Brenchley v The Owners – Strata Plan No 80609

The plaintiffs and the second defendant were the lot owners in Strata Plan No 80609, by which the former first defendant, The Owners – Strata Plan No 80609, was created.

The Court has recently made orders under s 136 of the Strata Schemes Development Act 2015 (NSW) that the strata scheme be terminated and that the first defendant be wound up. I will set out the relevant orders below.

The only outstanding issue for the Court to deal with is the costs of the proceedings.

The plaintiffs seek the following cost orders:

The plaintiffs accept that if orders are made in these terms, this will not disturb the previous costs order made by Darke J against the plaintiffs in favour of the first defendant on 24 September 2021.

The second defendant's response was that the plaintiffs should be ordered to pay the second defendant's costs. Alternatively, if the Court is not satisfied that the order sought by the second defendant is warranted, then the Court should, subject to the order of Darke J in favour of the first defendant, order that the parties bear their own costs.

In the second defendant's submissions, he canvassed many of the individual issues that arose in the proceedings and the parties' responses to those issues and submitted that in respect of many of them it would be warranted for the Court to order the plaintiffs to pay the second defendant's costs on the indemnity basis. Having made those submissions, the second defendant submitted that, striking a proper balance overall, an order for the plaintiffs to pay the second defendant's costs of the whole proceedings on the ordinary basis is appropriate.

The first defendant accepted that the appropriate order in respect of its costs was that there be no order as to those costs. I understand that there is no contest about the first defendant's position in respect of costs, and that order will be made.

I will begin by saying something about the circumstances that have led to the termination of the strata scheme and an order for the winding up of the first defendant.

There were five lots in the strata scheme, three of which were held by the plaintiffs and two of which were held by the second defendant.

Unfortunately for the lot owners, the building containing the apartments represented by the lots on the land owned by the first defendant was so poorly constructed that it was discovered that the building and the apartments were entirely uninhabitable. That had the result that the purpose of the strata scheme failed, and it became inevitable that the strata scheme would be terminated, and the first defendant wound up. Furthermore, the evidence established that the return to the lot owners would be substantially greater if the land owned by the first defendant was sold in one line, so that the building could be demolished and the land redeveloped, than if the lot owners sold their lots individually.

Before these proceedings were commenced by the plaintiffs, disputes had arisen between the plaintiffs and the second defendant concerning the conduct of the affairs of the first defendant.

That dispute led to proceedings in the New South Wales Civil and Administrative Tribunal (NCAT) that were determined by orders made on 8 September 2020. The orders were:

The application to NCAT was made by the second defendant and resisted by the first defendant. At that time, the executive committee of the first defendant was controlled by the plaintiffs. Effectively, the plaintiffs caused the first defendant to resist the second defendant's application. That resistance was unsuccessful.

It is not necessary to consider the reasons in the NCAT decision in detail. The underlying facts considered by NCAT are not entirely clear to the outside observer.

In 2016, the second defendant was successful in obtaining an order for the appointment of a compulsory managing agent (apparently called "Hylands" or "Highlands"). On 4 October 2016, Highlands determined that a special levy of $250,000 should be made on the lot owners. The second defendant paid his share of the levy in respect of the single lot that he owned at the time. NCAT found (at [107]) that the other lot owners were obliged to pay but failed to pay their shares in the levy when it was due. The plaintiffs had apparently paid money to meet the legal fees of the first defendant in litigation in which the first defendant and the plaintiffs were parties. The plaintiffs treated those payments as loans to the first defendant. At a time when the plaintiffs controlled the executive committee, they made a resolution on behalf of the first defendant that they could set off the supposed loans to the first defendant against their obligations to meet their share of the 2016 levy. That arrangement was made without the concurrence of the second defendant.

NCAT accepted (at [116]-[118]) the present second defendant's submissions that there is no right under the strata legislation that allows a lot owner to step into the shoes of an owners corporation and make payments directly due or payable by an owners corporation to a third party. Lot owners have no right to absolve themselves of their obligation to pay levies and offset that obligation by a payment to a third party, or by making a loan to the owners corporation instead of paying their levies. Lot owners have no power to absolve themselves of their obligation to pay levies and instead to be credited for money they have paid to third parties on the owners corporation's behalf.

NCAT concluded (at [122]-[123]):

NCAT then considered that issue but was not able to determine it conclusively.

NCAT concluded:

Strata Title Management was therefore appointed to carry out all the functions of the first defendant and its executive committee and to have the accounts of the strata scheme audited from October 2016 to date.

