The recent decision of Majet & Anor v Goggin & Miller as Trustees of the Bankrupt Estate of Brett-Hall & Anor considered the impact of a trustee-in-bankruptcy’s disclaimer of a contract for the sale of land on the rights, interests and liabilities of the parties to a contract for the sale of land.

The particular issue before the Court was the disclaimer constituted a default under the sale contract permitting the vendor to retain the deposit paid prior to the purchaser becoming bankrupt.

The Facts

In early 2014, and prior to entering bankruptcy, the purchaser paid a $139,000 deposit for a house in Port Douglas (pictured above).  The standard form contract provided for the vendor’s solicitor to hold the deposit in his trust account.

Settlement was 150 days after the contract date, and the contract was conditional on the sale of another property owned by a trustee company of the purchaser’s family trust.

Two months after exchange of the contracts for sale, the purchaser was declared bankrupt, with the act of bankruptcy predating the contract for the purchaser of the Port Douglas property.  As a result, the purchaser’s trustee-in-bankruptcy assumed responsibility as the purchaser under the contract for the Port Douglas house.

Six weeks after his appointment, pursuant to s133(1A) of the Bankruptcy Act the bankruptcy trustee gave notice of his disclaimer of the contract for the purchase as the contract was “unprofitable”.  The trustee sought the return of the deposit previously paid and the vendors understandably wanted to keep the whole of the deposit.

The Decision

The parties submissions as to the interaction between the contract and s133(1A) of theBankruptcy Act were:

  • for the applicant/vendors side, that once a disclaimer occurred, the purchaser could not complete the contract and hence the deposit was forfeited by the purchaser; and
  • for the respondent/trustee-in-bankruptcy, that the operation of s133(1A) relieved the vendors from completing their obligations under the contract, that the deposit remained the beneficial property of the bankrupt purchaser and as a result the vendor had no right to terminate and must return the deposit, or in the alternative the deposit should be returned to the purchase (by payment to the trustee of the deposit).

The Court found that, when a disclaimer occurs in respect of real property under such a contract, the buyer’s rights under the contract end, but the vendor’s rights remain under the contract because s133(2) provides that a disclaimer “does not … affect the rights or liabilities of another person”.

Further, it was said that “the disclaimer of a contract is of its nature a manifestation of an unwillingness or inability to perform the contract and is prima facie a repudiation of the contract by anticipatory breach”.

The Court went on to distinguish the facts in the present case from the High Court decision in Willmott Growers Group v Willmott Forests Ltd (Rec and Mgrs. apptd) where it was found a liquidator’s disclaimer of leases under s133 of theCorporations Act extinguished the tenants rights in those leases.

In closing, the Court noted that the disclaimer could not affect the rights of the vendor to recover the deposit as the payment of the deposit to the vendor would not amount to enforcing a “liability” on the bankrupt, since the contract merely provided for the deposit holder to release the deposit to one party when a certain event had occurred (i.e. completion or termination).

Conclusions

Insolvency practitioners should be careful as to the effect of a disclaimer on contracts for the purchase of real property and ensure they are properly advised before issuing a disclaimer notice.