What happens if a body corporate does not pay its creditors

What happens when a body corporate runs into financial difficulties due to unpaid levies by one or more owners – and is then unable to pay its creditors including the local municipality or its insurance company?

This, says Michael Bauer, GM of IHFM, the sectional title administrators, happens all too often in South Africa – and the subsequent steps usually follow these lines: the creditor will demand payment and will proceed with the debt collection process, a court summons, followed by default judgment against the body corporate.

It will then become clear that the body corporate has no significant funds or assets to meet the debt to satisfy the judgment – because the body corporate in fact owns no other physical assets (as the common property is owned by owners of sections in undivided shares, which cannot be sold off). The debtors book is its only asset and if it is not liquid it will have to be refinanced.

At that point the creditor is (according to section 47 (1) of the Sectional Title Act) entitled to apply to the court to amend the judgment making the members liable for the debt.

However, if a member can then prove with documentary evidence that he has paid his share of levies to date, he may be exempt from these payments.

The lesson to be learnt from all this, says Bauer, is that members must keep a close eye on the debtors when reviewing the annual financial statements before every Annual General Meeting– and ensure the trustees have undertaken the necessary steps to deal with defaulting members.

Bauer cautions that trustees need to be aware that the collection of arrears levies is a long and costly process and they need to keep a close eye on the monthly cash flow. He suggests that problems be dealt with at once and that trustees be pro-active in negotiating repayment terms with creditors or raising a special levy.

“Being a trustee is not a “popularity contest”. Fulfilling their fiduciary responsibilities requires trustees to make some unpopular and tough decisions to ensure a turnaround. That is why it is important to have a good managing agent on board, one with a good supplier network and financial and negotiation skills.

In the last six months IHFM has successfully “turned round” three bodies corporate which had severe debt problems, says Bauer.

Article by: www.ihfm.co.za