Consumer Information

Author:  Maryna Botha – STBB
20 March 2017

BODY CORPORATE WOES TO COLLECT LEVIES    
BODY CORPORATE OF EMPIRE GARDENS V SITHOLE (240/2016) [2017] ZASCA 28 (27 MARCH 2017)

This judgment illustrates the dilemma often faced by bodies corporate in collecting arrear levies: although it acts on behalf of and for the well-being of all owners, it cannot sequestrate a defaulting owner if it cannot be shown that the step will also be for the benefit of all other creditors of the owner. Perhaps, as the court intimated, this needs the attention of the legislature.

SUMMARY OF JUDGMENT:

 FACTS

Ms Sithole and her sister were joint registered owners of a unit in the Empire Gardens sectional title scheme. They were by law both members of its body corporate and obliged to pay their proportionate share of levies.

They fell in arrears and two default judgments – in the amounts of R13,385.70 and R99,298.80 respectively – were obtained against them in respect of the levies.

In order to satisfy the judgments, their movable assets were attached and sold at an auction, but it only realised R3,237.00. In a further attempt to satisfy the judgments, the body corporate obtained a warrant of execution against their immovable property and the unit was attached and sold at an auction. The sale was subsequently cancelled because Nedbank, as bondholder, did not accept the selling price of R70,000.00.

The body corporate then launched an application for Ms Sithole’s sequestration. (For reasons not before the court, only one sister’s sequestration was sought.) It alleged that Ms Sithole appeared to be factually insolvent in view of the fact that she had not paid her levies and because her movable assets had only realised a meagre amount of R3,237.00. It also referred to another judgment obtained by a third party in the amount of R31,008.00, which also had remained unsatisfied.

It is required in sequestration proceedings that an applicant shows advantage to creditors. The body corporate however argued that it was not required to show a pecuniary benefit to the body of creditors as its position was different from that of other ‘normal’ concurrent creditors in insolvent estates. This was because it enjoyed a certain preference over other creditors: case law has held that section 89 of the Insolvency Act (read with section 15B of the Sectional Titles Act) provides that, on insolvency, the ‘costs of realisation’ would include levies owing to the body corporate. (This means that the body corporate, as creditor, will simply be paid from the proceeds of the sale of the property without a claim being proved in the insolvency for payment thereof and without the claimant for such costs being liable for a contribution. The body corporate, in this sense, had a preferent claim which enjoyed preference even over the secured creditor holding the mortgage over the unit.)

The body corporate’s argument was thus that:
(i) it was only required to establish that it has exhausted all reasonable execution remedies in respect of the movable assets and immovable properties of one of its members; and
(ii) that this distinction was necessary, because bodies corporate were not merely acting to protect their own financial interests, but had a statutory obligation to protect the interests of all the members who are prejudiced when a single member fails to pay his/her arrear levies.

Nedbank intervened and opposed the sequestration proceedings, arguing that it was not shown that the sequestration would be to the advantage of any creditor other than the body corporate. Its bond instalments were up to date.

The court a quo accepted the submission by Nedbank that a sequestration order would only benefit the body corporate and dismissed the application. The body corporate appealed to the Supreme Court of Appeal.

HELD

• The Sectional Titles Act obliges a body corporate to collect levies from its members which will be adequate for the repair, upkeep, control, management and administration of the common property, for the payment of rates and taxes, insurance and the like. Owners are obliged to make contributions to this fund for the purposes of satisfying any claims against the body corporate, as determined in the scheme’s annual budget and in accordance with their participation quotas.

• The purpose and effect of the sequestration process is ‘to bring about a convergence of the claims in an insolvent estate to ensure that it is wound up in an orderly fashion and that the creditors are treated equally’. Once a sequestration order is made, a concursus creditorum comes into being. This means that the rights of the creditors as a group are preferred to the rights of the individual creditor.

• The phrase ‘advantage to creditors’ is not defined in the Insolvency Act, but if the principle of concursus creditorum is taken into account, it means that there should be a reasonable prospect of some pecuniary benefit to the general body of creditors as a whole. This requirement is fulfilled where it is established that there is reason to believe that there will be advantage to a ‘substantial proportion’ or the majority of the creditors reckoned by value. Although advantage to creditors is not a rigid concept it requires proof of a tangible benefit to the general body of creditors. Sequestration proceedings is thus not a mechanism to be utilized by a creditor to claim a debt due by the debtor to one single creditor.

• Neither the Insolvency Act nor the Sectional Titles Act provides for the distinction between bodies corporate and other creditors as sought in the present matter. What is provided for is found in section 15B(3)(a)(i)(aa) which provides that a sectional title unit cannot be transferred into the name of a new owner unless a clearance certificate is obtained from the body corporate and provision is made for the payment of all arrear contributions. In terms of s 89(1) of the Insolvency Act, outstanding levies due to the body corporate are treated as being part of the cost of realisation.

• The difficulty experienced by bodies corporate generally in collecting arrear levies is not a novel one. It is part of a socio-economic problem. Nonetheless, since 1986 the legislature has effected several amendments to the Sectional Titles Act, but has not deemed it fit to accord bodies corporate any additional preferential treatment beyond that provided through the provisions of section 15B (3)(a)(i)(aa) of the Sectional Titles Act and s 89(1) of the Insolvency Act.

• This Court cannot usurp the functions of the legislature and grant immunity from the Insolvency Act, which the body corporate sought.

• The other fundamental problem that the body corporate faced was the fact that the debt owed to the third party (Amazing Properties CC) had not been proved and Nedbank, which was both a major and preferential creditor, had objected to the application on the basis that its monthly instalments are paid regularly. There was no basis to conclude that a sequestration order would be to Nedbank’s advantage, and hence to the general body of creditors.

CONCLUSION:
The appeal was accordingly dismissed.

The Judgment can be viewed here: