TGIF 4 June 2021 – Trash or treasure: recovering property disclaimed by a bankruptcy trustee

This week’s TGIF looks at the decision of the Federal Court of Australia in Kellendonk v State of Western Australia, in the matter of Jasienska-Dudek (a Bankrupt) [2021] FCA 418, where former mortgagees satisfied the Court that property disclaimed by the bankruptcy trustee should vest in them on the basis of a prior dealing between themselves and the bankrupt.

Key takeaways 

• Following an effective disclaimer made by a bankruptcy trustee under section 132(2) of the Bankruptcy Act, the disclaimed property will vest in the Crown, and more specifically land will revert to the state government.
  
  
• Equitable interests created before a disclaimer, such as the interest of a good faith purchaser for value, will not ordinarily be terminated by the disclaimer.  
  
  
• On an application to vest disclaimed property in another person, the Court will consider whether it is just and equitable to vest the property in that person having regard to the respective interests in the property and the nature and value of the property.  

Background

In early 2016, Mr and Mrs Kellendonk (Applicants) lent Ms Jasienska-Dudek $350,000 for the purpose of a purchase of a residential property in Midland, Western Australia (Property). The loan was secured by a first registered mortgage over the Property.  

Ms Jasienska-Dudek defaulted on the loan shortly after the funds were advanced and remained in default at all times until an agreement was reached in 2019 by the parties in relation to how the Property and the loan should be finalised (Agreement). 

Under the Agreement, Ms Jasienska-Dudek agreed to transfer the Property to the Applicants in consideration for the Applicants discharging the mortgage and releasing Ms Jasienska-Dudek from other liabilities in connection with the Property.  

In October 2019, the Applicants received a transfer of land form for the Property signed by Ms Jasienska-Dudek, but the Applicants did not lodge the transfer form with Landgate, the relevant state government authority, due to higher-than-expected stamp duty assessment from the Department of Finance. 

In January 2020, the Applicants received a notice from the bankruptcy trustee stating that Ms Jasienska-Dudek had been declared bankrupt.  The trustee disclaimed the Property on 29 April 2020 under section 133(2) of the Bankruptcy Act (Act) because the trustee considered there to be insufficient equity in the Property to warrant a sale based on its likely market value and accordingly, from the perspective of the trustee, the Property was deemed to be burdened with onerous covenants and not readily saleable. 

In July 2020, the Applicants lodged the transfer of the Property for registration but subsequently received a letter from Landgate stating that due to the bankruptcy of Ms Jasienska-Dudek and the disclaimer on the Property, Landgate considered that Ms Jasienska-Dudek’s ability to deal with the Property, as well as her rights, interests and liabilities in the Property, had been terminated. As a result, the transfer was not registered. 

Nature of the application

As a result of the disclaimer made by the trustee under section 132(2) of the Act, both Ms Jasienska-Dudek’s legal title and the trustee's equitable title were terminated and the Property reverted to the Crown in the right of the State of Western Australia. 

The Applicants applied to the Court for relief under section 133(9) of the Act, seeking to have the Property vested in them on the basis that they had an interest in the Property and it was just and equitable for such an order to be made.    

What did the Court decide? 

The Court observed that prior to the trustee’s disclaimer of the Property, Ms Jasienska-Dudek had the legal title as registered proprietor and the trustee had the equitable title to the Property as trustee in bankruptcy.  At the time of the Agreement, Ms Jasienska-Dudek had the right to deal with the Property, subject to the interest of the Applicants as mortgagees. 

Despite the fact that the trustee’s disclaimer had terminated Ms Jasienska-Dudek’s legal and equitable interests in the Property, the Court considered that the Property continued to exist to the extent necessary for the Applicants to claim an interest under section 133(9) of the Act.  

Jackson J considered that the Applicants’ equitable interests was in the nature of being purchasers under the sale of land contract (evidenced through correspondence between themselves and Ms Jasienska-Dudek) and decided that the equitable interests held by the Applicants were not terminated by the disclaimer.  

Jackson J cited High Court authority of Brunker and National Trustees Executors & Agency Co of Australasia Ltd v Boyd (1926) 39 CLR 72, where it had been held that unregistered instrument of transfer provided the purchaser equitable title to the Property on payment for value, despite the intervening death of the vendor. 

The last issue before the Court was whether it was just and equitable in all of the circumstances to vest the Property absolutely in the Applicants under section 133(9). 

The Court was satisfied that the correspondence between the Applicants and Ms Jasienska-Dudek demonstrated an objective intention that the Applicants should obtain an ownership interest in the Property. That Agreement had pre-dated Ms Jasienska-Dudek’s bankruptcy and would likely have been effective except for the intervening event of the bankruptcy. 

The Court also observed that, having regard to the likely value of the Property, the Applicants were not likely to make any windfall gain that needed to be dealt with by making additional orders.  

Comment

The Court retains power to deal with property disclaimed by a bankruptcy trustee for the benefit of a person who is able to demonstrate an interest in the disclaimed property and who can satisfy the Court that it is just and equitable for the disclaimed property to be dealt with other than in accordance with the Act. In considering such an application, the Court will consider the relevant circumstances and the respective interests of all relevant parties.