“The three C’s arising from the bankrupt’s ownership of real estate”: Property Issues in Bankruptcy Friday, 24 August 2012 Presented by: Catherine Pulverman Partner Wisewould Mahony
INTRODUCTION The main asset in a bankruptcy will be real estate owned by the bankrupt and which vests in the Trustee – section 58(1) Bankruptcy Act 1966 (Cth). The three C’s which are relevant for Trustees are: a) Caveats; b) Change of ownership arising from transmission applications and Transfers of Land; and c) Co-ownership disputes requiring an application for an order for sale and partition of the proceeds.
CAVEATS: WHAT IS CAVEATABLE? A caveat must establish a “caveatable interest” which is: “Any estate or interest in land under any unregistered instrument or dealing or by devolution in law or otherwise”: section 89(1) of the Transfer of Land Act 1958 (Vic). A number of fact situations clearly give rise to a caveatable interest: • The claim of a beneficiary under a trust; • The interest of an optionee under an option to purchase; • The rights under an agreement for a mortgage or charge; • The rights under a lease; • The interest of a purchaser under a contract for sale; • A vendor’s lien.
REMOVAL OF CAVEATSAn application for a removal of a caveat can be made to theRegistrar of Titles: section 89A Transfer of Land Act 1958 (Vic).Alternatively, any person adversely affected by a caveat maymake an application for its removal to the Supreme Court:section 90(3) of the Transfer of Land Act.The test for the removal of a caveat is the same as the testapplicable for an application for an interlocutory injunction: • There is a serious question to be tried: There is a prima facie case: Australian Broadcasting Corporation v O’Neill (2006) 277 CLR 57. • The balance of convenience favors the removal of the caveat.
CASE STUDY 1Transfer of Land between Mum and Dad to Daughter 1 (whowas the bankrupt) and Daughter 2.Caveat lodged around the time of the transfer with grounds ofclaim being “pursuant to a constructive trust between Daughter 1and Daughter 2 and Mum and Dad”.An undated agreement was produced in support of thecaveatable interest – essentially an acknowledgement betweenall parties of an outstanding debt owed to Mum and Dad (beingsettlement moneys on the transfer of the property).
CASE STUDY 1Equitable charge: see McMillan v Dunoon  VSC 440. Determining whether there was an interest by the wording of a loan agreement. It is a question as to whether or not the Court can infer an intention to constitute a security. The Court found that it was the common intention of the parties to create a charge over the property by the specific wording of the loan agreement.
CASE STUDY 1Constructive trust: see Handberg v Walter and the Registrar ofTitles  VSC 145: • Must be shown that a contribution was made where the parties had agreed or intended that a trust be created. • Evidence of a clear agreement for an intention to have arisen.A mere financial contribution does not of itself give rise to acaveatable interest: see Burgtreus Pty Ltd v Burgin  VSC339.
CASE STUDY 2Caveat was lodged by a supplier in respect of a debt.The grounds of claim merely stated that it was “a chargingclause pursuant to an agreement between the caveator andregistered proprietor”.The supplier relied upon a clause of a Guarantee andIndemnity which accompanied a Credit Application and statedthat: “The Guarantor charges in the Supplier’s favour with payment of all monies owed to the Supplier by the Customer and/or the Guarantor, all of its/their estate and interest in any land… in which the Guarantor now has any legal and/or beneficial interest… and the Guarantor agrees to execute on request, a registrable instrument and/or any other necessary documents to register such charge with ASIC or any other relevant body”.
CASE STUDY 2McMillan v Dunoon is relevant – by examining the wording ofthe purported charge in the documentation.Whilst the clause purported to be a charging clause, it was notsufficient to show that the parties’ common intention was that acharge would be created over the specific property as securityfor the outstanding debt (in accordance with the principlesarising from McMillan v Dunoon).Important consideration was the fact that the clause stated thatthe bankrupt as guarantor agreed to execute on request, aregistrable instrument to register the charge..
CASE STUDY 3Caveat was lodged by a financier – based on a chargingclause contained in a Guarantee which supported a Hire-Purchase Agreement.Guarantee document could be rendered invalid for severalreasons including: • The principal debtor and the guarantor were the same person. • Hire-Purchase Agreement did not include a charging clause. • Legal impossibility to guarantee your own debt.
TIPS FOR TRUSTEESExamine the documentation which purportedly gives rise to acaveatable interest – Hire/Purchase agreement, CreditApplication incorporating Terms and Conditions, Guarantee andIndemnity.Does the clause give rise to a charge which would give thecaveator a right to lodge a caveat?Ensure that the bankrupt is a party to the relevant agreementwhich incorporates a charging clause.Obtain all necessary documentation which purports to create atrust.
