Westpac Banking Corporation v State of Western Australia

Counsel for the First and Second Respondents: Ms GM Mullins

Solicitor for the First and Second Respondents: State Solicitor's Office

Counsel for the Third Respondent: The third respondent did not appear

BETWEEN: WESTPAC BANKING CORPORATION (ABN 33 007 457 141) Applicant

AND: STATE OF WESTERN AUSTRALIA First Respondent

SHAKERA BAREKZI (A BANKRUPT) Third Respondent

order made by: JACKSON J DATE OF ORDER: 13 September 2021

Pursuant to s 133(9) of the Bankruptcy Act 1966 (Cth):

1. The estate in fee simple in the property described as Lot 227 on Plan 17411 in the Local Government of Wanneroo, being the property contained in Certificate of Title Volume 1879 Folio 368 and situated at 3 Aldersea Circle, Clarkson in the State of Western Australia (Property), vests in the applicant as mortgagee in possession for the purposes of the applicant exercising its powers as mortgagee under the Property Law Act 1969 (WA), the Transfer of Land Act 1893 (WA) and/or registered mortgage number K261846 (Mortgage).
2. On the vesting of the above interest in the Property in the applicant pursuant to s 133(9) of the Bankruptcy Act 1966 (Cth), the applicant: (a) may deal with the Property pursuant to its powers as mortgagee under the Property Law Act 1969 (WA), the Transfer of Land Act 1893 (WA) and/or the Mortgage, including exercising the right to sell the estate in fee simple of the Property in exercise of its power of sale and all its other rights under the Mortgage; (b) for the purpose of selling the estate in fee simple in the Property, is deemed to have served: (i) any further 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; or (ii) any further notice pursuant to s 106 of the Transfer of Land Act 1893 (WA); (c) must, for the purposes of giving effect to the sale of the Property pursuant to paragraph 2(a) of these orders, lodge with the Registrar of Titles at the Western Australian Land Information Authority (Landgate): (i) a sealed copy of these orders; (ii) a transfer of the Property as mortgagee exercising its power of sale (Form T4); and (iii) the duplicate Certificate of Title for the Property; (d) 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 in Bankruptcy of the bankrupt estate of the third respondent not disclaimed the Property, and (subject to paragraph 2(e) below) to deduct and retain for its own absolute use and property such amount from any proceeds of sale of the Property as 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); (e) must apply the proceeds of sale from the Property as follows: (i) first, in payment of any statutory costs and charges affecting the Property, which the relevant statute provides are payable in priority to the applicant; (ii) secondly, 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) thirdly, in discharge of the debt owed to the applicant by the third respondent; (iv) fourthly, in payment of any subsequent mortgages (if any); and (v) the residue (if any) of the proceeds so received must be paid to the Trustee of the bankrupt estate of the third respondent or, if when any surplus funds become available a Trustee has ceased to be appointed over the bankrupt estate of the third respondent, the surplus proceeds must be paid into Court; (f) must, after any sale of the Property, provide an account of its payments and receipts to: (i) Graeme Trevor Lean as Trustee of the bankrupt estate of the third respondent; (ii) the third respondent; (iii) the Registrar of the Court; and (iv) the first respondent.
3. The applicant's reasonable costs of and incidental to this proceeding are to be treated as reasonable enforcement expenses under its Mortgage over the Property and are to be payable from the proceeds of sale of the Property on the indemnity basis pursuant to clause B1(b) of the Mortgage Memorandum of Provisions No. H232954. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

JACKSON J: 1 In this application, Westpac Banking Corporation seeks orders pursuant to s 133(9) of the Bankruptcy Act 1966 (Cth) in relation to the vesting of real property which has been disclaimed by Graeme Trevor Lean, the trustee in bankruptcy of Shakera Barekzi (Trustee). The respondents are the State of Western Australia, the Western Australian Registrar of Titles and Ms Barekzi. They do not oppose the application. For the following reasons, the orders sought will be made (with minor amendments).

