Lihua Limited v Body Corporate 366611
[2013] NZCA 630
•10 December 2013 at 11.30 am
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA669/2012 [2013] NZCA 630 |
| BETWEEN | LIHUA LIMITED |
| AND | BODY CORPORATE 366611 THETA MANAGEMENT LIMITED BCS LIMITED |
| Hearing: | 13 November 2013 |
Court: | Stevens, Miller and Dobson JJ |
Counsel: | B P Rooney for Appellant |
Judgment: | 10 December 2013 at 11.30 am |
JUDGMENT OF THE COURT
AThe appeal is allowed in part. We order that the Body Corporate Committee permit James Keat (or Lihua, at Lihua’s option) to search the body corporate register.
B The Body Corporate must pay Lihua costs in this Court for a standard appeal on a band A basis and usual disbursements.
CCosts in the High Court are remitted to that Court to fix if Lihua so requests.
DLihua must pay BCS costs of $500.
____________________________________________________________________
REASONS OF THE COURT
(Given by Miller J)
Introduction
The Empire apartment building, at Whitaker Place, Auckland, is a large unit title complex which was built as student accommodation. It comprises 313 units, of which 300 are residential.[1] Many of the unit owners are thought to live overseas. The appellant, Lihua Ltd, owns one unit and manages several.
[1]These figures are taken from the judgment under appeal. They differ slightly from those in Mr Rooney’s submissions, but nothing turns on it.
The second respondent, Theta Management Ltd, manages the building under a contract with the Body Corporate. Theta is also the lessee and manager of 276 of the units, many of which it has sublet to tenants. The third respondent, BCS Ltd, is the Body Corporate’s secretary. For our purposes it is relevant only as to costs.[2]
[2]Following the filing of an amended notice of appeal, Lihua no longer pursues its appeal against the second and third respondents. There is a residual dispute regarding costs in respect of the third respondent (the second respondent has not sought costs). The parties agreed that the Court could deal with that issue on the papers and it is addressed at [36] of this judgment.
As Woolford J explained in the judgment under appeal,[3] the leases to Theta once included enduring proxies permitting Theta to cast the owners’ votes at meetings of the Body Corporate, but the Unit Titles Act 2010 introduced restrictions on proxies, which must now be meeting-specific,[4] and Theta responded by replacing enduring proxies with a power of attorney allowing it to appoint a proxy at any given meeting. The owners of 189 units agreed to vary their leases in this manner. Theta has also negotiated some new leases on the same terms, and it has procured powers of attorney from a few owners whose units it does not lease. In all, Theta holds powers of attorney for 239 units. By this means it controls the Body Corporate.
[3]Lihua Ltd v Body Corporate 366611 [2012] NZHC 1975, (2012) 13 NZCPR 767.
[4]Unit Titles Act 2010, s 102 [2010 Act].
Not all owners find this state of affairs congenial. Lihua, one of the disaffected, believes that the Body Corporate is insolvent and poorly managed. There is a history of conflict.[5] This judgment addresses two specific disputes:
(a)Lihua contends that the notice of an annual general meeting held on 13 December 2011 had to be accompanied by a set of audited financial statements, and complains that the financial statements that did accompany the notice were not “audited” because the auditors later withdrew their approval;
(b)Lihua wants access to the Body Corporate register, so that it may write to fellow owners to enlist support for a challenge to Theta.
Must audited financial statements accompany the notice of annual general meeting?
[5]One example involves a claim for private nuisance considered by this Court in Body Corporate 366611 v Wu [2012] NZCA 614, [2013] 3 NZLR 522.
The Empire was formerly governed by rules created under s 37 of the Unit Titles Act 1972. That section provided for default rules in schs 2 and 3. It permitted variations upon the default rules, but the Empire’s rules did not differ from them in any relevant way. Its rules provided that a notice of annual general meeting must be accompanied by audited accounts:
2.12 The Committee shall:
(d)… arrange for the accounts of the Body Corporate for each year to be duly audited by an independent auditor, for a copy of the duly audited annual accounts to be sent to each Proprietor before each annual general meeting of the Body Corporate, and for the duly audited annual accounts to be presented to each annual general meeting of the Body Corporate.
The 2010 Act repealed the 1972 Act, but it contains in s 220 a transitional saving provision for s 37 and schs 2 and 3:
220 Continuation of certain provisions of Unit Titles Act 1972
Despite the repeal of the Unit Titles Act 1972 by section 218 of this Act, section 37 and Schedules 2 and 3 of that Act continue to be in force until 15 months from the first day of the month following the date of commencement of this Act in respect of an existing unit title development, unless a body corporate agrees under section 221 that sections 105 and 138 of this Act apply.
