The SCA disallowed the appeal and held that a body corporate does not enjoy special rights with regard to ‘advantage to creditors’. The problem experienced by bodies corporate in collecting arrear levies is not a novel one. It is part of a ‘socio-economic problem’. The SCA must not usurp the legislature and grant immunity from the Insolvency Act. There is no basis to distinguish bodies corporate from and other creditors. The legislature has amended the Sectional Titles Act since 1986 but has not accorded bodies corporate preferential treatment beyond s15B(3)(a)(i)(aa) and s89(1) of the Insolvency Act.
Body Corporate of Empire Gardens v Sithole (240/2016) [2017] ZASCA 28 (27 March 2017) per Tshiqi JA (Wallis, Petse and Mbha JJA and Nicholls AJA concurring):
Excerpts without footnotes
[1] The issue in this appeal is whether in an application for compulsory sequestration, a body corporate of a sectional title development is required to prove that the order of sequestration sought will be to the advantage of the whole body of creditors as contemplated in s 10(c) of the Insolvency Act 24 of 1936 (Insolvency Act).[1]
[2] The appellant, the body corporate of Empire Gardens (the E G Body Corporate) was established in accordance with s 36 of the Sectional Titles Act, 95 of 1986 (the Sectional Titles Act). The first respondent, Ms Nobuhle Sithole, is the joint registered owner of unit 12 of the sectional title scheme of the E G Body Corporate and is accordingly, in terms of s 36(1) of the Sectional Titles Act, one of the members of the E G Body Corporate. The other registered owner of the unit is the first respondent’s sister, Ms Cynthia Sithole, but she was not cited as a party in these proceedings. Any reference to Ms Sithole in this judgment will thus be a reference to Ms Nobuhle Sithole.
[3] Section 37(1)(a) of the Sectional Titles Act, provides that a body corporate is obliged to:
‘. . . establish for administrative expenses a fund sufficient in the opinion of the body corporate for the repair, upkeep, control, management and administration of the common property (including reasonable provision for future maintenance and repairs), for the payment of rates and taxes and other local authority charges for the supply of electric current, gas, water, fuel and sanitary and other services to the building or buildings and land, and any premiums of insurance, and for the discharge of any duty or fulfilment of any other obligation of the body corporate;’
In terms of s 37(1)(b) it must require the owners of the units, who, in terms of s 36(1), are also members of the body corporate, to make contributions, where necessary, to the fund established in terms of s 37(1)(a), for the purposes of satisfying any claims against the body corporate. It must determine from time to time amounts to be raised from each member and must raise the amounts by levying contributions on the owners in proportion to the quotas of their respective sections (s 37(1)(c) and (d)).
. . . . .
[8] Nedbank, which has a mortgage bond over the unit, obtained leave of the court a quo to intervene in the sequestration proceedings. It opposed the application mainly on the basis that it was not proved that the sequestration would be to the advantage of any creditor other than the E G Body Corporate. It said that its bond instalments were up to date. It further criticised the fact that the application was against only one of the co-owners of the unit and highlighted the fact that if an order of sequestration were granted in respect of only one co-owner, the trustee would face practical difficulties in dealing with half of the value of the unit. The court a quo accepted the submission by Nedbank that a sequestration order would only benefit the E G Body Corporate and it consequently dismissed the application and subsequently granted leave to this court.
[9] 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’.[1] (See Investec Bank Ltd & another v Mutemeri & another 2009 ZAGPJHC 64; 2010 (1) SA 265 (GSJ) at 274-275.) It cannot fittingly be described as a mechanism to be utilized by a creditor to claim a debt due by the debtor to one single creditor. (See Collett v Priest 1931 AD 290 at 299.) 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.
[10] 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. (See Lynn and Main Inc. v Naidoo & another 2006 (1) SA 59 (N) paras 33-35; Ex Parte Bouwer and Similar Applications 2009 (6) SA 382 (GNP) para 13). 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.[2] (See Fesi & another v Absa Bank Ltd 2000 (1) SA 499 (C) 505-506; Trust Wholesalers and Woolens (Pty) Ltd v Mackan 1954 (2) SA 109 (N); Samsudin v De Villiers Berrange NO [2006] SCA 79 (RSA)). Although advantage to creditors is not a rigid concept (Stratford v Investec Bank [2014] ZACC 38; 2015 (3) SA 1 (CC) para 44) it requires proof of a tangible benefit to the general body of creditors.
[11] In this appeal counsel for the E G Body Corporate urged this Court to deviate from the trite principle of concursus creditorum and conclude that it is not necessary for bodies corporate to prove actual or prospective pecuniary benefit to the general body of creditors. He submitted that a body corporate only needs to establish that it has exhausted all reasonable execution remedies in respect of the movable assets and immovable properties of one of its members. According to him this distinction is necessary, because bodies corporate are not merely acting to protect their own financial interests, but have a statutory obligation to protect the interests of all the members who are prejudiced when a single member fails to pay their arrear levies. Counsel confirmed that he was not asking this Court to develop the common law and agreed that no such case was made out in the papers. He was also constrained to concede that the Insolvency and the Sectional Titles Acts, do not provide for the distinction sought.
[12] The fundamental problem with the proposition is that the difficulty experienced by bodies corporate in collecting arrear levies is not a novel one. It is part of a ‘socio-economic problem’. (See Body Corporate of Geovy Villa v Sheriff Pretoria Central Magistrate’s Court, & another 2003 (1) SA 69 (T) at 73 paras 6-7; Barnard NO v Regspersoon van Aminie [2001] ZASCA 47; 2001(3) SA 973 (SCA) at 981 D-F; South African Law Journal.[3]) Since 1986 the legislature has effected several amendments to the Sectional Titles Act,[4] but has not deemed it fit to accord bodies corporate any other preferential treatment beyond that provided through the provisions of s 15B (3)(a)(i)(aa) of the Sectional Titles Act and s 89(1) of the Insolvency Act. Section 15B(3)(a)(i)(aa) provides that a sectional title unit cannot be transferred to 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. (See Nel NO v Body Corporate of the Seaways Building & another 1996 (1) SA 131 at 140 A-D; First Rand Bank Limited v Body Corporate of Geovy Villa [2003] ZASCA 141; 2004 (3) SA 362 (SCA) at para 27).
[13] This Court cannot usurp the functions of the legislature and grant the immunity from the Insolvency Act now being sought. There is thus no basis to make the distinction between bodies corporate and other creditors.