On 10 August 2021, an appeal by the first defendant to the NCAT Appeal Panel was dismissed (see Brenchley v Clissold [2021] NSWCATAP 319 at [1]), and an order was made extending the compulsory management to 8 March 2022.

The summons commencing these proceedings was filed by the plaintiffs on 4 December 2020. The plaintiffs sought the following orders:

It will be noted that, apparently because the application became contested on an adversarial basis, no party has asked the Court to make the costs order sought in prayer 3 of the summons.

For the purposes of these reasons, the significant aspect of the relief sought in the summons is that the plaintiffs wanted an order appointing the two gentlemen to wind up the first defendant with all powers "necessary or convenient to effect winding up and termination of the said strata scheme", without any precise specification of their powers and functions or what the effect of the termination and winding up order would be.

The two sections of the Strata Schemes Development Act referred to in the summons relevantly provide as follows:

It is not necessary for the purpose of this costs judgment to consider the effect of the strata legislation in any detail. It is sufficient to note that it was agreed by the parties that the effect of the Court making an order terminating the strata scheme would be that, so to speak, all the individual lots would dissolve into the common property owned by the first defendant. Furthermore, the winding up of a strata scheme operates under a completely different legal regime than the winding up of a company incorporated under the Corporations Act 2001 (Cth). Under the statutory scheme governing the winding up of a corporation, the corporation continues to exist until it is deregistered. The making of the order that the company be wound up does not have any immediate effect on the assets and liabilities of the company, although the way the assets and liabilities may be determined and the entitlements of third parties and members in relation to the assets and liabilities will be regulated by a new regime under the legislation. There are regulatory arrangements for the liquidator to receive proofs of debt from creditors and to determine creditors' claims, subject to established appeal procedures. The making of the winding up order does not have any direct effect on the rights of the company's secured creditors.

The position is different in respect of the termination of a strata scheme and the winding up of an owners corporation because, as I have said, the individual lots disappear, as it were, when the termination becomes effective, and the lot owners' rights, and therefore the rights of any mortgagees, are fundamentally changed. Furthermore, there is no established regulatory scheme for the determination of the assets and liabilities of the strata scheme and the determination of claims by and between lot owners and the owners corporation.

As a practical matter, if the termination of a strata scheme and the winding up of an owners corporation is to be done in a proper, fair and orderly manner, the Court must fashion appropriate orders under the Strata Schemes Development Act on an ad hoc basis to deal with all of the issues that may arise.

The orders sought by the plaintiffs in the summons did not address these practical problems.

On 24 June 2021, the plaintiffs filed a notice of motion in these proceedings, which sought the following relief:

This notice of motion was amended by the plaintiffs on a number of occasions, and it was ultimately dismissed, as I understand it, because it was not prosecuted. As mentioned above, Darke J ordered the plaintiffs to pay the first defendant's costs of the notice of motion.

The proceedings came before Darke J for directions on 6 August 2021. The transcript of those proceedings reveals the different positions as between the plaintiffs and the second defendant concerning the appropriate fate of the first defendant. The parties have challenged the propriety of the others' motivations in these proceedings, but it seems to me that all the parties had a reasonable basis for the approach that they took.

The plaintiffs were concerned about the costs, and in particular the legal costs incurred by Strata Title Management in carrying out the functions of the first defendant and its executive committee and in conducting the audit pursuant to the orders of NCAT. There was evidence in these proceedings that, between November 2020 and May 2021, legal fees of $91,911.29 had been incurred, and, between June 2021 and January 2022, a further $198,115.86 in legal fees had been incurred.

The plaintiffs' position, as explained to Darke J, was that as the termination of the strata scheme and the winding up of the first defendant was inevitable, there was no justification in Strata Title Management incurring further costs and fees, and that the appropriate course was for the Court to appoint liquidators and the liquidators could then decide in a summary way all outstanding questions to enable the termination of the strata scheme and the winding up of the first defendant. The then counsel for the plaintiffs said [T 06/08/21 3.41-3.49]:

Counsel added [T 06/08/21 4.15-4.18]:

Counsel made it clear that the plaintiffs’ position was that there was no longer any point in the parties arguing about the standing of lot owners to participate in particular meetings.

