FEDERAL COURT OF AUSTRALIA National Australia Bank Limited v State of New South Wales [2014] FCA 298 Citation: National Australia Bank Limited v State of New South Wales [2014] FCA 298 Parties: NATIONAL AUSTRALIA BANK LIMITED v THE STATE OF NEW SOUTH WALES and TRUSTEE OF THE BANKRUPT ESTATE OF DOMIT ELTERS File number: NSD 147 of 2014 Judge: PERRAM J Date of judgment: 27 March 2014 Catchwords: BANKRUPTCY – where property disclaimed by trustee pursuant to Bankruptcy Act 1966 (Cth) s 133 – escheat of property to Crown in right of State of New South Wales – application for order vesting property in mortgagee Legislation: Bankruptcy Act 1966 (Cth) ss 58, 133 Real Property Act 1900 (NSW) ss 57, 58 Cases cited: National Australia Bank Ltd v Leroy [2003] FCA 862 cited National Australia Bank Ltd v New South Wales (2009) 182 FCR 52 cited National Australia Bank Ltd v Victoria (2010) 118 ALD 527 cited Rams Mortgage Corp Ltd v Skipworth (No 2) (2007) ALR 799 cited Re Hopgood; ex parte Coveney (1957) 18 ABC 133 cited Re Tulloch Ltd (in liquidation) (1978) 3 ACLR 808 cited Date of hearing: 27 March 2014 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 15 Counsel for the Applicant: Mr J Hynes Solicitor for the Applicant: TurksLegal IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 147 of 2014 BETWEEN: NATIONAL AUSTRALIA BANK LIMITED Applicant AND: THE STATE OF NEW SOUTH WALES First Respondent TRUSTEE OF THE BANKRUPT ESTATE OF DOMIT ELTERS Second Respondent JUDGE: PERRAM J DATE OF ORDER: 27 MARCH 2014 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Pursuant to section 133(9) of the Bankruptcy Act 1966 (Cth), the interest held by the first respondent in the property formerly owned by Domit Elters (a bankrupt), comprised in certificate of title folio identifier Lot 141 in Deposited Plan 262017, being all of the land situated at and known as 3 Paruna Place, North Nowra in the State of New South Wales ('Property'), vest in the applicant, National Australia Bank Limited, subject to the conditions referred to in paragraph 2. 2. Upon the vesting of the Property in the applicant pursuant to section 133(9) of the Bankruptcy Act 1966 (Cth): a) the applicant may only deal with the Property pursuant to its powers as mortgagee under the Real Property Act 1900 (NSW) and under its registered mortgage affecting the Property; and b) after the sale of any of the Property, the applicant must deliver to the second respondent, the whole of the proceeds of sale remaining (if any) after first deducting from the proceeds all moneys due to the applicant as mortgagee, including all costs properly incurred of and incidental to the sale, and any moneys due to the caveator Foster's Australia Limited. 3. There be no order as to costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 147 of 2014 BETWEEN: NATIONAL AUSTRALIA BANK LIMITED Applicant AND: THE STATE OF NEW SOUTH WALES First Respondent TRUSTEE OF THE BANKRUPT ESTATE OF DOMIT ELTERS Second Respondent JUDGE: PERRAM J DATE: 27 MARCH 2014 PLACE: SYDNEY REASONS FOR JUDGMENT (Revised from transcript) 1 This is an application by the National Australia Bank Limited, who I will refer to as 'the Bank', pursuant to s 133(9) of the Bankruptcy Act 1966 (Cth) for orders which, if made, would vest in it certain real property previously held by Mr Domit Elters. Prior to 3 November 2011 Mr Elters was the registered proprietor of the whole of the land referred to in Certificate of Title folio identifier 141/262017, being all of the land situated at, and known as, 3 Paruna Place, North Nowra in New South Wales. It is apparent that he had been the owner of that land for some time. On or about 15 June 2009 Mr Elters had mortgaged the Paruna Place property to the Bank, and that mortgage was a first mortgage which was subsequently registered. It incorporated the terms of memorandum No AD522901. 2 There were, in effect, two loans secured by that mortgage. The first was a home loan which had been extended to Mr Elters by the Bank on or around 15 June 2009. Additionally, the Bank had extended a facility to an entity that, I assume, was controlled by Mr Elters, called DM@B Industry Pty Limited (now in liquidation). That loan was a 'Business Secured Overdraft and Business Options Combination Loan', which was secured by a number of securities including the mortgage that Mr Elters had given the Bank over the Paruna Place property. So much is apparent from a guarantee and indemnity executed by Mr Elters on or around 16 June 2009. During 2011, Mr Elters defaulted under the terms of the home loan. On 14 September 2011, the Bank served a default and demand notice upon him dated 13 September 2011 pursuant to which all the monies then owing under the home loan became due and payable. 3 That notice also constituted a notice pursuant to s 57(2)(b) of the Real Property Act 1900 (NSW). The operation of that section is that upon there being a default and service of the relevant notice, a mortgagee becomes entitled to sell the mortgaged property in accordance with s 58 of the Act. The Bank issued a further default and demand notice on Mr Elters in respect of the home loan on 21 October 2011. On 30 September 2011, the Bank served a default and demand notice with respect to the loans which had been extended to the company. Neither the company nor Mr Elters complied with the notices and, if matters were to rest there, the Bank's power to sell the Paruna Place property would have been enlivened in the ordinary course of events under s 58 of the Real Property Act. 4 As at 10 February 2014, the monies owing under the Bank's facilities are: (a) in relation to the home loan, the sum of $243,796.56; and (b) under the deed of guarantee and indemnity in respect of the company's debts, the sum of $946,926.50. 5 The combined total indebtedness is therefore $1,190,723.06. Perhaps unsurprisingly, on 3 November 2011 Mr Elters presented a debtor's petition, and on that day a sequestration order was made with respect to his estate. The effect of the sequestration order was that, pursuant to s 58 of the Bankruptcy Act, his property, not being after-acquired property, vested forthwith in the Official Trustee. 