By Alric Lindsay
In a judgment delivered on September 18, 2024, the Honourable Justice Jalil Asif KC ruled in favour of Global Marketing Associates LLC, saying that The Proprietors, Strata Plan No. 44, must provide copies of its books of account to Global Marketing Associates LLC. This proprietor raised concerns over the possible improper use of the Strata’s bank account by certain foreign owners to hide rental proceeds from US authorities. By not previously providing books of account to Global Marketing Associates LLC, the judge said the Strata breached its obligation under its Strata rules.
Background
By way of background, Global Marketing Associates LLC brought the claim because its managing director, Mr James Keim, was concerned that Strata’s accounts could have been used to circumvent US foreign bank account reporting obligations.
Keim said:
The issue is that owners who rent their units short-term and long-term have potentially avoided opening bank accounts in the Cayman Islands, or in the alternative avoided placing their rental proceeds into their own account, and have instead used the Strata bank account as a de facto bank, in effect having the Strata bank account used to collect their rent and retain the funds in those accounts until such time as those owners otherwise direct. This could enable avoidance of US FATCA or CRS reporting and could expose both the Strata’s bank, and the Strata and/or proprietors themselves, to suspected involvement in serious criminal issues including money laundering.
The Honourable Justice noted that “this is not a fanciful concern on Mr Keim’s part was recently demonstrated to me in a different case about a different strata, where a witness gave evidence that a proprietor, who is a US citizen, had asked the witness to pay money into the proprietor’s strata account, rather than to pay it directly to the proprietor.”
The Honourable Justice added, “The reason was so that the proprietor’s (soon to be ex-) wife and the US authorities were not aware of the funds.”
In Mr Keim’s case, he reportedly joined the Strata executive committee in 2010.
According to the judgment, the executive committee members found significant management problems, including disarray in Strata’s financial records and unregulated and opaque proprietors’ rental activities.
The executive committee hired an independent accountant to rectify the Strata’s books and records and hired a professional management company, BCQS, to help manage the Strata and its financial records going forward.
Mr Keim attempted to set up a more transparent arrangement for a rental pool of strata lots, but he met with opposition from some proprietors involved in short-term rentals who appeared to be opposed to transparency.
The judgment added:
In 2011, four proprietors who were not locally resident and who were involved in short term rentals were elected to Exco, including Ms MacNeil, and Mr Keim stood down. Mr Hall remained the only locally resident member of Exco.
Ms Clancy replaced one of the non-resident proprietors in 2012 and the composition of Exco did not change after that until Ms Clancy’s retirement as a member at the end of 2020.
The judgment explained further:
Mr Keim says that issues with transparency of the strata management arose again in 2011, almost immediately after the new Exco took office. He gives a number of examples, including that efforts to set up a transparent rental pool were stopped. All rentals were instead handled by individual proprietors by private agreement or through private websites.
During 2018, Mr Keim’s concerns about the management of the strata by Exco became more troubling.
In 2018, Exco issued Rules of Occupancy, which Mr Keim describes as reading like rules for a boutique hotel. He says the Rules attempted improperly to restrict the legal rights of residents.
The judgment continued:
Mr Keim identified a website being used by the four Exco members and certain other proprietors to arrange short-term rentals of lots within the strata. He says the website appeared to be a coordinated effort by Exco to manage rentals but was not transparent in that it was not made known to proprietors by Exco, not openly managed by the Strata, and was difficult to find on the internet.
Mr Keim discovered that one Exco member had failed to disclose her ownership of a strata lot in her bankruptcy filing in the US in 2011. Copies of the bankruptcy filings which appear to confirm this were before the Cayman court in evidence.
Mr Keim says that these features caused him concern that:
- strata funds might be being used to set up and manage the strata lot rental website, i.e. without disclosure to the body of proprietors and for the benefit of a selected group of proprietors only; and
- the strata bank accounts might be being used to circumvent transparency laws that had recently come into force, with that concern being amplified by the obscure nature of the website.
Therefore, Mr Keim sought to find out more about the Strata’s management by exercising Global Marketing Associates LLC’s right to inspect the Strata’s financial records under the bylaws.
Discussions over the right to inspect and take copies of the Strata’s books of account and other documents between September 2018 and September 2019 were described as fruitful and conciliatory, however, when Mr Keim sought in September 2019 to involve accountants on his side to review the Strata’s books of account, Exco’s position hardened.
Ruling in favour of Global Marketing Associates LLC, the Strata proprietor owned by Mr Keim, the Honourable Justice Jalil Asif KC said:
A strata corporation’s duty to keep and to make its “books of account” is equivalent to the duty on a company under s.59 of the Companies Act. The strata corporation’s “books of account” must include documents sufficient to allow a proprietor to obtain a true and fair view of the financial status of the strata and is to be construed as including ledgers and material underlying documentation including contracts, bank statements and documents (redacted as necessary to comply with data protection principles), invoices and expense records.
The duty on a strata corporation is to make such documents available for inspection as are necessary to allow a proprietor to obtain a true and fair view of the financial status of the stratabut should also reflect the duty of a fiduciary to make a full account to his principal.
The Honourable Justice added: “The duty on the strata corporation to provide inspection implicitly includes a duty to provide copies of documents as requested by the proprietor, but subject to the proprietor paying the reasonable cost of making such copies.”
The Honourable Justice concluded:
The Defendant was in breach of its obligation under cl 3.11.6 of the Defendant’s byelaws in that it had failed to make the Defendant’s books of account available to the Plaintiff for inspection.
Insofar as it has not already done so since these proceedings were commenced, the Defendant must provide the Plaintiff with inspection of its books of account in accordance with the principles set out above. In my judgment, this includes all of the classes of documents requested by the Plaintiff as set out in paragraph 61.
Further, the Defendant should provide the Plaintiff with copies of documents, if requested, but is entitled to charge the Plaintiff the reasonable costs of preparing such copies.
The Defendant did keep minutes of Exco meetings, so the Plaintiff’s claim in that respect is dismissed.
Note to readers:
The “books of account” that the Honourable Justice said must be disclosed to the Strata proprietor in this instance were as follows:
- the strata’s annual financial statements
- accounts payable ledgers
- accounts receivable ledgers
- balance sheets
- general ledgers
- profit and loss statements
- trial balances
- expense ledgers for all strata expenditure, including outgoing wires, electronic funds transfers and cheque payments
- income ledgers, including all income received by the strata
- unredacted bank statements in electronic form for any bank account held or managed by the strata
- check payment details
- deposit slip details
- details of outgoing wire payments
- detailed invoices and expense records; and
- contracts.
