Federal Court of Australia

Australia and New Zealand Banking Group Limited v State of Victoria, in the matter of Paksoy [2023] FCA 62

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to section 133(9) of the Bankruptcy Act 1966 (Cth), the estate in fee simple in the land described in certificate of title volume 06961 folio 006 situated at and known as 93 Warrigal Road, Mentone in the State of Victoria (Property) vest in the Applicant for the purpose of the Applicant exercising its powers as mortgagee under the Transfer of Land Act 1958 (Vic) and registered mortgage AM730821K.

2.    The purchase money arising from the sale of the Property be applied by the Applicant in accordance with section 77(3)(a)-(c) of the Transfer of Land Act 1958 (Cth).

3.    In the event there are any surplus funds from the sale of the Property after the Applicant has applied the purchase money in accordance with order 2 above, such funds be paid into Court.

4.    Within 30 days of the sale of the Property, the Applicant provide an account of its payments and receipts to:

(a)    the Respondent;

(b)    Alice Fay Ruhe and Kenneth Sellers as trustees in bankruptcy of the bankrupt estate of Cihan Paksoy; and

(c)    the Registrar of the Court.

5.    There be no order as to costs.

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

REASONS FOR JUDGMENT

O’BRYAN J:

Introduction

1    On 28 June 2018, Mr Cihan Paksoy was declared bankrupt and a sequestration order was made against his estate. Mr Kenneth Sellers and Ms Alice Ruhe were appointed as his trustees in bankruptcy (Trustees). Prior to his bankruptcy, Mr Paksoy was the sole registered proprietor of a property described in certificate of title volume 06961 folio 006 and situated at 93 Warrigal Road, Mentone, Victoria (Property).

2    By originating application filed on 12 December 2022, the Australia and New Zealand Banking Group Limited (ANZ) seeks the following orders:

(a)    an order pursuant to s 133(9) of the Bankruptcy Act 1996 (Cth) (Act) that the estate in fee simple in the Property be vested in ANZ in its capacity as the registered mortgagee of the Property;

(b)     an order that the purchase money arising from the sale of the Property be applied by ANZ in accordance with s 77(3)(a)-(c) of the Transfer of Land Act 1958 (Cth);

(c)    in the event that there are any surplus funds from the sale of the Property after ANZ has applied the purchase money in accordance with sub-paragraph (b) above, an order that such funds are to be paid into Court; and

(d)    that there be no order as to costs.

3    The application was supported by:

(a)    an affidavit of Julian Byers sworn on 8 December 2022 (Byers Affidavit);

(b)    an affidavit of Sarah Rogers sworn on 31 January 2022 (First Rogers Affidavit);

(c)    a further affidavit of Sarah Rogers sworn on 2 February 2023 (Second Rogers Affidavit); and

(d)    an outline of submissions dated 2 February 2023.

4    The application was listed for case management on 31 January 2023. At that hearing, I made orders requiring ANZ to file and serve further material in support of the application and providing for the application to be determined on the papers.

5    For the reasons that follow, I make the orders largely in the form sought by ANZ.

Background

6    On 13 April 2016, Mr Paksoy executed a mortgage over the Property in favour of ANZ. The mortgage was registered on 27 April 2016 in dealing number AM730821K (Mortgage). The Mortgage was security for a loan advanced by ANZ to Mr Paksoy pursuant to a loan agreement with an effective date of 25 March 2016 (Loan Agreement).

7    On 8 August 2017, following Mr Paksoy’s failure to make payments due under the Loan Agreement, ANZ issued a notice of demand, which expired unsatisfied.

8    On 15 August 2018, ANZ obtained default judgment against Mr Paksoy in the Supreme Court of Victoria (Proceeding No S CI 2018 01715) for the recovery by ANZ of possession of the Property and for payment of a sum owing under the Loan Agreement and the Mortgage, together with costs.

9    On 28 June 2018, Mr Paksoy was declared bankrupt and the Trustees were appointed. There has been no transmission of the legal estate to the Trustees: a title search obtained on 2 February 2023 and annexed to the Second Rogers Affidavit records Mr Paksoy as the sole registered proprietor.