The second defendant's response was to acknowledge that the termination of the strata scheme and the winding up of the first defendant was inevitable, but to submit that the issue was as to when that should happen. The second defendant submitted that Strata Title Management should be given an opportunity to finish its audit task to determine what the rights of the lot owners were as between themselves and as against the first defendant. The second defendant submitted that the preferred course was to permit the dispute resolution process available under the strata schemes legislation to take place before termination and winding up orders were made [T 06/08/21 5.32-5.40]. Counsel for the second defendant advised Darke J that the second defendant would abide by the decisions made by the compulsory manager through the audit process [T 06/08/21 6.4-6.7].

It is evident that the second defendant was concerned that, by commencing these proceedings, the plaintiffs were seeking to avoid the consequences of the orders made by NCAT and to deprive the second defendant of the benefit of the unfinished management and audit process in which Strata Scheme Management was engaged with the authority of NCAT.

Darke J decided that the appropriate course was to fix these proceedings for hearing as soon as was practically possible, substantially on the ground that his Honour considered that the dispute would not be resolved without a court hearing to determine the matter.

The initial hearing took place before me on 24 and 25 November 2021 commencing at 10:00 AM on the first day and ending at 2:55 PM on the second. The proceedings were conducted in an adversarial way.

Prior to the commencement of the hearing, my Associate received an email that contained draft short minutes of order stating the orders sought by the plaintiff and the revisions to those orders proposed by the second defendant. In particular:

Counsel for the parties made detailed submissions to the Court as to how the strata scheme legislation operated generally, and in particular how it might operate in the context of the termination of a strata scheme and the winding up of the owners corporation in circumstances where some of the lots may be encumbered by mortgages. This was entirely appropriate and was invited by the Court because the issues for determination were unusual and not within the ordinary experience of the Court. The submissions also addressed the role of Strata Title Management, which was represented by counsel in the interests of the first defendant.

The parties led their evidence, which canvassed a significant range of issues concerning the history of the first defendant, the reasons why the termination of the strata scheme and the winding up of the first defendant were necessary, the financial affairs of the first defendant, the consequences of the defective building work and the legal proceedings that the defective work had generated, the mortgages on the lots owned by the plaintiffs and what steps might be appropriate to protect the interests of the mortgagees, the result of the NCAT proceedings and what should be done to properly balance the interests of the lot owners as between the completion of the implementation of NCAT's orders and the appointment of liquidators of the first defendant.

A particular focus of the discussion between counsel and the bench was how the simple appointment of liquidators of the first defendant with generally worded powers, as sought by the plaintiffs, could lead to a proper resolution of the dispute.

At the end of the hearing, I was not persuaded that the parties had provided the Court with sufficient information to enable it to make a proper determination of the appropriate orders to achieve the termination of the strata scheme and the winding up of the first defendant, particularly in respect of doubts as to how the relevant aspects of the strata scheme legislation operated in relation to the time when the Court's orders took effect and the directions that the Court might be empowered to give to the liquidators to ensure that the steps taken by them in pursuance of the orders were lawful and effective.

At [T 25/11/21 91.3-97.24], I listed a number of matters as to which I sought further information from the parties. I will now paraphrase those matters as follows:

The proceedings were then stood over to 16 December 2021 at 2:00 PM.

New counsel were retained to appear for the plaintiffs at the hearing on 16 December 2021.

At the end of the hearing on 16 December 2021, it was necessary to stand the proceedings over for further hearing at 10:00 AM on 17 December 2021.

At that hearing, counsel for the plaintiffs propounded a new set of short minutes of order that had been drafted having regard to the issues that I had raised at the earlier hearing. The plaintiffs proposed orders that would protect the mortgagees of lots on an interim basis and give them an opportunity to appear to protect their interests. Messrs Sallway and Marsden would be appointed to sell the first defendant's property. Orders would be put in place to restrict unnecessary costs being incurred, pending the making of a final order for the winding up of the first defendant. The underlying objective was to try to avoid unnecessary disputation by having the Court make orders in stages that might facilitate the termination of the strata scheme and the winding up of the first defendant being achieved in a practical way.

It was necessary for senior counsel for the plaintiffs to take the Court through the proposed orders to explain their effect. The Court was able to provide its provisional reaction to the various orders and, in some limited respects, that process disclosed issues that would require some revision to the wording of the proposed orders.

In the interim since the earliest stage of the hearing, the person responsible for the compulsory management of the first defendant had prepared a report that, provided to the Court an updated explanation of the activities of the compulsory manager undertaken in performance of its appointment under the orders made by NCAT.

