APX Projects Pty Limited v The Owners – Strata Plan No. 64025

1. [1]

   In these proceedings an owner of lots in a strata scheme administered under the Strata Schemes Management Act 1996 (“the Management Act”) seeks to bring an action (as plaintiff) on behalf of the scheme’s owners corporation (the first defendant) against the treasurer of the scheme’s owner corporation (the second defendant). The plaintiff claims only to recover loss on behalf of the owners corporation against the treasurer.

2. [2]

   In so doing the plaintiff must establish that it is a person with standing to bring the proceedings on behalf of the owners corporation. The proper plaintiff rule in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 (“Foss v Harbottle”) applies to owners corporations regulated under the Management Act: see Carre v Owners Corporation Strata Plan - SP 53020 (2003) 58 NSWLR 302; [2003] NSWSC 397 (“Carre”). The plaintiff claims to bring itself within two of the recognised exceptions to the rule in Foss v Harbottle, the ultra vires exception and the interests of justice exception.

3. [3]

   The central issues in these proceedings are: (1) whether the underlying claims have any merit; and (2) whether the plaintiff has brought itself within either of the two claimed exceptions.

4. [4]

   Two factual complaints underlie the plaintiff’s action. Both complaints relate to the strata scheme’s executive committee’s administration of the sinking fund for the strata scheme, a fund that is required to be maintained under Management Act, Chapter 3, Part 3.

5. [5]

   The plaintiff’s first complaint is that when in August 2012 certain litigation brought by the owners corporation settled that the treasurer of the owners corporation in breach of his duties under the Management Act failed to pay the settlement sum, which was alleged to be sinking fund moneys, into the Owners Corporation’s sinking fund bank account (“the August 2012 settlement issue”). This action fails because the plaintiff fails to show that the settlement moneys were sinking fund moneys.

6. [6]

   The plaintiff’s second complaint is that between March 2011 and July 2012 the treasurer and executive committee paid out of the sinking fund, instead of the administrative fund, in breach of their duties four cheques on account of legal fees payable by the owners corporation to its lawyers (“the legal fees disbursement issue”). This action fails because the plaintiff cannot establish that it comes within a recognised Foss v Harbottle exception.

7. [7]

   This proceeding is but one episode in protracted litigation involving the lot owners, tenants, their managers and the owners corporation of a strata scheme located in Hope Street Rosehill in Western Sydney. But it is possible to decide the issues presented in this case without analysis of that wider litigation.

Strata Plan 64025 – the Facts Behind the Issues

1. [8]

   APX Projects Pty Ltd (‘APX’), the plaintiff, owns 14 lots at Hope Street, Rosehill, within Strata Plan 64025 (‘the Strata Plan’). The second defendant is Mr Bernard Keith White, the Treasurer of the Owners Corporation for the Strata Plan (‘the Owners Corporation’). The Owners Corporation, the first defendant, has entered a submitting appearance in this proceeding.

2. [9]

   APX purchased these lots at various times after April 2011. In 2009 and 2010, the Owners Corporation adopted budgets for the strata scheme’s financial administration. It then levied contributions towards its administrative fund and sinking fund. In respect of some of the properties that APX purchased, these levies were unpaid at the dates of purchase.

3. [10]

   The facts concerning the August 2012 settlement issue may be shortly stated. In August 2011, the Owners Corporation commenced Local Court proceedings against APX to recoup these unpaid levies. In settlement of those proceedings, on 2 August 2012 APX paid $101,653.31 (‘the Settlement Amount’) to the trust account of JS Mueller & Co (‘JS Mueller’), the solicitors for the Owners Corporation. APX contends that part of the amount paid, $60,635.94, was attributable to sinking fund levies. That amount was not deposited into the Owners Corporations’ sinking fund, which is the first complaint. At the direction of Mr White, the monies were used to pay legal fees and disbursements to JS Mueller in respect of litigation in this Court between the Owners Corporation and Quest Rose Hill Pty Ltd and others, proceedings file number 2010/342330 (‘the Quest Proceedings’). Quest Rose Hill Pty Ltd is a third party related to APX.

