts due to it by the third respondent, Lorraine Butson. 2 The application is made under s 133(9) of the Bankruptcy Act 1966 (Cth) which provides that: (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. 3 I am satisfied that parties with an interest in the application have been served. The only respondent that has sought to be heard is the State of Western Australia and I acknowledge the useful submissions filed by both the Bank and the State.

Facts 4 The following facts are established by the affidavits of Jarrod Ramage, a secured recoveries case manager with the Bank, and Melinda Smith, a partner of the firm of MinterEllison who has carriage of the application on behalf of the Bank. 5 On or about 16 March 2009, the Bank entered into a Loan Agreement with Ms Butson secured by a Mortgage over the Properties. The Mortgage is registered over the titles to the Properties and bears registered mortgage number K901093. Registered mortgage memorandum of provisions number G294339 applies to the Mortgage. 6 By the terms of the Loan Agreement and Mortgage, Ms Butson was required to make monthly repayments. 7 No payment has been made by Ms Butson since at least April 2015. Accordingly, Ms Butson is in default under the Loan Agreement and the Mortgage. The Bank is entitled to enforce its rights under the Mortgage, which include taking possession of and selling the Properties. 8 On 2 November 2015 Ms Butson was made bankrupt on a petition issued on behalf of the Deputy Commissioner of Taxation. Initially the Official Trustee was appointed the trustee of her bankrupt estate. However, on 8 June 2016 Jennifer Low, of the accounting firm Sheridans, was appointed the Trustee. 9 The Trustee lodged caveats on the titles to the Properties upon her appointment, notifying that she claimed an interest in the estates in equity as trustee of the estate of Ms Butson. 10 On or about 8 December 2018, the Trustee notified the Bank by notices of disclaimer that she disclaimed any interest in the Properties under s 133(1) of the Bankruptcy Act. The Trustee advised that having regard to the Mortgage, the costs and expenses of realising the Properties were likely to exceed any proceeds she might receive. 11 The Bank wishes to enforce the Mortgage over both Properties. On 4 January 2017 and 6 August 2018 the Bank served notices of default on Ms Butson. The default notices were in evidence, and set out the nature of the default and the consequences for Ms Butson if the arrears were not met, including that the total amount outstanding under the Loan Agreement would be immediately due and payable. Ms Butson did not comply with the default notices. 12 At about the date of filing of the application, the amount due under the Loan Agreement was $702,458.84 with arrears of some $33,308.74. Mr Ramage has certified those figures in accordance with the terms of the Mortgage. A copy of an extract from the Bank's computerised records for the account for the Loan Agreement also supports that position. Interest has continued to accrue.

Effect of bankruptcy and disclaimer 13 Pursuant to s 58(1)(a) of the Bankruptcy Act the effect of the making of the bankruptcy order with respect to Ms Butson's estate was that all of the right, title and interest in her estate vested in the Official Trustee and then the Trustee. 14 However, Ms Butson's interests in the Properties were fee simple interests in land. The effect of s 58(2) of the Bankruptcy Act is that legal title to fee simple interests in land does not vest in the trustee in bankruptcy on the making of the bankruptcy orders. In order for a trustee in bankruptcy to secure legal title to those interests, it is necessary to cause the land to be registered in their own name. 15 This is provided for by s 234 of the Transfer of Land Act 1893 (WA). That provision entitles every person who, as trustee, is the representative of a bankrupt estate to be registered as the proprietor of property. However, the requirements of the Transfer of Land Act must be complied with, and unless that occurs, the trustee in bankruptcy has only equitable title to the property. 16 The Trustee did not seek to be registered as the proprietor of the Properties. 17 Rather, as noted above, the Trustee disclaimed any interest in the Properties. 18 Section 133(1) of the Bankruptcy Act affords trustees in bankruptcy 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. 19 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 notices of disclaimer issued by the Trustee were addressed to the Bank, Ms Butson, the Official Receiver and Landgate (for the attention of the Registrar of Titles), and appear to have been properly issued in writing under s 133(1) of the Bankruptcy Act. 20 The effect of a disclaimer in circumstances where a trustee in bankruptcy has not become the registered proprietor was summarised by Derrington J in Australia and New Zealand Banking Group Limited v State of Queensland, in the matter of McFarlane (a Bankrupt) [2017] FCA 696 as follows: [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. 21 See also Commonwealth Bank of Australia v State of Queensland; in the matter of Ginn [2016] FCA 1337 at [16], where Edelman J described the view stated by Perram J in National Australia Bank Limited v State of New South Wales [2014] FCA 298 (cited by Derrington J in the above extract) as the 'dominant view'. Justice Edelman continued: [16] … However, on any view, in this process a pre-existing charge is not extinguished. A fee simple interest remains subject to a charge even after disclaimer and escheat: Rams Mortgage Corporation Ltd v Skipworth (No 2) [2007] WASC 75; (2007) 210 FLR 11, 15 [10] (E M Heenan J, citing Sandhurst Trustees, 564 (Bryson J)); National Australia Bank Ltd v State of New South Wales [2014] FCA 298 [8] (Perram J). 22 I respectfully adopt the position as explained in Commonwealth Bank of Australia v State of Queensland; in the matter of Ginn and Australia and New Zealand Banking Group Limited v State of Queensland, in the matter of McFarlane. It follows that the Trustee's notices of disclaimer determined the interests of both Ms Butson and the Trustee with respect to the Properties, but the Bank's rights under the Mortgage remain 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) of the Bankruptcy Act.

