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Why strata title is superior to company title

A recent saga played out in the Supreme Court of NSW illustrates why the dispute resolution procedures available to strata owners under the Strata Schemes Management Act 2015 (NSW) make strata title superior to company title.

This is because company title property owners have only the blunt instruments of liquidation and administration available under the Corporations Act 2001 (Cth).

This article analyses how poorly the Corporations Act 2001 (Cth) is equipped to handle disputes between owners of company title properties.

The company title property

The company, Wentworth Place Pty Ltd, is the owner of an old Georgian sandstone mansion in Wentworth Place, Point Piper, Sydney. It has two storeys which are converted into four apartments, two on the upper floor and two on the lower floor. Particular classes of shares in the company give the right to exclusive occupation of particular apartments, hence the use of the terms ‘company title’ or ‘shared block company’.

In all properties with shared ownership, a major source of disputes is repairs and maintenance to the building – the necessity, the nature and extent and the cost.

So it was that at Wentworth Place: roof repairs were required to stop leaks, garage driveway gates needed to be replaced, vines needed to be removed from the sandstone walls and a Fire Order from Woollahra Council needed to be complied with.

In 2015, the owners agreed to convert the company title to strata title and to carry out repairs to the building. They signed a Deed, but many of the details were left to be agreed later.

Discussions ensued between the Goldings, who owned 2 apartments and 54.37% (in number) of the shares, and the O’Ryans who owned of 1 apartment and 28.07% of the shares. The owner of the other apartment, with 17.54% of the shares, did not participate. There were dealings with the local council and attempts to agree on the terms of a building contract. But no agreement could be reached between the Goldings and the O’Ryans as to the scope and cost of the repairs, and the discussions broke down in December 2018.

The Supreme Court Proceedings

The proceedings were a six part saga.

Part I – The Application for winding up

In July 2019, the O’Ryans brought proceedings in the Supreme Court to specifically enforce the agreement, and alternatively for the appointment of a receiver of the property. The Court observed that “The deadlock between [the parties] is manifest and appears irresolvable to the naked eye.”
The Court said that it was “soon apparent” that a winding up order was “the only feasible solution … unless contrary to lengthy history, the parties came to their senses and reached some accommodation which would enable the conversion to strata to occur and the building to be repaired.”

Accordingly, the Court concluded that: “Winding up on the just and equitable basis under section 461(1)(k) of the Corporations Act 2001 (Cth) is appropriate, indeed necessary” and ordered the appointment of a liquidator.

Stephen Richard O’Ryan v Greg Ray Golding [2019] NSWSC 1229 (Hammerschlag J) (12 September 2019)

Part II – The Application to stay the winding up order

The Goldings sought a stay of the winding up order.

The Court noted that the Goldings were majority shareholders, and therefore had a veto over repairs, and the public interest in compliance with the Fire Order.

The Court refused to grant a stay, relying on the liquidator’s evidence that the company was insolvent and that: “the relationship between O’Ryan and Golding has reached such a level of dysfunctionality to the point where the ability of the company to make decisions is effectively paralysed and the appointment of an independent third party such as a liquidator was necessary to implement the proposed Strata scheme.”

Stephen Richard O’Ryan v Greg Ray Golding No.2 [2019] NSWSC 1349 (Hammerschlag J) (3 October 2019)

Part III – The appointment of administrators

The liquidators had a problem. They needed to raise levies to complete the building work and strata conversion. To do so, they needed to be appointed as a voluntary administrator under section 437A(d) of the Corporations Act 2001 (Cth) to exercise the powers of the company officers to raise those levies (under the company’s constitution the directors have exclusive power to raise levies).

In the circumstances that the liquidators proposed to keep the shareholders informed and seek their views on building and design matters, and undertook to not embark on a process of sale of the property without giving 14 days notice, the Court gave leave for the liquidators to appoint themselves as voluntary administrators of the company. The Court also approved a funding agreement.

Stephen Richard O’Ryan v Greg Ray Golding No. 3 [2019] NSWSC 1372 (Hammerschlag J) (10 October 2019)

Part IV – The Appeal

Golding appealed to the Court of Appeal, Supreme Court of New South Wales, against the winding up order on the grounds of denial of procedural fairness. The Court dismissed the application for leave to appeal with costs, finding there was no error of law.

Golding v O’Ryan [2019] NSWCA 259 (Macfarlan JA, Bell P and Gleeson JA agreeing) (25 October 2019)

Part V – The liquidators / administrators remuneration

In March 2020, the liquidators and administrators applied to the Court for a determination pursuant to s 60-10(1)(c) of Schedule 2 of the Corporations Act 2001 (Cth) that the liquidators be entitled to receive remuneration for work done in the amount of $36,933, and the administrators be entitled to receive remuneration for work done in the amount of $72,302.

The O’Ryans supported the application, the Goldings opposed it. The Court stated: “A factor which I consider to be material in this case ... is the [Goldings] lack of co-operation. The administrators have been distracted by litigation, including that which they have commenced to recover the special levy which the Goldings have not paid. Without the necessary funding, the conversion works [which include the repairs] cannot happen.”

The Court determined that: “the work was necessary, and that the remuneration claimed by the administrators is not excessive and is reasonable.”

Stephen Richard O’Ryan v Greg Ray Golding No. 4 [2020] NSWSC 424 (Hammerschlag J) (21 April 2020)

Part VI - The legal fees

The administrators raised a special levy in November 2019 for building works, remuneration and other expenses. The O’Ryans paid their share of $77,221.27 and Ms Freyberg paid her share of $48,252 in early December 2019. But the Goldings made no payment until 27 April 2020, when they paid $51,412.91, and the balance of $90,215.33 on 12 May 2020.

The administrators applied to the Court that the Goldings pay their legal costs in the proceedings on the indemnity basis. The Court, took into account the fact that the Goldings had “no reasonable defence” in the proceedings and taking into account their reluctance to pay the special levy necessitated the current motion. The Court specified and fixed the costs at $73,044.73, payable by the Goldings. The order was made under the Civil Procedure Act 2005 (NSW) ss 98(1)(c) and 98(4)(c).

Wentworth Place Pty Ltd (in liquidation) (administrators appointed) v Gregory Ray Golding (Costs) [2020] NSWSC 928 (Hammershclag J) (21 July 2020)

Concluding comments

  1. Two comments to be made:Company title works very well when the shareholders / owners are harmonious. Decisions are easier to make and implement than in a Strata Scheme, and ‘undesirables’ can be excluded from purchasing or renting.
    But when the owners are in a “state of warfare”, it is the Supreme Court that is the forum for disputes not NCAT, and the remedies are under the Corporations Act 2001 (Cth), not the Strata Schemes Management Act 2015 (NSW), which means that disputes are often resolved judicially by the appointment of a liquidator and an administrator.
     
  2. The conversion of company title to strata title requires Council Consent by way of a Development Application. The Council will impose conditions for consent such as fire safety compliance, which can be expensive, especially for upgrading an older building for fire compliance. Company title property owners need to be prepared to pay the special levies for the fire upgrades and building upgrades when committing to a strata conversion.
     

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