4. [11]

   The facts concerning the legal fees disbursement issue may also be shortly stated. Between March 2011 and July 2012. Mr White authorised the drawing of cheques against the bank account for the Owners Corporation’s sinking fund for the payment of legal fees to JS Mueller & Co solicitors and Mr M. Christie of counsel, in relation to the other proceedings. There is no dispute that these legal fees were owing and payable by the Owners Corporation. Those cheques were the following:

5. [12]

   The total amount withdrawn from the Owners Corporation’s sinking fund account totalled $77,045.66. After these cheques were met only $1,674.97 was left remaining in the sinking fund account.

6. [13]

   APX now contends that Mr White misapplied the sinking fund monies in his role as Treasurer. APX originally alleged that Mr White had misapplied funds for his own benefit. But this allegation was withdrawn just before trial, apparently on the basis that it was unsupported by evidence.

7. [14]

   These reasons will first deal with the August Settlement Issue then the Legal Fees Disbursement Issue. But first some exposition of the applicable legislation is necessary.

The Payment of Sinking Fund Levies

1. [15]

   Part 3 of the Management Act regulates the finances of strata schemes. It is convenient to briefly set out the scheme of the Part here.

2. [16]

   Part 3 of the Management Act requires that owners corporations generally must establish two types of funds: an administrative fund: s 66; and a sinking fund: s 69. The purpose of the administrative fund is for the owners corporation to make certain payments that are administrative and recurrent in nature. Examples of such payments are those made for recurrent expenditure as insurance, water charges and electricity charges; payments to members of the corporation’s executive committee in accordance with the Management Act; and payments in connection with carrying out the owners corporation’s functions under this Act or the by-laws: ss 66, 75(1). In contrast the purpose of the sinking fund is for the owners corporation to make payment of expenses that are capital in nature. For example, for painting or repairing the common property, to acquire personal property, or to renew or replace fixtures that are part of the common property: s 75(2).

3. [17]

   Sections 66, 67 and 68 of the Management Act together explain how an owners corporation’s administrative fund is to be established, and for what purposes money may be paid into and out of the fund. Section 66 requires an owners corporation to establish an administrative fund. Then ss 67 and 68 govern what monies can be paid into and out of an administrative fund as follows:

4. [18]

   Similarly, ss 69, 70 and 71 of the Management Act explain how a owners corporation’s sinking fund is to be established and operated. Given APX’s claim alleging that Mr White has misapplied monies in the Owners Corporation’s sinking fund, of the three provisions s 71 is of particular relevance. Section 69 requires an owners corporation to establish a sinking fund. Then ss 70 and 71 deal with payments into and out of the sinking fund.

5. [19]

   Section 72 of the Management Act establishes how an owners corporation may distribute money in either an administrative fund or a sinking fund that is not required for the purposes of either fund.

6. [20]

   Section 73 of the Management Act provides that an owners corporation may invest money in its administrative or sinking fund in the same way that a trust fund may be invested, or in a prescribed investment, the interest earned on such investment forming part of the fund to which the investment belongs. Section 74 requires that an owners corporation, or its strata managing agent, must pay any amounts received and not invested into an account held by a financial institution in the owners corporation’s name.

7. [21]

   Division 2 of Part 3 regulates how contributions to administrative and sinking funds are to be levied. Section 75 requires an owners corporation to produce estimates of the monies that each fund will require; those estimates in relation to the sinking funds of owners corporations established after the commencement of s 75A will no doubt be informed by the 10-year sinking fund plans which that section requires such owners corporations to maintain. Section 75 also prescribes the types of expenses to which payments from administrative and sinking funds are to be put:

8. [22]

   The final relevant section for the purposes of this brief survey of Part 3 is s 76, which requires an owners corporation to determine its levies based on and at the same time as it determines its estimates for crediting those funds.

