Federal Court considers whether bankrupt’s property should vest in mortgagees following disclaimer by bankruptcy trustee

The Federal Court’s recent decision in Kellendonk[1] concerned a $350,000 loan made by the applicants, Mr and Mrs Kellendonk, to Ms Maria Jasienska-Dudek to help her buy a property in Midland, Western Australia (Property). Ms Jasienska-Dudek defaulted under the loan agreement and the parties subsequently entered an informal agreement which, after Ms Jasienska-Dudek became a bankrupt, led to some novel circumstances and a novel application of section 133 of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act).

Background

1. 1. In April 2016, Mr and Mrs Kellendonk agreed to lend $350,000 to Ms Jasienska-Dudek to help her buy the Property. Ms Jasienska-Dudek in turn agreed to repay the principal in full by 1 December 2016 and interest at 5% per annum payable on demand.
   2. In May 2016, Mr and Mrs Kellendonk advanced the funds to Ms Jasienska-Dudek and took a first registered mortgage over the Property.
   3. Ms Jasienska-Dudek defaulted in repayment of the principal of $350,000 and other amounts owing.
   4. In September 2019, following unsuccessful attempts to market the Property for sale and extensive negotiations, the parties entered an informal agreement whereby Ms Jasienska-Dudek agreed to sell the Property to Mr and Mrs Kellendonk for $350,000 in lieu of repayment of the loan and in full and final settlement of all claims they had against Ms Jasienska-Dudek in relation to the Property.
   5. In October 2019, Ms Jasienska-Dudek delivered a signed transfer of land form for the Property, which was then lodged with the Western Australian Department of Finance for stamp duty assessment.
   6. In January 2020, Mr and Mrs Kellendonk received a stamp duty assessment based on a valuation that was higher than they had been expecting.
   7. Later in January 2020, Mr and Mrs Kellendonk received an email from the Official Trustee in Bankruptcy notifying them that Ms Jasienska-Dudek was declared bankrupt in December 2019.
   8. In April 2020, the Official Trustee served a notice of disclaimer in relation to the Property.
   9. In June 2020, Mr and Mrs Kellendonk received a reassessment of the stamp duty, which was acceptable to them.
   10. In July 2020, Mr and Mrs Kellendonk lodged the transfer for registration, but Landgate did not register the transfer because Landgate’s view was that the bankruptcy terminated Ms Jasienska-Dudek’s authority to deal with the Property and the disclaimer terminated her rights, interests and liabilities in it. The transfer was then withdrawn.

Section 133(9) of the Bankruptcy Act

Mr and Mrs Kellendonk applied for orders under section 133(9) of the Bankruptcy Act that the Property vest in them absolutely “with the same effect for the purposes of entering them as registered proprietors as an order for foreclosure …”

Section 133 of the Bankruptcy Act relates to the disclaimer of onerous property, and subsection 133(9) provides that:

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.

The issue for the Court to consider, therefore, was essentially whether title in the Property could and should be transferred to Mr and Mrs Kellendonk.

Analysis and decision

Firstly, the Court considered whether Mr and Mrs Kellendonk had standing to bring the application under section 133(9) as “a person either claiming an interest in …. disclaimed property“.

Although the result of the Official Trustee’s disclaimer was that the land escheated to the Crown (as Ms Jasienska-Dudek’s legal title and the Official Trustee’s equitable title were terminated),[2] the Court accepted that Mr and Mrs Kellendonk had standing on the basis that they had an equitable interest in the Property: “once Ms Jasienska-Dudek had given the executed transfer of the Property to the applicants with the intention that they would lodge it for registration, that created (or brought closer to perfection) an equitable interest in the Property.”[3] The Court also confirmed that the determination of the rights of Ms Jasienska-Dudek and the Official Trustee by way of the disclaimer did not terminate that equitable title held by Mr and Mrs Kellendonk.[4]

The Court then considered whether Mr and Mrs Kellendonk were “a person entitled to [the Property]“, or whether they were “a person in whom, or to whom, it seems to the Court to be just and equitable that it should be vested“.

The Court noted that the question of what was just and equitable would turn on the proper characterisation of the agreement for the transfer of the Property: “Was it an agreement to transfer the land absolutely, in consideration of a release and discharge of all claims? Or was it an agreement that the property would be transferred to the applicants so that they could use it to obtain recovery of the principal and interest on the loan (and other costs and amounts payable under the mortgage)?“[5]

The Court considered it clear that there was a mutual intention for the Property to be transferred to Mr and Mrs Kellendonk in return for a release of all claims against Ms Jasienska-Dudek. Moreover, as valuation evidence showed the value of the Property was only around $230,000, Mr and Mrs Kellendonk did not stand to receive a windfall if the Property vested in them. Accordingly, the Court held it was just and equitable to vest the Property in Mr and Mrs Kellendonk absolutely, so as to give effect to the agreement, and made the orders as sought.

Key takeaway

This was a case where novel facts gave rise to a novel (but sensible) application of section 133 of the Bankruptcy Act, resulting in an order being made akin to an order for foreclosure. The Court’s decision gives practitioners a better insight into the utility of section 133(9) and the circumstances in which it may be considered “just and equitable” for property to vest in a person claiming an interest in disclaimed property.

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Authored by: 

Guy Edgecombe, Partner
Mitchell Byram, Senior Associate

[1] Kellendonk v State of Western Australia, in the matter of Jasienska-Dudek (a Bankrupt) [2021] FCA 418.

[2] Kellendonk at [18], citing Australia and New Zealand Banking Group Limited v State of Queensland, in the matter of McFarlane (a Bankrupt) [2017] FCA 696 at [17] and Rams Mortgage Corporation Ltd v Skipworth (No 2) [2007] WASC 75 at [8].

[3] Kellendonk at [21], citing Brunker v Perpetual Trustee Co (Ltd) (1937) 57 CLR 555 at 599.

[4] Kellendonk at [23], citing National Australia Bank Limited v State of New South Wales [2014] FCA 298 at [8]-[9].

[5] Kellendonk at [25].