Insolvency in Sect. Title Schemes

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03 Jul 2013

When owners of sectional title units don't take an interest in the running of their body corporate problems can creep in, some as serious as overly large municipal bills.

Another thing that needs to be done when overly large accounts are presented is to ascertain the actual amount outstanding and check whether the building has been overcharged in any way.

Michael Bauer, general manager of IHFM says this can lead to the insolvency of the sectional title scheme.

A case he refers to was a sectional title scheme in Johannesburg where IHFM was called in to assist with the management and financial salvage, which received a municipal account for electricity to the amount of R3.8 million.

In this particular case, the disconnection notice arrived a few days before the electricity was cut off, and the building was left without electricity for over ten days.

How the account was allowed to run up to this amount, no one knows, he says. “In most cases before the amount even gets to hundreds of thousands the municipality would have cut the electricity or water in order to get the overdue amounts paid.”

In cases such as these urgent help is needed to manage the crisis and the first step is to raise the money to pay the outstanding account or to arrange a repayment plan with the municipality to settle the amount over a certain period of time, he says.

All the trustees here were replaced with new trustees who were willing to tackle the problem of the financial mismanagement of the scheme. 

Another thing that needs to be done when overly large accounts are presented is to ascertain the actual amount outstanding and check whether the building has been overcharged in any way, Bauer says. In this case, there were some inaccurate readings which were then credited.

The next step is to manage the reconnection and raise a special levy or finance to settle the outstanding account. It might be necessary to implement a management system to keep the electricity bills in check.

The trustees need to work on a workable business plan to get the building back on track, where monthly or quarterly reports are generated to check on the finances regularly, he says. 

Once the crisis has been averted, he says the trustees will need to work out what happened to the scheme’s funds and where the levies paid to the body corporate actually went. It might be necessary to commission a forensic audit to work out whether funds were stolen or whether it was purely under-budgeting that left the scheme without enough cash to pay the bills each month. 

Bauer says that this shows how important it is for owners to get involved and, either become trustees themselves, or to ask questions on the financial management of their scheme.

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