Federal Court of Australia AFSH Nominees Pty Ltd v State of Western Australia [2022] FCA 1168 File number: WAD 78 of 2022 Judgment of: COLVIN J Date of judgment: 30 September 2022 Catchwords: CORPORATIONS - application by mortgagee under s 568F of the Corporations Act 2001 (Cth) for order vesting in its name a disclaimed residential property - where liquidator also purported to disclaim the 'mortgage agreement' between the company and the mortgagee - where liquidator elected to not appear and did not file a submitting appearance - where tenant has filed submitting appearance - whether disclaimer can affect rights other than those held by the company in liquidation - whether mortgagee can enforce mortgage despite the escheatment of the property to the Crown - orders made declaring the disclaimer of the 'mortgage agreement' as being of no lawful effect as against the mortgagee's interest - application allowed Legislation: Bankruptcy Act 1966 (Cth) s 133 Corporations Act 2001 (Cth) ss 491, 568, 568A, 568B, 568C, 568D, 568F Residential Tenancies Act 1987 (WA) Transfer of Land Act 1893 (WA) s 108 Cases cited: Australia and New Zealand Banking Group Limited v State of Western Australia, in the matter of Raleigh [2022] FCA 639 Bank of Queensland Limited v State of Western Australia [2020] FCA 442 Brooks, in the matter of Tease Hair & Spa Pty Ltd (in liquidation) [2022] FCA 457 Commonwealth Bank of Australia v State of Queensland, in the matter of Hewton [2021] FCA 22 Francis (Trustee), in the matter of Fotios (Bankrupt) v Helios Corporation Pty Ltd [2022] FCA 199 Jones (Liquidator) v Matrix Partners Pty Ltd; in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; (2018) 260 FCR 310 National Australia Bank Ltd v State of New South Wales [2009] FCA 1066; (2009) 182 FCR 52 Sandhurst Trustees Ltd v 72 Seventh Street Nominees Pty Ltd (in liq) (1998) 45 NSWLR 556 Stacks Managed Investments Limited v State of New South Wales [2016] NSWSC 1349 Westpac Banking Corporation v Western Australia [2021] FCA 1097 Division: General Division Registry: Western Australia National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Number of paragraphs: 28 Date of last submissions: 19 September 2022 (Applicant) Date of hearing: 11 August 2022 Counsel for the Applicant: Ms J Moore Solicitor for the Applicant: Thomson Geer Counsel for the First, Second, Third and Fifth Respondents: The First, Second, Third and Fifth Respondents did not appear Counsel for the Fourth Respondent: The Fourth Respondent filed a submitting notice ORDERS WAD 78 of 2022 BETWEEN: AFSH NOMINEES PTY LTD Applicant AND: STATE OF WESTERN AUSTRALIA First Respondent TRAVIS JAY PULLEN IN HIS CAPACITY AS LIQUIDATOR OF N1 INVESTMENTS PTY LTD (ACN 167 883 034) (IN LIQUIDATION) Second Respondent REGISTRAR OF TITLES Third Respondent PILBARA PORTS AUTHORITY Fourth Respondent N1 INVESTMENTS PTY LTD (ACN 167 883 034) (IN LIQUIDATION) Fifth Respondent order made by: COLVIN J DATE OF ORDER: 30 september 2022 THE COURT ORDERS THAT: 1. There be a declaration that the notice of disclaimer of onerous property being document 7EBI44029 lodged by the second respondent on 16 June 2021 in respect of 'Mortgage agreement between AFSH Nominees Pty Ltd and the Company registered on 3 December 2014', such Company being N1 Investments Pty Ltd, is of no lawful effect to the extent that it seeks to disclaim the interest of AFSH Nominees Pty Ltd as registered mortgagee pursuant to registered mortgage number M846076 (Mortgage) in Unit 8, 60 Moore Street, Port Hedland WA 6721. 2. Pursuant to s 568F of the Corporations Act 2001 (Cth), the estate in fee simple in the property known as Unit 8, 60 Moore Street, Port Hedland WA 6721, which is more particularly described as Lot 8 on Strata Plan 66600 and being the whole of the land comprised in Certificate of Title Volume 2854 Folio 246 (Property) shall vest in the applicant for the purposes of the applicant exercising its powers as mortgagee under the Transfer of Land Act 1893 (WA) and the Mortgage, subject to the following conditions: (a) for the purposes of any dealings with the Property the applicant may (but is not bound to) act as if it were exercising its power as mortgagee and as mortgagee in possession under the Transfer of Land Act 1893 (WA) and under the Mortgage, except that it is: (i) deemed to have served any additional default notices under s 88 of the National Credit Code (being Schedule 1 to the National Consumer Credit Protection Act 2009 (Cth)); and (ii) deemed to have served any