Can a developer vote when he has a direct interest?

1. Introduction

 

What does the legislation say in this regard?

Can a developer vote on matters when he has a direct interest? recently was asked by a client whether the developer, who was also a trustee, could make decisions on matters in which he had a direct interest.

Where the developer is a trustee, he or she is disqualified from voting on matters in which he or she has a direct interest. The legislative provisions that require the prohibition relate to the trustee’s fiduciary responsibility.

Section 8(1) of the STSM Act states that each trustee of a body corporate must stand in a fiduciary relationship to the body corporate.

Section 8(2) of the STSM Act states that without derogating from the generality of the expression ‘‘fiduciary relationship’’, the relationship implies that a trustee

(a) must in relation to the body corporate act honestly and in good faith, and in particular

(i) exercise his or her powers in terms of the STSM Act in the interest and for the benefit of the body corporate; and

(ii) not act without or exceed those powers; and           

(b) must avoid any material conflict between his or her own interests and those of the body corporate, and in particular

(i) not receive any personal economic benefit, direct or indirect, from the body corporate or from any other person; and

(ii) notify every other trustee of the nature and extent of any direct or indirect material interest which he or she may have in any contract of the body corporate, as soon as such trustee becomes aware of such interest.

Section 8(3) of the STSM Act states that a trustee of a body corporate who acts in breach of his or her fiduciary relationship, is liable to the body corporate for

(a) any loss suffered as a result thereof by the body corporate; or

(b) any economic benefit received by the trustee by reason thereof.

Section 8(4) of the STSM Act states that except as regards to the duty to exercise his or her powers in terms of the STSM Act in the interest and for the benefit of the body corporate, any particular conduct of a trustee does not constitute a breach of a duty arising from his or her fiduciary relationship to the body corporate if such conduct was preceded or followed by the written approval of all the members of the body corporate where such members were or are cognisant of all the material facts.

Prescribed Management Rule (“PMR”) 8(4) states that the body corporate must indemnify a trustee who is not a managing agent against all costs, losses and expenses arising as a result of any official act that is not in breach of the trustee’s fiduciary obligations to the body corporate.

Trustee resolutions and disqualification from voting

A motion at a trustee meeting must be determined by resolution adopted by the majority of the trustees present and voting as set out in PMRs 14(1) and (4). In terms of PMR 14(2) each trustee is entitled to one vote, unless disqualified from voting for reasons as discussed below. In circumstances where all the deliberative votes of the trustees including that of the chairperson are tied, the chairperson has a casting vote (except where there are only two trustees).

In terms of PMR 14(3) trustees are disqualified from voting in two circumstances. In the first place a trustee may not exercise their vote in respect of any proposed or current contract or dispute with the body corporate in which the trustee is a party. In the second place a trustee may not exercise their vote in respect of any matter in which the trustee has any direct or indirect personal interest. A trustee who has any direct or indirect personal interest in any matter to be considered by the trustees must not be present at or play any part in the consideration or decision of the matter concerned.

What recourse does the body corporate have?

If the body corporate wishes to have decisions taken by the trustees revoked it can make an application to the Community Schemes Ombudsman (the “CSOS”). In terms of section 38 of the CSOS Act it is possible that any person may make an application to the CSOS if such person is a party to or affected materially by a dispute. Any such person can therefore make an application to the CSOS to declare a dispute against the trustees. An application must be made in the prescribed manner and as may be required by practice directives; lodged with an ombud; and accompanied by the prescribed application fee. The application must include statements setting out: 

1. 1. the relief sought by the applicant, which relief must be within the scope of one or more of the prayers for the relief contemplated in section 39 of the CSOS Act; 
   2. the name and address of each person the applicant considers to be affected materially by the application; and 
   3. the grounds on which the relief is sought. 

Should you wish to have any decisions made by the trustees revoked you can make an application to the Ombud in terms of section 39(4)(c) of the CSOS Act, which states that:

“An application made in terms of section 38 must include one or more of the following orders: in respect of meetings – an order declaring that a resolution purportedly passed at a meeting of the executive committee, or at a general meeting of the association— (i) was void; or (ii) is invalid”

Alternatively, you can make an application to the Ombud in terms of section 39(4)(e) of the CSOS Act, which states that:

“An application made in terms of section 38 must include one or more of the following orders: in respect of meetings – an order declaring that a particular resolution passed at a meeting is void on the ground that it unreasonably interferes with the rights of an individual owner or occupier or the rights of a group of owners or occupiers.”