Once judgment is obtained against a debtor lot owner, there are various enforcement options that may be canvassed by the owners corporation. If the judgment debt (which includes interest and legal costs) is $5,000 or more, one of the enforcement options open to owners corporations is issuing a bankruptcy notice with a view to commencing bankruptcy proceedings against the debtor lot owner.
If the debtor is subsequently made bankrupt and a trustee in bankruptcy is appointed, it is possible that the trustee in bankruptcy may sell the debtor’s property in order to raise funds to distribute to creditors.
As strata managers would be aware, payment of levies (and any other debt recorded on the section 109 certificate) are usually paid out of the proceeds of settlement when a lot owner sells his or her property. Otherwise, the new owner will be stuck with an obligation to pay the previous owner’s strata debts.
However, in the case of a sale of property by the trustee in bankruptcy, there is no guarantee that debts recorded on the section 109 certificate will be paid automatically from the proceeds of sale. This is because strata levies do not fall within the scope of priority payments (pursuant to section 109 of the Bankruptcy Act 1966) and are not classified as debts owed to a secured creditor. This means that a secured creditor, such as a caveator (someone who has lodged a caveat on the title of the debtor’s property) or a mortgagee (usually a bank) both take priority to owners corporations in order of payment.
Creditors may decide, by special resolution at a creditor’s meeting, that the owners corporation should be given preference in receiving payment above other creditors or classes of creditors, subject to certain statutory priorities set out in the Bankruptcy Act. However, there is no guarantee that the then-available settlement funds will be adequate to pay the whole of the debt owed to the owners corporation.
Prior to commencing bankruptcy proceedings, we recommend conducting a title search on the debtor’s property to ascertain if there are any mortgages and/or caveats registered on title. Further searches of any mortgages and caveats can then be undertaken at minimal cost, to provide the owners corporation with more information as to the pecuniary position of the debtor and to assist in the making of an informed choice when it comes to taking enforcement action.
To discuss bankruptcy proceedings or enforcement options available to owners corporations, please contact either:
Allison Benson –
Legal Practitioner Director
Ph: (02) 4032 7990
Angie Rennie –
Ph: (02) 8706 7060