FEDERAL COURT OF AUSTRALIA National Australia Bank Limited v The State of Victoria [2010] FCA 1230 Citation: National Australia Bank Limited v The State of Victoria [2010] FCA 1230 Parties: NATIONAL AUSTRALIA BANK LIMITED v THE STATE OF VICTORIA, THE STATE OF NEW SOUTH WALES and INDRANI SELVARAJAH File number(s): NSD 1043 of 2010 Judge: BENNETT J Date of judgment: 12 November 2010 Catchwords: BANKRUPTCY – bank registered first mortgagee of properties under Torrens title – mortgagor bankrupt – trustee in bankruptcy disclaims mortgagor's properties – whether mortgagee is person claiming an interest in properties pursuant to Bankruptcy Act 1966 (Cth) s 133(9) – whether mortgagee entitled to order vesting properties in mortgagee Legislation: Bankruptcy Act 1966 (Cth) s 133 Cases cited: National Australia Bank Ltd v Leroy [2003] FCA 862 applied National Australia Bank Ltd v New South Wales (2009) 182 FCR 52 applied Rams Mortgage Corp Ltd v Skipworth [2007] WASC 24 cited Rams Mortgage Corp Ltd v Skipworth (No 2 ) [2007] WASC 75 cited Re Tulloch Ltd (in liq) and the Companies Act (1978) 3 ACLR 808 applied Re Weiland (Deceased) (1944-45) 13 ABC 220 cited Date of hearing: 28 October 2010 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 21 Counsel for the Applicant: Mr J Hynes Solicitor for the Applicant: Minter Ellison Counsel for the First and Second Respondents: The First and Second Respondents did not appear Solicitor for the Third Respondent: IHS Law IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1043 of 2010 BETWEEN: NATIONAL AUSTRALIA BANK LIMITED ACN 004 044 937 Applicant AND: THE STATE OF VICTORIA First Respondent THE STATE OF NEW SOUTH WALES Second Respondent INDRANI SELVARAJAH Third Respondent JUDGE: BENNETT J DATE OF ORDER: 12 NOVEMBER 2010 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Pursuant to s 133(9) of the Bankruptcy Act 1966 (Cth), the interest held by the first respondent, the State of Victoria, formerly held by Peter Selvarajah, in the land comprised in certificate of title folio identifier 10674/828 (Victorian Property), vest in the Applicant, National Australia Bank Limited, as tenant in common in equal shares with the third respondent, subject to the conditions referred to in paragraph 4. 2. Pursuant to s 133(9) of the Bankruptcy Act 1966 (Cth), the interests held by the second respondent, the State of New South Wales, formerly held by Peter Selvarajah, in the following properties vest in the Applicant, National Australia Bank Limited, subject to the conditions referred to in paragraph 4: (a) the land comprised in folio identifier 58/SP76740; and (b) the land comprised in folio identifier 100/SP77403. 3. Pursuant to s 133(9) of the Bankruptcy Act 1966 (Cth), the interests held by the second respondent, the State of New South Wales, formerly held by Peter Selvarajah, in the following properties vest in the Applicant, National Australia Bank Limited, as tenant in common in equal shares with the third respondent, subject to the conditions referred to in paragraph 4: (a) the land comprised in folio identifier 45/SP72462, as is held by Peter Selvarajah; (b) the land comprised in folio identifier 60/SP74790, as is held by Peter Selvarajah; (c) the land comprised in folio identifier 9/831647, as is held by Peter Selvarajah; and (d) the land comprised in folio identifier 308/1032021, as is held by Peter Selvarajah (NSW Properties). 4. Upon the vesting of the Victorian Property and the NSW Properties in the Applicant pursuant to s 133(9) of the Bankruptcy Act 1966 (Cth): (a) the Applicant may only deal with those properties pursuant to its powers as mortgagee under the Property Law Act 1958 (Vic) (in respect of the Victorian Property) and the Real Property Act 1900 (NSW) (in respect of the NSW Properties) and under its registered mortgages affecting the Victorian Property and the NSW Properties; and (b) after the sale of any of the properties, the Applicant must deliver to the trustee of the bankrupt estate of Peter Selvarajah, accounts of how the proceeds of sale are dealt with, together with the whole of the proceeds of sale remaining (if any) after first deducting from the proceeds all monies due to the Applicant as mortgagee, including all costs properly incurred of and incidental to the sales. 5. The Applicant must not dispose of its interests in the properties obtained pursuant to orders 1 and 3 prior to the determination of the NSW Supreme Court proceedings No. 2009/298595 except with the prior written consent of the Third Respondent or otherwise pursuant to an order of this Court. 6. There be no order as to costs. Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1043 of 2010 BETWEEN: NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937) Applicant AND: THE STATE OF VICTORIA First Respondent THE STATE OF NEW SOUTH WALES Second Respondent INDRANI SELVARAJAH Third Respondent JUDGE: BENNETT J DATE: 12 NOVEMBER 2010 PLACE: SYDNEY REASONS FOR JUDGMENT 1 From about 2005 Mr Selvarajah and Mrs Selvarajah (the Selvarajahs) and a number of associated companies became customers of the National Australia Bank (the Bank). The Bank advanced in excess of $13 million to the Selvarajahs and to their associated companies. The Bank provided a number of personal and business facilities to the Selvarajahs and to their associated companies, secured by mortgages over certain properties held by the Selvarajahs and supported by an interlocking personal guarantee and indemnity. The guarantee and indemnity dated 9 November 2006 cross-secured the liabilities of the Selvarajahs and the companies to the Bank. 2 Mr Selvarajah is the sole registered proprietor of two properties in New South Wales at Burwood (the Burwood Property) and Marrickville (the Marrickville Property). The Selvarajahs are joint registered proprietors in New South Wales of properties at North Sydney, Maroubra, Orchard Hills and Bella Vista and a property in Victoria at Camberwell (the Jointly Held Properties). The Bank holds mortgages over each of the Burwood Property, the Marrickville Property and the Jointly Held Properties (together, the Properties). 3 On 19 June 2009 Mr Selvarajah became bankrupt on a debtor's petition and Mr Phillip Aggs (the Trustee) was appointed trustee in bankruptcy of his estate. The total present liability outstanding to the Bank is in excess of $8.6 million. Mr Selvarajah remains an undischarged bankrupt. By notice dated 6 July 2010 the Trustee gave notice of a disclaimer of the Properties (the Disclaimer) pursuant to s 133 of the Bankruptcy Act 1966 (Cth) (the Act). The Disclaimer stated that the disclaimed property 'consists of land of any tenure burdened with onerous covenants; or property (including land) that is unsaleable or is not readily saleable'. Prior to the Disclaimer, a default had occurred under the facilities and mortgages provided by the Bank in relation to each of the Properties and the Bank had issued the relevant statutory power of sale notices, which had lapsed. Accordingly, prior to the Disclaimer, the Bank was entitled to possession of each of the Properties under both the terms of the mortgages and the provisions of the applicable real property legislation. 4 The Bank commenced proceedings in relation to the Burwood Property and the Marrickville Property on 7 April 2010 in the Supreme Court of New South Wales seeking possession. Judgment for possession of those properties was granted on 23 June 2010 and 21 July 2010 and writs of possession were issued. Since the Disclaimer on 6 July 2010, no further action has been taken by the Bank to secure possession of the Burwood Property and the Marrickville Property. 5 There are currently further proceedings in the Supreme Court of New South Wales concerning the Jointly Held Properties in New South Wales. Those proceedings have not been finalised. On 30 March 2010 the Bank issued a statutory notice to the Selvarajahs in respect of the Victorian Jointly Held Property pursuant to s 76 of the Transfer of Land Act 1958 (Vic). The Bank has not commenced possession proceedings in respect of the Victorian Jointly Held Property since the Disclaimer. As a result of the Disclaimer, the Bank has taken no further action to enforce its security in respect of the Properties. The Bank seeks orders pursuant to s 133(9) of the Act that the interests as held by Mr Selvarajah in the Properties vest in it. 6 The State of Victoria does not oppose the order sought and the State of New South Wales has filed a submitting appearance. Mrs Selvarajah appeared at the hearing in order to ensure that her interest in the Jointly Held Properties was protected. It is not in dispute that Mr Selvarajah's bankruptcy severed the joint tenancy between him and Mrs Selvarajah and constitutes them as tenants in common in each of the Jointly Held Properties. It is Mr Selvarajah's interest as a tenant in common that is the subject of these proceedings. Mrs Selvarajah does not oppose the proposed orders, consents to an order specifically directed to protect her interests and otherwise makes no submissions. The RELEVANT STATUTORY PROVISIONS 7 Section 133 of the Act relevantly 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. (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. … (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. CONSIDERATION 8 The consequences of a trustee's disclaimer over properties the subject of the present application are of some interest and complexity. In National Australia Bank Ltd v New South Wales (2009) 182 FCR 52(NAB v NSW) at [28], Rares J observed: …however, as all judges since Jessel MR have recognised, the question of where the title goes after a disclaimer is as clear as mud. This is because of the interaction between s 133 of the Act, Torrens title legislation and the principle that upon disclaimer the disclaimed properties, by the doctrine of escheat, vest in the Crown. As Rares J pointed out at [1], as a consequence of a disclaimer, an unfortunate dilemma confronts mortgagees of Torrens title land after their mortgagor's trustee in bankruptcy disclaims the bankrupt's interest in the land. The issue is how the mortgagee can sell the land when there is no mortgagor on whom the mortgagee can serve a notice of default. Justice Rares gave detailed consideration to the history of the doctrine of escheat, which I do not need to repeat. Is the Bank a person to whom s 133(9) of the Act applies? 