Did you know that if a Company is deregistered all it property passes into the ownership of the State? The remedies available to creditors if a company or close corporation has been deregistered by CIPC: the recent decision of Matjhabeng Local Municipality v McDonald and Others (4075/2020; 4077/2020/4078/2020 (2021) ZAFSHC 34 (19-02-2021).
The process of deregistration:
The Companies and Intellectual Properties Commission (“CIPC”) has placed numerous companies and close corporations (“corporations) in the process of deregistration for failing to file their annual returns on time as is required by the Companies Act No 71 of 2008 (“the Act”).
In terms of section 82(2)(b) of the Act, CIPC must remove the company’s name from the register only if the company has failed to file an annual return for two or more years in succession (see section 33) and in terms of section (82(3)(a)(i), has on demand by CIPC, failed to give satisfactory reasons for the failure to file the required returns or show satisfactory cause for the company to remain registered.
The Registrar must serve a notice on the company or corporation that it will be deregistered unless good cause is shown to the contrary.
The effect of deregistration:
The effect of deregistration is that a company or corporation is deprived of its legal existence.
According to Henochsberg (vol 3 issue 20 Com 55):
“it is submitted that the effect of deregistration of a corporation is that its existence as a legal person ceases … and upon such deregistration all its property, movable and immovable, corporeal and incorporeal, passes automatically (i.e. without any necessity for delivery or an order of Court) into the ownership of the State as bona vacantia” (See also Miller and Others v Nafcoc Investment Holdings (Pty) Ltd and Others 2010 (6) SA 390 (SCA para 11) and Silver Sands Transport (Pty) Ltd v SA Linde (Pty) Ltd 1973 (3) SA 548 (W) 549C).
A debt due to a creditor of a company or corporation which has been deregistered is not extinguished but it is rendered unenforceable against the corporation ( Barclays National Bank Ltd v Kalk 1981 (4) SA 291 (W) at 295) and if a creditor of a company or corporation wishes to sell in execution any immovable property owned by the aforesaid company or corporation which has been deregistered, the creditor will not be able to do so and will in effect have lost its security.
Any summons served on a company or corporation which has been deregistered, cannot be enforced (similarly a company or corporation which has been registered cannot issue summons against a defaulting debtor).
Sechaba Mohapi argues that where a director or officer of the entity authorises the institution of an action on behalf of a corporation after the date of deregistration and if the fault lies with him for taking such action despite knowledge of such deregistration, such director or member will be personally liable for the defendant’s legal costs (in an article on the effects of deregistration of corporate entities during litigation proceedings which was posted on 22 February 2012 on the Phatshoane Henney Group website). Furthermore, the Courts have also been known to grant punitive cost orders against legal practitioners who bring wasteful actions on behalf of deregistered corporations (See for example Barclays National Bank Ltd v Traub, Barclays National Bank Ltd v Kalk 1981 (4) SA 291 (W) 295; Ex parte Varvarian: In re Constantia Pure Food Co (Pty) Ltd 1965 (4) SA 306 (W)).
Deregistration terminates the authority of a person who was a lawful agent of the company or corporation prior to deregistration and an attorney who continues to act for the company or corporation may be held personally liable for the costs of the action from the date of deregistration.
There is an onerous duty upon members and directors of corporate entities, as well as attorneys acting on behalf of such company or corporations to ensure that the entities are registered at all times when they engage in commercial transactions and in litigation. What this requires is that the aforementioned officers and agents have an obligation to check the “status” of the corporate entities with CIPC.
Finally it must be pointed out that although liabilities are not enforceable against a corporation while the deregistration of the corporation subsists, If a corporation is deregistered while having outstanding liabilities, the persons who are members of such corporation at the time of deregistration shall be jointly and severally liable for such liabilities section 26(5) of the Close Corporations Act). However, this may not be of assistance to a creditor if the deregistered corporation owned immovable property against which the creditor wished to execute.
Options available to proceed against a company or corporation which is in the process of being deregistered or which has been finally deregistered?
