Escheat – An Update

Escheat is a feudal doctrine and an incident of the doctrine of tenure under which no land could be without an owner.1

As Hetyey AsJ noted recently in Re Energy Brix Australia Corporation Pty Ltd,2 “In essence, under common law, escheat refers to a situation whereby a fee simple interest in real property comes to an end and ownership in the property re-vests or reverts in the Crown. The radical title in the property merges in the Crown, which is then entitled to re-grant the land as it sees fit. As explained by the learned author of Butt’s Land Law, under an escheat, the Crown takes back what had always been its own property, subject only to the intervening (but now ceased) rights that had been granted to the tenant or holder of the property.”

It finds its modern practical emanations only in the insolvency regime under section 133 of the Bankruptcy Act and section 568F of the Corporations Act. Both sections contemplate that the trustee\liquidator in charge of an insolvent estate might “disclaim” property which does not enure to the benefit of creditors; in such a case, the property is then said to “escheat” to the Crown. (Whether under the Torrens system such a transfer to the Crown may occur is the subject of ongoing judicial controversy but is, happily, of little practical importance).3

Escheat to the Crown is qualified by the vesting power under s 568F of the Corporations Act or the court setting aside the disclaimer under s 568E. There is also a tension between the doctrine of escheat, which relies on a feudal concept of tenure, and the modern statutory basis for a registered proprietor’s interest in real property.

The provisions of section 568 of the Corporations Act

In ANZ v Fairfield City Council4 Emmett J discussed the operation of section 568.

Section 568(1)(a) of the Corporations Act relevantly provides that a liquidator of a company may, at any time, on the company’s behalf, disclaim property of the company that consists of “land burdened with onerous covenants”. Under s 568A(1), the liquidator must, as soon as practicable after disclaiming property, give written notice of the disclaimer to each person who appears to the liquidator to have an interest in the property. Under s 568B(1), a person who has an interest in disclaimed property may apply to the Court for an order setting aside the disclaimer before it takes effect, but may only do so within 14 days after the liquidator gives such notice to that person. Under s 568C(1), a disclaimer takes effect if, and only if, relevantly, no such application is made to the Court. Under s 568C(3), such a disclaimer is taken to have taken effect on the day after the day when the liquidator gave notice under s 568A(1).

24. Under s 568D(1), a disclaimer is taken, as from the day on which it is taken to take effect by the operation of s 568C(3), to have terminated the company’s rights, interests, liabilities and property in or in respect of the disclaimed property. However, a disclaimer does not affect any other person’s rights or liabilities, except so far as necessary to release the company and its property from liability.

25. Under s 568E, a person who has, or claims to have, an interest in disclaimed property may apply to the Court, with the leave of the Court, for an order setting aside the disclaimer after it has taken effect. The Court may set aside a disclaimer only if satisfied that the disclaimer has caused, or would cause, to persons who have, or claim to have, interests in the property, prejudice that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company’s creditors and persons who have changed their position in reliance on the disclaimer taking effect. Finally, s 568F relevantly provides that the Court may order that disclaimed property vest in, or be delivered to, a person entitled to the property or a person to whom it seems to the Court appropriate that the property be vested or delivered.

26. The purpose of providing for disclaimer by a liquidator in a winding up is to enable the liquidator to rid the company of burdensome financial obligations that might otherwise continue to the detriment of those interested in the winding up of the affairs of the company. The power to disclaim is given to enable the liquidator to advance the prompt, orderly and beneficial administration of the winding up of the affairs of the company.”

Obtaining a “vesting order”

Under the section a party interested in the property (say as mortgagee) may seek a “vesting order” to enable the property to be sold and the security paid out and it is this circumstance which provokes the recent cases. The authorities make it clear that any supervening third party must be joined to the proceedings by the mortgagee (whether supported by caveat or not).5 The relevant principles applying to the Court’s discretion to vest property in a mortgagee applicant have been helpfully summarised by Derrington J in Commonwealth Bank of Australia v Queensland; in the matter of Hewton6 as follows:

“(1) The reference to “property” in the section includes a reference to any land which is burdened with “onerous covenants”, and that includes any financial obligations which can be enforced against the land: Re Tulloch Ltd (in liq) and the Companies Act (1977) 3 ACLR 808, 812; ING Bank (Australia) Ltd v Queensland, Re of Watson [2017] FCA 411 (ING v Queensland) [15];