The August 2012 Settlement Issue

1. [23]

   APX contends that part of its payment of the Settlement Amount in the Local Court levy recovery proceedings to the trust account of JS Mueller was for the payment of sinking fund levies. After subtracting from the total settlement amount of $101,653.31 the sum of $41,017.37, which APX accepts represented recovery of administrative fund monies and could be used to discharge payments owing to JS Mueller, APX argues that the remaining $60,635.94 was sinking funds. Its argument is that the Owners Corporation and APX appropriated the payment of the Settlement Amount against APX’s sinking fund debt. It is said that this alleged appropriation either occurred expressly by communication between the Owner’s Corporation’s solicitors and APX’s solicitors, or impliedly by the Owners Corporation’s solicitors’ conduct.

2. [24]

   APX also incidentally pleads its own loss and damage, alleging it will be liable to levies by the Owners Corporation for sinking fund contributions to replace the monies wrongfully appropriated.

3. [25]

   In a telephone call on 31 July 2012 Akash Lodhia, the solicitor representing APX in the recovery proceedings being settled, telephoned Adrian Mueller of JS Mueller & Co for the Owners Corporation. Mr Mueller does not recall exactly what was said in the conversation, and is not sure whether he made a contemporaneous note of the conversation. Mr Lodhia did make a note of the conversation and attests to the conversation having taken place as follows, a conversation the substance of which is admitted:

4. [26]

   Following this conversation, Mr Lodhia and Mr Mueller exchanged emails. Those emails did not contain any specific agreement as to what was to happen to the settlement monies once paid. Mr Lodhia agreed that he would give a cheque in favour of the Owners Corporation for the sum of the Settlement Amount in exchange for signed notices of discontinuance in the Local Court and District Court recovery proceedings the Owners Corporation had pursued against APX and other owners of lots in the Strata Plan. Those proceedings all reproduced a standard form of pleading that alleged that money was “due and owing by the defendant” for “administration, sinking fund and special levies”.

5. [27]

   The emails in more detail are as follows. Mr Lodhia wrote by email on 31 July 2012, relevantly as follows:

6. [28]

   Mr Mueller replied on 1 August 2012 in terms that founded the settlement:

7. [29]

   On these facts APX alleges and Mr White contests that the settlement monies (or at least $60,000 of them) were sinking funds that the Owners Corporation was required to pay into its sinking fund under Management Act, s 70.

8. [30]

   The principles for ascertaining to which debt a payment will be appropriated work in the following stages. Firstly, a debtor has the right, in the first instance, to declare in respect of which debt he pays money: Mills v Fowkes (1839) 5 Bing (NC) 455; 132 ER 1174. However as noted by the authors in E Tyler, P Young and C Croft, Fisher & Lightwood's Law of Mortgage (3rd ed 2013, LexisNexis) at 32.52, the debtor’s direction must be in clear terms: Colonial Bank of Australasia v Kerr (1889) 15 VLR 314; Healey v Commonwealth Bank of Australia (Court of Appeal, (NSW), 8 December 1998, unrep). For example, entries made by the debtor in his or her own books are not sufficient evidence of a particular appropriation of money paid on a general account: Wrout v Dawes (1858) 25 Beav 369; 53 ER 678.

9. [31]

   Equally, it is possible that in circumstances where a debtor fails expressly to communicate to the creditor the appropriation of a debt, the circumstances of payment may be such that the proper appropriation of the debt is implied. This may be the case, for example, where two debts of different amounts are owing and the amount paid equates to one of them.

