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In the recent decision of Owners Corporation 1 Plan No PS 707553K and Ors v Shangri-La Construction Pty Ltd and Anor [2023] VCC 1473, the State succeeded in its first subrogated recovery against a director of a building company.
The State recovered nearly $1.2million against the builder’s sole director in circumstances where the builder’s company was placed into liquidation while proceedings were on foot. The judgment provides guidance as to what the State must establish to succeed against a building company’s officer in a subrogated recovery claim which seeks to recover funds advanced by Cladding Safety Victoria.
Background
In around September 2021, it became clear that the Victorian Government was creating a legislative regime which would make it easier to pursue builders responsible for installing combustible cladding.
This was achieved via amendments to the Building Act 1993 (Vic) (Building Act) which:
- extended the limitation periods to provide owners corporations with 15 years (where the time limit would have otherwise expired between 16 July 2019 and 1 December 2023) to recover the costs of removing combustible cladding; and
- where Cladding Safety Victoria pays an amount to an owner by way of a grant of financial assistance for cladding rectification work, allows the State to be subrogated to all the rights and remedies of the owners and for the State to enforce any rights against entities and enforce any rights jointly and severally against persons who were the entity’s officers at the time of the act or omission that gave rise to the right remedy.
The decision
As foreshadowed, the County Court of Victoria judgment now provides guidance as to the elements the State must establish in order to succeed in a subrogated recovery claim against a building company’s officer.
Valid claim
Firstly, the State needs to establish that it has a valid claim against the relevant entity. If the entity is in liquidation such that proceedings are stayed or cannot be commenced without leave of the Court (under section 471B of the Corporations Act 2001 (Cth) (Corporations Act)), the validity of the claim is simply assessed subject to the statutory stay.
Liability
Secondly, there needs to be a liability of the officer’s company. As was the case here, the builder’s company was found to have breached the statutory warranties under sections 8(b), 8(c) and 8(f) of the Domestic Building Contracts Act 1995 (Vic) by:
- supplying materials which were not “good and suitable for the purpose”;
- failing to carry out the work in accordance with all laws and legal requirements; and
- failing to carry out the work such that the building was fit for purpose. The Court observed that it “goes without saying” that a building which does not meet the relevant performance requirements under the Building Code of Australia cannot be regarded as “reasonably fit” for use and occupation as an apartment.
Is the person/recovery target an officer?
Thirdly, the State needs to establish that the person / recovery target was an officer “at the time the act or omission that gave rise to the right or remedy occurred”. The Building Act adopts the definition of “officer” from section 9 of the Corporations Act making a range of persons capable of becoming targets for a State recovery for the cost of cladding rectification works including directors and secretaries as well as a person who “makes or participates in making, decisions that affect the whole or substantial part of the business of the entity”. It can, therefore, extend to senior executives who do not hold positions on the board.
Subjective knowledge
Fourthly, the State must establish that the officer had subjective knowledge. That is, the State will need to deprive the officer of the defence available under s 137F(4) of the Building Act which provides:
“If it is proved that an act or omission by an entity occurred without the knowledge or consent of an officer of the entity, a right or remedy is not enforceable as provided by subsection (3) against the officer in relation to the act or omission.”
This element can be considered in the context of the State’s third requirement. That is, the amendment to the Building Act to allow for recovery against “officers” was not intended by Parliament to allow for recovery against officers who are removed from the relevant knowledge or decision in relation to the non-compliant or non-confirming external wall cladding product.
For example, the Building Act is not trying to be so expansive so as to make the following categories of “officers” recovery targets:
- Non-executive directors such as a building company’s solicitor or accountant who sits on the board on account of their legal or accounting expertise;
- Company secretaries who focus on office administration, keeping or supervising accounts or accounting systems or dealing with payroll issues;
- Executive directors or non-director executives involved in non-building aspects of the company’s operations (for instance marketing managers or an individual devoted entirely to raising finance); or
- Executive directors or senior executives tasked to manage or supervise projects which are not affected by cladding.
The Court held that the question to be determined is whether the officer had knowledge of the wrongful act or omission. In other words, one must look at what the officer actually knew (subjective knowledge), as distinct from what the officer ought to have known (objective knowledge).
Further, whether the officer knew the cladding was non-compliant or non-conforming is not a relevant consideration.
Quantum
Lastly, the State must establish the quantum of its claim. Here, the State relied on lay evidence on the progress of the remedial works and the expert evidence of a quantity surveyor to assess whether the charges were reasonable. This evidence was sufficient.
Comment
At the time of writing, an appeal has not been lodged and the Court has not yet heard argument on the question of costs.
Further reading
Read other items in Australian Insurance Brief – November 2023
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