The current low interest rate environment is great if you are a homeowner! It’s not so great if you are a body corporate committee looking to invest body corporate funds to generate a return.
This article was contributed by Mark Mellick, Legal Practitioner Director of Active Law.
A body corporate operates two funds. The administrative fund takes care of regular expenditure, for example, gardening, regular cleaning. The sinking fund holds money set aside for big ticket items like painting, capital repairs, lift replacement.
Given the sinking fund may build up a substantial amount of money which is not immediately needed, it makes sense for the money in the fund to be invested.
Indeed, the Regulation Module governing the scheme expressly recognises the ability of the body corporate to invest the administrative fund and the sinking fund.
The traditional form of investment is in term deposits with the body corporate’s bank. However, the low interest rate environment has made term deposits less attractive from a rate of return perspective.
As a result, we have been receiving enquires as to whether the abovementioned funds can be invested in ways other than a term deposit.
The Regulation Modules provide “the administrative and sinking funds may be invested in the way a trustee may invest funds”.
Trustee investment rules apply
How then may a trustee invest funds? The answer to that question is found in section 21 of the Trusts Act 1973.
That section provides:
A trustee may, unless expressly forbidden by the instrument creating the trust—
(a) invest trust funds in any form of investment; and
(b) at any time, vary an investment or realise an investment of trust funds and reinvest an amount resulting from the realisation in any form of investment.
In the body corporate context (which is the focus of this article), there will not be an instrument creating the trust, and there will be no specific instructions about how the body corporate can and cannot make investments.
As such it would on the face of it appear as though a body corporate has carte blanche when it comes to investing the money in the administrative fund and the sinking fund.
So, can a body corporate invest in “any form of investment” – shares, managed funds, forex accounts, crypto-currency? Not so fast!
How should the committee proceed?
As noted above, the Regulation Modules provide “the administrative and sinking funds may be invested in the way a trustee may invest funds (our emphasis)”. In addition, Section 96(2) of the Body Corporate and Community Management Act (the “Act”) relevantly provides that a body corporate may “invest amounts not immediately required for its purposes in the way a trustee may invest trust funds (our emphasis)”.
Section 22(1) of the Trusts Act essentially sets out a “standard of care” when it comes to a trustee exercising a power of investment and by extension, a body corporate exercising such a power.
The body corporate, through its committee (as the committee will be the decision maker when it comes to investing funds), must “exercise the care, diligence and skill a prudent person of business would exercise in managing the affairs of other persons”.
Risk of loss
Investment options with a higher rate of return often bring a higher risk of loss. For example, if a committee invested body corporate money in the share market, it is possible that the invested funds would lose value.
The body corporate only holds money which it requires to meet its obligations under the Act. If a body corporate lost money on a failed investment, the amount of the loss would need to be again funded by owners, possibly by a special levy.
Would it be careful, diligent and prudent for a committee to invest the sinking fund in a high-risk investment? We suggest not.
Further, pursuant to section 94 of the Act, the body corporate must administer the common property and body corporate assets (including money) for the benefit of owners.
The committee members should ask themselves:
- Is a high-risk investment in the best interests of owners?
- Is it reasonable for the committee to make a decision to make a high-risk investment?
- Is the committee and owners prepared to deal with the possible scenario of an investment loss?
Committee member liability
Where a committee decision is made in good faith and without negligence then Committee members will usually be protected from personal liability in relation to the decision.
If committee members make an investment decision without due consideration of the risk, resulting in a financial loss for the body corporate, then, notwithstanding the members might be acting in good faith, where they are found to have acted negligently, the members may be exposed personally to a negligence claim by owners.
Committee members ought to act in the best interest of the owners, notwithstanding the members personal appetite for risk. .
When all of the relevant pieces of legislation are pulled together, we think it safe to say the ability of a body corporate to invest in “any form of investment” is in fact somewhat restricted.
We suggest the “care, diligence and prudence” requirement might be the reason for term deposits being the preferred form of investment.
Of course, this article is not financial investment advice. If a body corporate is deciding on an appropriate form of investment, recourse ought to be had to a licensed financial/investment adviser.
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The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.