Is a Body Corporate protected from prescription of levy debts owed by its members?

Legal Prescription of Levies

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Category: Funding and Treasury, Legal and Advisory

Is a Body Corporate protected from prescription of levy debts owed by its members?

This article is focussed on a recent court case Body Corporate of Sante Fe v Bassonia Four Zero Seven CC (the “Sante Fe case”)  wherein a specific legal defence called “prescription” was raised by a unit owner in respect of arrear levies. But before we unpack this case, let’s have a look at what a defence of “prescription” means.

What does prescription mean?

Prescription can be described as a legal defence that can be raised by a debtor to extinguish their liability towards the payment of an alleged debt. This defence can only be validly raised after the passing of prescribed time periods and in where there has been no interruption of these prescribed time periods as set out in the Prescription Act.

Introduction to the Sante Fe case

  • The Body Corporate of Sante Fe (“the applicant”) applied for the liquidation of Bassonia Four Zero Seven CC (“the respondent”) based on outstanding arrear levies due to it in respect of two units owned by the respondent in the Santa Fe Sectional Title Scheme.
  • In response to the liquidation application, the respondent raised, among others, the specific defence of prescription.
  • The respondent argued that the outstanding levies had prescribed in terms of section 11(d) of the Prescription Act which states that “the period of prescription of debts shall be, save where an Act of Parliament provides otherwise, three years in respect of any other debt”.

Initial findings of the court

The court dismissed the court application on the basis that the institution of liquidation proceedings does not interrupt the prescription of a debt.

As part of the court’s reasoning for their dismissal of the application the court referred to Section 15(1) of the Prescription Act which states that, unless the debtor acknowledges liability, prescription shall “be interrupted by the service on the debtor of any process whereby the creditor claims payment of the debt.”

The court reinforced the position in law that winding-up proceedings, such as liquidation proceedings, are not considered to be proceedings whereby “the creditor claims payment of the debt”.

While this principle in relation to whether or not liquidation proceedings, are proceedings where a “creditor claims payment of the debt”, may be correct in law, there are additional underlying issues with the way that the court dealt with the levy debts and the claims in question.

Appeal proceedings

The Body Corporate applied for leave to appeal the initial findings of the court on the following grounds:

  • that the unit owner’s indebtedness (levy debt), or alternatively a part of that levy debt, was the subject of a judgment granted in favour of the Body Corporate (the first Body Corporate action to collect the arrear levies) and as such, the period of prescription in respect of such debt is 30 years from the date of judgment as set out in section 11(a)(ii) of the Prescription Act:

          Periods of prescription of debts.

          11. The periods of prescription of debts shall be the following:

               (a) thirty years in respect of –

                      (ii) any judgment debt;

  • that, in any event, the outstanding levies, for which no judgment had yet been obtained, or for which no action had yet been instituted by the Body Corporate, had not prescribed as a result of the provisions of section 13(1)(e) and (i) of the Prescription Act.

These provisions provide that the period of prescription would be delayed until a year after the debtor (the Unit Owner) who is a member of the governing body of a creditor who is a juristic person (the Body Corporate), ceases to be a member of the governing body.

The Body Corporate’s application for leave to appeal was also dismissed by the High Court.

The Body Corporate has taken this matter to the Supreme Court of Appeal (“the SCA”) wherein they have requested special leave to appeal. The parties await the outcome of this special leave to appeal application to the SCA as the proceedings have not yet been finalised.

Additional arguments to support the appeal to the SCA

A significant part of the levy debt due to the Body Corporate had not prescribed, on the basis that the body corporate obtained a judgment against the unit owner, in the first body corporate action and served a summons in the second Body Corporate action.

Following the above actions instituted by Body Corporate, the Body Corporate argues that:

  • the judgment granted in the first Body Corporate action, qualifies as a judgment debt in terms of section 11(a)(ii) of the Prescription Act; and
  • the summons served on the Unit Owner in the second Body Corporate action, interrupted prescription in terms of section 15 of the Prescription Act

The SCA, if it agrees to hear this appeal, would need to rule on the above arguments, and it does appear that the Body Corporate has good prospects of success on these grounds.

The initial grounds of appeal

Let’s explore one of the initial grounds of appeal relating to prescription, that is whether prescription is delayed until one year after the Unit Owner ceases to be a member of the Body Corporate [sections 13(1)(e) and (i) of the Prescription Act].

The purpose of sections 13(1)(e) and (i) of the Prescription Act?

The proposed mischief which this particular provision of the Prescription Act seeks to address / ameliorate, is to prevent a person in control of a juristic person, to obstruct or benefit from inaction against them on behalf of the juristic person for the collection or enforcement of debt owed by them to the juristic person.

Practically speaking, one can ask the question if this provision only protects the Body Corporate (the juristic person) from prescription in respect of levy debts owed by Trustees or by ordinary members of the Body Corporate too?

Who qualifies as a “member” of the governing body for purposes of sections 13(1)(e) and (i) of the Prescription Act? A Unit Owner or a Trustee?

To confirm the above, you need to look at two aspects:

  • the functions and duties of Trustees; and
  • who ultimately has the power to manage and administer the Body Corporate?
  • The (“the STSMA”) states that Unit Owners are members of the governing body (the Body Corporate) in that any person who becomes an owner within a Sectional Title Scheme:

The Sectional Titles Schemes Management Act (“the STSMA”) states that Unit Owners are members of the governing body (the Body Corporate) in that any person who becomes an owner within a Sectional Title Scheme:

  • is regarded as being a member of the Body Corporate; and
  • ceases to be a member of the Body Corporate when such member ceases to be an owner of a unit within the scheme in question.

As we all know, the Body Corporate (and the Unit Owners who are members thereof) are responsible for the management and administration of the Sectional Title Scheme and are given extensive functions and powers in terms of the STSMA, albeit that these functions are carried out by elected Trustees of the Body Corporate.

While Trustees must be appointed to perform the said functions and powers on behalf of the Body Corporate, subject to the STSMA and the management and conduct rules of the Body Corporate, it is the Unit Owners that have sufficient and ultimate power to elect and remove the Trustees, and the Trustees must abide by any restriction imposed or direction given at a general meeting of the Unit Owners.

Based on the above it can be summarised that the true and ultimate power of the Body Corporate lies with the Unit Owners.

Does a Body Corporate qualify as a “governing body” in terms of sections 13(1)(e) and (i) of the Prescription Act?

  • Governing bodies generally govern the actions and conduct of a particular juristic person, such as the board of directors of a company.
  • A Sectional Title Body Corporate is not a company though, it is a unique juristic person. The Trustees are not directors of a company and shareholders of a company are not the same as members of a Body Corporate.
  • The term ‘body corporate’ and ‘governing body’ are synonymous in nature given the practical and unique operation of a Body Corporate in the Sectional Title environment. Hence, the Body Corporate qualifies as a “governing body” for purposes of sections 13(1)(e) and (i) of the Prescription Act and all unit owners are members of that governing body, not only the Trustees.

Conclusion

Look back at the proposed mischief which s 13(1)(e) and (i) of the Prescription Act seeks to address, viewed against the backdrop of the unique nature of a Body Corporate made up of its members. The Body Corporate’s claim against the member of the Body Corporate, whether they are an ordinary Unit Owner or a Trustee, should be protected by this delay until one year after they cease to be a member of the Body Corporate.

The Unit Owners can obstruct and delay the implementation of levy collection activities and the institution of legal action against them as defaulting levy debtors, inasmuch as a trustee could do so for a debt which he personally owes to the Body Corporate.

Practically, therefore, the levy debts of a member should rarely prescribe due to the effect of the levy clearance certificate, which requires that all debts in respect of the unit must have been paid, or provision has been made to the satisfaction of the Body Corporate for the payment thereof, before the transfer can be registered in the name of a new owner.

Whatever the outcome of this argument is, it will have a wide industry impact on the collection of levies where a member of a governing body either as a Unit Owner or a Trustee may be prevented from relying on prescription as an absolute defence to a claim for arrear levies while they are still members of the said Body Corporate.

The Body Corporate of Santa Fe and its legal representatives, and ultimately the SCA, have an opportunity to finally argue and carefully pronounce on the prescription of levies owed to Sectional Title Bodies Corporate by its members. They should take the opportunity.

Download the full article written by our very own Fausto Di Palma, STS Chief Legal Officer and Adv. Viviana Vergano, Johannesburg Bar.

Have more questions regarding levies and levy collections? We offer specialist Legal Advisory solutions for Community Schemes. Contact us for all your complex problems.