Buyer Beware: Purchasing Property from a (former) Bankrupt
- kemartin18
- May 19
- 4 min read
Sophia Chetcuti, Lawyer
Buying property can be one of life’s biggest financial commitments—but what if the deal isn’t as secure as it seems? Behind the scenes of what appears to be a routine transaction can lie hidden legal issues that could leave unsuspecting buyers in a precarious position.
An increasingly common example is when someone is purchasing property from a seller who has been declared bankrupt, even if the trustee of the bankrupt’s estate has no interest in the property and has formally disclaimed it. This risk similarly arises when the seller is a liquidated company, and the liquidator has no interest in the company’s assets (e.g. property).
In these situations, the former bankrupt’s name may still appear as the registered owner on title, despite having no legal interest in the land. This can leave the buyer in a legal limbo, having signed the contract and paid for the property, only to later discover that the seller (the former bankrupt) is unable to transfer the legal title into the buyer’s name. These situations can be stressful, and as Justice Rares aptly put it, “it’s an unfortunate dilemma”.
With the current volatility in the property market, Australia is seeing a significant rise in disclaimed properties, which puts more buyers at risk. It is essential to be aware of this risk and seek legal advice if you find yourself facing this dilemma.
Effect of bankruptcy
When a person is declared bankrupt, his/her property will vest in the trustee in bankruptcy. "Vesting" of property means that this bankruptcy trustee becomes the owner of the property and is able to deal with it for the benefit of the bankrupt estate. This includes selling the property.
Effect of disclaimer
Sometimes, it might not be commercial for a trustee in a bankruptcy to sell real property (if it has little value) or if the bankrupt's debts can be discharged without recourse to the bankrupt's real property. In those circumstances, a trustee in bankruptcy can disclaim its interest in the property. The question that arises is, after a disclaimer, who owns the land and can sell it?
The effect of the disclaimer is not entirely settled. There are two competing views:
One view is that if the bankruptcy trustee never registered themselves as having interest in the property before disclaiming the property, then they have only given up their equitable interest (an equitable interest is a legitimate interest which can be enforced, but it’s not true ownership). In this case, it would seem that the legal title remains with the former bankrupt (regardless of whether that person is discharged from bankruptcy). If this interpretation is adopted, this would mean that the former bankrupt can sell the property.
The alternative view is that a disclaimer wipes out all of the former bankrupt’s rights and interest, including legal title, even if the trustee never registered his/her name on the title. Some recent court decisions suggest that, in these cases, ownership of the property reverts to the State (aka the Crown) as “ownerless property” (a legal concept known as escheat).
The law on this point remains unclear, but recent court decisions appear to favour the second view. However, this approach raises a challenging question—particularly for the lawyers reading this: how can a mortgage over the fee simple interest continue if the fee simple ceases to exist? Well, the courts seem to sidestep this question. Instead, they accept a practical workaround: that the fee simple does not revert absolutely to the State but it is held by the State subject to registered interests (such as mortgages). Yes, it’s a legally complex area, and for now, and there is no clear answer.
Vesting order
Even if the fee simple interest remains, albeit held by the State, case law suggests that any further dealings with the land are subject to the jurisdiction of the court. This often involves the need to commence court proceedings and to add the State as a party to the proceedings.
This means, a buyer of real property from a former bankrupt will, most likely, need to apply to a court for an order that declares the property is “vested” in or owned by the bankrupt seller which enables that seller to transfer the property into a new buyer’s name.
This is costly and time consuming. However, until a more definitive process is reached by the courts, parties to a sale contract who find themselves in the ‘unfortunate dilemma’ have very few practical alternatives other than to commence court proceedings.
Key takeaways
Purchasing disclaimed property from a bankrupt carries significant legal risk that is often not apparent. Even when a seller appears as the registered owner on title, they may no longer have the ability to deal with the property to facilitate the sale process. In such cases, the buyer may be left with no clear path forward without court intervention.
If you know you're purchasing property from a bankrupt or former bankrupt, or you are a bankrupt or former bankrupt selling property, you need to be fully advised about the property can be transferred without court supervision.
If you require any assistance with the terms of the contract or applying to the court for relevant orders, please do not hesitate to contact:
Kimberley Forman, Director
(07) 3307 4523
Sophia Chetcuti, Lawyer
(07) 3307 4515
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