We have previously wrote about the High Court’s decision of 3 Two Square Sdn Bhd v Perbadanan Pengurusan 3 Two Square & Ors [2018] 4 CLJ 458.
The High Court in brief ruled:
(a) The council members owed a fiduciary duty to the management corporation and to the proprietors as a whole, this duty however was not owed to any individual proprietor.
(b) A council member of a management corporation owes a fiduciary duty to act bona fide in the interests of the management corporation. This duty is owed to the management corporation and to the proprietors comprised in the development managed by the corporation. This fiduciary duty is not, however, owed to individual proprietors.
Both the Management Corporation and 3 Two Square Sdn Bhd (developer and also proprietor of Block F) appealed the decision to the Court of Appeal.
Facts:
In brief, the suit originated from the Developer suing the Management Corporation for not carrying out their duty to maintain and upkeep in good proper working condition of the common areas and facilities resulting in them suffering losses from loss of rental.
Decision:
After hearing both appeals, the Court of Appeal granted part of the appeal and made findings as follows:
Fiduciary Duty
(a) The Court of Appeal agreed with the observation of the High Court Judge in that the individual council members, like that of the management corporation only owes a fiduciary duty to ALL proprietors collectively, but not to individual parcel owners;
Statutory Duty
(b) Council Members, in carrying out the duties and functions of the management corporation as provided in the Strata Titles Act 1985, are required to act in the best interest of the Management Corporation and ALL the proprietors. So long as council members act in good faith and in the best interest of the proprietors as a whole, no personal liability will arise in connection with the exercise of any duty or function of the management corporation.
What is Common Property
(c) the definition of “common property” in Section 4 of the Strata Titles Act 1985 defines it by exclusion, that is, common property is simply which is not comprised in any parcel. The fact that areas are not demarcated as common property in the strata plan does not mean that they are not common property.
Utilisation of Sinking Funds
(d) There is no need to go through a general meeting to obtain a special resolution to utilise the sinking fund as long as the purposes for which it is utilised comes within the matters specified in the Act (Sub-Paragraphs (a) to (d) of Section 46 of the Strata Titles Act 1985).
On the point of Fiduciary Duty, the Court of Appeal drew an analogy of the duties of members of the management council to those of directors of a company and elaborated that such a duty requires them not to allow any conflict to arise between their duty to the management corporation and their personal interest.
The duty is to be discharged with such care as an ordinary prudent person in a like position would use under similar circumstances.
If the duty is discharged as such, council members may not be held liable for decisions that were fairly and reasonably made, even if it is turned out to be wrong in hindsight.
This is often referred to as the “business judgment rule” and will protect the council members if it can be established that they have acted in good faith taking into account all the factors surrounding the matter and they they personally believed the decision arrived at was made in the best interest of the management corporation and ALL proprietors.
Takeaways:
- In order to show that the committee has acted in good faith, it is always good practice to narrate and record the background of the issue being deliberated in the minutes of meeting.
- Thereafter, set out the reasons for reaching such a decision and more importantly avoid any form of conflict of interest.