The question arises how does a creditor sue a company or corporation which has assets and is in the process of being deregistered or which has been finally deregistered?
Application to court to restore a company or corporation:
Under the Previous Act, an interested person could apply to a competent Court for a restoration order and the Court could restore the company if it was satisfied that a company was at the time of its deregistration carrying on business or was in operation or otherwise that it was just that the company was restored - section 73(6)(a),
In terms of the Close Corporations Act, as a result of the amendment of subs (7)(by s62(c) of Act 24 of 2005, with effect from 14th December 2007, there were conflicting court decisions. Initially there were some decisions which held that third parties no longer had a clear statutory right to approach a Court for relief where the circumstances justified the relief.
In Peninsula Eye Clinic (Pty) Ltd v Newlands Surgical Clinic (Pty) Ltd & Others 2012 (4) SA 484 (WCC) (paragraph 5) one finds the following dicta by Binns Ward J:
“Furthermore, under the 2008 Companies Act, the reinstatement of the registration of companies deregistered in terms of s 82(3) of the Act falls exclusively within the province of ‘CIPC’. There is no provision in the 2008 Act for the restoration of the registration of a company by order, on application to a court”.
On 14th November 2012, Henny J delivered a judgment in the Western Cape High Court, in ABSA Bank and Voigro Investments 19 CC and in ABSA Bank Limited v CIPC and Nine Others (2103) JOL 30000 (WCC). Henney J held that:
“If a close corporation has been deregistered for failing to file its annual returns, the registration thereof can be re-instated only by the commissioner and only in terms of section 82(4) of the Companies Act of 2008. In my view there is no other manner in which reinstatement can occur. No provision is made for the restoration of a deregistered company, or in this case a close corporation, by order, on application to a court (at 34)”.
This case also revolved around section 83(4) of the Act, which permits the liquidator of a company, or other person with an interest in the company, to apply for an order declaring the dissolution to have been void or any other order that is just and equitable in the circumstances.
Henney J disagreed with the contention that section 83(4) is equivalent to section 73(6)(a) of the Previous Act and said that in his opinion section 83(4)(a) only gave a possible remedy to an interested party when a company is dissolved following a winding up and does not empower a court to reinstate a company that has been deregistered for a failure to lodge annual returns.
Henny J says at paragraph 44 of his judgment that:
“I am not convinced that it would be impossible or that difficult for the Applicant as an “interested party” to apply to the Commission to reinstate the registration of the close corporation. An argument can be made out that within the ambit of section 82(4) that such application would be permissible”.
However, in ABSA Bank Limited v CIPC (2013) JOL 30290 (WCC), before a full bench, Rogers J held that the present Court erred in concluding that section 83(4) did not apply to a company or close corporation deregistered for reasons other than liquidation. The Court was of the opinion, that section 83(4) applied in all cases where a company or corporation’s name had been removed from the register in terms of Part G of Chapter 2 and where the company or corporation has as a result been dissolved. This includes deregistration on any of the grounds set out in section 82(3). The Court held that where a company or corporation has been deregistered by the CIPC in terms of section 82(3) rather than in terms of section 82(2)(b), an interested party may either apply to the CIPC for restoration in terms of section 82(4) or the Court in terms of section 83(4). Particularly where the interested party finds it impossible or practically difficult to comply with the prescribed requirements relating to restoration in terms of section 82(4), an application to court in terms of section 83(4) is available as an alternative.
In essence, the Court held that the revival of the Company would be just and equitable. It was dissolved while still owning valuable property. The company had at least two unpaid creditors, namely the Municipality and ABSA. Also, the Court went further and held that because the order is being granted in terms of section 83(4), not section 82(4), the prescribed requirements relating to reinstatement under section 82(4) do not have to be met.
Unfortunately, CIPC have placed insurmountable obstacles in the path of a creditor wishing to apply to CIPC to restore the company.
Application to by a Creditor to CIPC to restore a Company:
It is perhaps useful to first consider the options that were available to a creditor in term of the Previous Act.
