The consequences of re-registration of deregistered companies: latest instalments in the on-going debate

2nd December 2013

An important issue that has been a source of much debate since the Companies Act, No 71 of 2008 (Companies Act) came into force on 1 May 2011 involves the consequences of re-registering a deregistered company or close corporation (CC).

A company or CC may be deregistered by the Companies and Intellectual Property Commission (CIPC) if it failed to timeously lodge its annual returns with the CIPC or if it has been inactive for a number of years (s82). When a company or CC is deregistered, it ceases to exist as a separate juristic person and its assets and rights vest automatically in the State as bona vacantia. There are of course ways of procuring re-registration, whether by application to the CIPC or to the high court (s82(4) and s83). The question then is, what are the consequences of re-registration, having regard to the fact that upon deregistration the company's assets had become bona vacantia?

The previous Companies Act, No 61 of 1973 and the Close Corporations Act, No 69 of 1984 (CC Act) (prior to its amendment by the new Companies Act) contained provisions that were clear(er) that the reinstatement of companies and CCs was fully retrospective, and the effect was as if the entity was not deregistered in the first place. The new Companies Act however does not contain a similar express provision, and this remains a major bone of contention more than two and half years into the new Act, and has been addressed in perhaps a dozen cases with varying and conflicting views in various provincial divisions. Two of the latest instalments in this string of cases are the Supreme Court of Appeal (SCA) case of CA Focus CC v Village Freezer t/a Ashmel Spar 2013 (6) SA 549 (SCA) (27 September 2013) and the Western Cape High Court case of Peninsula Eye Clinic (Pty) Ltd v Newlands Surgical Clinic and Others (21325/11) [2013] ZAWCHC 156 (22 October 2013).

The position prior to the new Act: Kadoma and CA Focus First some background on the position under the previous Companies Act regarding deregistration and re-registration.

Two cases decided this year (but still applying the previous regime, as the matters arose back then) sum up the position:

In Kadoma Trading 15 (Pty) Ltd v Noble Crest CC 2013 (3) SA 338 (SCA) (28 March 2013) the Supreme Court of Appeal (SCA) pronounced upon the effect of the (now amended) provisions of s26(7) of the CC Act. S26 regulates the deregistration of CCs (it was amended by the new Companies Act and now cross-refers to the latter with respect to deregistration). In particular, s26(7) included a so-called 'deeming provision', which stipulated that where a CC had been deregistered and was thereafter re-registered, it was deemed to have existed as a legal entity from the date of deregistration as if it had not been deregistered. The same regime applied to companies (s73 of the Companies Act, 1973).

In Kadoma, the parties had concluded two agreements: a sale agreement and a franchise agreement in terms of which the appellant acquired the respondent's business. Having paid the initial purchase consideration, the appellant became dissatisfied with the acquisition (for reasons that are not relevant for present purposes). The appellant then discovered that at the time that the parties had concluded the agreements, the respondent was deregistered. Before the SCA the nub of the dispute turned on the following legal question: whether agreements concluded with a CC are void if at the time they were concluded the CC was deregistered, but is thereafter restored?

In determining the proper approach to s26(7) of the CC Act the SCA referred to the provisions of s73(6)(a) and s73(6A) of the Companies Act, 1973, from which s26(7) of the CC Act originated, and cases dealing with the approach to these sections. The SCA noted that in Insamcor (Pty) Ltd v Dorbyl Light & General Engineering (Pty) Ltd 2007 (4) SA 467 (SCA) it had held (in the context of the foregoing provisions of the previous Companies Act) that "…a restoration order seems to validate, retrospectively, all acts done since deregistration  – including for example, the institution of legal proceedings – on behalf of a company that did not exist". The SCA held that there was no reason for it to depart from this reasoning in the context of the CC Act and, accordingly, confirmed that acts taken by a corporation performed 'in good faith' during its period of deregistration are saved from invalidity by s26(7) of the CC Act where it is subsequently restored.

The same line of reasoning was accepted and adopted by the SCA six months later in CA Focus, but the following remark at the end of the judgement is significant (although not binding as it is merely obiter):

"In conclusion it is interesting to note that ss26(7) of the Act and 73(6) of the 1973 Companies Act were repealed by s224 of the Companies Act 71 of 2008, which came into operation on 1 May 2011. Section 82(4) of the 2008 Act now allows the registration of deregistered company or close corporation to be reinstated, but the provision permitting the restoration to operate retrospectively was omitted, perhaps because the lawmaker is now aware of potential anomalies."

Here, the court in CA Focus was alluding to its concern that, despite its obvious merits and practical utility, automatic retrospective reinstatement could, in a given set of circumstances, bring about its own potential difficulties and inequities for other parties.

The latest on the 2008 Act: Peninsula Eye Clinic

A month after CA Focus, the Cape Town High Court in Peninsula Eye Clinic had to address the question head-on under the new Companies Act, as the case concerned whether an arbitration award, granted against a company that was at the time deregistered (under the processes of the new Act),
was retroactively resuscitated upon re-registration of the company. After a lengthy and reasoned analysis, the following conclusions were reached:

Where a company is re-registered on application to the CIPC (which is permissible in instances where the CIPC initially deregistered the company due to failure to lodge annual returns or inactivity), such reinstatement has the effect that the assets of the company retrospectively re-vest in the company (this is a significant statement), but corporate activity by the company (eg entering into transactions) during the time that it was deregistered is not validated upon re-registration;

The court in Peninsula Eye Clinic in effect struck a balance between the concerns and interests of the company (and its stakeholders) and third parties in circumstances where a deregistered company is re-registered. This then is the latest pronouncement on this issue by our courts and it remains interesting to see whether, and to what extent, future cases in other divisions of the high court will agree with the reasoning in Peninsula Eye Clinic.

Written by Justine Krige,  and Yaniv Kleitman, senior associates in the Corporate and Commercial Practice at Cliffe Dekker Hofmeyr