The 2010 Act commenced on 20 June 2011, so the 15-month transitional window for the former rules closed on 1 October 2012.
The financial year for the Body Corporate ended on 30 April 2011. An annual general meeting was convened and held on 20 May 2011, under the 1972 Act rules. The minutes record that the 2010 Act would soon be coming into force and would require an audit of the “financial accounts”.[6] (As we explain later, this last statement was wrong; the 2010 Act does not insist on an audit.) The Secretary suggested that in order to average the cost for the current and next financial years the Body Corporate should budget to audit the accounts “now”. The meeting adopted a budget for the period 1 May 2011 to 30 May 2012; it included $10,000 for audit fees. An audit was commissioned for the year ended 30 April 2011, and in due course audited financial statements were prepared.
[6]The former rules spoke of accounts, while the 2010 Act speaks of financial statements.
The 2010 Act also required[7] that every body corporate hold an annual general meeting within six months after the Act commenced. It is for this reason that the Body Corporate held a second annual general meeting in 2011, on 13 December. Theta appointed John Chen as proxy for the owners of 228 units, and owners of 21 other units were represented.
[7]2010 Act, ss 89 and 225.
We draw the next part of the narrative from the High Court judgment:
[13] Prior to the meeting held on 13 December 2011, nominations were sought for the positions of Body Corporate Chairperson and members of the committee. Following receipt of nominations, formal notice was given to the owners of the meeting to be held on 13 December 2011. It was sent pursuant to reg 6 of the 2011 Regulations. The notice was accompanied by the documents required by reg 6(5), including a copy of the Body Corporate’s financial statements for the most recent financial year. These statements had been audited. A copy of the audit certificate was also sent out with the notice of the meeting.
[14] After the notice of the annual general meeting had been sent to the owners, the solicitors acting for Lihua wrote to the auditors making various assertions in relation to the financial statements. On 9 December 2011, four days prior to the meeting, the auditors wrote to the Body Corporate committee advising them that, subsequent to issuing their audit opinion, they had been advised of additional facts which could have an impact on the financial results for the year ended 30 April 2011. Under those circumstances, the auditors advised that they were formally withdrawing their audit certificate and further advised that the financial statements should neither be approved at the meeting on 13 December 2011 nor relied upon by any party for any purpose.
[15] Subsequently, at the annual general meeting on 13 December 2011, the motion to approve the financial statements for the year ended 30 April 2011, which was included in the agenda set out in the notice of the meeting, was withdrawn. The minutes of the meeting record that the auditors would re-issue their audit certificate once the audit was finished and the financial statements would be subject to approval at the next annual general meeting.
The central facts are these: audited financial statements accompanied the notice of meeting; the auditors subsequently withdrew their approval pending further work; and pending clarification the meeting did not adopt those or any other financial statements.
Lihua contends that audited financial statements must accompany the notice, either under the 2010 Act or under the 1972 Act if the latter still applied, and complains that because the auditor’s certificate was withdrawn the financial statements supplied with the notice of meeting were not “audited”. Initially it sought to have the meeting and the decisions made at it declared invalid, but that relief was not pursued before us, Mr Rooney accepting that it is now moot. Rather, Lihua seeks only a declaration that audited financial statements ought to have been provided.
It is not in dispute that the 1972 Act rules insisted that a notice of annual general meeting be accompanied by audited financial statements. And, with all due respect to Mr Rooney’s argument, the 2010 Act manifestly does not require that every body corporate have its financial statements audited at all, still less that it supply audited statements with the notice of meeting. It provides rather that accurate and auditable financial statements must be kept in a prescribed manner, and that a copy of the statements for the most recent financial year[8] must be provided with the notice of meeting,[9] and that the body corporate may by special resolution decide at the annual general meeting not to have the statements verified at all for a particular year.[10] Absent such special resolution, the statements must be audited or verified in one of two alternative ways:[11]
132 Financial statements
(2)Within 2 months after the end of each financial year, the body corporate must—
(a)submit its financial statements to an independent auditor for auditing; or
(b)submit its financial statements to an accountant for review; or
(c)engage an accountant to undertake specific verification procedures as determined by the body corporate by special resolution at a general meeting.
[8]The financial year ends on the anniversary of the body corporate’s establishment or such other date as it decides.
[9]Unit Titles Regulations 2011, reg 6; 2010 Act, s 5, definition of “financial statements”.