Just and equitable 23 I accept the Bank's submission that it is just and equitable that the Properties vest in it. A significant amount of money remains outstanding to the Bank. It is proper that the Bank should have the opportunity to take reasonable steps to recover the monies which it provided to Ms Butson and that remain outstanding, a step that would have been open to it if the Properties had not been disclaimed, taking into account Ms Butson's default. Without such an order, the Bank will be unable to sell the Properties and will be deprived of the benefit of the Mortgage.

Orders 24 The Trustee has indicated through correspondence with MinterEllison that she does not oppose the orders sought and is willing to withdraw the caveats previously lodged by her over the Properties to facilitate a sale if the orders are made. 25 The Bank and the State are largely in agreement as to the nature of the orders that should be made. Indeed the orders are of a form described as 'usual' by Edelman J in Commonwealth Bank of Australia v State of Queensland, in the matter of Ginn at [19]. As is standard, the Bank seeks that the Properties vest in it so that it can exercise its powers of sale as mortgagee in possession. The exercise of such rights does not require the Bank to be the registered proprietor of the Properties. The order in this regard is appropriate. 26 The only issue upon which the parties do not agree is what should happen to any surplus proceeds of sale. The Bank seeks an order that any surplus be paid into Court, so that rights to the surplus can be determined if and when the issue arises. It refers to a number of cases where such an order has been made: Commonwealth Bank of Australia v State of Queensland, in the matter of Ginn; and Australia and New Zealand Banking Group Limited v State of Queensland, in the matter of King [2016] FCA 1338 (Edelman J). See also Commonwealth Bank of Australia v State of Queensland [2018] FCA 1041 (Rangiah J); and National Australia Bank Limited v State of Queensland [2018] FCA 1624 (Logan J). 27 On the other hand, the State seeks an order that any surplus proceeds be paid to the Trustee for distribution. I accept that there has been, in a number of authorities, some suggestion that any excess might revert to the trustee in bankruptcy: see the orders in Australia and New Zealand Banking Group Limited, in the matter of Hawks (bankrupts) v State of Queensland [2018] FCA 1982 (Griffiths J); National Australia Bank Limited v The State of Queensland [2018] FCA 2020 (Burley J); and AMP Bank Limited v State of New South Wales [2014] FCA 1437 (Rares J). 28 In circumstances where the Trustee has expressly disclaimed the Properties, there is room for different views as to whether any surplus should be paid to the Trustee. The Bank's submissions do not address the authorities where the court ordered that there be payment of any surplus to the trustee. However, the Trustee was in the best position to assess the question of whether there might be any surplus proceeds at the time of the disclaimer. Having made such an assessment, the Trustee chose to disclaim both Properties. Accordingly, I am of the view that the question is most likely to be academic. 29 Under the orders the Bank is in any event to account to the Registrar of this Court. Therefore, I consider that it is appropriate that any surplus proceeds be paid into Court. Any issue as to the dispersal of the surplus might then be ventilated fully. The State says that such a course may impose too high a costs burden on the Trustee as it may be necessary to initiate or be involved in a further hearing. However, the extent of the Trustee's involvement in any further hearing is a matter for the Trustee to consider, having regard to the quantum of any relevant surplus once known. 30 It follows that I will make orders in terms as sought by the Bank, with minor edits as to form only. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Banks-Smith.