Background 2 Ms Barekzi is the registered proprietor and mortgagor of a property located in Clarkson in Western Australia (Property). 3 In June 2007, Ms Barekzi and Westpac entered into a loan agreement, under which Ms Barekzi borrowed $365,750 (First Loan Account). In April 2009, Ms Barekzi and Westpac entered into another loan agreement whereby Ms Barekzi together with another joint borrower borrowed a further $100,000 (Second Loan Account). Ms Barekzi's repayment obligations under both loan accounts were secured by a mortgage over the Property, and it appears that the other joint borrower under the Second Loan Account also provided security over a different property. Under the terms of the First Loan Account and the mortgage, Ms Barekzi was required to make monthly repayments to Westpac. Pursuant to the Second Loan Account, both Ms Barekzi and the other joint borrower were also required to make monthly repayments. 4 Beginning in March 2019, Ms Barekzi began to fall behind in the scheduled repayments in respect of the First Loan Account, which accordingly fell into arrears. The Second Loan Account, however, is not in arrears. The applicant submitted, and I infer, that the monthly payments have been maintained by the other joint borrower. 5 On 11 June 2019, Westpac sent Ms Barekzi a default notice in respect of the First Loan Account and the mortgage for failing to pay the sum of $5,483.17. Ms Barekzi was given until 19 July 2019 to remedy the default. On 5 July 2019, Ms Barekzi made a payment of $2,100. The repayments made thereafter were only for a fraction of the amount due and did not make up for the amount in arrears. The last payment made by Ms Barekzi was on 10 February 2020. 6 On 28 February 2020, Ms Barekzi was made bankrupt by way of a debtor's petition. On 11 March 2020, her Trustee gave notice to Westpac that he had disclaimed 'an interest' in the Property and associated mortgage contract. It is clear that the reference to 'an interest' was a typographical error, and that the Trustee intended to disclaim 'any interest'. 7 The Trustee disclaimed the Property on the basis that it fell within s 133(1AA) of the Bankruptcy Act because there was no realisable equity for the benefit of the bankrupt estate 'given the Westpac Banking Corporation mortgage amount, outstanding rates and taxes, responsibility for sundry utilities, agent fees and legal expenses'. This was said to make both the Property and the mortgage contract a 'burden and onerous contract'. Although not expressly stated by the Trustee, he was evidently relying on s 133(1) of the Bankruptcy Act in order to disclaim the Property (the relevant text of s 133 is set out below). It is not clear how the Trustee purported to disclaim the mortgage contract, presumably under s 133(1A), but no party suggested that this aspect of the disclaimer had any impact on Westpac's rights. 8 The bankruptcy is undischarged. As at 25 May 2021, the First Loan Account balance was $343,492.08, and was in arrears in the amount of $47,697.58, with interest, fees and costs continuing to accrue.

Orders sought 9 Westpac now wishes to enforce its mortgage over the Property with a view to recovering the amounts owing to it. It seeks orders under s 133(9) of the Bankruptcy Act to permit it to do so. If made, the orders will vest the Property in Westpac as mortgagee in possession, and authorise it to deal with the Property pursuant to its powers as mortgagee under the Property Law Act 1969 (WA), the Transfer of Land Act 1893 (WA) and the mortgage itself, including the right to sell the Property. 10 The orders sought will require Westpac to apply the proceeds of any sale: first, in payment of any costs and charges affecting the Property which have statutory priority; second, in payment of all of Westpac's costs, charges and expenses properly incurred as incidental to the sale or any attempted sale of the Property; third, in discharge of the debt owed to Westpac by Ms Barekzi; fourth, in payment of any subsequent mortgages; finally, the residue (if any) of the proceeds of the sale will be paid to the Trustee. But if a trustee is no longer appointed over Ms Barekzi's bankrupt estate, the orders sought require any surplus funds to be paid to the Crown in right of the State. Westpac will also be required to provide an account of its payments and receipts to interested persons, including Ms Barekzi, the Trustee, the court and the State.

Principles 11 The effect of the Trustee disclaiming the Property is that the fee simple escheated to the Crown in right of the State of Western Australia. This occurred in respect of both the legal title which Ms Barekzi held as registered proprietor, and the equitable interest her Trustee held by reason of the fact that the vesting of the Property in him was not followed by a transfer of the registered title: see Australia and New Zealand Banking Group Ltd v State of Queensland, in the matter of McFarlane (a Bankrupt) [2017] FCA 696 at [14]-[20]. So Westpac's rights against Ms Barekzi as mortgagor of the Property no longer allow it to enforce the mortgage over the Property, and it has no right to enforce the mortgage against the State: National Australia Bank Ltd v State of New South Wales [2014] FCA 298 at [9]. Accordingly, Westpac must be granted vesting orders under the Bankruptcy Act if it is to take action to realise its security. 12 Section 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. 13 The principles which govern the application of these provisions to the enforcement of mortgages have been the subject of numerous decisions in this court. Derrington J recently gave the following summary in Commonwealth Bank of Australia v State of Queensland, in the matter of Hewton [2021] FCA 22 at [15], which I gratefully adopt: (1) The reference to 'property' in [section 133] 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 Ltd v Queensland [2016] FCA 1221; Ginn [19]; ING v Queensland [38]; ANZ v Queensland [25]; NAB v Queensland [25].