One aspect of the compulsory manager's activities was that it had exercised its power to ratify a number of resolutions made by the executive committee of the first defendant that had been contested, which had the effect of removing the issue of the effectiveness of those resolutions from the ambit of the dispute.

The compulsory manager had also made progress on the report that it had been preparing, which, in draft terms at the time of the adjourned hearing, provided the Court and the parties with a fairly close indication of the final divisible property of the first defendant, the liabilities of lot owners to the first defendant, and the likely distributable dividends. The compulsory manager was also working towards the calculation of interim distributions that could safely be made to lot owners. The Court was informed that it might only take the compulsory manager seven days to complete the report.

The Court was advised by counsel for the first defendant that an estimate had been made of the compulsory manager's costs to complete the work required by its appointment. It was said that the compulsory manager's costs of getting in an insurance payout of $1.5 million had been increased by the necessity to resist the application made by the plaintiffs for the interlocutory injunction sought in the notice of motion that I have referred to above.

One of the advantages of the interim distributions being made would be that it would fund the repayment of mortgage debts that lot owners were not otherwise able to repay from their other resources.

The approach adopted by counsel for the second defendant was to make submissions about the Court's power under the strata schemes legislation to make some of the orders proposed by the plaintiffs. Counsel also made observations about a number of practical aspects of the proposed orders. For this purpose, the second defendant proposed an alternate set of orders.

I decided the legal issues that were in contention in two brief ex tempore judgments in which I upheld the submissions made on behalf of the plaintiffs.

Ultimately, I considered that the version of the proposed short minutes of order that had been revised by the plaintiffs overnight to accommodate issues raised in the debate the previous day were appropriate in principle and within the Court's power.

Although the challenges made on behalf of the second defendant to the regime proposed by the plaintiffs for the termination of the strata scheme and the winding up of the first defendant were not successful, I consider that the view of the operation of the strata schemes legislation propounded on behalf of the second defendant was reasonably arguable and was conscientiously put to the Court to assist it to avoid error and in accordance with the invitation that the Court had earlier made to the parties to educate it about the operation of the legislation.

I made the following orders in chambers on 20 December 2021 based on the final form of the short minutes of order provided by the plaintiffs. My principal purpose in setting out the orders is to demonstrate how they vary in complexity with the orders sought by the plaintiffs in prayer 1 of their summons:

At a short hearing on 22 February 2022, I made directions concerning the exchange by the parties of drafts of the final orders that they sought and required the plaintiffs and the second defendant to confer in order to agree a single set of proposed orders to the extent possible.

The final hearing of about one hour in duration occurred on 7 March 2022. On that date, I made the following final orders for the winding up of the first defendant:

For the purpose of these reasons, order 1(j) and (k) are particularly significant. I have referred above to the difference in the approaches proposed by the plaintiffs and the second defendant at the hearing before Darke J that took place on 6 August 2021, when the plaintiffs advocated the early appointment of liquidators of the first defendant with generally worded powers to resolve all outstanding disputes, and the second defendant resisted that approach because it would deprive the second defendant of the benefit of his success in the NCAT proceedings and the resolution of the financial disputes between the parties by means of the audit process. I mention this initial dispute because the significance of order 1(j) of the orders made on 7 March 2022 is that the passage of time enabled the compulsory manager to complete its investigations in a manner that was ultimately accepted by the parties so that it was able to be incorporated in the final orders.

I have set out the history of these proceedings at some length as that history is essential for the purpose of understanding the costs order that I consider is appropriate. Remembering that no party ultimately proposed that the parties' costs should be costs of the winding up of the first defendant, the appropriate order is that no costs order should be made as between the plaintiffs and the second defendant, with the intent that those parties will pay their own costs of the proceedings.

I will make that order for the following reasons:

These matters have caused me to conclude that the costs issue as between the plaintiffs and the second defendant should be resolved in the same manner as did McHugh J in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624-5; [1997] HCA 6, on the same basis as if they had been able to resolve the issues in the proceedings by a single compromise agreement without the Court having to decide in a formal way the rights of the parties after a contested hearing. His Honour said (footnotes omitted):

The Court's order is:

In the order that I had just made I have not said anything about how the costs incurred by the first defendant will be paid. I assume that any costs of the first defendant under the management of the compulsory manager will be dealt with under the strata schemes legislation or the NCAT orders. I give the first defendant leave to provide my Associate and the other parties with proposed short minutes of order if it thinks it necessary that I deal with the first defendant's costs in a different manner than I have in the above order.