10    On 10 December 2020, the Trustees disclaimed the Property pursuant to s 133(1) of the Act, having previously given notice to ANZ of their intention to disclaim on 16 October 2020. The evidence filed in support of ANZ’s application discloses that the Trustees disclaimed the Property because they expected the costs, charges and expenses of realising the property would likely exceed the proceeds received and because, once the debt owing to ANZ had been paid out, there would be no funds remaining for distribution to the unsecured creditors of Mr Paksoy’s estate.

11    On 6 June 2022, ANZ obtained a warrant of possession against Mr Paksoy for the Property. The warrant was executed by 11 October 2022. ANZ has been in possession of the Property since that time.

12    ANZ has appointed O’Brien Real Estate to sell the Property via auction. The auction is scheduled to occur on 18 February 2023.

13    As at 17 November 2022, the total amount owing to ANZ pursuant to the terms of the Loan Agreement and Mortgage is $782,822.62.

14    As at 2 February 2023, the Victorian Register of land records that the registered proprietor of the Property is Mr Paksoy and also records:

(a)    the Mortgage in favour of ANZ;

(b)    caveat AR229874P, registered on 11 July 2018 by the Trustees following the sequestration of Mr Paksoy’s estate;

(c)    caveat AS026445M, registered on 21 March 2019 by South East Water Corporation and comprising a statutory charge arising under the Water Act 1989 (Vic); and

(d)    caveat AT866211T, registered on 15 December 2020 by the Registrar of Titles following the Trustees’ disclaimer in respect of the Property.

15    In the First Rogers Affidavit, Ms Rogers deposes that:

(a)    on 13 December 2022, Ms Rogers sent by email copies of the originating application and the Byers Affidavit to:

(i)    the Victorian Government Solicitor’s Office on behalf of the State;

(ii)    Ms Ruhe on behalf of the Trustees; and

(iii)    Ms Susan Fenby of Mason Black + Mendelsons Lawyers, on behalf of the South East Water Corporation;

(b)    between 16 December 2022 and 18 January 2023, in response to Ms Rogers’ correspondence:

(i)    representatives of the State accepted service of the application documents and subsequently confirmed that, while the State would neither consent nor object to the application, it would seek an order that, if a vesting order is made, any surplus proceeds of sale of the property following discharge of the debt owed to ANZ are to be paid into Court;

(ii)    representatives of the Trustees confirmed that the Trustees did not object to the application and did not wish to be heard in relation to it on the basis that any surplus proceeds of sale of the Property following discharge of the debt owed to ANZ are to be paid to the bankrupt estate of Mr Paksoy; and

(iii)    a representative of the South East Water Corporation confirmed that it did not seek to be heard in relation to the application.

16    On 31 January 2023 by email to the Court, the State confirmed its position as previously, expressed to Ms Rogers. The State did not appear at the case management hearing.

17    ANZ submits that, as the first (and only) registered mortgagee of the Property, it is eligible to apply for a vesting order under s 133(9) of the Act. It further submits that it is just and equitable for the Court to grant a vesting order in respect of the Property in circumstances where:

(a)    neither the State nor any other interested party (including the Trustees and the South East Water Corporation) object to the application; and

(b)    if a vesting order is not granted, ANZ will be unable to enforce the Mortgage and will therefore be deprived of its security.

Relevant principles

18    Section 133 of the Act 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 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, 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.

19    The principles which govern the operation of s 133 of the Act in circumstances such as the present were recently summarised by Derrington J in Commonwealth Bank of Australia v Queensland, in the matter of Hewton [2021] FCA 22 as follows (at [15]):

The nature of the operation of s 133 has been the subject of a number of decisions in this Court in recent years and the principles which have emerged in relation to it can be summarised as follows:

(1) The reference to “property” in the section 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) Ltd v Queensland, Re 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 Western Australia, Re of Arbidans (a Bankrupt) [2020] FCA 1514 (CBA v WA ) [19]; Commonwealth Bank of Australia v 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 Queensland [2016] FCA 269 [31]; Commonwealth Bank of Australia v Queensland, Re of Ginn [2016] FCA 1337 (Ginn) [15]; ING v Queensland [17]–[20]; Australia and New Zealand Banking Group Ltd v Queensland, Re of McFarlane (a Bankrupt) [2017] FCA 696 (ANZ v Queensland ) [17]; Australia and New Zealand Banking Group Ltd v 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 Ltd v 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 Ltd v New South Wales [2014] FCA 298 [8]–[9]; ANZ v Queensland [17]; Stacks Managed Investments Ltd v New South Wales [2016] NSWSC 1349 [11]–[13]; National Australia Bank Ltd v Queensland [2019] FCA 1780 (NAB v Queensland ) [16](c);

(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](d);

(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]. The orders sought and made in the present case are what have become the standard suite of orders giving effect to these matters.