[10]Section 132(8). This subsection provides that: “The body corporate may, at the annual general meeting, decide by special resolution that subsection (2) does not apply for a particular year.”
[11]Section 132(2). These alternatives were designed to allow small bodies corporate to opt out of audit requirements, so saving compliance costs, so long as the financial statements were transparent and accessible to all owners: See Department of Building and Housing Departmental Report to the Social Services Select Committee on the Unit Titles Bill 2008 (July 2009) at 26–27. The Unit Titles Bill 2008 originally permitted bodies corporate with nine units or fewer to opt out of audit requirements but that requirement is not in the 2010 Act.
It follows that the first question is whether the 1972 Act rules governed the general meeting held on 13 December 2011. The answer turns on the meaning of s 220. The section has occasioned uncertainty because it saved the former default rules during the transitional window and those rules handled governance in a manner inconsistent with parts of the 2010 Act, which required that at least one annual general meeting be held during the same window.[12] For example, under s 95 of the 2010 Act those entitled to vote for not less than 25 per cent of the units constitute a quorum, while the 1972 Act rules, as varied for the Empire, provided that those entitled to vote for not less than 20 units – just six per cent – constituted a quorum.
[12]Rod Thomas “Analysis of Unit Titles Legislation” in Brookers Unit Titles Handbook 2011 (Thomson Reuters, Wellington, 2011) 1 at 47–48; Thomas Gibbons Unit Titles Law and Practice (LexisNexis, Wellington, 2011) at [8.3].
Notwithstanding that the 2010 Act insisted on a general meeting within six months, s 220 also provides expressly and without qualification that the former rules “continue to be in force” during the transitional window. In a commendably clear and focused argument, Mr Price sought to read these words down via the proviso, the effect of which is that the former rules cease to apply where a body corporate agrees under s 221 (which permits it to bring certain provisions of the new Act into immediate effect) that ss 105 and 138 of the new Act apply. Section 105 provides for operational rules, which are prescribed by regulation and susceptible to amendment by agreement, while s 138 deals with duties of repair and maintenance, extending the body corporate’s responsibility for common areas. Counsel contended that s 220 saves only those parts of the former rules that address the same topics. But that is not what the section says. It saves the entirety of the former rules, including those parts concerned with governance.
Mr Price also pointed to s 89, which provides (when read with s 225) that at the first annual general meeting under the Act the body corporate must nominate and elect a chairperson in accordance with the Regulations. To that extent the 2010 Act procedures must prevail, but s 89 goes no further. It might easily have specified that the meeting must be called and conducted in accordance with the Act and regulations, but it does not.
We observe, however, that s 220 works by saving the former s 37 and schs 2 and 3; it does not provide that these provisions prevail over the new Act. Faced with a transitional provision such as this, a court must work out any conflict between old and new using ordinary principles of interpretation, inquiring whether the two statutes can be reconciled, and if not, whether the new has impliedly repealed the old, and to what extent.[13]
[13]Progressive Enterprises Ltd v Foodstuffs (Auckland) Ltd [2002] UKPC 25, [2004] 1 NZLR 145 at [25].
There is no conflict here. Under the 2010 Act a body corporate may have its accounts audited, and s 132(2) does not require that the decision be made retrospectively; that is, after the financial statements have been presented at the annual general meeting. The body corporate may decide upon audit or an alternative form of verification in advance, by ordinary resolution.
We observe that the position differs if the body corporate contemplates that the financial statements will not be audited or verified in any of the two alternative ways. As already noted, s 132(8) provides that, for a particular year, the s 132(2) requirements can be dispensed with by special resolution. The legislation envisages that some bodies corporate may wish to dispense with the s 132(2) requirements because they do not consider any of the three forms of review necessary in their particular circumstances and wish to minimise compliance costs.[14] Consistent with the policy of the legislation, we think the decision not to require review must be made year by year, for the financial statements of that year. The decision may be made, however, before the statements for that year are presented to the annual general meeting; put another way, a body corporate may decide on the form of review at the annual general meeting held at the end of the previous financial year. Of course, a body corporate that has chosen an alternative form of review (or dispensed with review altogether) may later decide, by ordinary resolution, to have the financial statements audited after all.
[14]Section 132(4).
The second question is whether the financial statements provided with the notice of meeting were in fact audited. As noted above, the Body Corporate decided at the May 2011 meeting that the statements for the financial year just ended would be audited for a meeting to be held after the 2010 Act commenced, an audit was duly commissioned, and the audited statements accompanied notice of the December meeting. These facts cannot be altered by the auditors’ subsequent withdrawal of their audit certificate. A decision to adopt financial statements in that condition could have been contested, but no such decision was made.
