The Companies Act 71 of 2008 (“the Companies Act”) requires Companies and Close Corporations (“entities”) to be registered with the Intellectual Properties Commission (CIPC) and file their annual returns. The CIPC will place an entity in the process of deregistration if the entity fails to comply with this obligation.
In terms of s 82(2)(b) of the Companies Act, the CIPC must remove a company or close corporation’s name from the Companies Register only if the company or close corporation has failed to comply with this obligation for two or more consecutive years. Further, in terms of this section the entity must, on demand by the CIPC, give satisfactory reasons for the failure to file the required returns or show satisfactory cause for the company to remain registered. Thereafter the Registrar of the CIPC must serve a notice on the entity notifying it of deregistration, unless good cause is shown to the contrary.
Notwithstanding the above, no provision has been made for notification of the creditors of the company or the close corporation which the CIPC is proposing to deregister. The creditors are therefore not taken into consideration during the proposed deregistration of the company or close corporation.
The consequences of deregistration
The effect of deregistration is that the entity ceases to exist in a legal sense. The effect on creditors is that the legal remedies which the creditors might have had become unenforceable. In the instance where a creditor serves a summons on the debtor (the company or close corporation which is in deregistration), in the hope of recovering monies due, the summons cannot be enforced. Similarly, a company or close corporation which is in deregistration cannot institute any legal action against a debtor.
In addition to the above, any person who had authority to act on behalf of the entity prior to the deregistration may be held liable for the costs of any action instituted after deregistration.
Reinstating a deregistered company or close corporation
Remedies are available to creditors who wish to recover outstanding debt owed to them by the deregistered company or close corporation.
In terms of section 82(4) of the Companies Act, an interested person, including the entity itself, any of its creditors or any other person who has sufficient reason to have the entity reinstated, may apply to reinstate the entity. It is important to note that Close Corporations may be dealt with differently due to personal liability of the members in some instances.
The CIPC has established the following requirements for the reinstatement of a company or close corporation.
The applicant, who may be any interested person, must prove one of the following:
- the company or close corporation was in business at the time of deregistration – bank statements for the period of six months before and six months after deregistration would be sufficient to prove that the entity was in business; or
- immovable property is registered in the name of the deregistered business; or
- the court issued an order re-instating the company or close corporation.
Practical difficulties associated with reinstatement of a deregistered entity.
Notwithstanding the cost associated with bringing a court application for the reinstatement of the deregistered company or close corporation, the applicant must also pay the annual fees, restoration fees and penalties to the CIPC when bringing such application.
A further difficulty is that the applicant must submit a certified copy of the directors’/members’ identification documents, which in most probability the applicant would not have access to.
The CIPC also requires the applicant to give reasons in the form of an affidavit as to why the entity did not file their annual returns, which in all likelihood the applicant is unable to do.
It is clear that dealing with deregistered entities poses a huge risk for companies. In practice, companies normally only require a client to complete the procedural documents (for example a credit application) at the beginning of an engagement. In order to avoid the risks of dealing with a deregistered company, it is advisable to have a process in place which requires the clients to submit proof of being a registered entity as often as is necessary.
RMI4Law members enjoy access to quality telephonic legal advice 24/7, 365 days a year and insurance for legal costs arising from business activities. Izak Viljoen is a Director of Barnard Incorporated Attorneys.