Pursuing payment at all costs

Bodies corporate refusing to pay can be a major pain. K3 Legal explains how applying for administration can help

Pursuing payment at all costs

The rising number of apartments in urban centres has led to an increasing number of bodies corporate throughout New Zealand needing a range of service providers, particularly construction contractors to assist in dealing with the fallout of the leaky building crisis. Unfortunately, it can be difficult to get payment from the body corporate once work is complete, even if it has been properly done. For example, a body corporate committee with one or two difficult members may simply refuse to pay for no good reason.

While there are a variety of debt recovery mechanisms in place under New Zealand law, these are not always effective against bodies corporate. Creditors will be familiar with the presumption of insolvency that can trigger liquidation when a statutory demand is left unsatisfied.  However, this type of action is not available against bodies corporate because they cannot be liquidated in the way that companies can. Similarly, steps can be taken such as obtaining a charging order, which effectively freezes a body corporate’s accounts – though this doesn’t necessarily mean creditors will be paid.

But this doesn’t mean there are no other options available. Helen Edwards, director at K3 Legal, notes that the Unit Titles Act 2010 provides for a body corporate to be put into administration by the High Court.

“Administration can be applied to anybody corporate at all, commercial or residential, provided certain criteria are met, such as evidence of dysfunctionality” says Edwards. “A body corporate can’t just be unreasonable and dysfunctional and expect the outside world to put up with that.”

It’s rarely a first course of action.  Indeed, it can be considered an extreme measure – Edwards notes that typically administration would be used in cases where a creditor already has a judgment against the debtor, or where formal adjudication has taken place previously, so that there is a clear, outstanding debt. Administration is a further step that enables administration of the body corporate to be placed into the hands of a third party who will hopefully be more amenable to the needs of creditors.

“To achieve an order for administration, applicants must be able to demonstrate to the court that the body corporate was somehow dysfunctional or acting outside the scope of its powers,” says Edwards. “Alternatively, an applicant should be able to demonstrate that the decisions of the majority were unnecessarily harming the interests of the minority.” 

Even commencing an application could sometimes be enough to get a positive outcome for a contractor, notes Edwards. Frequently, the body corporate will be unwilling to go to court to defend against the application and will simply pay what is owed to avoid that.

She points to the 2019 case of Naylor Love Construction Limited v Body Corporate 200012, where it was apparent that an application for administration by Naylor Love was sufficient to prompt a body corporate to pay up the amount it owed the company.

With this said, applying for administration is not necessarily a simple process, cautions Edwards. It’s an extreme step to take, and that’s at least partially why it’s rarely used. Edwards also notes that the cases make clear that administration cannot be considered a formal method of debt collection. 

“As a result, the costs of an application can’t be fully recovered by the applicant,” says Edwards. “It’s not a cast-iron guarantee of getting your money either, as you have to assume and hope that if an administrator is appointed then they will be sympathetic to your situation.”

However, it can still prove a useful tool under certain circumstances, she stresses. When other methods have proven ineffective and/or court orders are being ignored, it presents contractors and other creditors with another tool for recourse.

“It’s also a lesson to bodies corporate that if they have a committee that’s refusing to cooperate with the law, matters may be taken out of their hands and put in the hands of administrators,” says Edwards.

Of course, prevention is the best safeguard. Edwards advises that anyone doing business with bodies corporate should have clear and robust contractual documentation with well-defined milestones requiring sign-off and payment before work continues.

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