01 Jun 2016

Lot owner derivative actions

By Katherine Flynn and Daniel Russell

Tan v The Owners – Strata Plan 22014 (No 2) [2015] NSWSC 1885

The Supreme Court of NSW recently considered a derivative action of a lot owner on behalf of an owners corporation and the application of the ‘proper plaintiff’ rule.

The ‘proper plaintiff’ rule is derived from Foss v Harbottle, an English case, which held that in an action where a wrong is alleged to have been done to a company, the proper plaintiff is the company itself. This rule is subject to a number of exceptions, including the so-called “interests of justice” exception.

The Court found that in certain circumstances, a lot owner who is a member of the owners corporation could be permitted to bring a derivative action on behalf of an owners corporation and be entitled seek indemnification for its costs from the owners corporation.

Facts

The Owners – Strata Plan No 22014 (“owners corporation”) is the registered proprietor of the common property in a strata apartment building in Circular Quay. Due to contention within the executive committee of the owners corporation, a lot owner, Ms Porter applied to the NSW Civil and Administrative Tribunal (“NCAT”) for the appointment of a compulsory strata managing agent. Member Meadows of NCAT ordered the appointment of a compulsory strata managing agent of the owners corporation for a period of 24 months under section 162(1)(a) of the Strata Schemes Management Act 1996 (“SSMA”). The effect of this order being made under subclause (a) rather than subclause (b) was that the compulsory strata managing agent was ordered to exercise all the functions of the owners corporation rather than specified functions (such as those of the executive committee).

The apparent consequence of the orders was that the owners corporation or any of the lot owners could not initiate an appeal of the decision. The difficulty faced by the lot owners and former executive committee arose in the context of the requirement under section 80D of the SSMA that a decision to commence legal proceedings must be put to a general meeting for approval (subject to limited exceptions).

The plaintiffs (certain lot owners) commenced proceedings in the Supreme Court of NSW seeking a number of alternative orders designed to enable the owners corporation to appeal the NCAT decision or otherwise have it set aside.

One aspect of the plaintiffs’ claim was to request that the Court make an order that they be indemnified by the owners corporation in relation to their costs of their application, as well as the costs of conducting an appeal in the name of the owners corporation.

After the Supreme Court proceedings were commenced, Member Meadows subsequently made orders varying the original orders to the effect that the compulsory strata managing agent was only given the functions of the executive committee of the owners corporation rather than all functions of the owners corporation. The owners corporation no longer needed the authority of the Court to commence and prosecute an appeal or other action in the name of the owners corporation (and it subsequently declined to do so).

The plaintiffs sought to discontinue the proceedings, and members of the former executive committee purported to instruct the plaintiffs’ solicitor to appear for the owners corporation before the Court and consent to that discontinuance with costs to be borne by the owners corporation.

However, another lot owner objected, and on her application the orders were set aside by the Court on the basis that, at the time the executive committee had purported to engage the plaintiffs’ solicitor to consent to the discontinuation of the proceedings, the powers of the executive committee were in fact vested in the compulsory managing agent.

Although they no longer sought substantive relief, the plaintiffs pursued an application that their costs should be indemnified by the owners corporation on the basis that their action was a derivative action brought in the interests of the owners corporation.

Findings of the Court

The Court ultimately held that the owners corporation should indemnify the plaintiffs for their costs in making the application, however that the indemnity should be limited to the costs of the proceedings seeking leave to appeal in the name of the owners corporation, including the costs of the application for an indemnity order and the costs of terminating the proceedings after the relevant NCAT orders were varied. The owners corporation was not obliged to indemnify the plaintiffs for their costs incurred in the pursuit of their own personal interests in relation to the internal processes of the owners corporation. 

The Court found that the appeal of the NCAT orders was to achieve a result that would be a genuine benefit for the owners corporation, and for all lot owners, rather than for the benefit of only the plaintiffs. His Honour did not consider that the application had been made to promote the personal interests of the plaintiffs and found that the residual personal benefit to the plaintiffs in bringing the proceedings would not cause his Honour to exercise his discretion against making an indemnity order.

The plaintiffs’ had argued that serious injustice would arise if they were precluded from pursuing the derivative action (allowing the application of the interests of justice exception to the proper plaintiff rule). However, the owners corporation had argued that the exception did not arise as there were other available alternatives to remedy the alleged wrong. The Court was not satisfied that the interests of justice exception to the ‘proper plaintiff’ rule did not apply, holding that ‘serious injustice’ would arise if the plaintiffs had been required to pursue remedies available to them in their own name.

Finally, the Court considered the significance of section 80D of the SSMA. It found that whilst the Court must respect the section’s statutory intent in relation to the commencement of proceedings; the absence of compliance with the section in this instance was not a proper reason for the Court to decline to make the indemnity order as compliance with the section 80D requirement was impossible in this circumstance.

Implications

Despite non-compliance with section 80D of the SSMA, a lot owner who is a member of the owners corporation could be permitted to bring a derivative action on its behalf if that action was found to fall within one of the exceptions to the ‘proper plaintiff’ rule in Foss v Harbottle. To the extent that such an action was in the interests of the owners corporation the plaintiff may be entitled to be indemnified by the owners corporation for their costs of taking those proceedings.

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