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How $1.8 m of letting income was distributed by the receiver of a serviced apartment manager

Ruby Apartments held the management rights to 242 serviced apartments in Ruby One Tower, Surfers Paradise, when Receivers were appointed on 1 August 2019. The Receivers were appointed by a secured creditor one day after Ruby Apartments had appointed an administrator.

The Receivers carried on the business of a serviced apartment manager until 30 September 2019, when they sold the business as a going concern to a third party purchaser.

The Receivers had of over $1.8 million in trust funds from rentals and service charges. The trust funds belonged to the apartment owners. The Receivers wanted to charge Management Expenses for carrying on the business in August and September of $734,108.00 and the Administration and Distribution Expenses for reconciling the trust account so as to ascertain the respective interests of each owner, and for obtaining judicial advice of $644,453.50.

In September 2021, a ‘compromise’ was entered into between the Receivers and most of the apartment owners, following a mediation held before a Judicial Registrar of the Court. In reaching the compromise, the Receivers reduced their charges by almost half.

The Receivers approached the Federal Court of Australia for directions twice for directions.

#1 Directions as to service of originating process

The first time the Receivers approached the court was to apply for deemed service of process on the owners, tenants and paid guests of the apartments.

The Receivers effected service on the owners by sending an email containing a hyperlink to the originating documents. The emails were sent to the email addresses recorded for owners of the apartments in the Surfers Paradise property, and also to email addresses for guests and tenants. Delivery confirmation was received in most instances.

The Receiver’s application was for deemed service in instances where a ‘failed delivery notification’ was received.

The Court was satisfied that the emails were delivered to email addresses previously used by each of those owners and that the delivery confirmation ‘evidences that the Receivers have taken reasonable steps to bring the originating documents to the attention of those’ owners.

See Heenan (Receiver), in the matter of Ruby Apartments Pty Ltd (in liq) v Ralan Paradise No. 1 Pty Ltd (in liq) [2020] FCA 1878 (Reeves J)

#2 Directions as to distribution of funds available

The second time the Receivers approached the Court was for judicial advice under s 424 Corporations Act 2001 (Cth) in relation to the proposed distribution of the funds under the compromise. The Court said that it was appropriate for the Receivers to ‘to look to the trust assets for their indemnity’.

The approach to the Court was necessary because ‘not all of the claimants on the fund’ had agreed to the compromise and ‘there is therefore a real and practical threat that one or more’ of them ‘could seek to challenge it at a future date’.

The Court was satisfied that it was appropriate for the Receivers to apply for the directions pursuant to s 424 of the Act. It was appropriate because this is ‘not a case where privately appointed. Receivers are seeking directions concerning the commercial merits of a proposed settlement’. In this case, assertions were made that the compromise was not lawful, and the Receivers were justified in obtaining ‘judicial advice’ to distribute the fund in a particular way.

The Court noted that: The Receiver’s management of the letting pool during August and September benefitted the apartment owners by generating rent and benefitted the secured creditor by preserving the value of the Business to be sold and the property secured.

The compromise was approved by the Court.

The Court resolved two contentious claims made by the Receivers for expenses:

  1. Letting income

    When the Receivers were appointed on 1 August, the July letting and sundry income had not been distributed.

    The gross lettings balance for July 2019 was $747,593.62. The Receivers were allowed to retain $314,960.67 for Administration and Letting Expenses, and to pay the balance of $432,632.95 to the apartment owners.
  2. Sundries income

    Sundries amounting to $175,832.46 were collected in July 2019 from guests for food, beverage or room service. The sundries were to be accounted to the Ruby Management, which supplied the sundries, and not to the apartment owners, after deduction of the Receivers’ Administration and Distribution Expenses.

    Sundries amounting to $119,585.38 were collected in August and September 2019 from guests for food, beverage or room service. The Receivers were able to deduct $41,198.61 for a pro rata share of the Administration and Distribution Expenses, with the balance of $78,386.77 paid to the apartment owners.

How was the letting income distributed?

The fund of $1,880,089.85 was distributed as follows:

  1. Receivers - $758,549.68 for Expenses, less $210,000 for the legal costs of the apartment owners*;
  2. apartment owners in the Ruby One Tower - $794,819.76 for rents for July, August and September;
  3. service providers - $136,509.47;
  4. some former guests - $13,078.33;
  5. some former tenants (bond refunds) - $3,487.20; and
  6. the liquidator of the other Ralan Group companies - $173,645.51.

*The apartment owners were paid their legal costs out of the fund because the proceedings were needed to resolve questions relating to the administration of the fund.

See Heenan, in the matter of Ruby Apartments Pty Ltd (in liq) v Ralan Paradise No. 1 Pty Ltd (in liq) (No 2) [2021] FCA 1314 (Downes J) (27 October 2021)

Comments

Apartments in the Ruby Apartments, a 30-level serviced apartment complex at 9 Norfolk Avenue, Surfers Paradise, were sold by the developer, the Ralan Group, to investors with an attractive rental guarantee for the first two years. The return was to be achieved by having the apartments managed as serviced apartments.

This case illustrates that if a receiver is appointed to the manager of a serviced apartment complex, the letting income and sundries received from guests are subject to a deduction for administration expenses incurred by the receiver.

In this instance, 29.17% of the fund was paid to the Receivers, 42.27% to the apartment owners and 28.56% to others.

Fortunately for the investors in this case, the Receiver’s management (and therefore the administration expenses) ended relatively quickly when the management rights were sold quickly to a new manager.

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