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
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
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.
Kemp Strang has received acknowledgements for the quality of
our work in the most recent editions of Chambers & Partners,
Best Lawyers and IFLR1000.
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A recent NSW decision has implications for liquidators of trustee companies dealing with trust funds and priority debts.
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