This ground of appeal succeeds to the limited extent that we have found that the former rules relevantly applied and required that audited financial statements accompany the notice of meeting. However, the issue is moot so far as these parties are concerned, and no relief, declaratory or otherwise, is warranted.
Access to the Body Corporate register
The second issue concerns an attempt made on 8 February 2012 by James Keat, a firm of solicitors, to search the Body Corporate register on behalf of unit owners.
The register, which must be maintained under the 2010 Act,[15] contains details of the owners’ names and contact details.[16] An owner must designate a preferred method of contact, by post or email. The register is not a public document. The chairperson and the body corporate committee may search it as of right for certain purposes. Any other person – including a fellow unit owner – may search under reg 4(3)(c) only if approved by the body corporate or the body corporate committee. It is not in dispute that under the regulations the body corporate committee is charged with responsibility to make such decisions.
[15]Section 85.
[16]Unit Titles Regulations, reg 4(1).
The regulations specify the purposes for which the register may be searched:
4 Register of unit owners
…
(4) The purposes referred to in subclause (3) are—
(a) to give notice of body corporate meetings:
(b) to give notice of resolutions voted on:
(c)to advise unit owners of matters relating to the body corporate or the unit title development:
(d) to serve documents:
(e)to forward information or documentation from a unit owner to another unit owner, provided that the information or documentation—
(i)relates to the management of the unit title development; or
(ii)relates to the use or enjoyment of the unit title development.
It will be seen that a unit owner may be permitted to search the register for the purpose of forwarding information to another owner about the unit title development’s management, use or enjoyment.
In the letter of 8 February 2012 James Keat advised that, as the Body Corporate knew, they acted for a number of owners of units in the Empire building. The reference to prior knowledge concerned separate disputes, in respect of which James Keat were indeed known to be acting for a number of owners. The letter did not identify the owners on whose behalf this particular request was made.
James Keat referred to a letter which had been sent to some owners by an anonymous group calling themselves the “Empire Body Corporate Committee” on 26 January 2012. That letter had raised concerns about a proposed settlement with a construction firm relating to defects in the building. James Keat requested access to the register so that the firm’s clients could discuss the issue raised in the 26 January letter, and other issues, with their fellow owners:
As provided under rules 4(3) and 4(4) of the Unit Titles Regulations 2011, our clients wish to search the register of unit-owners so that they can discuss this issue, and other issues relating to the management and use or enjoyment of the building, with the other owners.
The Body Corporate Committee ignored the request.
In late January 2012 the “Empire Owners Committee” had also distributed a circular to owners. Lihua supports that group, which is said to represent about 20 owners. The circular stated:
We are a group of owners of apartments in the Empire Building in Auckland who believe that we have lost control of our investment and that we are losing money.
Recently, the body corporate circulated audited accounts. The auditors, however, have withdrawn their audit certificate because the accounts were inaccurate. It appears that the body corporate is insolvent. Where has the money gone? We are gravely concerned about this and what it means for our investments. The present financial position of the body corporate suggests that the governance and management of the body corporate is inadequate.
We have looked at the finances of other bodies corporate of a similar size and we are convinced that the body corporate can achieve potential savings of $200,000.00 a year. We believe that there should be an independent and professional body corporate secretary and building manager to provide value for money services.
For some years now, long before we knew about the body corporate’s financial problems, we have been concerned that the present structure of the body corporate, and the way the building operates, is too heavily weighted in favour of the building manager, Theta Management Limited (Theta).
...
We also have a registered valuation which says that the agreements by which Theta manages Empire apartments are “heavily weighted in favour of” Theta and “disadvantage” the owners, and concluded that units “outside the Theta management lease result in higher values than if the same unit is compared to one subject to the management lease”.
Even if you currently have a management agreement with Theta, we still can help you to save a significant amount of money and improve the capital value of your property. We have successfully helped some owners to prevent Theta from managing their apartments, so there is nothing for owners to fear if they wish to do so. Remember it is lawful for owners to control their own apartments, even if they are being managed by Theta at present. We can do something about this! We need to exercise control over OUR body corporate! The Empire body corporate is the owners’ body corporate, not Theta’s.
(Emphasis in original.)
Woolford J accepted that no “formal request” for access to the register had been made. It appears that he may have reasoned that the letter from James Keat did not qualify because the firm had not named its clients. He recorded that the Committee was unhappy about the anonymous letter that had been sent to owners; it claimed that some owners had complained about breach of privacy and objected to the Empire Owners Committee’s objective of challenging Theta leases.
