FEDERAL COURT OF AUSTRALIA

Commonwealth Bank of Australia v State of New South Wales, in the matter of Erik Hornum (A Bankrupt) [2019] FCA 1217

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 133(9) of the Bankruptcy Act 1966 (Cth), the whole of the land in Certificate of Title, Folio Identifier 8/877561 and known as 8 Long Gully Road, Drake in the State of New South Wales (Property) vest in the Applicant for the purpose of the Applicant exercising its powers as mortgagee under the Real Property Act 1900 (NSW), Conveyancing Act 1919 (NSW) and registered mortgage numbered A1130915 (Mortgage).

2.    On the making of Order 1, on vesting of the Property pursuant to s 133(9) of the Bankruptcy Act 1966 (Cth), the Applicant:

(a)    be permitted to act as if exercising its powers as mortgagee in possession, including its exercise of the power of sale as mortgagee under the Real Property Act 1900 (NSW), the Conveyancing Act 1919 (NSW) and the Mortgage;

(b)    for the purpose of selling the estate in fee simple of the Property in exercise of its power of sale, not be required to serve a notice of default or demand under s 57(2)(b) of the Real Property Act 1900 (NSW) or a notice of default or demand under section 88 of Schedule I to the National Consumer Credit Protection Act 2009 (Cth) or otherwise;

(c)    be entitled to calculate the entirety of the debt secured and owing (Debt) pursuant to its Mortgage as including all monies that would have been secured by the Mortgage had the trustee in bankruptcy of Erik Hornum 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)    will apply the proceeds of sale from the Property in priority as follows:

(i)    first, in payment of any statutory charges affecting the Property which the relevant statute provides are payable in priority to the Mortgagee;

(ii)    secondly, in payment of all costs, charges and expenses properly incurred by the Applicant (including its agents) incidental to any sale or any attempted sale of the Property;

(iii)    thirdly, in discharge of the Debt secured by the Mortgage;

(iv)    fourthly, in payment of any subsequent mortgages or encumbrances (if any); and

(v)    fifth, the residue (if any) of the proceeds so received and remaining shall be paid to the trustee in bankruptcy of Erik Hornum, or in the event that the balance of the sale proceeds is subject to competing interests, into Court.

3.    Within 14 days after settlement of the sale of the Property, the Applicant provide an account of its payments and receipts in respect of the manner in which the sale proceeds of the Property have been dealt with to:

(a)    Robert William Naudi as trustee of the bankrupt estate of Erik Hornum;

(b)    The Respondent; and

(c)    The Registrar of this Court.

4.    The Applicant’s costs of, and incidental to, this proceeding are to be treated as reasonable enforcement expenses under the Mortgage and are to be payable pursuant to order 2(c) above from the proceeds of sale of the Property.

5.    There be no other order as to costs.

6.    In the absence of the filing of any interlocutory application, within 28 days after the account provided for in Order 3 above, the Application be otherwise dismissed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

(Revised from transcript)

1    The Commonwealth Bank of Australia (bank) is the registered mortgagee of land which was purchased by one Eric Hornum subject to that mortgage. Mr Hornum defaulted on his obligations under the mortgage and subsequently went into bankruptcy. His trustee in bankruptcy, in whom the land then vested, disclaimed the property under s 133 of the Bankruptcy Act 1966 (Cth).

2    Section 133 relevantly provides:

(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.

3    By subs 133(2), the disclaimer operates so as to immediately terminate the rights, interests and liabilities of the bankrupt in relation to the disclaimed property and to discharge the trustee from personal liability. Except to the extent necessary to release from liability the bankrupt, the bankrupt’s property and the trustee, however, the disclaimer does not affect the rights or liabilities of anyone else.

4    But s 133 also gives the Court power to vest the property in a person claiming an interest in the property. Subsection 133(9) provides that:

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.

5    The bank applies for such an order along with a number of ancillary orders, which would enable it to sell the Hornum property and use the proceeds to discharge the outstanding debt on the mortgaged land. A similar suite of orders were described by Edelman J in Commonwealth Bank of Australia v State of Queensland, in the matter of Ginn [2016] FCA 1337 at [2] as “the usual orders under s 133(9)”. The State of New South Wales has been named as the respondent because, in the absence of a vesting order, upon disclaimer the property escheats (reverts) to the Crown: see Re Tulloch Ltd (In Liquidation) (1978) 3 ACLR 808 (Needham J); National Australia Bank Ltd v New South Wales (2009) 182 FCR 52 (Rares J) (NAB v NSW) and the other authorities referred to there.

6    The application was supported by three affidavits, sworn by Manoj Thomas, an asset realisation specialist employed by the bank, Robert Bianchini, a solicitor employed by HWL Ebsworth Lawyers, the lawyers for the bank, and Malama Leatigaga, a property solution specialist with the bank.

