Lot owner successfully avoids bankruptcy notice by alleging OC negligence

A lot owner has convinced the Federal Court of Australia to ignore a bankruptcy notice – issued by an owners corporation in an attempt to recover unpaid strata levies and associated costs – by establishing her own counter claim against the owners corporation.

In this case, the owners corporation served the lot owner – Ms Blair – with two bankruptcy notices: one in the sum of $76,634.93 representing unpaid levies which the Local Court had ordered Ms Blair to pay, and the other in the sum of $19,911.50, representing the costs associated with those Local Court proceedings.

Ms Blair applied to the Federal Court (which has jurisdiction over bankruptcy matters) to have both bankruptcy notices set aside. She argued that she had a counter claim against the owners corporation that was equal to, or more than, the amounts claimed in the bankruptcy notices. The Bankruptcy Act provides that where the Court is satisfied that such a counter claim exists, a bankruptcy notice will be an ineffective path to proving a debtor’s bankruptcy.

Ms Blair’s counter claim arose from water penetration and associated damage caused to her lot. Ms Blair claimed the owners corporation and/or its strata manager had been negligent in failing to carry out necessary maintenance and repair work to prevent the water penetration to her lot. In this respect, she had filed a separate claim in the District Court.

The Court found that:-

  • Ms Blair had an arguable case against the owners corporation;
  • If she could establish that the amount of her damages claim was more than the amounts in each of the bankruptcy notices, the owners corporation could not rely on the bankruptcy notices to prove her bankruptcy;
  • Ms Blair could not establish that, at the time she should have complied with the first bankruptcy notice, the amount of her damages claim was more than the $76,634.93 claimed by that notice. The Court also found that Ms Blair should have raised this cross claim as part of the earlier Local Court proceedings, not waited until the issue of the bankruptcy notice. The first bankruptcy notice was not set aside;
  • Ms Blair did establish that, at the time she should have complied with the second bankruptcy notice, the amount of her damages was more than the $19,911.50 claimed by that notice. The Court also found that Ms Blair could not have raised her cross claim earlier, because the judgment giving rise to the $19,911.50 bankruptcy notice resulted from an argument about costs only: the Local Court had no jurisdiction to consider any cross claim at a time when it was considering costs only. The second bankruptcy notice was set aside.

The owners corporation is now left to rely on the first bankruptcy notice (no doubt petitioning the court for Ms Blair’s bankruptcy), while Ms Blair is left to pursue her claim in negligence in the District Court –  as long as she is not declared bankrupt in the meantime, as that would mean she loses her standing to pursue the claim.

I find this an interesting situation about which both lot owners and owners corporations should be aware: for lot owners faced with significant levy arrears and enforcement action from their owners corporation, consider the circumstances that have led to your being in that situation: have you been put to expense and therefore unable to pay your levies because of the owners corporation’s own failure to meet its statutory obligations – such as the obligation to repair and maintain the common property? If so, a cross claim may be appropriate. The timing of that claim is vital – if left too late, your right to “set it off” against any future award the owners corporation may obtain could be lost.

For owners corporations: where you are pursuing seemingly recalcitrant lot owners in significant arrears of levies, how “clean” are your own “hands”? Have you been holding up your end of the bargain, using owners funds to properly maintain and repair common property, as is your statutory duty? If criticised by the lot owner later down the track, can you comfortably respond to that criticism?

These are questions I recommend both sides cover off in this kind of situation.

The information contained in this article is not legal advice. This article is intended to provide general information in summary form only. You should not rely on the content of this article as legal advice If you would advice specific to you and your situation, please contact Lawyers Chambers.

Posted in LCOR