Under the Companies Act 61 of 1973 (the Previous Act”):
In terms of section 73(6)(a) of the Previous Act the Court could on application by any interested person or the Registrar, if it was satisfied that a company was at the time of its deregistration carrying on business or was in operation, or otherwise that it was just that the registration of the company be restored, make an order that the said registration be restored accordingly and thereupon the company would be deemed to have continued in existence as if it had not been deregistered.
Under section 73(6)(b), any such order could contain such directions and make such provision as to the Court deemed just for placing the company and all other persons in the position, as nearly as may be, as if the company had not been deregistered.
Section 73(6A) provided that notwithstanding subsection (6), the Registrar could, if a company has been deregistered due to its failure to lodge an annual return in terms of section 173, on application by the company concerned and on payment of the prescribed fee, restore the registration of the company, and thereupon the company would be deemed to have continued in existence as if it had not been deregistered.
Reinstatement of a Close Corporation before the coming into being of the new Act:
Before the promulgation of the new Act, in the case of a corporation and in terms of section 26(6) of the Close Corporations Act, no 69 of 1984:
“ the Registrar may on application by any interested person, if he or she is satisfied that a corporation was at the time of its deregistration carrying on business or was in operation, or that it is otherwise just that the registration of the corporation be restored, restore the said registration: Provided that if a corporation has been deregistered due to its failure to lodge an annual return in compliance with section 15A, the Registrar may only so restore the registration of the corporation after it has lodged the outstanding annual return and paid the outstanding prescribed fee in respect thereof”.
In the past, any “interested party” (including a creditor) could apply to restore a company or corporation. In Ex Parte Stubbs NO: In re Wit Extensions Ltd 1982 (1) SA 526 (W), Slomowitz AJ stated in relation to the provisions of the section 72(6), of the Act at the time, that:
“it seems to me that it was intended to widen substantially the class of people who could make the necessary application …. Members and creditors are obviously interested persons.”
Reinstatement of a Company or Close Corporation after the coming into being of the new Act:
In terms of section 82(4) of the new Act, any interested person may apply in the prescribed manner and form to CIPC to reinstate the company.
One must now read section 26(1) of the Close Corporations Act, with sections 81(f), 81(3) to (4) and 83 of the Act.
The procedure to be followed to apply to CIPC to reinstate a company or close corporation:
An initial practice note was issued in this regard being practice note 6 of 2008. On 17th October 2012, CIPC issued a notice to customers of CIPC that they are now required to refer to practice note 5 (sic- should be 6) of 2012 for the new requirements for re-instatement applications on form CoR40.5, which took effect on 1st November 2012.
A new Practice note (08 of 2017) followed on the 6th April 2017. In order to reinstate a company or close corporation from 1st May 2017, the reinstatement application must take place on form CoR40.5 and must comply with the following requirements regardless of the cause or date of registration:
(1) Certified identity copy of the applicant.
(2) Certified identity copy of the owner of the customer code.
(3) Multiple Deed Search (deed search of each of the 10 regional deeds offices).
(4) Letter from the Department of Public Works, ONLY if the multiple deed search reflects immovable property.
(5) Sufficient documentary proof indicating that the company or close corporation was in business or that it had any outstanding assets or liabilities (e.g. property, intellectual property rights) at the time of deregistration.
(6) Mandate from the applicant confirming that the customer may submit on his/her behalf.
Upon successful completion of the application, all outstanding returns must be filed to complete the process.
The practical difficulties:
With effect from 1st November 2012, one may no longer apply for “instant” electronic restoration of companies and corporations deregistered due to non-compliance with submission of CIPC annual returns. This facility has been removed from the CIPC website.
There are several costs involved to process the application, namely the party bringing the application must pay for every annual return not submitted, a restoration fee and penalties.
There are practical difficulties. For example, one has to produce a certified copy of the identity documentation of directors/members, which a creditor might not be in possession of.
One of the requirements is that one must submit a letter from the Department of Public Works, indicating that such departments have no objection to the re-instatement. If it has immovable property this seems patently unfair to creditors and unconstitutional.
