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

Strata Plan 64025 - the Facts Behind the Issues

1. 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. 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. 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. 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: 1. $11,441.61 by cheque number 1001 presented on 31 March 2011; 2. $12,258.40 by cheque number 1002 presented on 1 April 2011; 3. $33,345.65 by cheque number 1003 presented on 21 July 2011; and 4. $20,000.00 by cheque number 1004 presented on 5 July 2012.
5. 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. 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. 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 Legislative Scheme

1. 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. 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. 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: "67 What money is to be paid into the administrative fund? (1) An owners corporation must pay the following amounts into the administrative fund: (a) the contributions levied on, and paid by, owners for payment into the fund, (b) the proceeds of the disposal of any personal property of the owners corporation, (c) any fees paid to the owners corporation for inspection of its records and the provision of information and certificates relating to its records. (2) An owners corporation may pay into the administrative fund any amounts paid to the owners corporation by way of discharge of insurance claims. 68 What money can be paid out of the administrative fund? (1) An owners corporation must not pay any money from its administrative fund except for the purpose of: (a) payments of the kind for which estimates have been made under section 75 (1), or (b) payments made in accordance with this Division on a distribution of a surplus in the fund, or (c) payments to a member of the executive committee in accordance with this Act, or (d) other payments in connection with carrying out its functions under this Act or the by-laws, except payments of a kind referred to in section 71 (1). (2) However, an owners corporation may pay money by transfer from its administrative fund to its sinking fund or by meeting from its administrative fund expenditure that should have been met from its sinking fund so long as the owners corporation complies with subsection (3). (3) The owners corporation must, not later than 3 months after the disbursement, make a determination under section 76 (1) of an amount sufficient to recoup the amount of the disbursement."
4. 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. "70 What money is to be paid into the sinking fund? An owners corporation must pay the following amounts into its sinking fund: (a) the contributions levied on, and paid by, owners for payment into the fund, (b) any amounts paid to the owners corporation by way of discharge of insurance claims, unless those amounts have been paid into the administrative fund, (c) any amount received by the owners corporation that is not required or permitted to be paid into the administrative fund. 71 What money can be paid out of the sinking fund? (1) An owners corporation must not pay any money from its sinking fund except for the purpose of: (a) payments of the kind for which estimates have been made under section 75 (2), or (b) payments made in accordance with this Division on a distribution of a surplus in the fund. (2) However, an owners corporation may disburse money by transfer from its sinking fund to its administrative fund or by meeting from its sinking fund expenditure that should have been met from its administrative fund if the owners corporation complies with subsection (3). (3) The owners corporation must, not later than 3 months after the disbursement, make a determination under section 76 (1) of an amount sufficient to recoup the amount of the disbursement."
5. 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. 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. 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: "75 Estimates to be prepared of contributions to administrative and sinking funds (1) An owners corporation must, not later than 14 days after the constitution of the owners corporation and at each annual general meeting after that, estimate how much money it will need to credit to its administrative fund for actual and expected expenditure: (a) to maintain in good condition on a day-to-day basis the common property and any personal property vested in the owners corporation, and (b) to provide for insurance premiums, and (c) to meet other recurrent expenses. Note. Recurrent expenses would include such regular expenses as insurance, water charges, electricity charges, carpet cleaning, lawnmowing services and the like and minor expenses relating to maintenance of the common property. (2) An owners corporation must, at each annual general meeting, estimate how much money it will need to credit to its sinking fund for actual and expected expenditure: (a) for painting or repainting any part of the common property which is a building or other structure, and (b) to acquire personal property, and (c) to renew or replace personal property, and (d) to renew or replace fixtures and fittings that are part of the common property, and (e) to replace or repair the common property, and (f) to meet other expenses of a capital nature. Note. Expenses of a capital nature would include expenses in relation to major repairs or improvements to the common property or personal property of the owners corporation, such as painting of a building or replacement of roofing, guttering or fences and the like. (3) When estimating amounts needed to be credited to the administrative fund or the sinking fund the owners corporation must have before it, and take into account, a statement of the existing financial situation of the strata scheme and an estimate of receipts and payments. (4) In estimating amounts to be credited to the sinking fund, an owners corporation that is required to prepare a plan under section 75A is to take into account anticipated major expenditure identified in the plan for the 10-year period to which the plan relates. (5) An owners corporation of a large strata scheme must include in the estimates prepared under this section at an annual general meeting specific amounts in relation to each item or matter on which the owners corporation intends to expend money, or on which the owners corporation is aware money will be likely to be expended, in the period until the next annual general meeting."
8. 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. "76 Owners corporation to set levy for contributions to administrative and sinking funds (1) The owners corporation must determine the amounts to be levied as a contribution to the administrative fund and the sinking fund to raise the amounts estimated as needing to be credited to those funds. (2) That determination must be made at the same meeting at which those estimated amounts are determined. (3) The owners corporation must levy on each person liable for it such a contribution. (4) If the owners corporation is subsequently faced with other expenses it cannot at once meet from either fund, it must levy on each owner a contribution to the administrative fund, determined at a general meeting of the owners corporation, in order to meet the expenses. (5) A contribution is, if an owners corporation so determines, payable by such regular periodic instalments as are specified in the determination setting the amount of the contribution."

The August 2012 Settlement Issue

1. 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. 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. 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: Mr Lodhia: "I am referring to the Local and District Court proceedings. As you know, when my client settled the lots we only sought sinking fund levies from the respective vendors. Are you willing to settle all the claims in lieu of payments of those levies?" Mr Mueller: "Do you know the total of the amount for those lots?" Mr Lodhia: "It would be just over $100,000. However, this offer will need to be on the basis of each party paying its own costs." Mr Mueller: "Can you put this in writing and I will seek instructions."
4. 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. The emails in more detail are as follows. Mr Lodhia wrote by email on 31 July 2012, relevantly as follows: "As advised, our client is willing to hand over the cheques it withheld at settlement of the respective lots being detailed below: 1. Khor Lot 15 $2,325.00 2. De Souza Lot 7 $2,364.00 3. Sanguineti Lot 14 $2,364.04 4. Hartnett Lot 45 $3,310.81 5. Sandery 10 lot's $91,289.46 The cheques will be handed over upon receipt of an Undertaking from your firm that the proceedings at the Local Court (being 2011/273490, 2011/273484, and 2011/270884) and the District Court proceedings against Sandery (being 2011/64025) will be discontinued and each party pay its own costs. Further, the complaint against the writer must be dropped."
6. Mr Mueller replied on 1 August 2012 in terms that founded the settlement: "I refer to your email of 31 July 2012 (below) I have been instructed not to accept the proposal contained in your email. This is largely because my firm is not in a position to give a personal undertaking regarding the discontinuance of the local and district court matters, and the complaint made against you to the Law Society cannot be dropped. However I have been instructed to make a counter proposal in the following terms: 1. You will hand over to me all of the cheques referred to in your email by no later than the close of business this Friday. 2. I will hand you at the same time notices of discontinuance signed by me in the three local court matters (SP64025 -v- APX Projects, SP64025 -v- Harnett & SP64025 -v- Sanguinetti) and the district court matter (SP64025 -v- Sandery). The notices of discontinuance will provide for each of these matters to be discontinued with no order as to costs. 3. You will promptly countersign (and arrange for Mr Sandery's lawyer to countersign) and file with the local and district courts each of the relevant notices of discontinuance. (I suggest the notice for the district court matter be countersigned at a meeting which you, me and Mr Sandery's lawyer attend)."
7. 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. 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. 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. 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: "When a debtor is making a payment to his creditor he may appropriate the money as he pleases, and the creditor must apply it accordingly. If the debtor does not make any appropriation at the time when he makes the payment the right of application devolves on the creditor."
11. 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: "A debtor who owes two debts to a creditor is entitled to appropriate a payment which he makes to his creditor to one debt rather than to the other. If he omits to do so, the creditor may make the appropriation. If neither makes any appropriation, the law appropriates the payment to the earlier debt. If there is specific appropriation by the debtor cadit quaestio. In the absence of a specific appropriation it is a question of fact whether there was any appropriation by the debtor. To constitute an appropriation there must be more than an intention to appropriate by the debtor. I respectfully adopt the following passage from the judgment of Greene LJ in I [1936] 2 KB 156 at 162-163: 'When, however, he does not notify the creditor of his intention, and when the circumstances are such that the creditor receives the payment merely in satisfaction of the debts and the payment is not more appropriate to the payment of the one debt than to that of the other the creditor is entitled to make the appropriation. When it is said that there need not be an express appropriation of a payment, but that the appropriation can be inferred, that does not mean that appropriation of a payment can be inferred from some undisclosed intention in the mind of the debtor. It is to be inferred from the circumstances of the case as known to both parties. Any other view might lead to injustice, as the creditor's right to appropriate a payment would be defeated. When the matter is examined upon principle it will be found that an undisclosed intention in the mind of the debtor is not sufficient to support an appropriation. If authority is needed for that proposition it can be found in the judgment of Lush J in Parker v Guinness (1910) 27 TLR 129 at 130 where he said: 'What is to be considered is this. Is the true inference to be drawn from all the circumstances of the case that the debtor paid the moneys generally on account, leaving the creditor to apply them as he thought fit, or is the true inference that he paid them on account of special portions of the debt for the purpose and with a view to wipe these out of the account? His undisclosed intention so to do would, of course, not benefit him. It is what he did in fact, and not what he meant to do that is to be regarded.' A debtor's undisclosed intention to appropriate a payment to one of two debts owed by him to a creditor cannot benefit him.'"
12. 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: "It is what he did in fact, and not what he meant to do that is to be regarded. But if the inference to be drawn from the circumstances is that the payment was in fact appropriated by the debtor at the time of payment, the fact that he made no express statement at the time is immaterial. Now an appropriation by the debtor may be inferred from a variety of circumstances. Each case must, in my opinion, be considered on its own peculiar facts."
13. 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. 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. 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. 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. 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. 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. 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. 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. 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.

The Rule in Foss v Harbottle

1. 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).
2. 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.
3. 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].
4. 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: "In a real sense, therefore, there is only one exception to the proper plaintiff rule, being a comprehensive "justice" exception. This has always has always been recognised and the four specifically defined classes of exception traditionally referred to are but particular examples of it. It is nevertheless necessary to consider the cases from which an exception beyond the established four may be seen to have been recognised."
5. 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: "One of the important themes running through the cases in this area is the reluctance of the courts to interfere in a situation that is capable of being resolved by an appropriate resolution of the members of a company. Where an individual shareholder seeks to assert a claim of the company in relation to some supposed cause of action and the company declines to proceed, the court will be reluctant to assist or to play any role at all unless and until it is seen that the matter cannot be resolved by a resolution of shareholders. The rationale was explained thus by Lawrence Collins J in Konamaneni v Rolls Royce (India) Ltd [2002] 1 WLR 1269 at 1277-1278: 'Where what has been done amounts to a fraud and the wrongdoers are themselves in control of the company, the rule is relaxed in favour of the aggrieved minority who are allowed to bring a minority shareholders' action on behalf of themselves and all others. The reason for this is that if they were denied that right, their grievance would never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue: Edwards v Halliwell [1950] 2 All ER 1064, 1067; the Prudential Assurance Co Ltd case [1982] Ch 204, 211. As Browne-Wilkinson LJ said in Nurcombe v Nurcombe [1985] 1 WLR 370, 378: 'Since the wrong complained of is a wrong to the company, not to the shareholder, in the ordinary way the only competent plaintiff in an action to redress the wrong would be the company itself. But, where such a technicality would lead to manifest injustice, the courts of equity permitted a person interested to bring an action to enforce the company's claim.''"

The Owners Corporation's alleged cause of action against Mr White

1. 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.

The 'Ultra Vires' Exception to the Rule in Foss v Harbottle

1. 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).
2. 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.

The 'Interests of Justice' Exception to the Rule in Foss v Harbottle

1. 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]): "However, each of the defendants submitted that the present case was not one of those "rare" or "unusual" cases in which it was in the interests of justice to permit a plaintiff, who is unable to bring itself within one of the four well-recognised exceptions to the rule in Foss v Harbottle, to nonetheless pursue a derivative action. It was further submitted by the defendants that in order for Eastmark to bring itself within the interests of justice exception to the rule, it was necessary for Eastmark to demonstrate: (a) that it brings the action bona fide in the interests of the Owners Corporation and not for an ulterior purpose; (b) that normal corporate procedures have failed to achieve the justice sought; (c) that there is no other remedy to address the alleged wrong; and (d) that serious injustice would arise if it was precluded from pursuing the derivative action."
2. 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".
3. 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.
4. 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.
5. 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.
6. 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.
7. 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: "Section 138(1)(a) of the Strata Schemes Management Act 1996 does not allow an Adjudicator, or, in this case the Tribunal, to make any order to settle any dispute or complaint. The words in paragraph (a) and (b) confine the subject matter of the dispute and complaint and are words of limitation." Under subs (3)(d) the Adjudicator may not make orders for the settlement of a dispute that includes the payment by of damages. Section 138 relevantly provides as follows: "138 General power of Adjudicator to make orders to settle disputes or rectify complaints (1) An Adjudicator may make an order to settle a dispute or complaint about: (a) an exercise of, or a failure to exercise, a function conferred or imposed by or under this Act or the by-laws in relation to a strata scheme, or (b) the operation, administration or management of a strata scheme under this Act. (2) For the purposes of subsection (1), an owners corporation or building management committee is taken to have failed to exercise a function if: (a) it decides not to exercise the function, or (b) application is made to it to exercise the function and it fails for 2 months after the making of the application to exercise the function in accordance with the application or to inform the applicant that it has decided not to exercise the function in accordance with the application. (3) An Adjudicator may not make an order under subsection (1) for the settlement of a dispute or complaint: (a) dealt with in another section of this Chapter, or (b) referred to the Tribunal or only within the jurisdiction of the Tribunal, or (c) relating to the exercise, or the failure to exercise, a function conferred on an owners corporation by this Act or the by-laws if that function may be exercised only in accordance with a unanimous resolution or a special resolution (other than a special resolution under section 62 (3), 65A or 65B), or (d) that includes the payment by a person to another person of damages."
8. 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]: "Section 207 in Part 7 of Chapter 5 provides, relevantly, that an order under s 138 in which an Adjudicator declares that the order is to have effect as a decision of the owners corporation is to take effect as a resolution of the owners corporation to do what is needed to comply with any requirement imported by that order. In other words, an order made by an Adjudicator under s 138 that the owners corporation perform its duty under s 62(2) to renew or replace a particular part of the common property takes effect as a resolution of the owners corporation with which it is bound to comply. If it fails to do so, the obvious remedy would be a mandatory injunction. However, it is to be noted that by operation of s 138(3)(d) an Adjudicator cannot make an order under subs (1) for the settlement of a dispute or complaint that includes the payment by a person to another person of damages. In my opinion, that provision is some indication of an intention on the part of the legislature that disputes relating to the owners corporation's duties under the 1996 Act, as well as disputes as to the strata scheme generally, are to be resolved in a manner which does not involve the payment of damages."
9. 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: "In this way, the purpose of the Act is achieved. Disputes involving internal management of the Owners' Corporation, for example, could be subject of settlement. Thus, issues that might be subject to regulation under the Corporations Act 2001, were it not for the exemption in s 11(2) of the Act, such as oppression etc, may be the subject of resolution by the Tribunal under s138(1)(b). However, s138(1)(b) does not allow the Tribunal to settle a dispute between a Lot owner and the Owners' Corporation which dispute arises under the general law unrelated to issues inter se."
10. 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.
11. 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. For these reasons the plaintiff fails in all aspects of this proceeding. The orders of the Court therefore are: 1. Summons dismissed; 2. Order the plaintiff to pay the second defendant's costs; and 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.

Amendments 02 September 2015 - Coversheet- Representation DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 02 September 2015