Who should be heard on the application? 14 Section 133(9) of the Bankruptcy Act empowers the court to make vesting orders 'after hearing such persons as it thinks fit'. As I have said, the respondents are the State, the Registrar of Titles and Ms Barekzi. Generally speaking, an applicant for vesting orders under s 133(9) should show that the application has been brought against and served upon the relevant Crown entity and any other person with a relevant interest in the proceeding, and that those parties have either not sought to appear in the proceedings, or that they do not oppose the vesting orders: Hewton at [20(a)]. Similarly, notice of the application should be given to the trustee in bankruptcy, and it is prudent to obtain the trustee's consent, or at least their non-opposition to the vesting orders: ibid at [20(b)]. 15 Here, the State and the Registrar of Titles are respondents and have participated in the proceeding. The Registrar of Titles considers that the orders sought by Westpac are appropriate. The State does not oppose the orders sought, but has filed written submissions addressing whether Westpac has satisfied the necessary preconditions under s 133(9) of the Bankruptcy Act, and addressing the appropriate terms and scope of any orders made by the court. Those submissions have been of assistance to the court. 16 Ms Barekzi has also been served with the application and accompanying materials. I make no comment on whether it was necessary to include her as a respondent. In any event, she has not filed a notice of appearance in this proceeding and has not participated in it. Her Trustee has also been given notice of the application, and has stated that he has no objection to it. 17 Other than Westpac's mortgage, a standard caveat over rights to mineral deposits and the like on the land, and a caveat lodged by the Registrar of Titles notifying the disclaimer of the Trustee, there is no other interest registered on the title of the Property. 18 It is, however, necessary to consider the position of the other joint borrower of the Second Loan Account. There is no evidence before the court as to who the borrower is and whether they have been made aware of this application. The amounts due under the Second Loan Account have been consistently paid, and the account is not in arrears. As I have indicated, it appears that the other borrower, and not Ms Barekzi, has been making those payments. 19 It would be in the interests of that other borrower for Westpac to apply the proceeds of sale of the Property to reduce the balance owing under the Second Loan Account, which is secured over the Property. But since the Second Loan Account is not in arrears and appears to be secured by a second property, that appears unlikely. The orders sought permit (but will not require) Westpac to apply all the net proceeds against the First Loan Account. It is therefore conceivable that the other joint borrower may have a concern about the application of the funds that Westpac will realise under the orders it seeks. 20 However, Westpac would generally be entitled to select which security it wanted to resort to and realise first: Mango Media Pty Ltd v Mertes [2006] NSWSC 1460; (2006) 14 BPR 26,971 at [32]. To the extent that this is not so here, it still could not affect the question of whether a vesting order over the Property should be made. A concern about the application of surplus funds is not the same thing as an interest in the Property which is to vest in Westpac. Subject to one possibility, nothing in the arrangements that have been disclosed to the court suggests that the other borrower has any such interest in that property. 21 The possibility that qualifies that last proposition is that, to the extent that the other borrower has been discharging the Second Loan Account, that might give him or her rights of contribution against Ms Barekzi: see Burke v LFOT Pty Ltd [2002] HCA 17; (2002) 209 CLR 282 at [42]-[44]. Any such rights would be in personam between Ms Barekzi and the other borrower and would not affect Westpac's right to apply the sale proceeds in discharge of the First Loan Account: see Friend v Brooker [2009] HCA 21; (2009) 239 CLR 129 at [38]. But in some circumstances, the in personam rights could be supported by subrogation to Westpac's security interest in the Property: see Official Trustee in Bankruptcy v Citibank Savings Ltd (1995) 38 NSWLR 116 at 119. 22 I have therefore considered whether it was necessary to serve the other borrower with the application in this case. I do not consider that it was because, despite the general principles just summarised, I do not see how subrogation could possibly arise here. It could only do so if the entire debt secured by the relevant mortgage were to be discharged: see Ghana Commercial Bank v Chandiram [1960] AC 732 at 745 and Boscawen v Bajwa [1996] 1 WLR 328 at 335B, 340G. Here, the other borrower has only paid part of that debt, namely part of the Second Loan Account, and that has not led to a discharge of the mortgage over the Property. Also, the relevant principle as to subrogation is usually invoked where the person who pays off the secured debt can be presumed to have wanted to keep the security alive for their own benefit: see Ghana Commercial Bank at 745 and Boscawen at 339G. Here, the other borrower has simply been discharging his or her own liability to Westpac under the Second Loan Account, so no such presumption can arise. 23 I am therefore satisfied that there is no basis to suggest that the other joint borrower has any interest in the Property, so there is no reason to hear from him or her in the present application. All necessary parties have been joined.