additional default notices pursuant to s 106 Transfer of Land Act 1893 (WA); (b) the applicant is entitled to calculate the entirety of the debt secured and owing pursuant to the Mortgage as including all monies that would have been secured by the Mortgage had the second respondent 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 the costs of this application and all costs properly incurred in selling, and incidental to the sale of, the Property); (c) the proceeds of sale from the Property shall be applied as follows: (i) first, in payment of any statutory charges affecting the Property which the relevant statute provides are payable in priority to the applicant (in its capacity as a mortgagee); (ii) secondly, in payment of costs, charges and expenses properly incurred by the applicant as incident to the sale, or any attempted sale of the Property by or on behalf of the applicant as mortgagee; (iii) thirdly, in discharge of the debt owed to the applicant as secured over the Property by the Mortgage (including its reasonable costs of the application); (iv) fourthly, the residue (if any) of the proceeds so received must be paid to the liquidator of the fifth respondent or, if when any surplus funds become available a liquidator has ceased to be appointed of the fifth respondent, then the surplus proceeds must be paid into the Court; and (v) if the Court holds any surplus proceeds two years after receipt by it of those proceeds, they shall be paid to the Crown in right of the State of Western Australia; (d) the applicant must, after any sale of the Property, file an affidavit providing an account of its payments and receipts to: (i) the first respondent; (ii) the second respondent; and (iii) the registrar of the Court. 3. There be liberty to the applicant to apply for such further orders as may be necessary to give effect to these orders, including as to the signing of any documents by any party or by a registrar of the Court. 4. Save as expressly provided for in these orders, there be no order as to the costs of the application. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT COLVIN J: 1 AFSH Nominees Pty Ltd (AFSH) seeks an order vesting in its name a residential property located in Moore Street, Port Hedland (PH Property). The PH Property is registered in the name of N1 Investments Pty Ltd (now in liquidation). AFSH holds a registered mortgage over the PH Property. It seeks orders that would enable it to exercise rights in respect of the PH Property that it would be entitled to exercise but for the disclaimer of any claim to the PH Property by the liquidator of N1 Investments. The liquidator of N1 Investments gave notices on 16 June 2021 purporting to disclaim each of the PH Property and the 'mortgage agreement'. It purported to do so pursuant to s 568A(1)(a) of the Corporations Act 2001 (Cth). 2 In the alternative to the vesting orders, AFSH seeks a declaration to the effect that each of the notices of disclaimer was of no legal effect and consequential orders that would enable AFSH to exercise its rights as mortgagee under the mortgage (particularly rights conferred by s 108 of the Transfer of Land Act 1893 (WA)). By way of further alternative, AFSH seeks orders for the appointment of a receiver to the property for the purposes of effecting the sale of the PH Property and the application of the proceeds of sale to the discharge of the debt owed to AFSH the subject of the mortgage. 3 The respondent parties are N1 Investments Pty Ltd (in liq), its liquidator, the Registrar of Titles and the current tenant of the property, being Pilbara Ports Authority (Tenant). 4 The Tenant submits to any order that the Court may make on the application. The liquidator was advised of the hearing date and asked whether he intended to 'partake in the proceedings' and, if not, whether the liquidator would be filing a submitting appearance. At that time, only the liquidator was a party. N1 Investments Pty Ltd (in liq) had not been joined. The liquidator responded 'I will not be making any submissions or appearances. You just do what you need to do'. 5 At the time of hearing the application, N1 Investments Pty Ltd (in liq) was still not a party. Oral submissions were heard in support of the application and an order was made to join N1 Investments Pty Ltd (in liq) with the further hearing of the application adjourned to a date to be fixed. Since then, the Court has been informed by the solicitors acting for AFSH that formal service on N1 Investments Pty Ltd (in liq) has now been effected. An affidavit of service has been filed. Service was effected on 19 August 2022. Although more than a month has passed, there has been no appearance entered for N1 Investments Pty Ltd (in liq). It may be assumed that the position of the liquidator remains unchanged and that is the explanation for the failure to appear. 