6 On 29 May 2012, the Official Trustee issued a notice of his intention to disclaim the Paruna Place property as land burdened with onerous covenants, pursuant to s 133 of the Bankruptcy Act. Subsections (1) and (2) of that section provide as follows: '(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.' 7 The effect of s 133(2) is that a trustee's disclaimer will operate to 'determine forthwith the rights, interests and liabilities of the bankrupt' in respect of the property disclaimed. It does so, however, without prejudice to the continuing existence of the rights of any other person. And this follows from the words in the section that the disclaimer will not 'affect the rights or liabilities of any other person.' 8 Mr Hynes, of counsel, who appeared for the Bank, drew to my attention the apparent tension in the text of s 133 between the determination forthwith of the rights, interests and liabilities of the bankrupt, on the one hand, and the continued existence of the rights or liabilities of other persons, on the other. In a purely theoretical space there is a tension between extinguishing a set of rights which is attached to another set of rights which are not extinguished. The courts, however, have not been troubled by this anomaly. In a series of decisions it has been held that the rights of other persons, and in particular, the rights of mortgagees continue to have sufficient existence to ground an application such as the present one made by the Bank: see, for example, Re Tulloch Ltd (in liquidation) (1978) 3 ACLR 808 at 813, per Needham J. That reasoning is regarded as orthodox: see National Australia Bank Ltd v Leroy [2003] FCA 862 at [5]-[7]; Rams Mortgage Corp Ltd v Skipworth (No 2) (2007) ALR 799 at [15]-[19]; National Australia Bank Ltd v New South Wales (2009) 182 FCR 52 at [29]; and National Australia Bank Ltd v Victoria (2010) 118 ALD 527 at [10]-[12]. 9 The immediate consequence of the disclaimer of the onerous property by the Bank was that the Paruna Place property escheated to the Crown in right of New South Wales: see Re Tulloch; NAB v Leroy at [5]; Rams v Skipworth at [8]. It has been said of the operation of s 133 that the Crown holds the property in fee simple and that only the interest of the proprietor goes out of existence on the escheat. The immediate consequence of the escheatment is therefore that the Bank does not presently have the rights it would have had against Mr Elters but for his bankruptcy and presently has no right to enforce its security against the State of New South Wales. Subsections 133(9), (10) and (11) provide as follows: '(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: 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 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.' 10 It has been held that a mortgagee of Torrens title land is a person 'claiming an interest in' disclaimed property within the meaning of s 133(9): see Re Hopgood; ex parte Coveney (1957) 18 ABC 133 at 139-41; Re Tulloch at 814; NAB v Leroy at [7]. In NAB v New South Wales Rares J made the following statement at [29]: '[b]y force of s 133(2) the effect of the trustee's disclaimer...appears to have determined any ongoing charge on the land for subsequent liabilities that would otherwise have continued to accrue, such as future (unpaid) interest on the debt secured by the mortgage. I agree with Needham J's conclusion that a mortgagee of Torrens title land is entitled to be granted a vesting order: Re Tulloch 3 ACLR at 814. I am of opinion that the land should be vested under s 133(9) in the bank for the purpose for which it originally was mortgaged, namely to secure payment to the bank of all principal, interest and other moneys due to it notwithstanding the effect of the disclaimer.' 11 A similar view was arrived at by Madgwick J in NAB v Leroy at [7]. It is apparent from the foregoing that on an application such as the present the Bank 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. 12 I am satisfied of all three matters. There is no doubt that the property has been disclaimed under s 133. There is also no doubt, for the reasons I have given, that the Bank as a mortgagee of the Paruna Place property has an interest in it within the meaning of s 133(9). It is also abundantly apparent that it would be just and equitable for the property to be vested in the Bank. It would be just and equitable because, unless the vesting order is made, the Bank will be deprived of the benefit of its security in circumstances where it has a secured debt in excess of $1 million. There are no further steps which the Bank can take apart from the present application, to make good its security position. 13 In those circumstances, in principle, the orders are appropriate. For completeness, I note that s 133(9) permits the Court to hear, on an application such as the present, any party who it sees fit, which would ordinarily include any party having an interest in the property. The title search which was placed before me as Exhibit 2 revealed that as at 26 March 2014 there was a mortgage to the National Australia Bank Limited over the Paruna Place property as well as a caveat lodged by a company called Foster's Australia Limited. On 13 February 2014, the Bank's solicitor wrote to Foster's Australia Limited informing them of the present application. 14 Exhibit 1, tendered by the Mr Hynes on the application, was a letter from the solicitors acting for Foster's Australia (sic), dated 7 March 2014, which confirmed receipt of the application and the intention of Foster's Australia not to take part in the proceedings. The other obviously interested party in the present proceedings is the first respondent, the State of New South Wales. It filed a submitting appearance. I am therefore satisfied that all the parties interested in the property have been notified of the present application, that the conditions precedent to the enlivenment of the power under section 133 have been established and that it is an appropriate exercise of the Court's discretion to make the orders which are sought by the Bank. 15 I make orders in accordance with the document provided to me by the Bank which are appropriate to give effect to these reasons. I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram. Associate: Dated: 15 April 2014