20    In applications of this kind, the applicant 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.

See National Australia Bank Ltd v New South Wales [2014] FCA 298 (NAB v NSW) at [11] (Perram J).

21    It is well-established that a mortgagee is entitled to a vesting order pursuant to s 133(9) of the Act: Re Tulloch Ltd (In Liquidation) (1978) 3 ACLR 808 at 814 (Needham J); National Australia Bank Ltd v New South Wales (2009) 182 FCR 52 at [29] (Rares J); NAB v NSW at [10]; Commonwealth Bank of Australia v Victoria [2021] FCA 705 at 18 (Anastassiou J).

Consideration

22    Having regard to the principles set out above, I am satisfied that the Court should make an order vesting the Property in ANZ pursuant to s 133(9) of the Act largely on the terms sought for the following reasons.

23    First, the evidence establishes that the Trustees have disclaimed the Property in accordance with the requirements of s 133 of the Act. No party to this application, nor any other interested party, contends otherwise. The Byers Affidavit shows that a written notice of disclaimer dated 10 December 2020 and signed by Ms Ruhe on behalf of the Trustees was lodged with the Registrar of Titles. As the terms of s 133(1) make clear, the fact that the Trustees were not the registered proprietors does not impede their ability to disclaim the property. The effect of the disclaimer was to vest in the State the legal and equitable estate in fee simple of the Property, subject to the Mortgage in favour of ANZ.

24    Second, it is clear that ANZ as mortgagee has an interest in the Property within the meaning of s 133(9). The evidence before me demonstrates that the debt which the Property secures has been in default since August 2017 and continues to be in default. ANZ is the first, and only, registered mortgagee. It currently has vacant possession of the Property and a right of sale. The security interest held by ANZ in the Property therefore continues to subsist and grounds ANZ’s entitlement to an order pursuant to s 133(9) of the Act.

25    Third, it is just and equitable for a vesting order to be granted in circumstances where ANZ may not be able to enforce, and may therefore be deprived of the benefit of, its substantial security if no order is made. The express purpose of the vesting order is to facilitate the exercise by ANZ of its power of sale as mortgagee of the Property.

26    I am also satisfied that all interested parties have been served or notified of the application, and that no party opposes it.

27    The form of orders sought by ANZ are generally consistent with the practice of the Court. The first order vests the Property in ANZ for the purpose of exercising its powers as mortgagee and the second order requires the purchase money arising from the sale to be applied in accordance with s 77(3)(a)-(c) of the Transfer of Land Act 1958 (Cth). Those provisions govern the application of monies received by a mortgagee exercising a power of sale and, in my view, are appropriate in the present circumstances. The third order is to the effect that any surplus funds from the sale after ANZ has applied the purchase money in accordance with s 77(3)(a)-(c) of the Transfer of Land Act 1958 (Cth) will be paid into Court.

28    If there are surplus funds paid into Court, the Trustees have foreshadowed that they may make a claim to the funds over the State. The Trustees’ entitlement to make such a claim, in circumstances where they have disclaimed the Property, is presently a hypothetical question which need not be determined. The practice of the Court in cases such as the present is to require the mortgagee to provide an account of its payments and receipts and to serve a copy on the State (as respondent) and the trustee(s) in bankruptcy. The preparation of an account helps to ensure that the mortgagee does not receive more than the amount to which it is entitled, and places the State and the trustee(s) in bankruptcy in a position to make an application to the Court in respect of any surplus funds as they consider appropriate: see National Australia Bank Ltd v State of Queensland [2019] FCA 1780 at [25] (Derrington J); ING Bank (Australia) Ltd v State of Queensland [2017] FCA 411 at [38] (Derrington J). Although ANZ did not seek orders to that effect, I consider it appropriate to order that, within 30 days of the sale, ANZ must provide an account of its payments and receipts to the State, the Trustees and the Registrar of the Court.

Conclusion

29    In conclusion, I consider that it is an appropriate exercise of the Court’s discretion to make the orders sought by ANZ, and an order providing for an account to be prepared following the sale of the Property.

Associate:

Dated:    7 February 2023