6 AFSH does not seek any further oral hearing and has asked the Court to proceed and determine the application. The purported disclaimer 7 Section 568(1) of the Corporations Act relevantly provides: Subject to this section, a liquidator of a company may at any time, on the company's behalf, by signed writing disclaim property of the company that consists of: (a) land burdened with onerous covenants; (b) property that may give rise to a liability to pay money or some other onerous obligation; or … (f) a contract; … 8 Then s 568(1A) provides that a liquidator 'cannot disclaim a contract (other than an unprofitable contract or lease of land) except with the leave of the Court'. 9 The PH Property was acquired by N1 Investments Pty Ltd as trustee of the Taylor Smith Investment Trust (Trust). The Loan Contract for the debt claimed by AFSH that is said to have been secured by the mortgage was entered into by N1 Investments Pty Ltd as trustee for the Trust. The trust deed for the Trust provides that a trustee is automatically removed if a petition to wind-up the trustee is presented or a resolution is passed for a members winding up or it enters into a scheme of arrangement. N1 Investments Pty Ltd (in liq) is being wound up by reason of a resolution that the company be wound up under s 491(1) of the Corporations Act. 10 There is no evidence of any replacement trustee. Therefore, N1 Investments Pty Ltd (in liq) is the bare trustee of the PH Property and must hold and preserve that property and transfer it to a new trustee. It is possible that N1 Investments Pty Ltd (in liq) may have rights of indemnity and exoneration as against the property of the Trust. If so, those rights persist even where a trustee has been removed from office and holds property as a bare trustee: Jones (Liquidator) v Matrix Partners Pty Ltd; in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; (2018) 260 FCR 310 at [85], [142], [198]. I described the nature of those rights and the equitable lien that supports them in Francis (Trustee), in the matter of Fotios (Bankrupt) v Helios Corporation Pty Ltd [2022] FCA 199 at [8]-[10], [30]-[32]. N1 Investments Pty Ltd (in liq) could not assert those rights in priority to the interests of AFSH as mortgagee of the PH Property. Indeed, it makes no claim on the present application to any such interest that might bear upon the orders that might be made on the application. 11 This is not a case where the liquidator of a bare trustee seeks to wind up the affairs of the trust and exercise such rights against the property of the trustee as may be held by that bare trustee in the interests of creditors: compare, for example, Brooks, in the matter of Tease Hair & Spa Pty Ltd (in liquidation) [2022] FCA 457. Rather, in the present case the liquidator seeks to disclaim all interest in the PH Property and also to disclaim the mortgage over that property held by AFSH. 12 By the time of the purported disclaimer, the extent of the property interest of the company in the PH Property was as the holder of the registered legal interest and the holder of any proprietary interest by reason of its right of exoneration. There remained the registered interest of AFSH under its mortgage. It was not suggested that there was any vested interest of any beneficiary (and the facts as established do not suggest the existence of any such interest). On the evidence, if the orders sought are made then the sale of the PH Property will not produce a surplus. Therefore, the only interest in the PH Property that could have any value is the interest of AFSH under its mortgage. In a different case, it may be necessary to consider the extent to which a disclaimer by a bare trustee may have consequences for the interest of any beneficiary or beneficial purpose and, indeed, whether there could be a disclaimer that extended to that interest. 13 As to the disclaimers, s 568D(1) of the Corporations Act provides that: A disclaimer is taken to have terminated, as from the day on which it is taken because of subsection 568C(3) to take effect, the company's rights, interests, liabilities and property in or in respect of the disclaimer property, but does not affect any other person's rights or liabilities except so far as necessary in order to release the company and its property from liability. 14 Relevantly for present purposes, any disclaimer took effect the day after the liquidator gave the notice: s 568C(3)(a)(i). 15 Having regard to the terms of the authority to disclaim as expressed in s 568D(1), the disclaimers could not terminate rights other than the rights of N1 Investments Pty Ltd (in liq). 16 As to the effect of the disclaimers upon the interest of AFSH under the mortgage, in Sandhurst Trustees Ltd v 72 Seventh Street Nominees Pty Ltd (in liq) (1998) 45 NSWLR 556 at 564, Bryson J stated: The view that the Crown takes on escheat, subject to existing charges, was also expressed in Re Middle Harbour Investments Ltd at (664) by Bowen CJ in Equity and in Re Tulloch by Needham J at (813). It is established in the modern law that it is only the interest of the fee simple owner which goes out of existence on an escheat, charges over land do not go out of existence and the land reverts to the Crown subject to those charges. This operates in the same way for land under the Real Property Act as for land under the general law. 17 In National Australia Bank Ltd v State of New South Wales [2009] FCA 1066; (2009) 182 FCR 52, Rares J sounded a note of caution against unqualified acceptance of that view by noting the significance of the express statutory power given to the Court (relevantly for present purposes by s 568F of the Corporations Act) to order that the disclaimed property vest in or be delivered to a person entitled to the property or 'a person in or to whom it seems to the Court appropriate that the property be vested or delivered'. Having regard to that provision, his Honour said at [23]-[24]: I think that the better view may be that by force of a disclaimer under the Bankruptcy Act (or Div 7A of Pt 5.6 of the Corporations Act) the title to the fee simple or other property does not escheat absolutely to the Crown in right of the State because the Court can make an order vesting that title in someone else. The Court's power to make such a vesting order is created by a law of the Commonwealth (s 133(9) of the Bankruptcy Act or s 568F(1) of the Corporations Act). By force of s 109 of the Constitution that law supplants any inconsistent automatic operation of a law of a State to the extent that some form of immediate and indefeasible escheat to the Crown in right of the State would otherwise have occurred. As I have observed, the ordinary incidents of an escheat are not readily seen as conformable with its suggested application to disclaimers. However, it is not necessary to express a final view, since this matter was not argued and I do not need to decide it. 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. 18 In Stacks Managed Investments Limited v State of New South Wales [2016] NSWSC 1349, Darke J applied the above authorities and in doing so described the effect of s 568D in the following terms at [11]: The company's rights, interests, liabilities and property in or in respect of the property were thus terminated when the disclaimer took effect. The plaintiff's rights [being rights claimed as registered mortgagee] in respect of the property were not affected, save so far as necessary to release the company from liability. 19 In Bank of Queensland Limited v State of Western Australia [2020] FCA 442, McKerracher J considered an application under s 133 of the Bankruptcy Act 1966 (Cth) for an order vesting real property that had been disclaimed by the trustee in the name of the Bank as mortgagee so that it could effect a sale. In that related context, his Honour described the effect of the disclaimer in the following way (at [36]): The consequence of the Disclaimer is that the title to the Property vests in the State. In Halsbury's Laws of Australia (LexisNexis Australia, 2015) at [295-7220] the legal position is explained as follows: After the disclaimer there is no personal covenant upon which the mortgagee can take action against the Crown because the Crown has no obligation under the mortgage. The mortgagee's rights following the disclaimer include the rights of a mortgagee accrued from the mortgagor's default under the relevant security and the doctrine of escheat does not preclude those rights of the mortgagee. The effect of the disclaimer is that, in the absence of a vesting order, the mortgagee will be precluded from taking any action to realise the security. see also RAMS Mortgage Corporation Ltd v Skipworth (No 2) [2007] WASC 75; (2007) 239 ALR 799 per Heenan J (at [28]-[30]). 