Booklet: Company Title Essentials (Chapter 8 – Levies)

Company Title Essentials booklet

Below is Chapter 8 of our ‘Company Title Essentials’ booklet. To read the other chapters of our booklet, click the links below:

Levies

Charging levies  

All constitutions provide the company with a power to charge levies or contributions on its shareholders.  Such levies are payable by the respective shareholders in proportion to their percentage shareholding in the company.  

The company will ordinarily charge a levy or contribution to establish an ‘administrative fund’ to finance the day-to-day management of the building or a ‘sinking fund’ to carry out building works.  It may also have the power to charge a ‘special levy’ to cover liabilities that cannot or should not be satisfied by the administrative fund or the sinking fund, such as major capital works or significant emergency repairs.  

Boards should be attentive to the scope of their constitutional power to charge levies.  Some levies may require an ordinary resolution.  

Collecting levies  

Boards must take a proactive stance to ensure that levies are paid on time and in full.  The company cannot operate unless it has sufficient funds to finance its operations and any proposed works.  

There are a number of things which the company can do to maximise its chances of efficiently collecting levies. Some examples include ensuring that:

  • The constitution provides for the restriction shareholders’ voting rights in circumstances where levies have remained unpaid for an extended period of time;  
  • The board has a constitutional power to charge interest on unpaid levies;  
  • The company has a constitutional power to recover any unpaid levies through debt recovery proceedings in the Local Court;
  • The constitution makes provision for the eventual forfeiture of shares in the event of ongoing failure to pay levies; and  
  • The constitution provides the company with a charge or lien over the proceeds of the sale of any share as security for any unpaid levies.  

Companies may be able to further protect their interest in recovering levies by allowing shareholders to occupy their units under separate licence agreements that may be terminated by the company if and when levies are unpaid for a certain period of time.  These agreements can help companies to protect their position in the event of a priority dispute with a bank.  If such an agreement is terminated because of the failure to pay levies, the company can recover funds by granting a new licence to occupy to a third party in return for the payment of rent.  

Boards should review the constitution to make sure the company has sufficient protection and powers to deal with a shareholder default on the payment of levies.  The board should have a policy for the collection of levies in arrears which is sent to all shareholders annually.  

Recovering interest  

Most constitutions provide the board with power to charge interest on unpaid levies.  This is important for getting levies paid promptly and can compensate the company for not being able to use the funds while the money was overdue.

Directors should be careful to ensure that the amount of interest charged is not so excessive as to constitute an unenforceable penalty.  This can be done by ensuring that the amount of interest charged does not extend more than 2-3% above an applicable small business lending rate. The Commonwealth Bank of Australia’s rate is a good guide. 

Alternatively, directors could adopt the 10% simple interest rate that applies when owners of lots in a strata building fail to pay their levies on time under the Strata Schemes Management Act 2015 (NSW).  

If a constitution has an interest rate that exceeds 10%, the directors can only resolve to enforce that interest rate to the extent that it is reasonable.  For example, if the interest rate in the constitution is 20%, the directors could resolve to enforce it only as to 10%.  This allows the company to recover reasonable interest without the need for a special resolution.  

If a company wishes to insert a new interest rate into the constitution, it is a good idea to insert a floating rate that mirrors change to market small business lending rates or the Strata Schemes Management Act 2015 (NSW) over time. This means that the company will not need to pass a resolution to change the interest rate every time that there is a substantial change in market rates. 

Make sure that interest is charged at a rate that is not too far beyond an applicable market rate.  

Recovering legal costs

Many constitutions also provide that the company may recover legal costs from any shareholder it has successfully taken to court to recover unpaid levies or rectify a breach of the constitution or house rules.  This allows the company to lessen the risk associated with commencing litigation to enforce compliance with the constitution and the house rules.  It will not, however, protect the company if it is unsuccessful in the claim.  

It is important to make sure that any such clause provides that costs are to be recovered on an indemnity basis. Such ‘indemnity’ costs will cover a greater proportion of the actual legal fees incurred by the company than ‘ordinary’ or ‘party-party’ costs.  

Boards should make sure that legal costs are recoverable on an indemnity basis.

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The information contained in this post is current at the date of editing – 3 April 2024.