(2) A disclaimer operates immediately to determine the rights, interests and liabilities of the bankrupt and their trustee in respect of the property: s 133(2) of the Bankruptcy Act: and its effect is not dependent upon the registration of a notice of the disclaimer by the trustee: Commonwealth Bank of Australia v Western Australia, Re of Arbidans (a Bankrupt) [2020] FCA 1514 (CBA v WA ) [19]; Commonwealth Bank of Australia v Queensland [2019] FCA 1362 [4];

(3) Where a trustee, who only holds an equitable title in a bankrupt’s land because the bankrupt remains the registered owner, disclaims under s 133, the effect is to disclaim both that equitable interest and any legal interest of the bankrupt who remains registered under the relevant Torrens system legislation

(citation omitted)

(4) The primary consequence of disclaiming the fee simple interest is to cause of the process of statutory escheat to take effect with the consequence that full and complete title to the land vests in the Crown. Any existing mortgage over the fee simple interest is not enforceable against the Crown which has given no covenants to repay any money: Bank of Queensland Ltd v Western Australia [2020] FCA 442 [36].

(5) However, it is now accepted that the erstwhile legal and equitable interests in the fee simple are not dissolved, and nor do they merge in the superior title; cf Purefoy v Rogers [1845] EngR 195; (1669) 85 ER 1181; with the consequence that the fee simple, which is taken to vest in the Crown, remains subject to any securities attaching to that interest (citation omitted);

(6) It follows that subsequent to the making of the disclaimer by the trustee, a person with an interest in the fee simple, such as mortgagee, may make an application under s 133(9) of the Bankruptcy Act for the vesting of the property in them: National Australia Bank Ltd v Victoria [2010] FCA 1230; (2010) 118 ALD 527, 530 [9]–[12]. It is possible that in the absence of the making of an order under this section the mortgagee will not be able to enforce their security: NAB v Queensland 16;

(emphasis supplied)

(7) Prima facie, it is just and equitable to vest title to the disclaimed fee simple interest in land in an unsatisfied security holder whose security exists over that interest because the making of an order removes all doubt as to the veracity of any other action by a security holder to recover their debt (ANZ v Queensland [23]), to refuse to make the order would diminish the value of securities including registered securities, the disclaiming by the trustee strongly indicates that the security holder’s claim exceeds the land’s value, and the security holder has an interest to realise the land for the highest value: ING v Queensland [31]–[ 33];

(8) It is usually the case, and especially so in circumstances where the debt of the security holder exceeds the value of the land, that a Court will make orders liberalising the holder’s ability to sell the land so that it may do so without compliance with statutory obligations relating to the exercise of the power of sale by security holders. That, is subject to the making of orders, such as the requiring of the making of an account, which ensure the security holder does not receive more than the amount to which it is entitled: Australia and New Zealand Banking Group Ltd v Queensland [2016] FCA 1221; Ginn [19]; ING v Queensland [38]; ANZ v Queensland [25]; NAB v Queensland [25]. The orders sought and made in the present case are what have become the standard suite of orders giving effect to these matters.

In National Australia Bank Ltd v New South Wales7 Perram J held that a vesting order may be made if the applicant bank can demonstrate (a) that a disclaimer to relevant property has occurred within the meaning of s 133; (b) that the applicant has an interest in the disclaimed property within the meaning of s 133(9); and (c) that the applicant is entitled to the disclaimed property or that the Court considers it to be just and equitable that it should be so vested or delivered.

Thus, an escheat does not deny the position of any prior security holder over the property. As Gardiner Ass J recently observed in Re Kralcopic Pty Ltd (deregistered)8 “When a third party has a security interest over the property such as a mortgage or a charge, those interests survive the vesting. The State’s ownership of the land that has escheated to it is subject to any existing mortgages or charges and if [the caveator] had not withdrawn its caveats it would have been necessary to make it a party to the proceeding.”

Recent cases

As Jackson J noted in Westpac Banking Corporation v State of Western Australia; in the matter of Conco Construction Service Pty Ltd9

“The effect of the liquidator disclaiming the Canning Vale property is that the fee simple escheated to the Crown in right of the State, subject to any existing mortgages or charges: Tonic Pty Ltd v State of South Australia [2019] FCA 1361 at [8] (Charlesworth J). Although there is no personal covenant upon which Westpac as mortgagee can take action against the Crown, the escheat does not erase the rights that have accrued from the mortgagor’s default. However the disclaimer does mean that in the absence of a vesting order, the mortgagee will not be able to take any action to realise the security. See AFSH Nominees Pty Ltd v State of Western Australia [2022] FCA 1168 at [15]-[21] (Colvin J) applying, among other authorities, Bank of Queensland Limited v State of Western Australia [2020] FCA 442 at [36] (McKerracher J). The mortgagee, as a person claiming an interest in the property, may make application for the vesting order: s 568F(2)(a).

