Efficient financial management is one, if not the most, important function of the body corporate. The body corporate funds need to be accurately budgeted for the expenses for the next financial year. The collection of the levy contributions is the lifeblood of the scheme, and the management and allocation of the scheme’s financial income and savings need to be handled with care. Ensuring that the monies collected and spent by the corporate body are protected is just as important. In this article, I will discuss some of the ways in which the body corporate can (and should) protect and secure the money in these funds.
In terms of PMR 24(1) the administrative fund must only be used to fund the operating expenses of the body corporate for a particular financial year. Operating expenses include items such as rates and taxes, electricity, insurance, management fees, and security costs. The trustees must make sure that they follow the restriction on spending from this fund set out in PMR 24(4) which states that money may be paid out of the administrative fund in accordance with:
- trustee resolutions, and
- the approved budget for the administrative fund.
In terms of PMR 24(2) the reserve fund maintained must be used for the implementation of the maintenance, repair, and replacement plan of the body corporate. In this way, the reserve fund is connected to the compulsory ten-year maintenance, repair, and replacement plan. The trustees must ensure that the money that goes in and comes out of this fund is in line with the rules set out for this purpose. In terms of PMR 24(3) the following amounts must be paid into the reserve fund:
(a) any part of the annual levies designated as being for the purpose of reserves or the maintenance, repair, and replacement plan;
(b) any amounts received under an insurance policy in respect of damage or destruction of property for which the body corporate is responsible;
(c) any interest earned on the investment of the money in the reserve fund;
(d) any other amounts determined by the body corporate, and all other body corporate income must be paid into the administrative fund.
The trustees must make sure that they follow the restriction on spending from this fund set out in PMR 24(5) which states that money may be paid out of the reserve fund:
(a) at any time in accordance with trustee resolutions and the approved maintenance, repair, and replacement plan; or
(b) if the trustees resolve that such a payment is necessary for the purpose of an urgent maintenance, repair, or replacement expense, which purpose includes, without limitation
(i) to comply with an order of a court or an adjudicator;
(ii) to repair, maintain or replace any property for which the body corporate is responsible where there are reasonable grounds to believe that an immediate expenditure is necessary to ensure safety or prevent significant loss or damage to persons or property;
(iii) to repair any property for which the body corporate is responsible where the need for the repairs could not have been reasonably foreseen in preparing the maintenance, repair, and replacement plan; or
(iv) to enable the body corporate to obtain adequate insurance for property that the body corporate is required to insure; provided that the trustees must report to the members on any such expenditure as soon as possible after it is made.
In terms of PMR 24 (6) expenditure for urgent maintenance, repair, or replacement:
(a) must not exceed
(i) the amount necessary for the purpose for which it is expended; or
(ii) any limitation imposed by the body corporate on expenditure; and
(b) must comply with any restrictions imposed or directions given by members.
Body corporate funds bank account
In terms of section 3(1)(g) of the Sectional Titles Schemes Management Act 8 of 2011 (“the STSMA”), the body corporate must open and operate an account with any registered bank or any other financial institution. In terms of PMR 21(4) the body corporate must ensure that all money received by the body corporate is deposited to the credit of an interest-bearing bank account
(a) in the name of the body corporate; or
(b) that is a trust account opened in terms of either the Estate Agency Affairs Act, 1976 (Act No. 112 of 1976), or the Attorneys Act, 1979 (Act No. 53 of 1979).
In the opening, and operating of an account in the body corporate’s name with a registered bank or other financial institution the body corporate ensure that all monies received by the body corporate receives a level of protection.
PMR 10(1) states that no document signed on behalf of the body corporate is valid and binding unless it is signed on the authority of a trustee resolution by:
(a) two (2) trustees or the managing agent, in the case of a clearance certificate issued by the body corporate in terms of section 15B(3)(i)(aa) of the Sectional Titles Act 95 of 1986; and
(b) two (2) trustees or one trustee and the managing agent, in the case of any other document.
This double signing restriction ensures that no single trustee can sign any document in relation to the collection, banking, investment or loan of body corporate funds. This offers the body corporate another check and balance in regard to their funds.
Delegation of powers and duties
In terms of PMR 21(3)(g) the body corporate may, on the authority of a written trustee resolution delegate to one or more of the trustees, to a member, agent or an employee such of their powers and duties as they deem fit, and at any time to revoke such delegation; provided that when they delegate any power or duty they must specify in writing:
(i) the power or duty concerned;
(ii) a maximum amount of the body corporate’s funds that may be spent for a particular purpose; and
(iii) any conditions that may be applicable.
This provision limits and restricts the delegated power or duty. In this way, the body corporate is protected from a person misrepresenting the extent of their delegated power or duty in regard to body corporate funds.
Restrictions and directions regarding the body corporate funds
The body corporate should adopt restrictions and directions on the trustees in terms of section 7(1) of the STSMA in regard to how to deal. with body corporate funds. The restrictions can set out maximum spending before requiring body corporate authority. The directions can set out and identify what is considered low and medium-risk investments so that there is no suggestion that the trustees have acted negligently in the event that an investment is lost or does not produce the expected return. The trustees could do the research and make proposals at the annual general meeting for specific investment options. The owners can then give specific directions or restrictions regarding the final choice or manner of investment.
Safe and secure investments
Section 4(g) of the STSM Act states that the body corporate has the power to invest any money in the administrative fund.
PMR 21(3)(d) states that the body corporate may, on the authority of a written trustee resolution invest any money in the reserve fund in a secure investment with any institution referred to in the definition of “financial institution” in section 1 of the Financial Services Board Act 97 of 1990.
The trustees can always be directed by directions and restrictions as set out above, but the best way to protect the money invested by the trustees is for the body corporate to adopt a rule which would specify the level of risk that trustees are authorised to undertake in making an investment. The rule should set out the types of investments and the names of financial institutions with which they can invest. The trustees will then be empowered to consider and decide (possibly with the assistance of a suitably qualified financial adviser) what constitutes a low or medium-risk investment, and then to invest the surplus funds.
PMR 23(7) requires that the body corporate procure insurance for an amount determined by members in general meeting to cover the risk of loss of funds belonging to the body corporate or for which it is responsible, sustained as a result of any act of fraud or dishonesty committed by a trustee, managing agent, employee or another agent of the body corporate.
Furthermore, Regulation 15(1) made under the Community Schemes Ombud Service Act 9 of 2011 (“the CSOSA”) states that “every community scheme must insure against the risk of loss of money belonging to the community scheme or for which it is responsible, sustained as a result of any act of fraud or dishonesty committed by any insurable person.” An insurable person includes the trustees; employees and agents of the body corporate who has control over the money of the scheme; the managing agent and its contractors, employees, and agents who in the normal course of the scheme’s affairs has access to, or control over, the monies of the scheme. The minimum amount of fidelity insurance cover required is the total value of the community scheme’s investments and reserves at the end of its last financial year; and 25% of the community scheme’s operational budget for its current financial year.