9 In NAB v NSW, Rares J said at [26]: Since s 133(9) proceeds on the basis that the Court retains jurisdiction to vest property that has been disclaimed under s 133(1) in a person either actually entitled to it, or in whom it would be just and equitable to vest it, the concept that somehow, in the meantime, the property escheated to the Crown does not fit easily into the statutory scheme. 10 His Honour concluded, as did Needham J in Re Tulloch Ltd (in liq) and the Companies Act (1978) 3 ACLR 808, that a mortgagee of Torrens title land is entitled to be granted a vesting order; that is, that such a mortgagee is an interested person within the meaning of the Act and is not precluded from a vesting order by the doctrine of escheat. 11 In National Australia Bank Ltd v Leroy [2003] FCA 862 Madgwick J considered Re Weiland (Deceased) (1944-45) 13 ABC 220, where it was held that a mortgagee was not entitled to a vesting order unless, upon the trustee's disclaimer, the trustee became entitled to both the legal and beneficial estate in the land. Justice Madgwick observed that Re Tulloch declined to follow Re Weiland in the context of a consideration of s 296 of the Companies Act 1961 (NSW), which dealt with the like situation in relation to a company in liquidation. Justice Madgwick concluded at [7] that there is no reason to think that a registered mortgagee's interest in mortgaged land is not an interest that would qualify as such within the meaning of s 133(9). 12 I am satisfied that there is no restriction to the meaning of 'a person claiming an interest' within s 133(9) to preclude its application to a mortgagee of land held under the Torrens system. I take the same view as Madgwick J in Leroy that s 133(9) is clearly apt to encompass the position of a registered mortgagee under Torrens title legislation. I am satisfied that the Bank is an interested person within the meaning of s 133(9). Application of s 133(9) of the Act 13 There is no dispute that the Properties became vested in the Trustee upon Mr Selvarajah's bankruptcy to the extent of Mr Selvarajah's interests in the Properties, or that the vesting of the Properties in the Trustee did not affect the rights of the Bank as a secured creditor to realise or otherwise deal with its security. As a matter of logic, a trustee in bankruptcy can only disclaim a bankrupt's interest in mortgaged properties. Such disclaimer would not extend to the interests of a mortgagee. As applied to the present case, the vesting of the Properties occurred subject to the Bank's mortgages. The Trustee did not register his interest in the Properties which, as a result, were equitable rather than legal interests (s 58(2) of the Act; Rams Mortgage Corp Ltd v Skipworth [2007] WASC 24 at [81]). 14 There is no suggestion that the Disclaimer was otherwise than in accordance with s 133(1) of the Act. There is no dispute that, pursuant to s 133(2) of the Act, the Disclaimer operated to determine the rights, interests and liabilities of Mr Selvarajah in respect of the Properties to the extent necessary to release the Trustee and Mr Selvarajah, as the bankrupt, from liability. The Disclaimer did not affect the rights or liabilities of any other person, including, as is relevant in this case, the Bank. 15 I accept, as did Needham J in Re Tulloch and Rares J in NAB v NSW that, after the Disclaimer and by reason of s 133 of the Act, there is no personal covenant upon which the Bank as mortgagee can take action against the Crown because the Crown has no obligation under the mortgages of the Properties. However, the Bank's rights following the Disclaimer include the rights of the mortgagee that it had accrued from the mortgagor's default under the relevant security. The doctrine of escheat does not preclude the rights of the mortgagee. The effect of the Disclaimer is that, in the absence of a vesting order under s 133(9), the Bank will be precluded from taking any action to realise the Properties the subject of the securities (Rams Mortgage Corp Ltd v Skipworth (No 2) [2007] WASC 75)at [28]–[30]). The Court can make an order vesting the title in the land to a person other than the Crown in right of the State. The land does not escheat absolutely to the Crown such as to preclude the Court's ability to make an order vesting the title in someone else pursuant to s 133(9). 