Confusion regarding the deregistration dates of close corporations (CC) has caused challenges for members of CCs. While such uncertainty has been aggravated by conflicting court decisions, a recent decision by the Supreme Court of Appeal (SCA) has provided much-needed clarity.
Deregistration in relation to a corporation means the cancellation of the registration of the CC's founding statement.
In the event that a CC applies for re-registration, section 26(7) of the Close Corporation Act, No. 69 of 1984 (the Act) provides that, as from the date of notification in the Government Gazette, a CC will be deemed to have continued existing from its date of registration, as if it had not been deregistered.
In other words, the CC is deemed to exist as if the act of deregistration had never taken place.
Section 26(7) of Act has been interpreted in varying ways in both Magistrate's Courts and in the Eastern Cape High Court. But the recent case of CA Focus CC v Village Freezer t/a Ashmel Spar1 (the CA Focus case) has provided more certainty by repealing section 26(7).
The facts of the CA Focus case
The appellant, a CC, had an unpaid claim for services rendered to the respondent. The services had been rendered between April and September 2006. Payment for the services was due and payable in September 2006, and the appellant was deregistered on 8 November 2007.
On 12 March 2008 summons was issued and served on the respondent for an amount of R60,000.00. The claim would have prescribed at the end of September 2009 had prescription not been interrupted. Subsequent to the summons being served on the appellant, it applied for re-registration of itself. The Registrar of CCs accordingly re-registered the appellant on 11 March 2011.
In response to the appellant's summons, the respondent filed a special plea in which it argued that the summons did not interrupt prescription and that the claim had, as a result, prescribed. Its plea was based on the argument that the debt was due in September 2006 and that the issue of summons had no legal effect as the proceedings had commenced when the appellant was deregistered.
The fact that the summons was null and void was not in dispute. The issue in dispute was whether or not the summons had interrupted prescription.
The decisions of the courts a quo
The respondent's special plea was dismissed in the Magistrate's Court. The Magistrate held that section 26(7) had the effect of retrospectively validating an invalid summons issued by a CC after deregistration and of thus interrupting the running of prescription. The respondent appealed to the High Court.
The High Court, however, was in favour of the respondent's plea and upheld the appeal. It held that section 26(7) was not intended to revive a debt that had prescribed during the deregistration period. Prescription had therefore not been interrupted.
The respondent's contention was that reregistration had the effect of merely restoring the CC's assets and liabilities so that the CC could continue operating as it previously did. The respondent argued that reregistration did not have the effect of validating acts performed after deregistration, and the High Court accepted this argument.
Case law considering section 26(7)
The High Court, in coming to its conclusion, relied on the decision in Mouton v Boland Bank Ltd2 (the Mouton case), which also considered the application of section 26(7). In the Mouton case, the Court held that section 26(7) had to be interpreted in a restrictive manner to achieve the limited legislative purpose. The Court, in using this restrictive approach, found that the purpose of section 26(7) was to merely restore the deregistered CC's assets and liabilities so that it could continue its business, but nothing more.
The Mouton case is, however, somewhat different to the CA Focus case. Mr Mouton was a member of a CC that owed money to a bank. Upon deregistration, the CC still owed money to the bank. As such, the bank sued Mr Mouton in his personal capacity in terms of section 26(5) of the Act to recover the debt owed to it. Section 26(5) of the Act provides that if a CC is deregistered while having outstanding liabilities, the persons who are members of such CC at the time of deregistration shall be jointly and severally liable for such liabilities.
After pleadings had closed, Mr Mouton reregistered the CC and claimed in his amended plea that he was no longer liable for the debt as the operation of section 26(7) had released him from his liability. The Court concluded that the restoration of the CC did not relieve Mr Mouton from his liability to a creditor. In other words, the act of reregistration of the corporation did not extinguish the consequences flowing from the institution of legal proceedings while the CC was deregistered.
By applying the reasoning in Mouton, the High Court held that section 26(7) could not be interpreted in a manner that interfered with the existing rights of third parties. As the rights of third parties include a defendant's right to raise prescription as a defence to a claim for payment of a debt, the High Court upheld the respondent's special plea.
The decision of the SCA
In the SCA, the appellant argued that section 26(7) is unambiguous. It was therefore impossible to interpret the provision without it affecting the existing rights of third parties (as the High Court also found). The SCA noted that section 26(7) does not suggest that the provision was not intended to affect the rights of third parties.
In the CA Focus case it was held that even if the appellant's member of the corporation was aware of the deregistration, the respondent had no cause to complain. The formalities had been adhered to as proceedings were instituted against the respondent within the three-year prescription period, and the respondent pleaded and brought a counterclaim against the appellant. The counterclaim brought by the respondent indicated to the Court that the respondent became aware of the claim in good time and as such suffered no prejudice with regard to the re-registration of the corporation.
In light of the above, Kadoma Trading 15 (Pty) Ltd v Noble Crest CC3 (the Kadoma case) illustrates the SCA's reasoning for its findings in the CA Focus case. In the Kadoma case, a member of the CC was unaware of the deregistration when the agreement was conclude. As a result, the SCA held that the effect of section 26(7) on restoration of the CC was that it validated the agreement retrospectively.
Section 26(7) counterparts in common law
It is interesting to note that section 73(6) of the previous Companies Act, No. 61 of 1973 (the 1973 Act), contained a similar provision to section 26(7) of the Close Corporation Act. But section 224 of the Companies Act, No. 71 of 2008 (the 2008 Act) repealed the provision.
Section 82(4) of the 2008 Act provides that any interested person may apply in the prescribed manner and form to the Commission to reinstate the registration of the company. The provision under the 1973 Act that allowed the restoration to operate retrospectively, has however been omitted.
In the final order of the CA Focus case, the appeal was upheld with costs. The order of the High Court was set aside and replaced, with the appeal being dismissed with costs.
As a result of this order, there is now certainty regarding the deregistration process. Further potential and arbitrary differences between companies and close corporations in terms of section 26(7) have now been effectively done away with.