Admin and Sinking Fund Investments

The current low interest rate environment is great ….. if you are a homeowner!

It’s not so great if you are looking to invest money.

A body corporate operates two funds.

The administrative fund takes care of regular expenditure, for example, gardening, regular cleaning.

The sinking fund holds money set aside for big ticket items like painting, capital repairs, lift replacement.

Given the sinking fund may build up a substantial amount of money which is not immediately needed, it makes sense for the money in the fund to be invested.

Indeed, the Regulation Module governing the scheme expressly recognises the ability of the body corporate to invest the administrative fund and the sinking fund.

The traditional form of investment has been term deposits.

However, the low interest rate environment has made term deposits less attractive from a rate of return perspective.

As a result, we have been receiving enquires as to whether the abovementioned funds can be invested in vehicles other than the traditional term deposit.

The Regulation Modules provide “the administrative and sinking funds may be invested in the way a trustee may invest funds”.

How then may a trustee invest funds?

The answer to that question is found in section 21 of the Trusts Act 1973.

That section provides:

 A trustee may, unless expressly forbidden by the instrument creating the trust—

  1. invest trust funds in any form of investment; and

  2. at any time, vary an investment or realise an investment of trust funds and reinvest an amount resulting from the realisation in any form of investment.

In the body corporate context, there will not be an instrument creating the trust.

As such it would on the face of it appear as though a body corporate has carte blanche when it comes to investing the money in the administrative fund and the sinking fund.

So…. a body corporate can invest in “any form of investment”. Shares, high risk investment forex accounts, crypto, classic cars, rare watches!

Not so fast!

As noted above, the Regulation Modules provide “the administrative and sinking funds may be invested in the way a trustee may invest funds (our emphasis)”. In addition, Section 96(2) of the Body Corporate and Community Management Act (the “Act”) relevantly provides that a body corporate may “invest amounts not immediately required for its purposes in the way a trustee may invest trust funds (our emphasis)”.

Section 22(1) of the Trusts Act essentially sets out a “standard of care” when it comes to a trustee exercising a power of investment and by extension, a body corporate exercising such a power.

The body corporate, through its committee (as the committee will be the decision maker when it comes to investing funds), must “exercise the care, diligence and skill a prudent person of business would exercise in managing the affairs of other persons”.

Would it be careful, diligent and prudent for a committee to invest the sinking fund in a high-risk investment? We suggest not.

Further, pursuant to section 94 of the Act, the body corporate must administer the common property and body corporate assets for the benefit of owners.

Cash in the administrative fund and the sinking fund is unquestionably a body corporate asset.

Where a committee decides to invest in high-risk investments, is the committee acting for the benefit of the owners?

Also, it is well known that a body corporate (and its committee) must act reasonably when making a decision.

Again, is it reasonable for a committee to decide to invest in high-risk investments?

When all of the relevant pieces of legislation are pulled together, we think it safe to say the ability of a body corporate to invest in “any form of investment” is in fact somewhat restricted.

We suggest the “care, diligence and prudence” requirement might be the reason for term deposits being the preferred form of investment.

Of course, this article is not financial investment advice.

If a body corporate is deciding on an appropriate form of investment, recourse ought to be had to a licensed financial/investment adviser.

As always, Active Law is here to help with any of your body corporate legal needs.

STAY ACTIVE!


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The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.