Covering the needs of mortgages/lenders

AccomNews Wednesday, July 22, 2015

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Recently our firm became aware of a decision by a member of Queensland’s Civil and Administrative Tribunal relevant to an application for determination of an issue between a building manager company in receivership and liquidation and a body corporate who was purporting to terminate a caretaking agreement.

The particular question to be answered in the application related to an interpretation of a Section of the BCCM Act relevant to the protection afforded by that act to the financier of the management rights covered by the caretaking agreement.

While it was very clear from the act that the mechanics of the sections relevant to the matter, were included to give protection to a financier so as to preserve the caretaking and letting agreements against termination for a default existing before the bank appointed a receiver, the tribunal member decided that an action against the management company to appoint a liquidator, after the bank’s receiver was appointed, was sufficient to be a fresh default negating the purported protection desired by the bank under the act. In other words, whilst the bank, through a receiver, took over the management rights and the performance of the caretaking and letting agreement and was performing the terms of the agreement, a step by another creditor to appoint a liquidator to the company could be activated by the body corporate to terminate the agreement (due to a default clause to that effect).

Putting the decision in its right perspective, it is the decision of a single member of the tribunal, and is not binding on other members or higher courts. Our observation is that the tribunal only dealt with an interpretation of sections of the BCCM Act and there are other areas of law that may come into play.

It has always been our understanding that bankruptcy company laws in Australia exclude action over the appointment of a receiver or a liquidator, to trigger a right or an ability for a third party to gain some benefit over an asset of the debtor. It stands to reason that the assets of a debtor (such as a manager in receivership or liquidation) should be kept secure, as items to be realised for their value to be utilised to pay creditors.

Viewed from this perspective, it makes sense that an action by a body corporate to terminate an agreement with an onsite manager, which is only actioned due to the actual appointment of a liquidator or receivers to the manager, could be void if the action deprives the creditor of an asset i.e. the management rights.

There are several paths that will now no doubt be followed to provide a reasonable resolution to this situation. Briefly they could be described as:

The matter is left open to be tested in a court of law to be decided according to judicial process to cover all the aspects of law that may come into play. There can be future cases on points of law, where the issues and the wording of the law are more fully scrutinized and decided upon. This path may produce an entirely different outcome to the decision so far made in the tribunal;
The use of other lawful means of protecting the assets of the company, for the benefit of creditors, which restrain the body corporate from cancelling the asset of the company, by termination of the contract. This could mean action by a bank to step around this issue using other means to have the management rights protected until sold to pay back the bank;
By a move from the Queensland government through the attorney general to alter the law, as may be necessary to take into account the findings of the QCAT member, where the expected protection of the section appears to have been negated by the interpretation given in the tribunal. In the past, the Queensland government has been quick to recognise the need to rectify any shortcomings in the law and this can be achieved by amending legislation.

In these situations it is always necessary to take a holistic approach to any problem arising and to then apply the results of research and activity to solve the problem before it may affect any other person.

Another path, which would assist managers and bankers, is for bodies corporate to act reasonably and to readily agree to remove the possible uncertainty and consternation by a brief amendment of any caretaking and letting agreement wording which may give rise to this issue. It is our experience that only some caretaking and letting agreements allow the body corporate to take a path of termination if a receiver or liquidator is appointed to a company when it is a manager. The first step is to have a legal check of agreements to see whether this provision exists. If it does not then there is not a concern. If it does then a recommended path would be to explain to owners the need for a short variation to the agreement (to be agreed to by an ordinary resolution of the body corporate) to confirm a clause which removes any uncertainty at law, for both parties benefit.

A further path to avoid the issue would be for a financier, wishing to take action against a manager company in default of a loan, to appoint an administrator to the company (not a receiver or liquidator) and that should hold off any default action or termination activity by the body corporate, depending on the wording of the agreement.

We see that a careful consideration of circumstances, if they arise elsewhere, should avoid any impact from this decision.

It may take some time for banks to absorb the arrangements and protections open to them and our firm is assisting in that result.