Ivan Zartz Attorneys - Insolvency, Law, Liquidations, Debt Collectors

The collection of levies from owners in members of sectional title units are the bane of the lives of most managing agents and trustees of bodies corporate.

The most common way of collecting levies is by way of the issue of summons. In other words, the managing agent instructs an attorney, on behalf of a body corporate, once the account of the owner goes into arrears, to issue summons for the arrears outstanding on the unit. This method is still widely used in collecting outstanding arrears, but is beset with pitfalls of a practical and dilatory nature.

What alternative methods of collecting levies and utility fees, particularly with regard to large outstanding arrears, are available to managing agents or trustees?

Once a summons is served, it presently takes anything from two to three months to obtain a judgment, that is, if one is fortunate, by which time the owner has fallen further into arrears.
One used to be able to obtain a judgment and execute (attach) within a month. However, particularly in the Johannesburg Magistrate’s Court, it is now becoming more difficult to obtain a judgment because of administration difficulties. Managing agents and trustees should be mindful of this fact.

Some unscrupulous owners instruct creative attorneys to defend a summons for the purpose of delaying the payment of the arrears. This incurs unnecessary legal costs. The owner really does not have a defence and by the time the matter comes to court, the levies are substantial. It should be borne in mind that presently, it can take anything up to eighteen months for a case to be heard in court. During this period, invariably no levies or utility fees are being paid but there is a way to deal with such owners.

Once a judgment is obtained, the next process is to attach the movable assets of the owner.

Trustees of bodies corporate should be aware that they should, at all times, be in possession of the current address of the owner. It is no use instructing the sheriff to attach the movable goods in the unit, as often the units have been rented, and the movable property, i.e. the furniture and appliances, belong to the tenant, unless the unit is let fully furnished.

It often happens that the sheriff finds insufficient movable assets to attach at the owner’s residence. Many practitioners then proceed to instruct the sheriff to remove the goods attached and subsequently arrange for a sale in execution to take place. It is my view that this method wastes time and money in that, pending the sale of the assets, they are stored at the sheriff’s warehouse at considerable expense, which expense must be borne by the body corporate. The proceeds from the sale of the movable assets are often insufficient to cover the storage costs and removal costs, which increases the costs and claim even further.

A suggested alternative is that the sheriff be instructed to record that there are insufficient assets to satisfy the amount of the judgment. This then would constitute an act of insolvency and would entitle the attorney to apply immediately for the sequestration or liquidation of the owner – a drastic measure indeed.

After the sequestration application is served on the registered owner, the owner is put under enormous pressure in that he will be mindful of losing his property. In addition, if the owner has let the property to a tenant, he would be mindful; of losing the income generated from the rental paid by the tenant. The liquidation process often forces the owner to arrive at a settlement of the arrears.

To oppose and application for sequestration is far more expensive to the owner than to defend a summons. The successful outcome of such an application would also put all of the owner’s other assets at risk.

Many practitioners bypass the sequestration route and bring an application to sell the owner’s immovable property. This takes time and often, by the time that the court authorises the sale, there is already a judgement against the immovable property of the bondholder.

Bondholders control the sale of the immovable property, in that they can dictate the price at which the property is to be sold. The body corporate has no say when the sheriff sells a property. Ultimately, when the bondholder has consented to the sale, the new owner will have to pay the arrears owed to the body corporate and the legal costs in full, as transfer of immovable property will not take place in the absence of a clearance certificate being issued by the managing agent. Accordingly, I have found the sequestration route to be far more advantageous than waiting for the sheriff to sell the immovable property.

On a sequestration, the bondholder does not control the sale by the liquidator.
It should be pointed out that bond arrears and levies are both preferent in nature and even if the property does not realise the full amount of the arrears, both the bondholder and the levy holder will receive a pro-rata portion from the sale.

Where a close corporation or a company owns the immovable property, and where the arrears and utility fees are in excess of R50, 000.00, my suggestion is to apply for the liquidation of the close corporation or company owning the unit.

A company or close corporation is deemed unable to pay its debts if after a letter of demand has been sent to the registered office of the company or close corporation, demanding payment of the debt, (which letter must be served by the sheriff) and more than 21 days has elapsed from date that the letter has been sent and no payment or response has been received.

A company is also deemed unable to pay its debts if there is a written or oral admission by a representative of the finance credit department of the debtor that the company is unable to pay, because it has cash flow problems.

How does an inability to pay assist in the collection of levies owed by a close corporation or company?

In the first instance, if an attorney is instructed to collect debts in excess of
R50, 000.00 in respect of companies or close corporations which own a property, my suggestion is that instead of issuing a summons and wasting time in obtaining a judgment, one should proceed to send a letter of demand

“What alternative methods of collecting levies and electricity, particularly with regard to large outstanding arrears, are available to managing agents and trustees?”

to the registered office of the company or close corporation and wait for 21 days for a response. In my experience, most directors of companies or members of close corporations do not respond to the letter and one can then commence liquidation proceedings.

Of course, one can always contact the director or member, and if the attorney is advised by the director or member that the company or corporation is unable to pay, and asks for an extension of time, then, in certain cases, particularly where the arrears are high, the oral admission by the director or member is sufficient to begin the liquidation process.

The upshot of both of these processes is that these are severe measures, which ultimately force the owner to come to an arrangement, or lose the property, since the liquidator steps into the shoes of the owner.

Again, in liquidation, the property cannot be transferred until the new purchaser pays the arrear levies and legal costs.

I have found that if one can agree a fee with one’s client for the sequestration or liquidation, one can ultimately collect the costs from the debtor, as in most cases the debtor is under pressure not to lose his property.

Alternatively, if a trustee or liquidator sells the immovable property, the body corporate can furnish the conveyancer with the legal costs, which can be included in the conveyancer’s clearance certificate, and which costs the new purchaser must pay.

How to deal with a dilatory debtor

Finally, to revert to the dilatory owner who defends matters with no genuine defence, but merely in order to buy time, one should consider partially reducing his electricity, so that he can utilise basic electricity. There is a new decision in the South Gauteng High Court, which deals with reducing the owner’s electricity, but whether this will be followed is uncertain at this stage. This process is one, which should be exercised with caution.