Debt (Co)llection against a deregistered close corporation or company

According to the Companies Act 71 2008, and the Close Corporation Act 96 1984, a company, or close corporation (“CC”), which fails to file its annual return for two or more consecutive years or if the Registrar has reasonable cause to believe that it is not carrying on business or is not in operation, may be deregistered by the Registrar.

The Registrar must give notice to the company or CC that it will be deregistered unless good cause is shown. The effect of deregistration is that a company or CC is deprived of its legal personality. All its property, movable or immovable, corporeal and incorporeal, passes into ownership of the state as bona vacantia (Miller and Others v Nafcoc Investment Holdings Co Ltd and Others 2010 (6) SA390 (SCA).

There is no provision made to inform potential creditors of the pending deregistration. A debt due to a creditor of a company or CC that has been deregistered is not extinguished, but rendered unenforceable.

Under the previous Companies Act 61 of 1973 if a company or CC had assets against which a creditor wished to execute, but it was in the process of being deregistered or had finally been deregistered, an application to court to restore the company or CC could have been made. However, according to Peninsula Eye Clinic (Pty) Ltd v Newlands Surgical Clinic (Pty) Ltd the reinstatement of the registration of a company, which had been deregistered, falls within the powers of the CIPC and not a court.

Also, in ABSA Bank Limited v Voigro Investments 19 CC the Western Cape High Court delivered this judgment: “if a close corporation has been deregistered for failing to file its annual returns, the registration thereof can be reinstated only by the commissioner in terms of section 82(4) of the Companies Act of 2008. No provision is made for the restoration of a deregistered company or in this case a deregistered close corporation, by order of court.”

This later judgment was set aside in ABSA Bank Limited v The Companies and Intellectual Property Commission of SA. It found that section 83(4) of the Companies Act 2008 allowed the liquidator of a company or any other interested person to apply to court for an order declaring the deregistration to be void. This applies to cases where a company or CC’s name has been removed from the register due to deregistration or liquidation. An interested party may apply to the CIPC for restoration in terms of section 82(4) or to the court in terms of section 83(4).

Both these processes are expensive and the CIPC has placed a number of obstacles in the path of a creditor wishing to apply to it to have a company or CC restored.

The procedure to apply to the CIPC to reinstate a company or CC includes submitting the required forms and payment of all the outstanding annual returns as well as a restoration fee.

Some of the required documentation for an application to reinstate a company or CC, such as certified copies of identification documents of the directors/members, letters from National Treasury and Public Works, and  an affidavit indicating the reasons for non-filing of annual returns, make the process cumbersome, if not impossible, as such information is not readily available to creditors.

It would seem, in these circumstances, as if a creditor is not afforded its right  to just administrative action.

Another option for a creditor is to enforce its rights against the members of the Corporation.

Section 26(5) of the Close Corporations Act provided that if a close corporation was deregistered while having outstanding liabilities, the persons who were members at the time of deregistration would be jointly and severally liable for those liabilities. This provision has been repealed by the coming into law of the new Companies Act.

This is not good news for creditors, who previously were able to use section 26(5) as an effective tool for debt recovery. The provisions of section 26(5) still, however, apply to close corporations deregistered prior to 1 May 2011.

Close corporations and companies are now governed by the new Companies Act which provides that deregistration does not affect the liability of any former director, shareholder (or member) or any other person for any act or omission which took place before the company was deregistered. Members/ directors who knowingly are a party to reckless or fraudulent dealings of the close corporation will still be personally liable for debts of the close corporation, since the provision of the Close Corporations Act providing for this liability remains unchanged.

Does the action of a member or director who allows deregistration of its corporation or company, while having full knowledge of an outstanding debt to any third party, not amount to reckless or fraudulent behaviour?