You are right on so many points. The upstairs owner probably should have sought a DA from council before changing the living room to a kitchen and may also be in breach of the terms of the heritage listing.
The Owners Corp should have been across this from the moment they started work as there has almost certainly been alterations to Common Property.
They and the upstairs owner are jointly responsible for ensuring there are no leaks.
Your friend should call Fair Trading on 13 32 20 to take action against the upstairs owner to ensure there are no more leaks. They should also take the OC to task for failing in their statutory duty to maintain and repair common property.
And they should have a word with theircouncil’s planning department about what approvals the Mad Renovator upstairs should have had and what they are going to do about it.
They may also want to get themselves a good strata lawyer.