Court grants orders vesting interest in property that had previously been disclaimed

On 29 June 2022, the Federal Court of Australia made an order vesting an interest in a half share of land in Aaron Kevin Lucan in his capacity as trustee (the Trustee) of the bankrupt estate of Christopher Williams (the Bankrupt Estate).

The Trustee was seeking an order pursuant to section 133(9) and/or section 30(1)(b) of the Bankruptcy Act 1966 (Cth) that an interest in the property vest in him in his capacity as trustee. The Trustee was seeking this order because the interest had previously been disclaimed as onerous by a different trustee of the Bankrupt Estate.

The Court held that an order vesting the interest in the Trustee was just and equitable.

Background

In 1994, Christopher and Ellen Williams became the registered proprietors of a property located in Kearsley in New South Wales (the Property). National Australia Bank (NAB) had a registered mortgage over the Property and obtained orders for possession of that Property in 2006.

Mr Williams became bankrupt and Mr Morgan Lane was appointed as trustee to the Bankrupt Estate. NAB wrote to the trustee to advise that NAB was not taking action to realise the Property.

The trustee was replaced by Mr Nicholas Malanos. NAB notified the trustee that it would be commencing recovery action in relation to the Property.

NAB was a secured creditor with an order for possession, so the trustee did not expect any surplus proceeds after NAB sold the Property. Consequently, the trustee signed a disclaimer of Mr Williams’ interest in the Property and the State of New South Wales became a registered proprietor.

Mrs Williams became bankrupt in 2017 and Mr Andrew Scott was appointed as trustee in bankruptcy, the Second Respondent in this proceeding.

On 11 January 2021, NAB wrote to the Crown Solicitor’s office and the Second Respondent, indicating that NAB’s order for possession of the Property had expired and that NAB had discharged its mortgage without realising its interest in the Property.

On 30 April 2021, the Trustee was appointed to the Bankrupt Estate.

At the time of the decision in this case, the Bankrupt Estate had liabilities of $618,958.48 and no known assets. The Property was unencumbered and had an estimated value of $825,000.

Legal Framework

The Trustee’s application to the Court was made pursuant to section 133(9) of the Bankruptcy Act. This section gives the Court discretion to make various orders vesting disclaimed property and is enlivened where:

• There was disclaimed property;
• There is an application by a person claiming an interest in the disclaimed property or under a liability not discharged under the Bankruptcy Act in respect of the disclaimed property; and
• The Court heard from such persons as it thinks fit.

If these conditions are satisfied, the Court may make an order for the disclaimed property to vest in a trustee of an entitled person.

Disclaimer

There was no challenge to the efficacy of the trustee’s disclaimer of the interest in the Property.

Application

The jurisdiction of section 133(9) of the Bankruptcy Act is dependent on a person claiming an interest in the disclaimed property and not the vindication of that claim.[1]

The Trustee claimed an interest in the Property because of his position as trustee of the Bankrupt Estate and by operation of section 19 of the Bankruptcy Act. Section 19 imposes a duty upon the applicant to determine whether the estate includes property that can be realised and to take appropriate steps to recover property for the benefit of the estate.

The Trustee submitted that the Property was now a valuable asset and claimed an interest in it. This claim was sufficient to satisfy the precondition, but his Honour said that if it was necessary to decide whether the Trustee had an interest in the Property, he would have decided that he did.

Persons as the Court thinks fit

His Honour was satisfied that all the appropriate parties were heard or afforded the opportunity to be heard. The first respondent was the registered proprietor of the formerly held interest and the second respondent was the trustee of the estate of Ms Williams. As parties to the proceeding, both participated in the hearing.

Mr Williams was given notice of the proceeding and the hearing and was served copies of the materials of the applicant and first respondent. On that basis, his Honour was not convinced that Mr Williams needed the opportunity to address the Court but was satisfied that he was afforded the opportunity to do so.

Discretion of the Court

As each of the pre-conditions to the exercise of discretion were satisfied, the discretion of the Court was enlivened. His Honour held that the making of the vesting order would be just and equitable for 6 reasons:

1. Prior to the disclaimer, the interest in the property was vested in the trustee of the Bankrupt Estate;
2. The Property was disclaimed in circumstances where it would be onerous to the Bankrupt Estate and it was not suggested that the trustee acted improperly or in opposition of his duties;
3. The change in circumstances meant that a sale of the Property would now enable a significant return to creditors of the Bankrupt Estate;
4. Taking steps to recover the Property for the benefit of the Bankrupt Estate was consistent with the Trustee’s duty under section 19(1)(f) of the Bankruptcy Act;
5. If the order was not made, the creditors of the Bankrupt Estate would be unlikely to receive a dividend and the State of New South Wales instead would receive the proceeds, which was not a desirable outcome; and
6. The State of New South Wales and the Trustee of the Bankrupt Estate of Ms Williams did not oppose the application.

Key takeaway

In the event that a trustee in bankruptcy has disclaimed an interest in property because it was onerous, the Court can exercise its discretion to vest the interest back in the trustee, where doing so would be just and equitable. For example, in this case, the circumstances surrounding the property had changed and its sale would lead to a return to creditors.

If you found this insight article useful and you would like to subscribe to Gadens’ updates, click here.

Authored by:

Scott Couper, Partner
Caitlin Miller, Solicitor

[1] Walsh v State of Queensland [2019] FCA 871; (2019) 369 ALR 725 at 733 [32].