16 A disclaimer of the Properties has occurred within the meaning of s 133(1). The Bank has an interest in the disclaimed Properties within the meaning of s 133(9). The purpose for which the Properties were originally mortgaged was to secure payment to the Bank of all principal, interest and other money due to it. The Bank is presently unable to take any further steps based on Mr Selvarajah's previous defaults in realising the now disclaimed Properties. In particular, as pointed out by the Bank: (a) in relation to the Burwood Property and the Marrickville Property, the Bank is unable to enforce the writs of possession issued in respect of these properties and to realise these properties; (b) in relation to the Jointly Held Property in Victoria, while the Bank has issued a statutory notice in relation to the possession of this property, it is unable to take any further step to enforce its mortgage in relation to this property for the purpose of realising it; and (c) in relation to the Jointly Held Properties in New South Wales, the Bank is unable to continue with its cross-claim in the Supreme Court of New South Wales possession proceedings to the extent of the disclaimed interests in these properties. 17 In my view, it is just and equitable that the interests held by Mr Selvarajah in each of the Properties should be vested in the Bank. The Bank holds the first registered mortgage in relation to each of the Properties. Enforcement action has commenced by reason of defaults under the mortgages. Prior to the Disclaimer, the Bank held both statutory rights to possession and rights to possession under the terms of its securities. A significant sum of secured money remains outstanding to the Bank. As a result of the doctrine of escheat, the Bank cannot take further steps to realise the Properties without the intervention of the Court. The Bank's proposed orders 18 The Bank is entitled to an order that the Burwood Property and the Marrickville Property vest entirely in the Bank. In the case of the Jointly Held Properties, the Bank is entitled to an order that they vest in the Bank to the extent of Mr Selvarajah's prior interest. The interests so vested should be held in common and in equal shares with Mrs Selvarajah. It goes without saying that the rights of the Bank are subject to the Real Property Act 1900 (NSW) and the Transfer of Land Act 1958 (Vic). Third party interests in the Properties 19 Counsel for the Bank drew to my attention correspondence received by the Bank's solicitors from persons who claimed that Mr Selvarajah had entered into contracts of sale over the Burwood Property and the Marrickville Property approximately a year after he became bankrupt. There was an assertion in that correspondence that an application was made to the Trustee under s 133(6) of the Act for a disclaimer in relation to one of those properties. That section provides that if an application in writing has been made to the trustee requiring the trustee to decide whether he or she will disclaim the property and the trustee declines or neglects to disclaim the property, the trustee is not entitled to disclaim the property and, in the case of a contract, shall be deemed to have adopted it. The Trustee denies the receipt of any application in writing. The suggestion from the proposed purchaser's solicitors is that such an application was made by the solicitors for Mr Selvarajah. However, despite correspondence with those solicitors, no such application has been produced. If there was no application in writing under s 133(6), no occasion for the consequences of an absence of disclaimer arises. Mr Selvarajah's solicitors were served with proceedings for possession of each of the Burwood Property and the Marrickville Property. They were then notified by the Bank's solicitors that the time for the filing of a defence was imminent. No defence was filed, default judgment for possession was entered and writs of possession issued by the Supreme Court. I directed the solicitors for the Bank to notify the solicitors for each of the proposed purchasers of the application and the fact that I reserved my decision, thus enabling those persons to make an application urgently if they so wished. No such application was received in the time that I specified. The Court was subsequently notified by solicitors for each of those parties to the effect that they did not wish to be heard and did not oppose the orders sought. 20 An individual has lodged a caveat over the property in North Sydney and a company has lodged caveats over the Jointly Held Properties. Both caveators were served with notice of these proceedings. The individual responded that he had no interest in the property and would remove the caveat but has not done so. No response was received from the company despite service at its registered office. The caveats do not affect my conclusion that it is just and equitable that the orders sought by the Bank are made. Mrs Selvarajah's position, in relation to the Jointly Held Properties in which she is a tenant in common and which are the subject of proceedings in the Supreme Court of New South Wales, is preserved. Conclusion 21 The vesting orders proposed by the Bank should be made. The Bank does not seek any order as to costs. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Bennett. Associate: Dated: 12 November 2010