Mortgagees Need a Vesting Order

A recent federal case suggests mortgagees should get in quick for a vesting order when a mortgaged property is disclaimed by a trustee in bankruptcy or liquidator.

In Australia and New Zealand Banking Group Ltd v State of Queensland [2018] FCA 464, the bankrupt defaulted on their mortgage. The mortgagee (ANZ) obtained possession of the land before it had been disclaimed by the trustee in bankruptcy.

Disclaiming property

Generally, trustees/liquidators have the right to disclaim property held by the bankrupt/corporation in liquidation. By disclaiming the property, the trustee/liquidator is denouncing its rights in the said property. In effect, a disclaimer will determine the rights and obligations of the trustee/liquidator but will generally not affect the claims and obligations of others remain. Once disclaimed, the liability of the trustee/liquidator with regards to that land ends and the land escheats back to the Crown.[1]

Any liabilities accrued prior to the disclaiming remain unaffected and rights are only affected to the extent necessary to release the trustee/liquidator.[2] The Crown therefore, takes back the land subject to – not free of – existing rights. One such right being the right of a mortgagee to realise the security and sell the property upon a mortgagor’s default.

However, in this case, where the mortgagee obtained possession before the land was disclaimed, the court found that without a vesting order a mortgagee is precluded from taking action to realise the security by sale of the property after it has been disclaimed.

Key points to note
  • Trustees/liquidators have a general right to disclaim property held by the bankrupt/corporation in liquidation.
  • Disclaimed property does not vest in the Crown free of existing rights.
  • Mortgagees should obtain vesting orders as soon as possible if the property is to be disclaimed.

The information published in this paper is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.

[1] s 133(2) Bankruptcy Act 1966 (Cth); s 568D Corporations Act 2001 (Cth).

[2] Ibid.