THE BODY CORPORATE CONTROVERSIALLY BUYS FOUR APARTMENTS IN OUR COMPLEX WITH OWNERS’ MONEY.
In 2020, the body corporate committee decided to invest owners’ funds in property. However, instead of investing in a property trust managed by experts, or apartments at another location, unbeknown to owners, an ‘investment scheme’ was devised to circumvent body corporate law which does not allow a body corporate to buy apartments within its own complex.
Tens of thousands in legal fees were paid to get around legislated requirements.
The scheme involved the then chairman of the body corporate committee setting up a private company, CTS 35751 Investments Pty Ltd, that would own the four apartments.
The chairman was the new company’s sole director, secretary and shareholder. The body corporate committee under the same chairman/company director then approved the buying of $1.4 million worth of shares in the company using owners’ sinking fund monies. This financed buying four apartments.
The body corporate holds shares in the company but the property is owned by the company.
In June 2021, a concerned owner applied to the Office of the Body Corporate Commissioner to stop the body corporate from investing further funds in CTS 35751 Investments Pty Ltd.
In September 2022, a Queensland Body Corporate Adjudicator ordered that the body corporate divest itself of the shares and recover the funds invested in the company.
However the body corporate committee decided to reject the adjudication. Instead committee, which was elected in 2022, unanimously decided to appeal against the adjudicator’s orders to the Queensland Administrative and Civil Appeals Tribunal (QCAT).
This scheme involving placing owners funds in a private company operated by the body corporate chairman to buy apartments is deficient for the following reasons:
- The body corporate committee failed to get financial advice on the investment options available for property, it simply sought advice on implementing its own questionable plan of buying within the complex. The committee should be getting proper financial advice when investing owners’ money. The adjudicator said: “I am not satisfied on the submitted evidence that the investments made by the body corporate accorded with the IFS advice regarding more effective ways to invest the body corporate funds”;
- The adjudicator found that the funds to buy the apartments had been transferred from owners’ money to the company before the committee resolved to authorise the investment. The adjudicator said: “Funds were transferred to the company before the committee resolution to authorise the investment. This was not obviously an arm’s length arrangement”;
- The action of setting up the chairman’s company cost owners more than $54,000 in legal fees; this expense could have been avoided had the committee invested in compliance with the law, and with minimal fees, for example in a property trust;
- The adjudicator found that owners were not adequately informed about the plan when they voted to approve it at the 2020 AGM. The adjudicator also said record keeping had been inadequate. In the adjudicator’s words: “there appears to have been a wholesale failure of even a basic level of appropriate and transparent decision-making and record-keeping over an extended period. . . . decisions to invest in the company, would appear. . . to have occurred in a procedural vacuum. There appears to be an extraordinary lack of records. There also appears to have been very little disclosure to owners as to what was being done.”;
- The failure of the committee to keep records, to adequately brief owners of its actions, to incur tens of thousands of dollars of avoidable legal costs, and the fact the body corporate doesn’t directly own properties bought with $1.4 million of owners’ monies clearly demonstrates that the committee is not competently managing funds in the owners’ best interests. There is a serious lack of accountability and transparency;
- While the body corporate has shares in the company, it doesn’t have the absolute security of being the registered owner of the apartments;
- The adjudicator found that the authorisation to use owners’ money to buy the four apartments was not valid. “The resolutions of the committee of the Body Corporate for Southport Central Residential on 22 May and 16 June 2021, authorising the investment in shares in CTS 35751 Investments Pty Ltd and to enter into a subscription agreement with CTS 35751 Investments Pty Ltd, were not valid …“;
- The adjudicator ruled that the apartments be sold and owners’ money returned. “While the body corporate has declined to provide the legal advice that it says it relied on, I consider it is tolerably clear that the specific intention in creating the company and the structure of the company was to circumvent the statutory restriction on a body corporate owning lots in its own scheme … The Body Corporate for Southport Central Residential must, within a reasonable time, divest itself of its current shareholding CTS 35751 Investments Pty Ltd and recover the funds invested in that company”;
- The adjudicator said: “That if the body corporate does not have effective
control of the company, that will mean the body corporate has given effective
control over significant body corporate funds to a single committee member.”
THE BODY CORPORATE COMMITTEE CHOSE TO IGNORE THE ADJUDICATION AND HAS INSTEAD OPTED TO APPEAL IT.