The Crown’s Claim
You are acting on behalf of a lender client in respect to what should be a straight forward set of instructions to secure possession of a defaulting borrower’s mortgaged property. The matter deviates from its normally orderly path when out of the blue you receive a letter from the Crown Solicitor’s office informing you that the borrowers’ trustee in bankruptcy (Trustee) has disclaimed the mortgaged property. Pursuant to the Doctrine of Escheat (Escheat) the property has now vested in the Crown. The disclaimer is made by the Trustee without any communication with the lender. Whilst this event is not fatal to the lender’s rights, the remedial process involves an application to Court seeking orders to vest the property in the lender, which causes further delay and cost.
Whilst the above may sound rare, a number of recent cases demonstrate that this situation occurs more often than you might think. They highlight the fact that this further layer of complication may be unnecessary and easily avoided through simple communication.
The Doctrine of Escheat (Escheat)
A fundamental principle of Australian Property Law is that the Crown acquired root title (with some exceptions) over all land in Australia (Doctrine of Tenure), from which grants were then made to individuals (tenancy in Fee Simple). Escheat refers to the situation where a Fee Simple interest in property comes to an end and ownership in the property re-vests (escheats) in the Crown in right of the State which originally granted the land.1
Disclaimer of Mortgaged Property
Both liquidators2 and trustees3 have the ability, in certain circumstances, to disclaim property. In the above situation the Trustee would rely upon their power to disclaim property where the property is “burdened with onerous covenants”4 eg the mortgage5. In other words the Trustee would assert there to be no or little equity in the mortgaged property. The effect of the disclaimer is that it determines all of the Trustee’s and bankrupt’s interests in the mortgaged property, whereupon the mortgaged property then escheats to the Crown.
Furthermore, after the disclaimer (and the mortgagee’s solicitor has explained the effect of their disclaimer) the Trustee cannot retract their disclaimer (as the Trustee no longer has an interest in the property).
What Options Does the Mortgagee Have?
In the above scenario, if the mortgagee wanted to enforce its interest in the mortgaged property it would have to apply to a Court of competent jurisdiction for orders that the mortgaged property vest in the lender. Both the Corporations Act6 and the Bankruptcy Act7 give specific Courts the power, where there has been a disclaimer, to vest property in a party that has an “interest” in the disclaimed property.
Neither the act of the disclaimer or the Escheat extinguishes the lender’s secured interest in the mortgaged property. The interest that escheats to the Crown remains subject to the lenders interest (as the holder of a previously legally enforceable security).8
What are the Practical Implications of Such an Application?
There are obvious cost implications, which previously did not exist, for an interested party to consider when deciding whether to make an application to protect their interest in disclaimed property. If the disclaimer relates to a bankrupt estate any application must be brought within either of the Federal Circuit Court or the Federal Court. The filing fees within the Federal Courts can be significant especially where the applicant is a publically listed company or company limited by shares9.
In liquidations the Courts of competent jurisdiction extend beyond the Federal Courts to include state Supreme Courts, which may have lesser filing fees.
In some jurisdictions a court order vesting property in an interested party may constitute a dutiable transaction10 and therefore the lender may incur a stamp duty liability. To add insult to injury, duty would not have been leviable if the lender had been permitted to follow the usual course of activating and exercising its power of sale under the terms of its security and the relevant state property legislation.
To avoid the above scenario, an insolvency practitioner who has control of a mortgaged property that may be a candidate for disclaimer could:
- Contact the security holder and offer to orderly surrender possession of the mortgaged property (or to assist in its sale); and
- At the same time ask that the mortgagee account to them following the realisation of the mortgaged property.
Lenders/Lenders Legal Practitioner
Upon learning that a borrower has either been made bankrupt or entered into liquidation, the lender or their legal practitioner should immediately contact the liquidator or trustee in bankruptcy to arrange the orderly surrender of the secured property and seek assurances the property will not be disclaimed. This will assist in preserving access to the administrative power of sale provisions under the respective state property acts.
This article was written by Kyle Somann-Crawford, Partner in Hobart.
1For a short but succinct summary of the Doctrine of Tenure and Doctrine of Escheat see RAMS MORTGAGE CORPORATION LTD v SKIPWORTH and Another (No 2) (2007) 239 ALR 799 at para 6.
2S.568(1) of the Corporations Act 2001 (Cth).
3S.133(1) of the Bankruptcy Act 1966 (Cth).
4S.133(1AA)(a) of the Bankruptcy Act 1966 (Cth), similar provision exists in respect to liquidations under s.568(1)(a) of the Corporations Act 2001 (Cth).
5Re TULLOCH LTD (in liq) AND THE COMPANIES ACT (1978) 3 ACLR 808 at 812.
8Rams Mortgage Corporation Ltd v Skipworth (No 2)  WASC 75.
9At the time of writing this article the filing fees for an application brought under the Bankruptcy Act 1966 (Cth) by a publically listed company in both the Federal Court of Australia and Federal Circuit Court of Australia is $5,210.00 for publically listed companies and companies limited by shares $3,475.00.
10Duties Act 1997 (NSW) s.8(1)(b)(v); S.6(1)(c) (ii) Duties Act 2001 (Tas); Duties Act 2000 (Vic) s.7(1)(b)(iii).