The effect of a sequestration order is to divest the insolvent of his estate. The insolvent’s estate is divested by the sequestration order and vests firstly in the Master of the High Court, and then in the Trustee appointed by the Master of the High Court. It is the duty of a trustee appointed to take possession of the insolvent’s assets (movable or immovable, however encumbered), and to sell them, and distribute the proceeds in the proper order of preference.

In NEL NO v BODY CORPORATE OF THE SEAWAYS BUILDING AND ANOTHER 1995 (1) SA 130 (C), with regards to section 15 B(3)(a)(i)(aa) of the Sectional Titles Act 95 of 1986 (“the Act”), the Court a quo held (at 136F):

    ‘. . . (I)f [the contested provision] must be understood to create an effective preference in the event of insolvency in favour of the body  corporate in respect of its claim for outstanding levies, such a preference can be accommodated in the scheme of insolvency created by the Insolvency Act as being part of “the costs of realisation” envisaged in s 89(1) of the Insolvency Act.’

Accordingly in the event of insolvency it creates an effective preference in favour of the body corporate in respect of levies (pre-liquidation levies) which became due by the individual or company prior to sequestration or liquidation.  

The high watermark of this judgment is that the payment of outstanding levies must be treated as being part of the ‘costs of realisation’.

Accordingly, section 89 provides that the costs of realisation have to be paid out of the proceeds of the sale of the property.

It was confirmed on appeal [NEL NO v BODY CORPORATE OF THE SEAWAYS BUILDING AND ANOTHER 1996 (1) SA 131 (A)] that section 15B (3)(a) (i) (aa) of the Act gave the body corporate a preferent claim which enjoyed preference even over the secured creditor holding the mortgage over the unit. The question, however, was whether the body corporate’s effective preference was limited to arrear contributions.   

The Appeal Court (at 139J – 140I) clearly distinguished between taxes on immovable property in respect of which s 89(1) of the Insolvency Act conferred a preference for a maximum period of two years before sequestration and the de facto preference for an unlimited period in favour of the body corporate under section 15 B(3)(a)(i)(aa) of the Act. Although it did not say so in so many words, the Court had clearly been of the opinion that contributions under the Act were not ‘taxes’ for the purposes of s 89 of the Insolvency Act.

It was consequently decided in BARNARD NO v REGSPERSOON VAN AMINIE EN ‘N ANDER 2001 (3) SA 973 (SCA),  that  the arrear contributions were not ‘taxes’ for the purposes of sections 89(1) and (4) of the Insolvency Act and that the two-year restriction contained in those subsections could not be applied to the arrear contributions.

In FIRST RAND BANK LTD v BODY CORPORATE OF GEOVY VILLA 2004 (3) SA 362 (SCA) at paragraph 26, the following was stated: “The practical effect of the statute is that, assuming the availability of funds, a body corporate will be paid before transfer of immovable property is effected. A reasonable mortgagee and body corporate might arrive at an accommodation where there are insufficient funds available to cover the total of the debts owing to both parties – but neither is obliged in law to do so. ”

Hence, what is essential to appreciating a Body Corporate’s claim for arrear levies when an owner has been declared insolvent, and within the context of section 15B (3)(a)(i)(aa) of the Act, is the practical effect of section 15B(3)(a)(i)(aa), which is: assuming the availability of funds, (my underlining and emphasis) a body corporate would be paid before transfer of immovable property was effected.

In addition, Section 118(1) of the Local Government: Municipal Systems Act 32 of 2000 gives the Municipality the right to reject the transfer of property until such time as the rates and other amounts due in respect of the period of two years preceding the date of application for the certificate have been fully paid.

As a result a claim by the Municipality/ Local Authority for rates or charges upon the property are ranked in priority for up to two years preceding the date of liquidation out of the proceeds of the immovable property in preference to, and even to the exclusion of, the mortgage bondholder and a Body Corporate for the recovery of arrear levies.

In view of the aforegoing, the Body Corporate’s claim for arrear levies on the insolvency of a sectional title owner is considered to rank equally wiith that of a secured creditor, such as the bank (the mortgage bond holder), but it does not mean that the Body Corporate will always able to recover full payment of its claim for arrear levies, interest or costs.  The body corporate’s claim for arrear levies is deducted from the proceeds of the sale as part of the cost of realisation of the assets of the insolvent.

The body corporate will not recover its full claim for arrear levies if there are insufficient proceeds of the sale of the insolvent’s assets to cover the Body Corporate’s claim, especially if the sectional title unit is the only asset in the insolvent owner’s Estate.