This article is about disputes with the onsite manager.
The Hub Apartments [2020] QBCCMCmr 653
Most caretaking and letting agreements allow Bodies Corporate to terminate if their onsite manager becomes insolvent. Typically, the process of establishing insolvency is straightforward because the onsite manager is (for example) declared bankrupt or placed into liquidation. But what happens if there isn’t a clear insolvency event? Or the onsite manager claims to be solvent when all signs indicate they are actually insolvent? These issues arose for the Body Corporate for the Hub Apartments when it terminated the engagement of their onsite manager based on “presumed” insolvency. The onsite manager opposed this and applied to an Adjudicator to invalidate the termination. Fortunately for the Body Corporate, the termination was upheld. We acted for the Body Corporate in this case. It was a challenging dispute, but the Body Corporate ultimately won. So how did they do it?
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Summary
Hub Apartments is a 55-lot residential scheme located in Fortitude Valley.
On 6 December 2012, the Body Corporate entered into a Caretaking and Letting Agreement with a company called The Hub Rights Pty Ltd, whose director was Bridget Goodwin.
The Agreements both contained clauses that allowed the Body Corporate to terminate if the Hub Rights was insolvent.
On 21 June 2019, the Body Corporate was notified that the Hub Rights was being placed into external administration and that receivers had been appointed.
On 31 July 2020, the receivers retired, but not before producing reports that confirmed that the Hub Rights had $0.00 in its bank accounts and no assets.
On 18 August 2020, the Body Corporate conducted credit searches which indicated that the Hub Rights was in ‘financial distress’ and at ‘severe risk’ of not being able to pay its debts as they fell due.
On 31 August 2020, the Body Corporate terminated the engagement of the Hub Rights due to it being insolvent or presumed insolvent.
Ms Goodwin challenged the termination claiming (amongst other things) that the Hub Rights was not insolvent.
What is “Presumed” Insolvency?
Unhelpfully, the Agreements did not define what the term ‘insolvent’ meant and provided no examples of what constituted an insolvency event.
Therefore, even though the Hub Rights had been externally administered for more than a year, that alone did not necessarily mean it was insolvent.
According to the Corporations Act 2000 (Cth), you are insolvent if you cannot pay all of your debts as and when they become due and payable.
The Body Corporate claimed that the Hub Rights was insolvent or should be presumed insolvent because it could not pay all of its debts as and when they become due and payable, including debts it owed to the Body Corporate for unpaid levies.
Ms Goodwin maintained that Hub Rights was not insolvent, and alleged that the Body Corporate claims were unreasonable and ‘irrelevant’.
The Decision
The Adjudicator finds that the Body Corporate was entitled to terminate on the following grounds:
“[42] The body corporate set out in detail the basis for its view that the applicant was and is insolvent and previously put this to the applicant. Despite the body corporate’s repeated requests for financial information, the applicant has not provided any evidence it is solvent or any detail to refute the body corporate’s claims about its financial position. Whether or not it had any legal obligation to provide financial information to the body corporate, it would have been prudent for the applicant to do so to resolve the body corporate’s concerns. Given the circumstances, particularly in light of the matters put to the applicant by the body corporate, I do not consider the body corporate was obliged to rely on the applicant’s bare assertions that it was solvent….
[44] On balance, I am satisfied there is evidence on which the body corporate could reasonably conclude the applicant is insolvent (whether in fact it is), and was at the time of the AGM.”
Therefore, the Body Corporate was entitled to presume that the Hub Rights was insolvent because:
- its belief was reasonably held, and based upon all publicly available information;
- the Body Corporate was not required to rely upon Ms Goodwin’s “bare assertions” that the Hub Rights was solvent; and
- Ms Goodwin failed to provide any financial information proving that the Hub Rights was solvent, despite multiple requests.
Failure to Provide Financial Information
At virtually any stage of the proceedings, Ms Goodwin could have rebutted the presumption of insolvency by providing financial information that showed the Hub Rights was solvent.
The Body Corporate claimed that Ms Goodwin’s refusal to provide financial information further indicated that the Hub Rights was insolvent because failing to produce timely and accurate written financial records is an indicator of insolvency. In other words, Ms Goodwin’s failure to provide financial information was another indicator of “presumed” insolvency.
Ms Goodwin claimed that the Hub Rights was not required to provide financial information to the Body Corporate, either at law or under the terms of the Agreements. Whilst that may have been correct, Ms Goodwin’s failure to provide financial information was criticised by the Adjudicator.
Toward the end of the decision, the Adjudicator stated:
“[54] … It is also concerning that the applicant failed to assist itself by responding to appropriate requests for information from the body corporate, and ostensibly reasonable proposals to advance this dispute.”
The Body Corporate claimed that Ms Goodwin refused to provide the financial information because she knew that it would have shown that the Hub Rights was insolvent, rather than solvent.
Final Comments
Achieving this outcome was a team effort. The Committee invested considerable time and approved taking a number of steps that played an important role in the outcome, including carrying out every possible public credit search on the Hub Rights and engaging Counsel.
We predict that disputes of this kind will increase over the coming months and years, particularly as our economy adjusts to the impacts of COVID-19.
Indeed, since this decision was released, we have received instructions from several Bodies Corporate dealing with onsite managers affected by insolvency.
If you or your Body Corporate is engaged in a dispute with its onsite manager, please contact Mario Esera.
Mario Esera Partner HWL Ebsworth E: mesera@hwle.com.au P: +61 7 3169 4750
This post appears in Strata News #450
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EmbedThis article has been republished with permission from the author and first appeared on the HWL Ebsworth website.
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