One has to file sufficient documentary proof indicating that the company or corporation was in business or that it has outstanding assets or liabilities at the time of deregistration. Once again, this requirement effectively deprives a creditor of the opportunity to apply for the restoration of the company or corporation.
CIPC require a Mandate from the applicant confirming that the customer may submit on his/her behalf.
If a creditor is somehow able to overcome all these hurdles and restore the company or corporation, there are usually significant fees to be paid. The only way to recover these fees is to attempt to rely on an enrichment claim against the company or corporation, probably in the form of the extended negotiorum gestio, which is based on enrichment, which applies where the gestor is actually acting in his own interests.
The effect of reinstatement of a company or corporation:
Attorney Tony Tshivhase pointed out that unfortunately the “Peninsula” case did not confirm whether or not the reinstatement of a deregistered company in terms of the New Act will have retrospective effect (in his firm’s newsletter of June 2012). According to him, it was not clear whether or not CIPC had powers or authority to declare that assets of a deregistered company will re-vest in a reinstated company upon its reinstatement.
In Mouton v Boland Bank Ltd (2001) 3 All SA 877 (SCA), it was stated that the “general effect of the restoration of a company (and no doubt also of a corporation) to the “roll” is that the company is deemed not to have been deregistered at all” (at 881).
However, in Insamcor (Pty) Ltd v Dorbyl Light and Engineering (Pty) Ltd 2007 (4) SA 467 (SCA) at 475, it was pointed out that this is an oversimplification to regard it as being “no more than a return to where you were”.
In the matter between Fintech (Pty) Ltd v Awake Solutions (Pty) Ltd and Five Others (2012) JOL 29612 (GSJ), the deregistration of the Applicant was cancelled as opposed to being reinstated. Judge FHD van Oosten held that the Court retained its inherent jurisdiction, on application or otherwise, to validate anything done by or against an affected company between deregistration and reinstatement.
The uncertainty was resolved in Newlands Surgical Clinic (Pty) Ltd 2015 (4) SA 34 (SCA) where the court held that the Legislature must have intended to reserve the power of retrospective validation to the Courts to be exercised on the basis of what is just and equitable in terms of section 83(4). This means that those who seek retrospective validation are compelled to resort to the costly exercise of an application to court.
If a company which owns property is deregistered who owns the Immovable property: the recent decision of Matjhabeng Local Municipality v McDonald and Others (4075/2020; 4077/2020/4078/2020 (2021) ZAFSHC 34 (19-02-2021).
In this matter the Court dealt with a local authority’s application to Court to declare immovable property of three companies that had been deregistered by the CIPC, bona vacantia, to the Matjhabeng Local Municipality itself.
Together these companies owed the Matjhabeng Local Municipality more than R2,6 million in outstanding rates and taxes. The first company was deregistered in 2011 and owned two properties over which mortgage bonds were registered. The second company was deregistered in 2016 and was the registered owner of one unbonded property. The third company was deregistered in 2010. It owned one immovable property, which was also encumbered by a mortgage bond.
Bona vacantia: Established legal principles
The legal maxim, bona vacantia, deriving from Roman law, is an established legal principle since time memorial. In English law the same principle was adopted, i.e. ownerless property, whether in the case of an owner dying without a will and intestate heirs, or upon dissolution of a company, accrued to the Crown. This legal maxim has been applied in South Africa for at least a century.
The court held that the common law position is clear: ownerless property automatically passes to the State without any form of delivery (including registration in a deeds office in the case of immovable property). Treasury is the organ of State that exercises the right to decide whether the State will lay claim to any undistributed money or claims upon the dissolution of a company. This prerogative of the State has never been abolished by legislation.
In De Villiers and Others v GJN Trust and Others (2019(1) SA 120 (SCA) it was confirmed that ownerless properties automatically passes to the State without any form of delivery (see also Binns-Ward J in Walker Engineering CC t/a Atlantic Steam Services v First Garment Rental (Pty) Ltd 2011(5) SA 14 (WCC), where this was confirmed).
