{"id":3585,"date":"2021-06-28T09:48:04","date_gmt":"2021-06-28T07:48:04","guid":{"rendered":"https:\/\/dotnewsconnect.co.za\/law\/?p=3585"},"modified":"2021-06-28T09:48:07","modified_gmt":"2021-06-28T07:48:07","slug":"bodies-corporate-before-you-sequestrate-to-recover-arrears","status":"publish","type":"post","link":"https:\/\/dotnewsconnect.co.za\/law\/2021\/bodies-corporate-before-you-sequestrate-to-recover-arrears\/","title":{"rendered":"Bodies Corporate: Before You Sequestrate to Recover Arrears\u2026"},"content":{"rendered":"\n

\u201cBankruptcy – a fate worse than debt\u201d (Anon)<\/p><\/blockquote>\n\n\n\n

One of a Body Corporate\u2019s fundamental duties is to collect monthly levies from the scheme\u2019s members, and to take robust action to recover any arrears. As with any other creditor\/debtor relationship however, trying to recover debt can be an exercise in frustration and delay, and the more recalcitrant the debtor, the greater the temptation to \u201cgo straight for the jugular\u201d by applying to sequestrate the debtor\u2019s estate.<\/p>\n\n\n\n

You will have to show that the sequestration is to the advantage of creditors as a whole \u2013 not just to you – but that isn\u2019t the only consideration. You will be throwing good money after bad if you end up having to pay a \u201ccontribution to the costs of sequestration\u201d.<\/p>\n\n\n\n

The recent case of a sectional title Body Corporate, which perhaps thought that it was protected from this particular danger because of its statutory preferences for recovery of arrear levies prior to transfer, illustrates the danger.<\/p>\n\n\n\n

But before we get to the facts and the outcome of that case let\u2019s have a quick look at the general principles involved.    <\/p>\n\n\n\n

What is a \u201ccontribution to costs\u201d and who has to pay it?<\/h6>\n\n\n\n

If you want to share in the net proceeds of an insolvent estate, you must formally prove your claim at a meeting of creditors convened by the trustee of the insolvent estate. If you don\u2019t do that, you wave goodbye to any possible dividend and will be writing off the debt.<\/p>\n\n\n\n

On the other hand, if you decide to prove your claim you may be at risk of having to pay into the estate as well as writing off the debt – talk about adding insult to injury! That danger arises if the costs of sequestrating the estate exceed the funds in the estate available to pay them. In that event the trustee of the insolvent estate will recover a \u201ccontribution to costs\u201d from proved creditors \u2013 including you if your claim was proved as above.<\/p>\n\n\n\n

The special danger of being the \u201cpetitioning creditor\u201d<\/h6>\n\n\n\n

The creditor who applies for the debtor\u2019s sequestration is – as \u201cthe petitioning creditor\u201d \u2013 liable to contribute to the shortfall even without proving a claim. In other words, unlike other creditors, you cannot protect yourself from contributing to costs by holding back the claim \u2013 you are \u201cdeemed\u201d to have proved it. That\u2019s why, although applying for sequestration can be an excellent way of recovering debt from a recalcitrant debtor, it is essential to first consider the danger of contribution.<\/p>\n\n\n\n

How \u201csecured creditors\u201d can protect themselves<\/h6>\n\n\n\n

Also relevant to our story is that a creditor holding security (such as a bond over the insolvent\u2019s property) must prove its secured claim in order to be paid out the net proceeds of its security. A secured creditor can, if it suffers a shortfall after being paid out those net proceeds of its security, also share in the \u201cfree residue\u201d of the estate. The \u201cfree residue\u201d is the net proceeds of all unencumbered assets available for distribution to creditors. The secured creditor\u2019s share in this event will be based on the \u201cconcurrent\u201d portion of its claim, in other words it is now a concurrent creditor.<\/p>\n\n\n\n

This is where the danger comes in because any contribution payable is payable in the free residue by concurrent creditors. A secured creditor can largely protect itself from this danger by \u201crelying on the proceeds of its security\u201d to satisfy its claim. By doing so it waives its concurrent claim for the shortfall, but equally it no longer has to contribute along with the other proved (or petitioning) concurrent creditors. It will now only have to contribute when there are no other such creditors, or when other contributors are unable to pay their share.   <\/p>\n\n\n\n

The case of the Body Corporate that sequestrated to recover arrears \u2013 and paid the price<\/h6>\n\n\n\n

Let\u2019s see how those principles were applied in a recent Supreme Court of Appeal (SCA) case –<\/p>\n\n\n\n