TRANSMISSION APPLICATIONSTo become a registered proprietor of the bankrupt’s property,the Trustee must lodge a Transmission Application: section 51 ofthe Property Law Act 1958 (Vic).Caveat should be lodged immediately upon appointment: seeStar Poultry Pty Ltd v Ryan  FCA 688.Procedure to be undertaken: Transmission Application together with a Statutory Declaration. Endorsement (or consent) of mortgagee and production of Certificate of Title at Land Victoria. Lodgment of Transmission Application and Statutory Declaration.Relevant case law: Marchesi v Apostolou  FCA 259Marchesi (as Trustee of Bankrupt Estate of Vasiliou) v Registrarof Titles in State of Victoria  VSC 524.
TRANSFERS OF LANDProcedure to be undertaken: • A Transfer of Land has to be executed by the Trustee and the Respondent. • Statutory Declaration by transferor for Transfer to be stamped non-dutiable: section 48(a) Duties Act 2000 (Vic). • Transfer of Land to be endorsed by the mortgagee and production of the Certificate of Title. • Original Transfer endorsed by the mortgagee and the original Statutory Declaration is lodged with the State Revenue Office to be stamped non-dutiable. • Once stamped non-dutiable, the Transfer is lodged with Land Victoria for registration on the title.
TIPS FOR TRUSTEESEnsure a caveat is lodged at the earliest opportunity.Be familiar with the requirements of different financiers.The Statutory Declaration to accompany Transfers of Landshould be as detailed as possible – the purpose is for theTransfer to be stamped non-dutiable.General rule of thumb on the procedural steps for becoming aregistered proprietor pursuant to a Court order is • Transfer of Land and Statutory Declaration to be executed; • Transfer of Land to be endorsed by the mortgagee (and title to be produced); • Transfer of Land to be stamped non-dutiable; • Transfer of Land to be lodged with Land Victoria.
CO-OWNERSHIP DISPUTES - SALE OF PROPERTYWhere the bankrupt and their spouse are joint tenants of aproperty, the bankruptcy severs the joint tenancy: Peldan vAnderson  HCA 48.The Trustee will become a tenant in common with the spousein respect of the property.If no agreement can be reached with the spouse in respect ofthe Trustee’s interest, the Trustee needs to seek partition ordersunder Part IV of the Property Law Act 1958 (Vic).VCAT is the relevant jurisdiction although applications can alsobe made to the Federal Court of Australia.A co-owner of property can apply to VCAT for orders in respectof the property: section 225(1) Property Law Act 1958 (Vic).
CO-OWNERSHIP DISPUTES - SALE OF PROPERTY Co-owner is defined as a person who has an interest in land or goods with one or more other persons as joint tenants or tenants in common: section 222 PLA and see Kalotihos v Bulzomi  VCAT 1734. The sale of the property and division of the proceeds is the preferred option of VCAT: section 229 PLA. VCAT also has wide discretionary powers to make an order for a co-owner to account or compensate another co-owner on the grounds of “fairness”: section 234 and 234B PLA.
CO-OWNERSHIP DISPUTES - SALE OF PROPERTYThere are a range of usual orders which would be sought inthese applications (section 232 PLA) which include: • Sale of the property. • Sale by a licensed real estate agent to be agreed between the parties. • Sale by public auction. • Property to be sold for a reserve price to be agreed between the parties or by certified valuation. • Proceeds to be applied in payment of commission and expenses, payment of rates and taxes, to discharge any registered encumbrances and the net balance to be divided between the parties.
Can a co-owner oppose the sale and partition?The caselaw recognises that the discretion may be exercisedagainst an order for sale and partition in certain circumstances: • The co-owner has a contractual right to occupy the property. • An order made under section 79 of the Family Law Act in respect of the alteration of property interests is protected from challenge by the Trustee (Oliver v Malanos  FCA 1354). • The order would be inconsistent with a contractual or equitable duty binding the Trustee.
Yeo v Brassil  VSC 344The Trustee had sought orders for the sale of the family homeand the application was opposed by the bankrupts wife.VCAT dismissed the Trustee’s application and he appealed.In allowing the appeal, Justice Judd held that section 225 ofthe PLA was not a jurisdictional requirement and that VCAT haderred insofar as it had decided that there was no jurisdictionbecause there would be no proceeds for distribution once themortgagee had been paid.Furthermore, Justice Judd held that VCAT did not have anopen or unfettered discretion to refuse an order. Mere hardshipor unfairness was not a proper basis upon which to refuse toexercise the power.
TIPS FOR TRUSTEESThe Application will be made pursuant to the provisions of PartIV of the Property Law Act 1958 (Vic).The orders which are sought will be an order for sale anddivision of the proceeds together with any necessary orders forvacation of the property by the occupants; changing the locks atthe premises; ensuring the occupants keep the premises neatand tidy and properly maintained as well as ensuring that it iskept neat and tidy when presented for inspection.Are there any other additional orders which need to be sought,for example, accounting.Ensure that the relevant notice of the application is made toany person holding a security interest over the property.