10. [32]

    Secondly, where the debtor does not appropriate his or her payment to a particular debt, the creditor enjoys the right of choosing the debt to which the payment is appropriated. As Lord McNaughten in Cory Brothers & Company v Owners of Turkish Steamship ‘Mecca’ [1897] AC 286 at 293:

11. [33]

    Thirdly, where neither the debtor nor the creditor acts upon their successive entitlements to choose how the debt will be appropriated, the default position is that the payment will be applied to the oldest debts first: Devaynes v Noble (‘Clayton’s Case’) (1816) 1 Mer 572; Sibbles v Highfern Pty Ltd (1987) 164 CLR 214 at [11]. In Re Walsh; Ex parte DCT (1982) 13 ATR 40, Lockhart J explained the application of these three rules governing the appropriation of payments in the following way:

12. [34]

    As noted in Caltabiano v Electoral Commission Of Queensland [2010] 1 Qd R 100 (‘Caltabiano’) at [33], the above quotation from Parker v Guiness regarding when an appropriation of a payment to a particular debt will be inferred continues, as follows:

13. [35]

    Muir JA in Caltabiano held at [34] that the inference as to appropriation to be drawn from the circumstances “is the inference which would have been drawn by a reasonable person who had regard to those circumstances. The circumstances include ‘the purpose and object’ of the application.”

14. [36]

    Even accepting Mr Lodhia’s evidence as to the conversation that took place between Mr Mueller and him, and reviewing the correspondence that thereafter took place between the two solicitors, APX through its solicitor did not state in clear terms what debt the payment of the Settlement Amount would go towards extinguishing.

15. [37]

    Here the Owners Corporation’s claim against APX was a composite one, comprising administrative fund levies and sinking fund levies both of which were alleged to have been unpaid. Both parties well appreciated that the amount claimed was a mixture unascertained of administrative, sinking and special levies. Despite that uncertainty APX made no attempt to secure an express agreement as to the application of these amounts to one or more of these categories of levy and in what amounts.

16. [38]

    In these circumstances the creditor, the Owners Corporation, was free to appropriate the settlement monies to the payment of administrative fund expenses such as legal fees.

The Legal Fees Disbursement Issue

1. [39]

   APX pleads that, as Treasurer of the Owners Corporation, Mr White owed duties akin to a trustee to the Owners Corporation and to APX to preserve the administrative fund and sinking fund of the Owners Corporation as if those funds were held in trust for the purposes of the Act and for the benefit of individual lot owners, including APX. APX then pleads that Mr White has acted in a way not authorised by the Owners Corporation or by the Act, was in breach of his trustee-like duties and was in breach of a duty of care that also arose given his trustee-like status.

2. [40]

   Before being given leave to amend its pleadings at the opening of the hearing on 27 April 2015, APX alleged that Keith White had used monies from the Owners Corporation’s administrative fund and sinking fund for the purposes of the Quest Proceedings in his own interests. Mr White was in his own right the third defendant and cross-claimant in those proceedings. But by the time that the hearing began, APX had reduced its claim by no longer alleging that Mr White used his position to prefer his own interests or obtain a benefit in breach of any alleged fiduciary duties he might hold.

3. [41]

   APX now seeks to bring a claim on behalf of the Owners Corporation against Mr White. It contends that in applying sinking fund monies to pay legal fees and disbursements related to the Quest Proceedings in the form of the four cheques already identified, Mr White’s conduct was not authorised by the Owners Corporation or the Act, was in breach of his duties as Treasurer, was negligent, and was in breach of trust.

4. [42]

   APX’s contention is that Mr White as Treasurer owes certain duties under the Management Act. Section 23 of the Management Act establishes the statutory functions of the treasurer’s office. Those functions include notifying owners of contributions levied; dealing with money paid to the owners corporation, preparing certificates regarding payments owing in respect of lots; keeping accounting records; and preparing financial statements. The treasurer’s authority may be delegated. Section 24 makes it an offence for a person to deal with the money of an owners corporation unless the person fits certain descriptions, for example, being a member of the corporation or its executive committee and a treasurer, a strata managing agent, or a member of certain professional accountancy organisations. Under s 25, a treasurer may be paid an amount determined at an annual general meeting in recognition of services performed.

5. [43]

   But it is not necessary in my view to analyse very much of the detail of APX’s allegations on this part of the case.