21. In Sullivan v Energy Services International Pty Ltd (in liq) [2002] NSWSC 937 at [37]-[40] Young CJ in Eq traced the legislative history of the provision. The relevant standard for a vesting order was originallythat it seem ‘just’ to the Court, in 1981 the relevant adjective was changed to ‘proper’ (in the Companies Code), and in s 568F it must seem to the Court that it is ‘appropriate’ that the property be vested. There is no reason to think that these changes in wording changed the substance of the standard to be applied. Also, there are obvious parallels between s 568F and the cognate provision of the Bankruptcy Act 1966 (Cth), s 133(9), where the standard is that it be ‘just and equitable’ that the property vest in the person: see e.g. AFSH Nominees at [20].

Surplus funds and the liquidator’s fees

What if there is a surplus after the mortgagee has sold the property pursuant to a vesting order under the legislation? May the trustee or liquidator make a claim to the balance notwithstanding that the property was disclaimed? On this topic, in ANZ v Victoria; in the matter of Paksoy10 O’Bryan J recently said:

“If there are surplus funds paid into Court, the Trustees have foreshadowed that they may make a claim to the funds over the State. The Trustees’ entitlement to make such a claim, in circumstances where they have disclaimed the Property, is presently a hypothetical question which need not be determined. The practice of the Court in cases such as the present is to require the mortgagee to provide an account of its payments and receipts and to serve a copy on the State (as respondent) and the trustee(s) in bankruptcy. The preparation of an account helps to ensure that the mortgagee does not receive more than the amount to which it is entitled, and places the State and the trustee(s) in bankruptcy in a position to make an application to the Court in respect of any surplus funds as they consider appropriate: see National Australia Bank Ltd v State of Queensland [2019] FCA 1780 at [25] (Derrington J); ING Bank (Australia) Ltd v State of Queensland [2017] FCA 411 at [38] (Derrington J). Although ANZ did not seek orders to that effect, I consider it appropriate to order that, within 30 days of the sale, ANZ must provide an account of its payments and receipts to the State, the Trustees and the Registrar of the Court.”

Conclusion

The recent authority, discussed above, indicates that the vesting of disclaimed property in a mortgagee is a mundane and daily forensic occurrence. The exquisite questions remain:11 does the disclaimed title escheat absolutely to the Crown since the Court may make an order vesting it in someone else? does any “just terms” question arise if unsecured creditors are deprived of a surplus on the sale of the property? does the property fall into the Crown in right of the Commonwealth, or the State? Happily, such questions may await argument and decision in the unlikely event that anything ever turns on them.

1 See my earlier detailed discussion, Aitken, “Bankruptcy, escheat and the mortgagee’s interest – topics `as clear as mud’ in theory but simple in practice” (2020) 36(8) Banking Law Bulletin 119. The flood of cases on the topic has continued. I have long had an interest in this rather abstruse area which dates from my successful (unusually!) appearance in the landmark case of Sullivan v Energy Services International Pty Ltd (in liq) [2002] NSWSC 937 at [37]-[40] before Young CJ in Eq who traced the legislative history of the Corporations Law provision.

2 [2022] VSC 700 at [25] (citation omitted).

3 See the detailed analysis of all the possible difficulties in the judgment of Rares J in NAB v NSW [2009] FCA 1066 where his Honour discusses the history of the doctrine and its possible interplay with registered title.

4 [2016] NSWSC 668 at [23] – [26].

5 See, for example, the decision of Logan J in Westpac Banking Corporation; in the matter of Burton (a bankrupt) v Burton [2021] FCA 773. And see the detailed discussion on the full extent of a mortgagee’s interest upon sale and the consequences which flow from it in Point Coolum Ltd v Queensland [2022] QSC 291 per Williams J.

6 [2021] FCA 22 at [15].

7 [2014] FCA 298 at [11].

8 [2023] VSC 306 at [25].

9 [2022] FCA 1213 at [20] – [21].

10 [2023] FCA 62

11 See NAB v NSW footnote 2 above at [23] – [28] per Rares J.