7    The application is unopposed. The State of New South Wales filed a submitting appearance. The trustee in bankruptcy was notified of the proceeding and does not wish to be heard. On 28 March 2019 the trustee wrote to Mr Bianchini advising that he was “agreeable to the orders” the bank was seeking and had “no objections or concerns”. A copy of the originating application, the affidavit of Mr Thomas and the exhibit to that affidavit were served on the trustee on 10 July 2019 and he has not apparently changed his position. A title search of the Hornum property indicates that the bank is the only registered mortgagee and that there are no caveats on the title.

8    The property in question is a parcel of land in rural New South Wales near the village of Drake, northeast of Tenterfield. It is not occupied, nor is it used for residential accommodation.

9    The land is located at 8 Long Gully Road, Drake, and is Lot 8 in Deposited Plan 877561. The land was purchased by Mr Hornum on 25 September 2013 for $160,000, subject to a registered mortgage in favour of the bank secured over the property, executed on 13 September 2013. An annual payment of $148 is charged by the State for rent of a public road which passes through the property.

10    Mr Hornum failed to pay amounts owing to the bank under the mortgage as and when they fell due. On two occasions, the bank sent Mr Hornum notices pursuant to s 88 of the National Credit Code and s 57(2)(b) of the Real Property Act 1900 (NSW) demanding that he repay the debt. Ordinarily, if a notice is served on the mortgagor which satisfies the requirements of s 57(3) of the Real Property Act and the mortgagor fails to comply with the notice within the applicable time, the mortgagor is entitled to sell the property.

11    On 27 April 2018, nine days after the second notice had been served, Mr Hornum filed a debtor’s petition and Robert William Naudi was appointed his trustee in bankruptcy. At this point the property vested in the trustee by operation of s 58 of the Bankruptcy Act. No steps have been taken, however, to transfer title in the property to the trustee’s name.

12    On 17 May 2018 the trustee wrote to HWL Ebsworth Lawyers advising of his intention not to exercise rights over the property and giving notice of disclaimer under s 133 of the Bankruptcy Act. In his covering letter the trustee wrote that the property had been listed for sale since October 2016 by two real estate agents for an asking price of around $180,000 but “a kerbside appraisal” of the property indicated that the estimated realisable value was in the range of $125,000 to $150,000. Since the debt to the bank at this stage was around $143,000 with the prospect of continuing penalty interest and fees until settlement, the trustee said that it was “not commercial” for him to realise the property and so he disclaimed it.

13    As at 29 July 2019, the arrears in respect of the loan contract total $25,544.70 and the amount owing under the mortgage, including accrued interest, is $169,348.63. Interest continues to accrue on the balance due under the loan, currently at the rate of 5.92% each year or $21.97 per day. Currently, Mr Hornum also owes $848.20 in rent for the public road.

14    I am satisfied that the power to make the orders sought has been enlivened and that there is no reason why I should not exercise it in the bank’s favour. I note that the bank acknowledges that, upon taking possession of the property, it would be required to pay rent to the Crown and the rates and charges levied against the property.

15    First, the trustee has disclaimed the property in circumstances permitted by the Act.

16    Second, the bank has an interest in the disclaimed property within the meaning of s 133(9): Re Tulloch at 814; National Australia Bank Ltd v Leroy & Ors, in the matter of Woo & Ors (NAB v Leroy) [2003] FCA 862 at [7].

17    Third, the bank is entitled to the disclaimed property: Re Tulloch at 814. In any case, it is just and equitable in the circumstances to make a vesting order: NAB v Leroy at [10]. Without it, the bank would be deprived of the benefit of its security through no fault of its own.

18    In NAB v NSW at [24] Rares J counselled the need for caution in such an application. His Honour stated:

In the administration of bankrupt or insolvent estates, there is good reason for the Court to be cautious before uncritical acceptance of the application of the ancient doctrine of escheat, in light of its power to vest the disclaimed property in a person the Court considers (judicially) appropriate. An order divesting the Crown in right of the State of property that fell in to its radical title by escheat, may entitle the Crown to compensation on just terms for the loss of that title under s 51(xxxi) of the Constitution, where, for example, the Court concluded under s 133(9) of the Bankruptcy Act that any surplus after a mortgagee sale should be distributed to the bankrupt’s unsecured creditors. The permanent deprivation of that asset from the estate merely because the trustee in bankruptcy disclaimed may work an unfairness to the unsecured creditors and give a windfall to the Crown in right of the State.

19    Having regard to the facts and the attitude of the State, there is no reason for concern in the present case.

20    In the unlikely event that the sale of the property produces a surplus after the debts are discharged, the proposed orders provide for the surplus to be paid to the trustee or, in the event that there are competing interests, into Court.

21    It follows that the orders sought should be made.

Associate:

Dated:    5 August 2019