Is it just and equitable to make the vesting orders? 24 Pursuant to s 133(9) of the Bankruptcy Act, the court may make an order on such terms as it considers just and equitable for the vesting of the property in a person in whom it seems to the court to be just and equitable that it should be vested. 25 Ms Barekzi owes Westpac almost $400,000 under the First Loan Account. The account is in substantial arrears. Westpac holds a registered mortgage over the Property in order to secure that indebtedness. Unless the vesting orders are made, it is unlikely that Westpac will be able to enforce its mortgage and recover the amount owing to it, as it may have been able to do had the Property not been disclaimed. The court will attempt to ensure that valid securities are given effect even after the process of escheat has vested the land in the Crown, because to do otherwise would provide the Crown with an unmerited windfall: Hewton at [22]. It is accordingly just and equitable to make the vesting orders in favour of Westpac. The State makes no submission on the subject and so does not suggest otherwise.

Terms on which vesting is to occur 26 The court may make the vesting order on such terms as it considers just and equitable: Bankruptcy Act s 133(9). Westpac proposes orders authorising but not requiring it to deal with the properties as if it were exercising its powers as mortgagee in possession, including a power of sale. The orders would also exempt Westpac from the burdens of notice imposed on it by the National Credit Code, being Schedule 1 to the National Consumer Credit Protection Act 2009 (Cth) and the Transfer of Land Act. That is appropriate, as such notices would be redundant in this case. 27 I have summarised the other terms of the proposed orders above. Subject to one qualification, they are also appropriate, as they will mean that all interested parties will receive an account of Westpac's payments and receipts, and that the surplus funds (if any) will be in the hands of the Trustee whose role it is to determine to whom they should be paid. 28 The qualification is that it is possible that there is no trustee in bankruptcy in office when any surplus is realised. The orders sought would mean that the surplus would be paid to the Crown. That is likely to be academic, because there probably will be no surplus. But I am not persuaded that the Crown is the appropriate ultimate destination of the funds. In my view, if there are any surplus funds at a time when the Trustee is no longer in office, they should be paid into court. Numerous authorities can be arrayed on either side: those in which surplus funds are ordered to be paid to the Crown to which the property has escheated (see e.g. Bank of Queensland Ltd v State of Western Australia [2020] FCA 442 at [47]; National Australia Bank Ltd, in the matter of Collins (a bankrupt) v State of Queensland [2020] FCA 1889 at [8]-[9]) and those in which the surplus funds are paid into court (see e.g. St George - A Division of Westpac Banking Corporation v State of Western Australia [2020] FCA 397 at [29]). Those authorities reveal that there is no single principle that must be applied; it is a matter of discretion in the circumstances of the case. In this case, Westpac does not advance any strong submission in favour of paying the surplus to the State other than to note, correctly, that Westpac will have no entitlement to or interest in residue proceeds. That being so, the views of Westpac on the subject carry limited weight. 29 The State submits that it is appropriate for it to receive any surplus funds because had the application not been made, the Property would have remained vested in the Crown. However, once the orders are made, the Property will no longer be vested in the Crown, so that prior vesting, which reflects the feudal origins of the Australian law of property (see Attorney-General of Ontario v Mercer (1883) 8 App Cas 767 at 772 and Re Tulloch Ltd (1978) 3 ACLR 808 at 813), also carries little weight. The State also submits that it will be in a position to take a flexible approach to the distribution of surplus funds. It submits that the costs to the parties and the resources of the court to manage the funds if they are paid into court will be disproportionate. But holding funds and disbursing them appropriately is a proper function of the court in cases like this, and there is no real basis to think that the process will be significantly less costly if the Crown is holding them instead. 30 In my view, in the unlikely event that there are surplus funds with no trustee in bankruptcy to act as custodian of them, it is appropriate that they be paid into court as the body in the best position to make an impartial decision on the merits as to where they should be paid. That is particularly so when, as here, there is a third party (the other borrower) who may wish to lay claim to some or all of any surplus funds.

Conclusion 31 The application will be allowed and, subject to the point about surplus funds I have just addressed, the orders sought will be made vesting title to the Property in Westpac. There will also be an order that Westpac's reasonable costs of and incidental to this proceeding are to be treated as reasonable enforcement expenses under the mortgage and are to be payable from the proceeds of sale of the Property on an indemnity basis as required under the mortgage. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackson.