VCAT rules termination payment was unlawful

In an order published by VCAT at the end of 2019, Your Body Corporate Pty Ltd (YBC) and its directors, were ordered to repay the sum of $192,465 plus interest for fees it unlawfully deducted from an owners’ corporation’s (OC) account upon termination as OC manager.

The proceedings concerned an OC located at Wyndham Harbour, a community of over 800 residential lots.

YBC was appointed as OC manager to take over from a previous manager for an initial period of 12 months.

Its appointment was renewed for a further two years. However, during the period of YBC’s management, it became apparent to owners that there were problems with YBC’s handling of the accounts and records and administration of the development.

An independent auditor’s report confirmed that the accounts could not be verified and that the financial reports did not represent a true and fair view of the financial position of the OC.

When it became apparent to YBC that it would be terminated at an upcoming special general meeting, and that an overwhelming number of votes would support its termination, YBC prepared an invoice for the sum of $192,465 representing the balance of its management fees and future disbursements.

Because it still operated the OC’s trust account, the manager made the decision to immediately pay itself that sum from the OC’s maintenance fund.

It did not inform the OC of the invoice, nor did it disclose that it had transferred the funds.

It did not have the approval of the OC to make this payment to itself.

In addition, at the time YBC made the payment to itself, the OC had not yet given a notice to terminate the management agreement.

It can also be revealed that YBC then transferred the $192,465 payment from its business account to its directors one week later.

Three weeks later, YBC advised the OC that it could collect its accounts and records from its office and that it had ceased to provide services to the OC.

This was strange because the OC still had not terminated the agreement.

Nevertheless, the secretary collected the books and records and funds from the manager’s office.

The payment of the $192,465 by YBC to YBC was not contained within the financial records provided to the OC.

YBC maintained in the VCAT position this was an “oversight.” Two months after the transfer to itself, YBC applied to be de-registered as a company. YBC returned total funds of $325,423 to the OC.

This represented a $500,000 loss of OC funds in a two-year period.

VCAT found that the manager was in breach of its statutory and contractual duties to act honestly and in good faith with due care and diligence.

VCAT also found there was a gross failure to maintain proper financial records and to manage the financial affairs of the OC.

The payment by YBC to itself was all the more egregious because it was from the maintenance fund, which is a protected trust fund for the benefit of the owners for the capital repairs to common property.

VCAT also found that the removal of the OC’s funds were without any legal entitlement authority or consent was unconscionable conduct under the Australian Consumer Law, and found that the OC was permitted to join the directors of YBC to the proceeding in their personal capacity for their role in participating in the unconscionable conduct.

This decision should act as a precedent to stop any other manager from deducting or paying itself fees upon termination of the contact.

Even if there is a clause in the agency agreement which permits the payment, it is likely that such a clause is invalid and in breach of the Australian Consumer Law.

OC managers all across Victoria should familiarise themselves with this decision •

Tom Bacon, Principal - Strata Title Lawyers