Enforcing Interests in Disclaimed Land


Enforcing Interests in Disclaimed Land

Introduction

A bankruptcy trustee has the power to disclaim interests in land that are burdened with onerous covenants, unsaleable or not readily saleable. On doing so, the interest formerly held by the bankrupt re-vests in the Crown in the right of the State under the doctrine of escheat.

What effect does bankruptcy and disclaimer have on third parties’ interests in the land? How can a third party enforce its interest in the land? These questions were considered in two recent decisions of the Federal Court of Australia.

Kellendonk v State of Western Australia, in the matter of Jasienska-Dudek (a Bankrupt) [2021] FCA 418

Jasienska-Dudek mortgaged her land to the Kellendonks and the mortgage was registered. Following default under the mortgage, Jasienska-Dudek sold her interest in the land to the Kellendonks. The consideration for the sale was a release of all claims against Jasienska-Dudek. A transfer of land was signed, but was not registered.

Subsequently, Jasienska-Dudek was made bankrupt. The Official Trustee did not transfer the land into his name and instead disclaimed the interest in the land.

The Kellendonks sought to register the transfer of land but were refused by Landgate (the Western Australian Land Information Authority) on the basis that the transferee (Jasienska-Dudek) did not have the authority to deal with the property given the subsequent bankruptcy and disclaimer.

The Kellendonks then sought an order under section 133(9) of the Bankruptcy Act 1966 (Cth)(Bankruptcy Act), which states:

The Court may, on application by a person either claiming an interest in … disclaimed property, and after hearing such persons as it thinks fit, make an order … 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…”

The primary relief sought by the Kellendonks was a vesting order in respect of their interest as transferor rather than their interest as mortgagee.

Justice Jackson found that the disclaimer terminated Jasienska-Dudek’s legal interest and the Official Trustee’s beneficial interest and caused the land to re-vest in the Crown in the right of Western Australia. However, the provision of the signed transfer of land by Jasienska-Dudek gave the Kellendonks an equitable title, which survived the subsequent bankruptcy and disclaimer.

Justice Jackson observed that the Kellendonks would not receive a windfall from the sale of the property as the debt owed to them exceeded the realisable value of the property. The interest was found to be an interest for the purpose of section 133(9) of the Bankruptcy Act and a vesting order was made on the basis that it was just and equitable.

Commonwealth Bank of Australia v State of Victoria [2021] FCA 705

Andric mortgaged his interest in two properties to the Commonwealth Bank of Australia (CBA). CBA registered the mortgages on title.

Andric was made bankrupt. The bankruptcy trustee did not transfer title to the properties into his (the bankruptcy trustee’s) name. Rather, the trustee disclaimed the interests in the properties. Justice Anastassiou held that the bankruptcy trustee’s disclaimer was effective under section 133 of the Bankruptcy Act, despite legal title to the properties remaining with Andric. The disclaimer caused the properties to re-vest in the Crown in the right of Victoria.

Given that, under section 133(2) of the Bankruptcy Act, disclaimer did not affect the rights or liabilities of any other person, why could CBA not enforce its mortgage against the State of Victoria? This “tension” was considered in National Australia Bank Limited v State of New South Wales [2014] FCA 298 where Justice Perram found:-

  • The mortgagor’s (i.e. Andric’s) interest ceased to exist and therefore the bank had no right of enforcement against the mortgagor.
  • The bank had no right of enforcement against the State (i.e. because the State took the interest not as a successor to the mortgagor but by law).
  • The bank’s continuing interest was one that could be relied on to seek a vesting order under section 133(9) of the Bankruptcy Act.

Accordingly, CBA applied for a vesting order under section 133(9) of the Bankruptcy Act. Justice Anastassiou granted the order on the basis that a mortgagee’s interest in land was recognised as an interest in property under section 133(9) and without such an order, CBA would be unable to “make good its security position” and would therefore be deprived of its security.

Take away

A third party can maintain its interest in land despite the bankruptcy of the registered proprietor and the subsequent disclaimer of the interest in the land by the bankruptcy trustee. However, the third party may be unable to enforce its interest if:

  • the relevant authority refuses to register the dealing giving rise to the interest (such as a signed transfer of land); or
  • the interest is that of a mortgagee and the mortgage covenants cannot be enforced against the State.

In those circumstances, the third party can apply for a vesting order under section 133(9) of the Bankruptcy Act to take advantage of or enforce its interest.


Marcus Foggarty, Associate