Increasingly, trustees in bankruptcy and liquidators are disclaiming property. This article will outline what is meant by disclaiming property, the effect a disclaimer has upon a mortgagee, and what can be done to resolve the problems arising from the disclaimer.
The Legislation
Section 133 of the Bankruptcy Act 1966 provides a mechanism for a trustee in bankruptcy to disclaim real property when it is burdened with onerous covenants, or is unsaleable or is not readily saleable. Similarly, section 568 of the Corporations Act permits a liquidator to disclaim real property when it is burdened with onerous covenants. Neither statute outlines what "onerous covenants" are. Trustees and liquidators can also disclaim contracts and other types of property.
To disclaim real property, a trustee will prepare a signed written notice and lodge it with the relevant state Land Titles Office. A liquidator will complete a Form 525 and lodge it with ASIC and the relevant Land Titles Office. Whilst the disclaimer may be set aside by other interested parties, the timeframe is limited and quite often the effect of the disclaimer is not appreciated until it is too late.
The Effect of the Disclaimer
Immediately, the disclaimer discharges the trustee or liquidator from all personal liability in respect of the property disclaimed.
Who then becomes the owner of the property? The property vests in the State subject to any mortgages on title. The problem facing mortgagees is that they are unable to exercise their power of sale since the property vests in the State.
What Can Mortgagees Do?
If they act quickly when receiving notice of a disclaimer, mortgagees may have the option to set aside the disclaimer.
Even if the disclaimer is not set aside, both Section 133 of the Bankruptcy Act and Section 568 of the Corporations Act set out a mechanism whereby a person claiming an interest in disclaimed property can apply to the Court for the property to be vested in them. Increasingly, cases are being brought in the Federal Court of Australia by mortgagees seeking orders that property be vested in them to allow them to sell the property and recover their debts. This process adds time and expense to the recovery process for mortgagees, although orders for possession can be sought in the same proceedings.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
