Body corporate governance: A warning to committee members

Introduction

Every owner of a unit title property is a member of the body corporate.  Every body corporate is supposed to have a chairperson, and almost every body corporate of any size has a body corporate committee.

Guardian Retail Holdings (2013) is the latest word of the Courts on the risks of being a member of a body corporate committee.  The case highlights the potential personal liability involved in being a committee member and the importance of being aware of the nature of the role.

Outline of claims

Guardian Retail Holdings was a member of body corporate 323599 and brought proceedings against the body corporate and three members of the body corporate committee, claiming various breaches of body corporate rules and misuse of monies. 

The body corporate tried to ratify the actions that were the subject of the claims, and also tried to support the committee members, including by meeting their defence costs. 

Part of Guardian’s claim was that the body corporate’s law firm had a conflict in acting for both the body corporate and the committee members, particularly as the law firm’s advice was in issue in the proceedings. 

Guardian also claimed that the body corporate should not fund the committee members’ defence costs, as this was not in the best interests of the body corporate. 

Guardian therefore sought orders to stop the law firm from acting, and to stop the body corporate from funding the committee members’ defence. 

Background

The relevant building in the Guardian Retail matter was a mixed use building, with seven commercial units and 169 residential units.  Guardian owned six of the commercial units, giving it 21% of the ownership interest and voting rights.

The developer had tried to put in place body corporate rules that would relieve the commercial owners from meeting common area and facility servicing costs, as the relevant units were only used by the residential owners.  

In 2011, the body corporate received advice that the rules were invalid. Based on the advice received, the body corporate concluded that all levies should be based on unit entitlement (now ownership interest/utility interest). 

The committee had also taken steps to replace the body corporate secretary.  Guardian’s representative on the committee was excluded from some decisions because of a perceived conflict. 

The removal of the secretary was challenged by Guardian on the basis that this was a power reserved for a resolution at a general meeting of owners. 

The committee then resolved to reverse the 2010-2011 levies and recharge them, leading to the proceedings.

Liability of committee members

The Court’s view on liability deserves to be set out at some length:

A body corporate that has a body corporate committee exercises its powers through its committee. It is vicariously liable for breaches of its obligations occasioned through the conduct of the committee. However, the committee members themselves have personal obligations to act in accordance with the relevant statutory powers and rules. Breaches by them of those rules may result in personal liability in two ways. First, the body corporate has a right of action against the committee members concerned for ultra vires acts that result in liability to the body corporate. Secondly, other members of the body corporate may look to individual committee members for losses caused by breaches of their duties.

... Individual members of a body corporate must act in accordance with the body corporate rules and are personally exposed for their wrongful acts. If that were not the case … there would be no constraint on committee members and, importantly, any claim brought by a member of the body corporate would be devalued by the fact that the member would be required to meet a proportion of the claim himself.

That is, committee members may be personally liable for actions they take. 

This is an important finding – particularly given the fact that many bodies corporate find it difficult to get committee members to stand for office at all.

Conclusion

The Court held that the body corporate could not indemnify the committee members for their legal costs.  The Court restrained the body corporate from contributing to or otherwise funding the defence costs of the relevant committee members.

This left the committee members responsible for their own costs, reinforcing that committee members need to be very clear on their obligations and the risks associated with a committee role if things go wrong.

It also means that body corporate secretaries will find it even more difficult to get unit owners to stand for a committee.

If you would like further information please contact Dale Thomas on 07 958 7428.