Dealing with Real Property in
Bankruptcy
Michael Lhuede
Piper Alderman
10 June 2015
The facts
Unemployed bankrupt is co-registered
proprietor in equal shares with his wife of the family home.
2 years have elapsed since date of bankruptcy and AFSA have transferred file to you having done nothing to realise interest in property in meantime
Non-bankrupt spouse has since date of
bankruptcy met all mortgage repayments, rates etc and has renovated all from her own wages
The Process
Identify the asset and third party equities – the 10 rules.
Put your foot on the asset - secure the interest by lodging a caveat.
Rule 1: Presumption of Joint Beneficial Ownership
It will be presumed that husband and wife joint registered proprietors of the “family” home will own the property beneficially in equal shares Presumption will likely apply in de-facto
arrangements
Query what claim trustee may have where
family home registered solely in name of non-bankrupt spouse
See decision of High Court of Australia in
Trustees of the property of Cummins v Cummins (2006) 227 CLR 278
Rule 2: Discharge from bankruptcy does not result in a
re-vesting of property
Failure on the part of a trustee to realise
property prior to a bankrupt's discharge will not of itself result in a re-vesting of such
property
Dixon v Riquero [2004] FMCA 173 per Raphael FM @ para 16
Note limitation provisions of section 127
(20 years) and 129AA (6 years with option to extend)
Rule 3: Trustee has positive duty to realise assets
A trustee in bankruptcy:
> acting for remuneration, is under a higher duty than one acting gratuitously;
> is required to administer the estate so as to maximise the return from estate assets;
> must take all reasonable and proper measures to obtain possession of the trust property ... and to preserve it and secure it from loss.
Adsett v Berlouis (1992) 37 FCR 201 per Northrop Wilcox & Cooper 11 @ para 27
Rule 4: Remember the duty to act commercially at all
times
Duty to exercise powers in a commercially sound way (section 19)
Undertake cost-benefit analysis of all recovery actions (clause 2.8, 2.9 and 2.13 of Schedule
4A) (noting Court likely to impute similar standards to AFSA)
Avoid litigation unless prospects of
success/return are such as to outweigh risk of loss to estate (Adsett v Berlouis @ para 32)
No positive obligation on trustee to spend own money
Rule 5: If you aren’t going to take action to recover property (see Rule 3) then mitigate risk of complaints by creditors
Undertake and document preliminary
investigations to ascertain value of asset to be recovered
Make appropriate demands/invitations to purchase
Absent commercial settlement call on creditors for indemnity
Absent indemnity from creditors do we conduct recovery on speculative basis or invite transfer to new registered trustee to so conduct matter
Rule 6: Failure to realise property in a timely manner
will not of itself give rise to an estoppel
The decision of O'Brien v Sheahan [2002] FCA 1292 "...should not be understood as establishing any general applicable principle of law relating to estoppel in the
administration of bankrupt estates"
Per Gummow J of the High Court of
Australia on the hearing of the application for leave to appeal in Sheahan v O'Brien
Rule 7: Non bankrupt co-owner is entitled to an
allowance for contributions to mortgage
If the non bankrupt co-owner repays more than one half of the mortgage debts by way of either capital or interest then the co-owner may
recover the excess from the proceeds of sale. The right does not entitle the non bankrupt co-owner to a proprietary claim by way of trust over the bankrupt's share but a right to account from the proceeds
Draper v Official Trustee in Bankruptcy (2006) 156 FCR 53 per Besanko J @ paras 135 and 163
Rule 8: An allowance can be made for improvements
by non bankrupt co-owner
A non bankrupt co-owner may claim an allowance from the sale proceeds for the
lesser of one half of the cost of the
improvements, repairs and maintenance or
one half of the increase in value of the property arising from the improvements.
Draper v Official Trustee in Bankruptcy per Besanko J @ para 163
Rule 9: Non bankrupt co-owner is entitled to an
allowance for contributions to rates
As with the mortgage if the non bankrupt co-owner repays more than one half of the rates taxes and outgoings then the co-owner may recover the excess from the proceeds of sale.
