“… the difficulty experienced by bodies corporate in collecting arrear levies is not a novel one. It is part of a ‘socio-economic problem’” (extract from judgment below)
Levy collections are the life blood of sectional title schemes, and collecting them is likely to get harder with the economic fallout from our downgrade to junk status.
So if you own property in a scheme, and particularly if you are a trustee of your body corporate, you need to know about the new SCA (Supreme Court of Appeal) decision which puts at risk the body corporate’s right to apply for sequestration of levy defaulters.
Why apply for sequestration?
Applying for the sequestration of a recalcitrant debtor’s estate can be a very powerful debt collection tool. But it should generally only be used as a last resort, and it isn’t always open to you. The facts of the SCA case provide a perfect example –
There must be advantage to creditors as a whole
To understand why the body corporate’s application failed, we turn to the Insolvency Act’s requirement that there must be “reason to believe that it will be to the advantage of creditors of the debtor if his estate is sequestrated”. Bear in mind here that on sequestration what counts is creditors in the plural – as the Court put it “the rights of the creditors as a group are preferred to the rights of the individual creditor.”
In a nutshell, to succeed in sequestrating a debtor’s estate, you need to prove “a tangible benefit to the general body of creditors”. There should be “a reasonable prospect of some pecuniary benefit to the general body of creditors as a whole”, a requirement that will be 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”.
The body corporate failed in this case because it was unable to show pecuniary (monetary) benefit to any creditor other than itself.
Catch-22, and nipping arrears in the bud
“A catch-22 is a paradoxical situation from which an individual cannot escape because of contradictory rules” (Wikipedia)
That leaves bodies corporate in a real “catch-22” situation. You are obliged by law to collect levies, but you risk not being able to do so if you have to rely on what should be your strongest fall-back position – realising the value in the sectional title unit itself.
The bottom line for bodies corporate is this – unless and until our laws are changed to grant bodies corporate immunity from the Insolvency Act’s provisions, you need to prioritise and strengthen your levy monitoring and collection procedures so as to nip any arrear situations in the bud.
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