Fraud on the Minority – Does it Apply to Strata and Owners Corporations? Can the exercise of power in accordance with the voting rights be challenged?

06/01/2021

For many years there have been strata laws which will allow buildings to be subdivided so that within the same building separate lots can be separately owned.  A strata complex consists of various lots which are specified on a Strata Plan.  There is also common property which is property which does not form part of any particular lot.  There are many disputes in relation to what is common property and what other rights and obligations of each lot owner and also the Owners Corporation.

Decisions are made by the Owners Corporation at General Meetings based on votes by the lot owners.  Essentially each lot owner has a right to vote essentially on the basis of the unit entitlement for each particular lot under the Strata Schemes Management Act 2015 (and its predecessor).  There are regulations which set out the voting entitlements and what is required for the separate decisions to be made.  Some decisions are made by the majority, some decisions require special resolution and some decisions require unanimous resolution.  There are also specific rights in relation to lot owners that have already existing rights.  The regulations provide for the regime for votes.  However the question arises whether the exercise of power can be challenged in any circumstances. 

The doctrine of fraud on the minority was dealt with in the case of Gambotto v WCP Ltd [1995] 182 CLR by the High Court of Australia.  The case related to an amendment to the constitution of a company with the effect of depriving the minority shareholder of various rights.  The High Court stated that the power can be taken only if it is exercised for a proper purpose and its exercise will not operate oppressively in relation to shareholders. 

Since 1997 there have been numerous cases which the Courts have considered whether the doctrine of fraud on the minority or alternatively fraud on a power applies in relation to a Strata Owners Corporations.  There are cases in 1998, 2001 and following that confirm that the doctrine of fraud on the minority applies to Strata Schemes. 

It is important to note that fraud on a power does not require conduct amounting to fraud in the common law sense or conduct that is dishonest or immoral.  A fraudulent exercise of power is constituted if it is exercised for a purpose with an intention beyond the scope of power conferred on the majority or a special majority which must be exercised having regard to the purposes for which the power is created and to the rights of person affected by them. 

In 2011 the case of Thoo v Owners Strata Plan 50276 Justice Slattery in the Supreme Court of New South Wales considered the question as to whether the doctrine of fraud on a power applied and what were the circumstances in which the doctrine applied.  The Court held that the doctrine of fraud on the power and the principles in Gambotto’s case applies to Body Corporates as was confirmed in the case of Houghton v Immer  and other cases. 

His Honour Slattery J summarised the applicable principles as follows:

“The legal principles that define the application of the doctrine of fraud on a power and Gambotto v WCP Limited [1995] HCA 12; (1995) 182 CLR 432 (“Gambotto’s Case”) principles to strata schemes may be shortly stated.

First, the doctrine of fraud on a power and the principles of Gambotto’s Case apply to bodies corporate formed under the 1973 Act and to the power of the proprietors exercisable at general meetings: Houghton & Anor v Immer (No. 155) Pty Limited & Anor (1997) 44 NSWLR 46, at 53 per Handley JA.

Second, the formal validity of an exercise of a power is a pre-condition for the grant of equitable relief against its fraudulent exercise; if the attempted exercise of a power was void, adequate relief was available at law, and there was no occasion for equity to intervene; Houghton & Anor v Immer (No.155) Pty Limited & Anor (1997) 44 NSWLR 46 at 52 and Sugden on Powers, 5^th Edition 1831, at 415.

Third, fraud on a power does not require conduct amounting to fraud in the common law sense or conduct that is dishonest or immoral, in this context a fraudulent exercise of power is constituted if it is exercised for a purpose with an intention beyond the scope of the power: Vatcher v Paull [1915] AC 372, at 378 and Lin v Owners Strata Plan 50276 [2004] NSWSC 88 at [86].  The conclusion of the fraudulent exercise of a power may be inferred without analysis of the individual motives and intentions of the person voting; Lin v The Owners Strata Plan 50276 [2004] NSWSC 88 at [86].

Fourth, the doctrine of fraud on a power was developed long before the earliest legislation dealing with companies.  The doctrine applies to the exercise of powers (to alter by-laws) conferred on a majority or a special majority of shareholders at a general meeting “like other powers must be exercised bona fide, and having regard to the purposes for which they are created, and to the right of persons affected by them.”  British Equitable Assurance Co Ltd v Baily [1906] AC 35 at 42 and Houghton & Anor v Immer (No 155) Pty Limited & Anor (1997) 44 NSWLR 46 at 53.

Fifth, the doctrine of fraud on the minority is capable of application in relation to the contemplated expropriation of minority rights to a shared used of the relevant part of common property: Young & Anor v Owners Strata Plan No 3529 [2001] NSWSC 1135 at [45] and Lin v The Owners Strata Plan 50276 [2004] NSWSC 88.

Sixth, the principles in Gambotto’s Case apply not only to the “expropriation” of rights in the sense of the compulsory taking of the rights or property of another to oneself by transfer, but also to the compulsory destruction of rights” see Heydon v NRMA Limited & Ors [2000] NSWCA374; (2000) 51 NSWLR 1, per Ormiston AJA at 206 [577] and Young & Anor v Owners Strata Plan No 3529 [2001] NSWSC 1135; (2001) 54 NSWLR 60, at 74[52].”

There was an appeal against the Decision of Justice Slattery in Thoo’s case and the Supreme Court of Appeal agreed with Justice Slattery’s analysis of fraud on the minority as referred to above. 

We are aware of circumstances that have occurred where there has been, in our view, a fraud on the power which is often referred to a fraud on a minority.  The fraud of a power can be exercised not only as being a fraud on the “minority” but there is no reason why it could not be a fraud on the “majority”.  There are some simple factual matters which clearly are a fraud on the minority.  There are also other decisions by the majority which are questionable. 

However one also needs to consider the cost as against the benefit of any proceedings which one would contemplate in relation to decisions made by an Owners Corporation with which you are unhappy.

Fraud on a minority can present challenging circumstances and at Watson & Watson our experienced Strata Lawyers can provide advice and assist you in relation all strata matters.  Please contact Richard Watson Senior Strata Lawyer or his Personal Assistant Shereen Da Gloria to discuss your matter and seek appropriate timely advice.

This is only a preliminary view and is not to be taken as legal advice without first contacting Watson & Watson Solicitors on 9221 6011.