This article is about when a Victorian owners corporation may start bankruptcy proceedings to recover unpaid levies after other debt recovery steps fail.
Unpaid levies place real pressure on an owners corporation. While many arrears are resolved through reminders or standard debt-collection steps, some situations escalate to the point where more serious enforcement action must be considered. One of the most significant options is bankruptcy, a powerful legal mechanism available when an individual lot owner owes a debt of at least $10,000.
Bankruptcy should never be the first step. But understanding when, why and how an owners corporation may reach this stage helps committees make informed and lawful decisions.
Why Levy Recovery Matters
Owners corporations depend entirely on levies to fund essential services: insurance, maintenance, repairs, utilities, contract services and long-term capital works. When one owner stops paying, the shortfall is carried by everyone else. Persistent arrears can delay repairs, push up levies for compliant owners, and cause tension within the scheme.
Most owners corporations follow the usual sequence: reminder notices, interest charges, payment plans, debt-collection letters and, if necessary, application to VCAT or a court for judgment. Bankruptcy comes into play only when a judgment remains unpaid and other enforcement options have failed.
When Bankruptcy Becomes an Option
Bankruptcy is available only against individuals and only when the unpaid debt is $10,000 or more. The debt must also be the subject of a final order or judgment. This means an owners corporation cannot simply “declare” someone bankrupt; it must first obtain judgment for the unpaid levies.
Once an order or judgment exists and remains unpaid, the owners corporation may serve a Bankruptcy Notice on the debtor. If the owner fails to comply with that notice within the required time (usually 21 days), that failure becomes an “act of bankruptcy”. The owners corporation can then file a Creditor’s Petition in the Federal Circuit and Family Court seeking a sequestration order, which is the formal declaration of bankruptcy.
What Happens if the Debtor is a Company?
If the debtor is a company, the creditor may apply to the Federal Court of Australia for an order that the company be wound up in insolvency under section 459P of the Corporations Act 2001 (Cth).
The most common basis for such an application is the company’s failure to comply with a statutory demand issued under section 459E. If the company does not comply with the demand within the prescribed 21-day period, the company is presumed to be insolvent. The creditor who issued the demand is then entitled to rely on that statutory presumption as the foundation of their winding-up application. The presumption is rebuttable if the company can produce evidence to the contrary.
If the Court ultimately orders that the company be wound up, it will appoint a registered liquidator to take control of the company’s affairs and administer the liquidation.
Is Bankruptcy Appropriate for Levy Recovery?
While bankruptcy can be effective, it is a serious step with long-lasting consequences for the lot owner. Bankruptcy can lead to:
- appointment of a trustee;
- investigation of finances; and/or
- potential sale of assets, including the lot itself.
For the owners corporation, bankruptcy can achieve what standard debt recovery cannot: it can ultimately lead to realisation of the owner’s equity in the property to satisfy levy arrears. However, it also carries risks, especially if the owner has limited assets, if there are multiple secured creditors, or if the arrears are relatively small compared to legal costs.
Committees must therefore consider whether the action is proportionate, whether the owner can realistically pay, and whether bankruptcy is likely to produce a better outcome than other enforcement measures such as garnishee orders or charging orders.
Authority to Commence Proceedings
Before commencing any legal action, including bankruptcy and winding up in insolvency, an owners corporation must ensure it has the correct authorisation under the Owners Corporations Act. Generally, levy recovery proceedings fall within the monetary jurisdiction that allows ordinary resolution approval. However, if the matter moves into more complex or higher-court territory, or involves non-monetary relief, the owners corporation should get legal advice on whether a special resolution is required. Sound governance at the outset prevents challenges later.
Julia Moroz
Bugden Allen
E: julia@bagl.com.au
P: 03 8582 8100
Brodie Dyer
Bugden Allen
E: brodie@bagl.com.au
P: 03 8582 8100
Petra Lohmann
Bugden Allen
E: petra@bagl.com.au
P: 02 9199 1055
This post appears in Strata News #783.
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Read next:
- NAT: Ongoing levy debts require separate tribunal recovery proceedings
- VIC: Q&A Levies, Lot Allocations and Entitlements
- NAT: Levy arrears in strata: fairness, reform and respectful recovery
This article has been republished with permission from the author and first appeared on the Bugden Allen website.
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