6. [44]

   APX wishes to sue Mr White on behalf of the Owners Corporation by instituting a common law derivative proceeding. A statutory scheme under Corporations Act 2001 (Cth), Part 2F.1A applies to those bringing derivative actions against companies. But owners corporations do not fall within the statutory scheme of the Corporations Act, and so members of owners corporations may bring derivative proceedings as they would have at common law, before relevant statutory reforms: Management Act, s 11(2); Carre at [19] per Barrett J (as his Honour then was).

7. [45]

   At common law, members of a company cannot bring a claim on behalf of the company unless there are some exceptional circumstances, recognised in Foss v Harbottle and the cases following it, when a member of the corporation is entitled to sue to enforce a right of the company. There are four recognised sets of exceptional circumstances where a derivative action may be brought, with one further fifth potential exception. The four exceptions are (1) where a company has acted ultra vires; (2) where the company has acted without the approval of the requisite majority in general meeting (for example, where an action was approved only by an ordinary resolution where a special resolution was required); (3) where a member’s personal rights have been infringed; and (4) where there is a fraud on the minority. A recognised fifth exception is that the “interests of justice” require that the minority member be permitted to commence a derivative action suit.

8. [46]

   APX relies on the first and fifth exceptions to the rule in Foss v Harbottle. At common law there is no requirement for leave to be obtained before a plaintiff commences a derivative action: Oates v Consolidated Capital Services Ltd (2009) 76 NSWLR 69 at [105].

9. [47]

   As Barrett J pointed out in Carre (at [35]) all the exceptions to the proper plaintiff rule in Foss v Harbottle are subspecies of a comprehensive “justice” exception. His Honour said:

10. [48]

    But Barrett J in Carre also emphasised that Courts are reluctant to act on exceptions to the proper plaintiff rule where the situation is capable of being resolved by appropriate resolution of members of the company. Barrett J said (at [40]) the following:

11. [49]

    APX may only institute a derivative proceeding against Mr White on behalf of the Owners Corporation if the Owners Corporation itself has a cause of action available to it. I am prepared to assume this in APX’s favour as its difficulties lie in other areas.

12. [50]

    The ultra vires exception to the rule in Foss v Harbottle is not obviously attracted in this case. It is accepted there was no formal resolution either of the Owners Corporation or the executive committee authorising the payment of the four cheques out of the sinking fund. It is not in issue that the payment of legal fees was not a proper sinking fund expense. APX argues this is prima facie in contravention of s 71(1) of Management Act, s 71(1).

13. [51]

    But in my view Mr White’s reply to this is persuasive. Section 71(2) does permit disbursement of money by transfer of the sinking fund to meet administrative fund expenditure. Ordinarily this must be re-couped under s 71(3) within three months. That would require the Owners Corporation to levy a contribution under s 76(1) to re-coup the amount of the disbursement. That has not yet been done. This is largely because of the fact that no Owners Corporation meetings have been called for several years. But in my view on the proper construction of s 71 mere lateness in calling for the levy does not retrospectively make the disbursement ultra vires. The Owners Corporation can still make a s 76 determination.

14. [52]

    In Eastmark Holdings Ltd v Kabraji (2013) 97 ACSR 161; [2013] NSWSC 1763 Darke J identified factors that are relevant to the interest of justice exception to the rule in Foss v Harbottle (at [79]):

15. [53]

    His Honour found (at [89]) that the four matters identified are not factors each of which must invariably be established but each are plainly relevant to the question of whether the exception applies in any particular case and “the failure of the plaintiff to establish any one of them would generally indicate that the exception is not applicable”.

16. [54]

    APX has three main problems with maintaining its claim to the interests of justice exception here. First, it cannot establish that normal court procedures have failed to achieve the justice sought. Secondly, there are other obvious remedies to address the alleged wrong. Thirdly, it cannot be said that a serious injustice would arise if APX has precluded from the derivative action.