Draper v Official Trustee in Bankruptcy per Besanko J @ para 163
Rule 10: Non bankrupt co-owner can be required to
account for an occupation rent
A co-owner who exercises the right to
occupy the property is not obliged to pay an occupation rent unless he or she:
> wrongfully excludes the co-owner; or
> Claims an allowance for mortgage, improvements or repairs.
Draper v Official Trustee in Bankruptcy per Besanko J @ para 163
What is a caveat?
In Latin, the word ‘caveat’ means ‘let him beware’.
A caveat is a warning that the person who lodged the caveat (the ‘caveator’) claims an interest in the property.
Any caveats in respect of a title can be found by checking the register of titles with respect to the property.
What does a caveat do?
A caveat places restrictions on dealing with the property unless the caveator is notified and gives their consent or any dealing is taken subject to the caveat.
It gives the caveator the opportunity to call upon the court to determine the rights of the parties.
A caveat will not prevent dealings with the property which do not entitle the caveator to object, or which were registered prior to the registration of the caveat.
When should a trustee lodge a caveat?
In Victoria a Trustee will be registered as
proprietor upon making an application to the Registrar of Titles (s51 Transfer of Land Act 1958 (Vic)).
In the ordinary course, this is only done when the Trustee intends to sell the
property.
Consider lodging caveats immediately over any property of which the bankrupt is a
registered proprietor to prevent dealings – see Sch 4A Item 4.3.
Can you lodge a caveat under section 120?
A voidable transaction does not create a caveatable interest in land, only a personal right to take proceedings to have the
transaction voided (Martin v The Official Trustee in Bankruptcy [1990] TasRp 5).
CFHW Pty Ltd v Burness [2014] VSC 451
Trustee lodges caveat as constructive trustee but removed for absence of
Third Party Caveats
Trustee takes subject to equities so its
irrelevant if third party caveat lodged after that of trustee – Sonenco (No.11) Pty Ltd v Silvia (1989) 24 FCR 105
An agreement to lodge a caveat on a
property is sufficient to create an equitable charge over the property to secure a debt- see Porter & Ors v Bonarrigo & Ors [2009] VSC 500
Realise the asset
FCC or Federal Court application – NEVER VCAT
Invoke jurisdiction by seeking declaratory relief
Appointment as “trustee for sale” Order for Vacant possession
Realise the asset – Coshott v Prentice [2014]
FCAFC 88
Court does not have power under section 30 of the BA to order a sale of a third parties
interest in property
Court does have power by virtue of section 79 of the Judiciary Act 1903 (C’th) to apply State laws which will include the Property Law Act 1958 (VIC) - and this is so even if State law is expressed to grant power solely to State Tribunal
Property Law Act 1958 – Div 2 of Part IV
Order for sale in lieu of partition – s225
Power to make such order to ensure just and fair sale – s.228
Power to appoint “trustees” for the purpose of sale - s.231
Power to pay remuneration and to order payment from sale –s.231
Sale in conjunction with co-owner
Deed of Consent and Acknowledgement from co-owner
> Authority of co-owner to effectuate sale via power of attorney and agreement with co-owner on
distribution of sale proceeds
Occupancy Deed
Agreement to vacate property with consent orders for judgement for possession
Sale in conjunction with co-owner
Sale Contract
> Unilateral right to extend settlement date
Obtain informed consent of bankrupt if sale to non bankrupt spouse and potential surplus
The hard questions…..
Can a trustee just accept a cheque and withdraw the caveat?
> Sale of Land Act - s.16 – sale of land in
contravention of Act is an offence
> Section 32 – vendor statement
> Section 32K – offence not to provide s.32 and
The hard questions…..
If selling for equity, subject to mortgage, by instalments can trustee do a “standard” sale agreement?
> Sale of Land Act – s29M – restrictions on sale of
land under terms contract and offence for contravention
> S. 29N – voidable at option of purchaser – loss
of deposit
The hard questions…..
Can bankrupt borrow against property to pay out bankruptcy?
> Consent deed by mortgagee as to further borrowing and distribution of funds
