Protection of body corporate funds
Category Property Management
Protection of body corporate funds
Article by Dr Carryn Melissa Durham - Paddocks
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In previous articles, I addressed the two body corporate funds, and the investment of body corporate funds. In this related article, I will set out ways in which the body corporate can protect their funds.
If the trustees lose money or do not get the full amount of return expected on an investment, there are a few ways in which the trustees can be protected. The body corporate could 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 what constitutes a low or medium risk investment, and then to invest the surplus funds. If discretion is to be exercised by the trustees or managing agent it is recommended that, in assessing the level of risk involved, they rely on professional advice from a suitably qualified financial adviser.
The trustees may wish to allow owners, by a direction in terms of section 7(1) of the Sectional Titles Schemes Management Act 8 of 2011 (“the STSMA”), to identify what are 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.
The body corporate should procure insurance envisaged in Prescribed Management Rule (“PMR”) 23(7) “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 other 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 the 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.
The insurance cover must provide for payment of a loss by the insurer to the community scheme, within a reasonable period after reasonably satisfactory proof of the loss has been furnished to the insurer; and not require that criminal or civil proceedings be taken or completed against the insured person before payment is made under the insurance policy.
A sectional title scheme is not obliged to obtain fidelity cover for an insurable person if that person has delivered to the body corporate written proof that the scheme’s monies are covered by fidelity insurance that complies with the abovementioned requirements; and the insurer concerned has noted the scheme’s interest in the application of the proceeds of the policy and undertaken not to cancel or withdraw cover without giving the community scheme at least 30 days written notice.
If you have any queries in this regard, please contact me at email@example.com.
Article reference: Paddocks Press: Volume 12, Issue 03, Page 02.
Posted In: Paddocks Press Newsletter | 29/03/2017
This article is published under the Creative Commons Attribution license.
Author: Dr Carryn Melissa Durham - Paddocks