A question around the appropriate order of payments to creditors when a strata scheme is terminated and an owners corporation wound up has been addressed in a New South Wales Supreme Court judgment involving the long-running and unfortunate Mascot Towers case in Sydney.

The owners corporation (OC) of the defective and uninhabitable unit building in Sydney had applied to the Court to have the strata scheme terminated and a liquidator appointed to sell the property.

Acting for two major banks with mortgages over a large number of units, TG Legal + Technology (TGLT) argued that secured mortgagees over individual lots in the strata should take priority over creditors of the body corporate on a winding up.

While declining to terminate the scheme, Justice Peden noted that if she was wrong, then secured mortgagees should have priority over creditors of the body corporate on a winding up, agreeing with TGLT's arguments on the priority of secured creditors.

The judgment will be of interest to lenders offering secured loans on strata units with respect to  their position in the event of a strata scheme being terminated and an OC being  wound up, as well as to lenders to strata owners corporations.

What happened

In The Owners – Strata Plan No 80877 (Mascot Towers) v Lannock Capital 2 Pty Ltd & Ors, the OC for Mascot Towers applied for an order to terminate the strata scheme under Part 9 sec. 136 of the Strata Schemes Development Act 2015 (NSW) (SSDA) and for directions for the winding up of the scheme.

Mascot Towers has been in the spotlight since 2019 when residents were ordered out of the building after defects were  found throughout its foundations. They have been unable to return since.

Justice Peden described the application as novel, noting that a termination order had never previously been considered by the Court in circumstances where the OC claimed to be insolvent, the application was not brought by all lot owners, and there were competing creditors who were interested in the directions concerning the sale proceeds of the OC’s assets following a termination order.

The termination order was opposed by Lannock Capital 2 Pty Ltd (Lannock).  Lannock lent funds to the OC on an unsecured basis for remediation works to be undertaken.

Outcome

After declining to make the termination order, Justice Peden said that should the conclusion she had reached be wrong, she went on to address how the OC's debt to Lannock ought to be repaid.

Importantly, Justice Peden agreed with TGLT's submissions that the mortgagees having a charge over that portion of the fund achieved on a sale that represents the mortgagor's interest in that fund is consistent with the fundamental concept of indefeasibility of registered interests found within the Real Property Act (NSW).  

In coming to that conclusion, Justice Peden:

• said if it had been intended that the SSDA depart from that known position then it would be expected that this would be unequivocally set out in the SSDA. Instead, the SSDA states that it must be read and interpreted with the Real Property Act. In coming to that conclusion she rejected Lannock’s submission that the OC’s debts, including the total liability under the Lannock facilities (which was understood to be approx. $15 - $16 million) must be paid from any pooled fund from the sale of the building before lot owner's liabilities to their mortgagees;
• agreed with TGLT that Lannock ought be put in the same position as it was in before a termination order is made, which did not include them holding any interest in land. She said the position of creditors ought to be preserved, but not improved;
• rejected a submission made by Lannock that sec. 84 and 184 of the Strata Scheme Management Act (NSW) under which a mortgagee can become liable for a lot owner's liability for OC debts, demonstrates an intention of the legislature that any creditor of the OC ought take from a fund in priority. She said those sections did not change or elevate the OC's unsecured right to enforce the payment of levies, and she did not accept that secured mortgagees who had not exercised their right to possession prior to a termination order ought be deemed to be mortgagees in possession and therefore liable as quasi owner.

Her Honour concluded her judgment by saying said that after termination of the scheme the pooled fund realised by a sale would be distributed in the following order:

• Lot owners would be entitled to their portion representing their original unit entitlement;
• That portion would be charged by the current registered mortgagees to the extent of their security;
• Any remaining portion would be allocated to lot owners;
• Lot owners would be liable to contribute in their proportion to the debts of the OC, similar to the way levies are raised to pay expenses. If a lot owner has insufficient funds from their portion of the fund then they would be personally liable to pay the balance. If one or more owners did not pay their allocation of the OC’s debts then the person administering the OC could seek further contribution from lot owners in their respective portions.

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