Before us Mr Price accepted that when an owner wishes to communicate with others about the development’s management, the body corporate committee needs good reason to deny the request. That conclusion follows, we think, from the committee’s undoubted obligation to exercise the power of access to the register for purposes contemplated by the 2010 Act and Regulations. Regulation 4(4) protects the privacy interests of unit owners, which extends to keeping their names and contact details from fellow owners. But that interest gives way where a fellow owner wishes to contact them for generously defined purposes.
It bears emphasis that the power to deny a unit owner access to the register is a very modest one. The regulation supports accountability of the committee and body corporate by facilitating independent communication among unit owners about the development’s management or use and enjoyment. An applicant may wish to contact fellow owners precisely because it has failed to achieve its objectives via the body corporate’s governance processes or management. It follows that the committee cannot justify denying access merely because it disagrees with the applicant on the merits of any given dispute.
We observe that an applicant might sensibly satisfy the committee of its purpose by providing a copy of the proposed communication, as Woolford J suggested, but that is not a prerequisite. If the committee feels the need to set the record straight it may contact owners itself.
Mr Price argued that any application for access must be treated as if it were an application for judicial review. He emphasised that the power to grant or deny access is a statutory power.[17] Indeed it is, but it does not follow that an owner must seek relief in the High Court or make out grounds for judicial review. The 2010 Act confers on the Tenancy Tribunal jurisdiction to decide all disputes between unit owners and the body corporate or its administrators, and the Tribunal makes its decisions on the merits,[18] serving as what has been called an “expeditious clearing house” for such disputes.[19] The District Court and High Court also have jurisdiction in certain circumstances.[20]
[17]Velich v Body Corporate 164980 (2005) 5 NZ ConvC 194,138 (CA).
[18]Section 171. There are limits to the Tribunal’s jurisdiction, but they are not presently relevant.
[19]Thomas, above n 12, at 40.
[20]2010 Act, ss 172 and 173. We assume that in this case the parties proceeded in the High Court on the basis that relief amounting to more than $200,000 was sought.
We are satisfied, respectfully differing from Woolford J, that the Committee ought to have acceded to the request from James Keat. The letter of 8 February 2012 was sufficiently clear about the request and its purpose. The firm did not identify the particular owners who wanted access, but it would normally be reasonable to rely on an assurance from solicitors, especially when the Committee knew that the firm acted for owners and nothing is said to have turned on the identity of the requesting owner or owners. We note in passing that Mr Price told us that Lihua was not in fact one of the owners who James Keat represented at the time, but on the record before us that point was not taken in the High Court and it is too late to take it now.
In evidence Mr Chen deposed that many of the complaints about management were wrong, that he was concerned about owners’ privacy, and that the applicants evidently sought to interfere with contractual relations by inviting owners to challenge the Theta leases. We observe that Mr Chen evidently referred here to the circular, rather than the letter of 26 January 2012 that James Keat relied upon. In any event, the circular’s proposed challenge to the Theta leases falls within the permitted purposes; the leases contain the powers of attorney with which Theta controls the Body Corporate. The more important point is that Mr Chen’s evidence illustrates how a body corporate committee may abuse its control of the register. The Committee disagrees with Lihua on the merits, about which we express no view, but that cannot justify using its control over the register to foreclose communication among unit owners about governance and management issues.
Decision
The appeal is allowed in part. There will be an order that the Body Corporate Committee permit James Keat (or Lihua, at Lihua’s option) to search the body corporate register.
Costs
Lihua is entitled to one set of costs in this Court for a standard appeal on a band A basis and usual disbursements, payable by the Body Corporate only. It also seeks costs in the High Court, but we are not in a position to fix costs there. Woolford J was required to deal with other issues, on which Lihua was largely unsuccessful. The matter is remitted to the High Court to fix costs if Lihua so requests.
It remains necessary to deal with an application by BCS for indemnity costs. In the High Court BCS was awarded costs on the ground that it should not have been joined. Lihua initially cited BCS as a respondent on appeal, only to abandon the appeal in an amended notice of appeal. In a letter to the Registrar dated 13 September 2013, counsel for BCS sought indemnity costs. We are not prepared to award costs on that basis. However, for the inconvenience of having been named BCS will have a reasonable contribution of $500 to its costs. The security for costs which Lihua paid on appeal is to be repaid to it, less the $500 to be paid to BCS.
Solicitors:
James Keat, Auckland for Appellant
Minter Ellison Rudd Watts, Auckland for First and Second Respondents
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