Investment of body corporate funds

By Dr Carryn Melissa Durham

The nature of a body corporate is to generate funds to cover expenses and to build reserves. Therefore, making profit is not their primary function.

The trustees of a body corporate must ensure that all money received by the body corporate is deposited into an account with a registered commercial bank in the name of the body corporate. Section 3(1)(g) of the Sectional Titles Schemes Management Act 8 of 2011 (“the STSMA”) states that the body corporate has the function “to open and operate an account or accounts with any registered bank or any other financial institution.” Prescribed Management Rule (“PMR”) 21(4) requires that the body corporate must ensure that all money received by the body corporate is deposited to the credit of an interest-bearing bank account in the name of the body  corporate; or into a trust account opened in terms of either the Estate Agency Affairs Act 112 of 1976, or the Attorneys Act 53 of 1979. This is subject to any direction given or restriction imposed by owners at a general meeting, that money can only be used for payment of body corporate expenses, or it can be invested.

PMR 21(3)(d) states that the body corporate may, on the authority of a written trustee resolution, invest any moneys 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 reference to the reserve fund and financial institution in PMR 21(3)(d) limits a body corporate’s investment opportunities. The legislation requires a conservative approach to investing body corporate funds. The purpose of this management rule is to keep the body corporate’s money safe. The trustees have a fiduciary duty to the body corporate, and this would include the duty not to subject the body corporate’s funds to unnecessary risks. If the trustees exceed their power in this regard, they could be held personally liable if the body corporate suffered any loss from the investment, or any direct or indirect economic benefit received by the trustee from the investment in terms of section 8(3) of the STSMA. Managing and investing the finances of a body corporate should be based on sound financial principles and good governance.

While there should be a restriction to investments that do not involve risk, trustees are allowed to invest with any South African bank or insurance company. Where a body corporate has accumulated a considerable amount of money, it would make sense that it is more open to higher risk and higher reward investments. If this is the case, a management rule can be adopted by unanimous resolution allowing for this.

In terms of the previous PMR 44 the body corporate could use the interest on invested funds for any lawful purpose. PMR 24(3) now states that any interest earned on the investment of the money in the reserve fund must be paid into the reserve fund.

If you have any queries in this regard, please contact me at consulting@paddocks.co.za.

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