Australia: The section 133(9) shakedown: how the law fails to protect caveators in cases of onerous covenants

The operation of section 133

The law currently provides an easy out for trustees of a bankrupt, specifically in respect of real property

Section 133 of the Bankruptcy Act 1966 (Cth) (the Act) provides an option for the trustee in bankruptcy to disclaim real property where it is burdened by onerous covenants. This disclaimer is often exercised where the amount owed in the form of a mortgage and further caveats or covenants registered on title of the real property exceeds the value of the property.

The disclaimer discharges the trustee from all personal liability in respect of the property, subject to any mortgages on title if the property is vested in the state.

The disclaimer is only effective when the trustee gives written notice to anyone who has an interest in the property, including the relevant land titles office. The notice must also identify the bankrupt and the property being disclaimed.

Quite often, the trustee will disclaim the property in order to avoid the continuous costs and time involved in managing the land within a bankrupt estate. Once the property is vested in the state as registered proprietor, this means that while mortgagees have a vested interest in the land, they are effectively unable to exercise their power of sale without utilising section 133(9) of the Act.

Are you a caveator? How do you prevent yourself from being locked out from debt recovery during bankruptcy proceedings? Is lodging a section 133(9) application the answer?

While the notice of disclaimer could potentially be set aside in court, the timeframe to do so is limited and often parties do not realise the potential for such a disclaimer to limit the chances of recovering debts.

Instead, the law provides relief for debtors in this situation by providing an option in form of a section 133(9) application to the court for a vesting order to settle debts owed. Often, it is banks as registered mortgagees who have a mortgage interest that exceeds the value of the bankrupt's interest in the property. So far, section 133(9) has only successfully been used to protect banks essentially leaving businesses with registered caveats high and dry.

What is a Section 133(9) application? How does it work?

Section 133(9) of the Act allows an interested party to file an application with the Federal Court of Australia seeking orders that vests the real property of a bankrupt in them, to allow for the recovery of debts through the sale of the property as a registered proprietor.

A vesting order is a court order that grants legal title in lieu of a legal conveyance, meaning it operates as an equitable remedy. This means that the courts may use their discretion to transfer property from one party to another where fairness demands it. As such, in applying for a vesting order pursuant to section 133(9) of the Act, you would have to show that fairness mandates that the legal title of the property should be transferred to a particular a party.

It is a long-standing principle of the courts that an application can be made by any party who sees fit. However, the application must satisfy the court that it is just and equitable to vest the title of the property in the applicant.

When will the courts regard it as being 'just and equitable' to grant a section 133(9) application?

In determining whether parties have a just and equitable interest in the land, the courts established in National Australia Bank Ltd v New South Wales (2009) 182 FCR 52 that if the mortgage on title exceeds the value of the bankrupt's share in the property, then the mortgagee or caveator, is likely to be entitled to a vesting order.

For example, if a caveator is owed $100,000 in a bankrupt estate, in order for the court to be satisfied that a vesting order should be made, the court would need to be satisfied that the value of the caveator's security exceeds the value of the bankrupt's share in the property. Therefore, the value of the bankrupt's share in the property would have to be less than $100,000.

If there are numerous mortgagees and caveators with interests on title, this can place a party who holds security over the bankrupt's property in a costly and onerous position. Specifically, parties would have to engage in costly legal proceedings to secure their interest in disclaimed land that is likely to leave a shortfall when sold. Ultimately, this would mean that secured parties could end up spending more on legal fees than they would be likely to receive via a vesting order.

What if you are a caveator rather than a mortgagee?

Although there is no impediment to a caveator making an application to the court for a vesting order pursuant to section 133(9) of the Act, the effect of the 'just and equitable test' is such that the interests of mortgagees, who are generally owed significantly more money than caveators on title, are provided greater protection under the Act.

Unfortunately, this often results in caveators often being left in a position where they cannot seek a vesting order and are therefore unable to seek the protection afforded by Section 133(9).

How can caveators protect their positions in cases of bankrupt estates?

As you can see, the current situation with section 133(9) applications demonstrates a clear lack of protection for caveators in bankruptcy compared to mortgagees. This means that caveators are in a weaker position than mortgagees when it comes to recovering their debts. Ideally, section 133(9) needs to be re-drafted in order to balance the rights of mortgagees and caveators in cases of bankrupt estates.

As the situation stands at the moment, if you are a caveator, you should try to protect your position by:

  • Being aware of any interest you have in a property, as well as of your rights, should a trustee wish to disclaim their interest in the event that the property becomes part of a bankrupt estate.
  • Contacting other interested parties to allow for the prompt sale of the land without the need for any disclaimer. This would mean that, if the property is sold, you would have a greater chance of recovering your debts because you would avoid the need to apply for a vesting order against parties who have a stronger interest on title that would have little prospect of success. In this way, you could save yourself both time and unnecessary costs.

Finally, if a trustee files a notice of disclaimer, you should immediately ensure that they have complied with the requirements in filing a notice of disclaimer. You should then establish your rights at an early stage in the process because this will help to determine whether you should file a s 133(9) application.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions