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[2001] ZASCA 89
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Body Corporate of Caroline Court (505/99) [2001] ZASCA 89; [2002] 1 All SA 49 (A); 2001 (4) SA 1230 (SCA) (12 September 2001)
THE
SUPREME COURT OF APPEAL
OF
SOUTH AFRICA
CASE NO
: 221/2000
Reportable
Case
No: 505/99
In the matter of:
THE
BODY CORPORATE OF CAROLINE COURT
APPELLANT
__________________________________________________________________
Coram
:
Vivier
ADCJ, Olivier, Schutz, Navsa JJA and Cloete AJA
Date
of hearing:
17 August 2001
Date
of delivery:
12 September 2001
Summary: In
an application by a body corporate, established in terms of the
Sectional Titles Act 95 of 1986
, for a provisional order for its
winding-up due to its inability to pay its debts, notice should have
been given to all interested
parties for them to be heard on whether
a winding-up is competent, and, if so, the form of the order.
__________________________________________________________________
JUDGMENT
__________________________________________________________________
NAVSA
JA:
[1]
The
appellant is a body corporate established in terms of section 36 of
the Sectional Titles Act 95 of 1986 (“the Act”)
and is
responsible, in terms of the Act, for the enforcement of the rules
relating to the control, administration and management
of a building
named “Caroline Cour” (“the building”),
situated at 48 Caroline Street, Hillbrow, Johannesburg.
The building
forms part of a sectional title scheme with individuals owning
sectional units.
[2]
During
July 1999 the appellant, on the ground of its inability to pay its
debts, applied
ex parte
in the Witwatersrand Local Division of
the High Court for an order that its affairs be provisionally wound
up and that certain provisions
of the Companies Act 61 of 1973 be
made applicable to the winding-up. In addition it sought,
inter
alia
, an order that upon its dissolution following on the
winding-up, a new body corporate be declared to be in existence
comprising
existing owners of individual units.
[3]
The
matter was decided by Coppin AJ. In a brief judgment the learned
judge considered section 36(5) of the Act which states that
the
provisions of the Companies Act shall not apply to a body corporate
established in terms of the Act. Since the body corporate
could not
be wound up in terms of the Companies Act, Coppin AJ had regard to
the provisions of section 48 of the Act and concluded
as follows:
“
...section 48(6) of the…Act is the only
provision...dealing with the winding-up of a body corporate. In my
view upon a proper
construction of that section, a body corporate…can
only be wound up when the building to which it attaches is damaged or
destroyed. This is not the position in this case. I accordingly
dismiss the application with costs.”
Coppin AJ refused an
application for leave to appeal. The present appeal is with
the leave of this Court.
[4]
The appellant contends that in terms of
section 48(6) of the Act or in terms of section 48(1)(c) read with
section 48(6) of the
Act a Court is empowered to wind up the affairs
of a body corporate due to its inability to pay its debts.
[5]
The
learned judge in the court below did not consider whether he should
refuse to entertain the application because of the
ex parte
procedure adopted by the appellant and was content to decide a
complex issue on which no Court had pronounced before, without the
benefit of such argument and evidence that might have been advanced
by the various interested parties. The fate of this appeal
rests on
the procedural issue overlooked by Coppin AJ. I will deal with this
issue in due course.
[6]
I
turn to set out in some detail the basis of the application as
presented to the Court below: There are 34 units in the building,
the total market value of which is estimated to be approximately R340
000-00. Many units are subject to mortgage bonds. Some
owners of
sectional title units in the building have over the years defaulted
in the payment of their contribution levies with
the consequence that
the appellant was unable to meet its obligation to pay all water and
electricity charges and assessment rates,
resulting in an
indebtedness to the local authority concerned in an amount
approximating R1 million, as at 29 April 1999. In May
1998 during
negotiations between the appellant and the local authority the
appellant made an offer to settle its indebtedness on
specified
terms,
inter alia
,
that the amount of R577 000-00 then
owing be paid over a ten-year period without interest accruing. The
offer included an undertaking
by the appellant that upon acceptance
of the offer it would embark on major renovations. The offer has not
been responded to.
In the interim the building has had its
electricity supply intermittently suspended by the local authority.
The appellant asserts
that the local authority may reject its offer
of settlement with the attendant risk of further suspensions of the
electricity supply.
The appellant faces mounting debts which it is
unable to pay. Owners of units in the building continue to default
on the payment
of their levies. Attempts by the appellant to execute
judgments obtained by it against some defaulting owners have come to
nought.
In a number of instances this was due to the attitude
adopted by bondholders. The appellant has no cash reserves. The
appellant
states that although it is unable to pay its debts a
winding- up of its affairs will benefit the general body of creditors
since
a liquidator will be able to take effective steps to recover
monies from debtors and be in a better position to reach agreement
with the local authority on the settlement of its account.
[7]
It
appears that many bodies corporate established in terms of the Act
find themselves in a chaotic financial position similar to
that of
the appellant. In the June 2001 issue of the attorneys’
journal
De Rebus
,
Roger Green and Peter Feuilherade in
an article entitled
Lost Property
(at p 18)
state the
following:
“
Bodies corporate have always had to contend with
members who have not been able to maintain payment of regular
monthly levies
because of financial difficulties. However, in the
past few years a tendency has developed for some owners to
refuse
to pay levies. This has occurred very often when most of
the purchase price of the unit has been funded by a bank loan.
In
some instances the owners who are members of the body corporate
fail to recognize that the body corporate is their alter
ego, namely
the corporate representative of all the owners of the units in the
scheme. Instead the body corporate has been
seen as an alien body to
which no allegiance is owed. Failure to recognise the
obligations of communal living and
to pay levies has resulted
in several sectional title schemes being placed in jeopardy. The
members of the scheme who
have been diligent in paying their
levy contributions have been prejudiced.”
The
authors state (at p.20) that there has been a tendency on the part of
some bondholders to be obstructive when a body corporate
attempts to
sell a defaulting member’s unit in execution. The authors note
that in some schemes, members of the body corporate
who are in
arrears with payment of their levies and are in the majority have
themselves elected as trustees of the body corporate
and choose not
to take action against defaulting members, resulting in the financial
affairs of the body corporate becoming chaotic.
[8]
It
is clear from the contents of the affidavit filed in support of the
application, the prayer in the notice of motion for an order
declaring a new body corporate to come into existence comprising the
same members as before and a concession before us by appellant’s
counsel, that the appellant’s trustees, who authorised the
application, hold the view that an order winding up its affairs
is a
speedy and simple solution to its financial predicament. They believe
that after a new body corporate has been established
it can continue
with its business unburdened by the previous debts. It is clear that
the trustees authorised an application for
a winding-up having such
an effect and bearing only on the affairs of the body corporate.
There was no appreciation that in the
event of a winding-up, assuming
it to be competent, a Court might hold that the individual owners
could be pursued for such debts
as are owing by them to the body
corporate. This means that there is a risk that individual units
would have to be sold to recover
the amounts owing. The entire
scheme may be at risk: see in this regard section 47 of the Act
which provides that a creditor
who has obtained a judgment against a
body corporate, which remains unsatisfied, may apply to the Court
which gave the judgment
for the joinder of the members of the body
corporate in their personal capacities as joint judgment debtors in
proportion to their
respective participation quotas; and section
36(6)(c) of the Act, which provides that a body corporate shall have
perpetual succession
and be capable of suing and being sued in its
corporate name in respect of any matter in connection with the land
and building
for which the body corporate is liable or for which the
owners are jointly liable. There appears to be a fundamental
misunderstanding
on the part of the appellant to the effect that in
respect of debts such as assessment rates and water and electricity
charges,
individual owners are not co-debtors with the body
corporate.
[9]
I
now turn to deal with the
ex parte
procedure adopted by the
appellant. The appellant’s notice of motion is addressed only
to the registrar of the Court below
and was not served on any other
person. It is a principle of our law that interested parties should
be afforded an opportunity
to be heard in matters in which they have
a direct and substantial interest. In
Amalgamated Engineering
Union v Minister of Labour
1949(3) SA 637 (A) (
at
651)
the following is stated:
“
It was rather a subtle reasoning, which helped
the Court to do what it no doubt regarded as substantial justice in
the peculiar
circumstances of the case, while at the same time
enabling it to stand firm on the two essential principles of law that
had to
be borne in mind, viz.(1) that a judgment cannot be
pleaded as
res judicata
against someone who was not a party
to the suit in which it was given, and (2) that the Court should not
make an order that
may prejudice the rights of parties before it.”
Later
in the judgment (at
659-660)
the following appears:
“
Indeed it seems clear to me that the Court has
consistently refrained from dealing with issues in which a
third party may
have a direct and substantial interest without
either having that party joined in the suit or, if the circumstances
of the
case admit of such a course, taking other adequate
steps to ensure that its judgment will not prejudicially affect the
party’s interests… It must be borne in mind, however,
that even on the allegation that a party has waived his rights,
that party is entitled to be heard; for he may, if given the
opportunity, dispute either the facts which are said to prove
his
waiver, or the conclusion of law to be drawn from them, or both.”
This principle finds expression in Rule 6 (2)(a)
of the Uniform Rules of Court which states that where it is necessary
or proper
to give any person notice of an intended application, the
notice of motion shall be addressed to both the registrar and such
person.
[10]
On
the applicant’s version of events there are numerous interested
parties who in the ordinary course would have been entitled
to
receive notice of the intended application. The local authority,
which is the major creditor, is an interested party. Individual
owners, who in terms of section 36 of the Act are all members of the
body corporate are clearly interested parties. This is particularly
so given the potential risks to owners and the sectional title scheme
spelt out earlier in this judgment. Bondholders are clearly
also
interested parties.
[11]
Counsel
representing the appellant submitted that the
ex parte
procedure
adopted by the appellant is in line with the generally accepted
procedure followed in applications for the winding-up
of a company
and the sequestration of individuals, namely, that a provisional
order is granted
ex parte
with standard directions that the
order be served on interested parties including creditors pending a
return day. This analogy
is unfounded.
[12]
The
law regulating the winding-up of companies and close corporations and
the sequestration of individuals is largely settled and
the procedure
is well established. Of course novel questions may arise and a Court
will deal with them as and when they arise
in such manner as it deems
fit. Section 48 of the Act, on the other hand, is complex in
structure and its provisions concerning
a winding-up of the affairs
of a body corporate are brief to the extent of inadequacy. No Court
has yet pronounced on the interpretation
of section 48(6) of the Act.
Difficult questions arise when the interpretation and application of
section 48 are to be decided.
This is demonstrated by the brief and
limited consideration of section 48 which follows. Section 48 bears
the heading: “
Destruction of or damage to building
.”
Section 48(1) of the Act provides:
“
The building or buildings comprised in a scheme
shall, for the purposes
of this Act, be deemed to be destroyed -
(a) upon the physical destruction of the building or
buildings;
(b) when the owners by unanimous resolution so determine
and all holders of registered sectional mortgage bonds and the
persons
with registered real rights concerned, agree thereto in
writing; or
(c) when the Court is satisfied that, having regard to
all the circumstances, it is just and equitable that the building or
buildings
shall be deemed to have been destroyed, and makes an order
to that effect.”
Section
48(2) states:
“
In any case where an order is made under
subsection (1)(c), the Court may impose such conditions and give such
directions as it
deems fit for the purpose of adjusting the effect of
the order between the body corporate and the owners and mutually
among the
owners, the holders of registered sectional mortgage bonds
and persons with registered real rights.”
Section
48(3) is irrelevant for present purposes. Section 48(4) lists the
persons who may apply for an order in terms of section
48(1)(c) as:
a body corporate, an owner, a bondholder, a registered lessee, an
insurer who has effected insurance on the building
and a local
authority. Unlike section 48(6) the list does not include creditors
but does include a local authority.
Section
48(6) reads as follows:
“(a) The
Court may, on the application of a body corporate or any member
thereof or any holder of a registered real right
concerned, or any
judgment creditor, by order make provision for the winding-up of the
affairs of the body corporate.
(b) The Court may, by the same or any subsequent order,
declare the body corporate dissolved as from a date specified in the
order”
The
following questions readily present themselves:
Do
the circumstances referred to in the appellant’s affidavit in
support of the application justify an order in terms of
section
48(1)(c), or would this be stretching notional destruction beyond
the provisions of the Act?
Do
the provisions of section 48(2), which prospectively regulate the
relationship between affected parties, indicate that section
48(1)(c) operates only in circumstances where it is envisaged that
the scheme will come to an end or not continue in its existing
form
and consequently, that they do not apply in circumstances such as
the present, where it is intended that the scheme will
continue as
before?
Does
section 48(6) enjoy an existence and application independent of the
remainder of the section of which it is part?
Does
the heading of section 48 assist in the interpretation of section
48(6)?
Does
the distinction drawn between the persons who may bring an
application in terms of section 48(1)(c) and those who may bring
an
application in terms of section 48(6) support a contrary conclusion?
What
is meant by the expression “winding-up of the affairs of the
body corporate as it appears in section 48(6) - does it
relate to
the relationship between the members and the body corporate and to
their position as joint debtors as set out in section
47 of the Act?