20 The statement of the position by McKerracher J was included in a comprehensive summary of the principles to be applied where relief was sought by a mortgagee where the property the subject of the mortgage had been disclaimed under the equivalent statutory regime in the Bankruptcy Act by Derrington J in Commonwealth Bank of Australia v State of Queensland, in the matter of Hewton [2021] FCA 22 at [15]. It is a summary that has since been applied in other decisions in this Court. 21 Therefore, I do not accept that the disclaimers in the present case could operate in a way that might defeat the interest of AFSH under the mortgage. Rather, the disclaimer of the interest in the PH Property has the consequence that AFSH must obtain relief under the relevant statutory provision if it is to be able to be in a position to act as if its mortgage was enforceable despite the escheatment to the Crown effect by the disclaimer of the PH Property. 22 Applying the principles as explained by Derrington J, AFSH has demonstrated that it is entitled to relief under s 568F. In particular, the estimated value of the PH Property as at 14 February 2022 was $390,000 when the total debt secured by the mortgage was almost $600,000. But for the disclaimer AFSH would have been able to take steps to enforce its mortgage. Relevant default notices have been served and there is evidence to establish the defaults. Notice has been given to the tenant under the Residential Tenancies Act 1987 (WA) and the Tenant has submitted to any orders the Court may make on the application. Necessary parties have been joined to the application. Declaratory relief 23 For reasons that have been given, the liquidator had no authority to disclaim the registered mortgage. In that regard, the purported disclaimer of the mortgage was expressed as follows: I, as liquidator of the company, for the purposes of paragraph 568A(1), give notice that I disclaim the property described in the schedule. The property is property of the company and consists of: a contract The schedule of disclaimed property is: set out below Mortgage agreement between AFSH Nominees Pty Ltd and the Company registered on 3 December 2014. 24 To the extent that the disclaimer was purportedly made in respect of the rights and interest of AFSH as mortgagee, for reasons that have been given there could be no such disclaimer as part of or consequent upon the disclaimer of the PH Property. To the extent that the disclaimer was purportedly made as the disclaimer of an onerous obligation or an unprofitable contract, the disclaimer could not operate so as to defeat the accrued obligation to repay the debt that was secured by the mortgage over the PH Property. To the extent that the disclaimer purported to do so, it was not of any legal effect. 25 This was not an instance where it was necessary for application to have been made to set aside the disclaimer pursuant to s 568B. Any such application would presume the validity of the disclaimer. In this case, the purported disclaimer exceeded the authority conferred by s 568 and for that reason and to that extent the disclaimer did not have the effect described in s 568D upon the interest of AFSH as registered mortgagee. Appointment of a receiver 26 By reason of the above conclusions, the alternative basis upon which the appointment of a receiver was sought does not arise. Orders 27 For the above reasons, there should be orders substantially in the terms sought. 28 For the State it was submitted that the order should provide that as to any surplus there should be an order: 'If the Court holds any surplus proceeds 2 years after receipt by it of those proceeds, they shall be paid to the Crown in right of the State of Western Australia'. The submission was made noting the observation by Jackson J in Westpac Banking Corporation v Western Australia [2021] FCA 1097 at [28] and the concern expressed by Banks-Smith J that such matters had taken on a life of their own in recent cases concerned with such issues: Australia and New Zealand Banking Group Limited v State of Western Australia, in the matter of Raleigh [2022] FCA 639 at [35]-[41]. The order will ensure that any surplus is not left in some form of limbo and I will include an order to the effect sought, noting that the facts provide no basis for any expectation that there will be a surplus. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Colvin. Associate: Dated: 30 September 2022