17. [55]

    First, there is no evidence before the Court that APX has sought in any way to petition for the holding of a general meeting of the Owners Corporation to seek the justice that it seeks to achieve in these proceedings: namely, to have Mr White account to the Owners Corporation for the payment of legal fees from the sinking fund rather than the administrative fund. This on its own is a significant problem for APX’s case.

18. [56]

    Secondly, there are other remedies to address this wrong which are far more efficient and cheaper than the remedy which has been sought in this Court. Chapter 5 of the Management Act establishes a system for the resolution of disputes relating to the operation and management of strata schemes. While the legislative preference is for the resolution of disputes through mediation (see s 125), eligible persons may apply for orders to be made by either a Strata Schemes Adjudicator (“Adjudicator”) or the New South Wales Civil and Administrative Tribunal (“Tribunal”) depending on the orders sought: s 123. Appeals from an Adjudicator’s decisions are heard by the Tribunal: ss 177 and 181.

19. [57]

    Disputes referred to the Tribunal under the Management Act are allocated to the Tribunal’s Consumer and Commercial Division under Civil and Administrative Tribunal Act 2013 (“Tribunal Act”), Schedule 4, s 3. The Management Act, its regulations (Strata Schemes Management Regulation 2010) and the Tribunal Act confer or impose the Tribunal’s functions in relation to the Management Act. The Adjudicator may refer issues to the Tribunal, in which case the Tribunal has the same powers to make an order as the Adjudicator: s 184.

20. [58]

    The Adjudicator’s general power to hear claims is found in s 138. The section provides the Adjudicator with a broad power to make orders to settle disputes or rectify complaints, which extends broadly to “an exercise of, or a failure to exercise, a function conferred or imposed by or under this Act” and “the operation, administration or management of a strata scheme under this Act” under subs (1). The word "function" is defined in the Dictionary of the Management Act to include a "power, authority or duty". Wide as those terms are, as Rothman J pointed out in The Owners – SP 37762 v Pham [2006] NSWSC 1287 (“Pham”) at [63], they do not confer a limitless jurisdiction:

21. [59]

    The effect of an order of the Adjudicator can have the effect of a decision of the owners corporation, as was described in the following way by Tobias AJA in The Owners – SP 50276 v Thoo [2013] NSWCA 270 at [211]:

22. [60]

    In Pham at [76], Rothman J made the obiter observation that the limitation of the Act’s dispute resolution mechanisms to disputes arising under the Act would not exclude questions of oppression of the minority, one of the exceptions to the rule in Foss v Harbottle, from being heard:

23. [61]

    This dispute could and should in my view have been sent to the Adjudicator. The Adjudicator has power under Management Act, s 207 to make orders which would take “effect as the resolution of the owners corporation”. The Adjudicator’s powers under the Management Act are sufficiently wide in my view to have the effect of a resolution that would determine a levy to recoup monies for the sinking fund under a combination of Management Act, ss 71(3) and 76(1). APX has not given a clear explanation as to why this simple procedure has not been followed.

24. [62]

    Thirdly, APX is not able to establish that any serious injustice would arise if it was precluded from pursuing the derivative action. In my view APX is unlikely to be able to establish any loss or damage suffered by the Owners Corporation, which loss or damage should be restored to the Owners Corporation through this action. The failure to levy for these payments under Management Act, s 76(1) has not caused any loss. The cost of the s 76(1) levy itself would have to be incurred in any event. Any delay in receipt of the monies from the levy is counter balanced by the interest liability which the Owners Corporation would have incurred to the solicitors for unpaid legal fees. Beyond those two possible heads of damage APX has not identified any other loss. None of these heads fall into the category of serious injustice.

Conclusion and Orders

1. [63]

   For these reasons the plaintiff fails in all aspects of this proceeding. The orders of the Court therefore are:

   1. (1)

      Summons dismissed;

   2. (2)

      Order the plaintiff to pay the second defendant’s costs; and

   3. (3)

      Grant liberty to apply within 14 days in relation to the implementation of these orders or in relation to any special costs order that may be sought.