Assuming
that it is held that a winding-up of the affairs of a body corporate
based on its inability to pay its debts is competent,
is the Court
at large to fashion directions for such a winding-up?
May
the Court, in giving such directions, have regard to such mechanisms
as are set out in the Companies Act and employ them,
despite the
provisions of section 36(5) of the Act?
In
particular, what happens to the pro rata liability of an owner for
the debts of other owners, provided for in s 47?
How,
in formulating directions, does the Court deal with the body
corporate in relation to its members and what directions may
it give
insofar as individual defaulting and non-defaulting unit owners are
concerned?
Should
the Court consider other remedies that the Act provides to owners,
bondholders, members, trustees and local authorities
when it
considers whether to grant a winding-up order?
What
are the circumstances which in terms of section 48(6)(b) will
justify a Court granting an order for the dissolution of a
body
corporate at the same time as it grants an order for the winding-up
of its affairs?
What
are the circumstances that will justify a Court withholding an order
for the dissolution of the body corporate at the time
that it grants
an order that its affairs be wound up?
What
happens after a body corporate’s affairs are wound up?
[13]
These questions are not meant to be
exhaustive but to demonstrate how necessary it is for such issues as
may arise from the interpretation
of section 48 to be fully
ventilated among all interested parties. Lamentably, the Legislature
neglected to deal with questions
which would obviously arise. This
makes it all the more necessary for a Court to have the benefit of
argument by parties who may
be affected by its decision.
[14]
Coppin
AJ was faced with a manifestly incomplete set of facts in the absence
of a range of interested parties, who might have wished
to present
argument on a novel issue of public importance concerning the
interpretation of legislation which raises more questions
than it
answers. This situation does not begin to compare with the asserted
analogous situation of an
ex parte
application for a
provisional winding-up of a company or for the provisional
sequestration of an individual. The company being
wound up or the
individual being sequestrated is usually the debtor whose assets have
to be surrendered so that they may be sold
to meet debts owed to
creditors. A body corporate established in terms of the Act
represents its members and such debts as the
body corporate incurs
are usually incurred on behalf of its members. Members of a body
corporate have assets apart from the body
corporate. Usually the body
corporate’s assets will be negligible when seen against the
collective assets of its members.
As stated earlier, the rules and
procedure governing the winding-up of companies and close
corporations and the sequestration
of individuals are established and
clear. The complex of questions raised in the present case does not
arise. A primary question
in the present case on which the Court
should have the benefit of argument of all interested parties, is
whether it is empowered
in the circumstances of this case to issue
any winding-up order at all- provisional or otherwise. In this
regard a
dictum
in a recent decision of this Court is
relevant. In
Pretorius v Slabbert
2000 (4) SA 935
(SCA)
at
939 C-F
the following is stated:
“
Mr
Louw
,
for the respondent, sought to persuade us that Syfrets had no
material interest in the proceedings, so that the appeal might
proceed. There is an immediate difficulty with this argument, as it
appears to contradict the very contention upon which the
respondent
succeeded below and wishes to succeed here, namely that the
appellant’s rights in the deed of sale (reversionary
rights
excepted) had become vested in Syfrets. Depending upon a variety of
possible considerations, upon which the record throws
no clear
light, Syfrets might have an interest. For instance, it may have
something to say about the form of order, which envisages
payment to
the appellant and not itself as cessionary. But more to the point,
as was rightly said in
Selborne Furniture
Store (Pty) Ltd v Steyn NO
1970(3) SA
774 (A)
at
780G
,
the substantial question is whether it is proper for this Court to
proceed to draw an inference as to Syfret’s rights,
without
giving it an opportunity of being heard in regard thereto. The
answer is no.”
The
basic principle of our law that interested parties who may be
prejudiced by an order issued by a Court should be joined in
the
suit, as set out in the
Amalgamated Engineering
and
Pretorius
cases,
supra
, and expressed in Rule
6(2)(a) of the Uniform Rules of Court should have been applied by
Coppin AJ.
[15]
For
these reasons it follows that although Coppin AJ erred in his
approach to the matter, his decision to dismiss the application
should remain unaffected. In the light of all the circumstances of
the case it would serve no useful purpose to remit the matter
to the
Court below. It follows that the appeal should fail. The appeal is
dismissed.
MS
NAVSA
JUDGE
OF APPEAL
CONCUR:
VIVIER
ADCJ
OLIVIER
JA
SCHUTZ
JA
CLOETE
AJA