Our courts have also constantly confirmed the principle that deregistration puts an end to the existence of a company at which stage its corporate personality ends in the same way that a natural person ceases to exist at death. The effect of deregistration of a company is that all its property, including any claims it might have against third parties, thereupon vest in the State as bona vacantia.
Did the Municipality (as opposed to the State) become owner of the immovable properties registered in the names of the three deregistered companies?
The Municipality argued that the common law was not relevant anymore in light of our Constitution. The question in these three cases was therefore whether our Constitution has changed the common law.
The common law did not support such a claim of ownership. The Municipality wanted the Court to overrule the common law (and a long line of authorities) to develop the common law to make provision for such vesting in itself of the ownerless properties.
Where a rule of the common law is incompatible with constitutional values, courts have a constitutional duty to develop the common law to in accordance with those values. However, in exercising their powers to develop the common law, judges should be mindful of the fact that the major engine for law reform should be the legislature and not the judiciary. Judges can and should adapt the common law to reflect the changing social, moral and economic fabric of the country. Nonetheless there are significant constraints on the power of the judiciary to change the law and in a constitutional democracy, it is the legislature and not the courts which has the major responsibility for law reform.
The Court quoted an extract from Carmichele v Minister of Safety and Security 2001 (4) SA 938, which is a case where the writer was the attorney of record:
“In exercising their powers to develop the common law, Judges should be mindful of the fact that the major engine for law reform should be the Legislature and not the Judiciary”.
The Public finance Management Act (PFMA), enacted during our present constitutional dispensation, regulates financial management in the national and provincial governments to inter alia ensure that the assets of those governments are mentioned efficiently and effectively. Section 76(1)(k) of the PFMA provides that the National Treasury must make regulations or issue instructions applicable to departments concerning “the alienation, letting or other disposal of state assets”. Section 76(2)(i) of this Act provides that the national Treasury may make regulations or issue instructions applicable to departments concerning “assets which accrue to the state by operation of any law”. The Schedules to the PFMA deal with constitutional institutions, major public entities, and other public entities without any reference to local authorities.
Regulation 10.2.1 of the Treasury Regulations provide as follows:
“10.2 Assets accruing to the state by operation of any law (section 76(2)(i) of the PFMA)
10.2.1 Where any money, property or right accrues to the state by operation of law (bona vacantia), the relevant treasury may exercise all powers, authority and prerogatives, and fulfil any obligation on behalf of the state.”
The Municipality submitted that this regulation was not peremptory. The fact was through that it was always accepted that National Treasury should be cited in applications for the reinstatement of a deregistered company or close corporation. The prescribed manner and form for such an application are contained in the regulations issued in terms of the Companies Act. A number of requirements must be met by an applicant, one which was the requirement to obtain written confirmation from National Treasury and the Department of Public Works indicating that such departments have no objection to the reinstatement of the company if it has immovable property. This requirement does not mention a local authority such as a municipality at all. The Local Government: Municipal Finance Management Act deals with the management of the financial affairs of municipalities. This Act does not contain similar provisions as the PFMA pertaining to bona vacantia for obvious reasons: local authorities such as municipalities do not acquire ownership of ownerless property, this being the entitlement of the State.
In the circumstances, the Court held that the application to amend the common law must fail. It would not be a case of adapting “the common law to reflect the changing social, moral or economic fabric of the country”, but a dramatic departure from existing legal principles. Such a major change in order to reform our law is the prerogative of the legislature and not the judiciary. In fact, the PFMA, its regulations and schedules are indicative of the legislature’s intention not to change the common law principles in respect of bona vacantia.
The position is therefore that properties automatically became vested in the State upon deregistration of the three companies. Nothing prohibits National Treasury to decide on how the properties should be liquidated and what to do with the proceeds thereof. The liabilities of the deregistered companies have not been extinguished upon deregistration, but only rendered unenforceable as long as deregistration subsists. No doubt, the municipality’s claims in respect of rate and taxes need to be paid as a first charge against the properties.
The court however held that the bondholders remain preferent and secured creditors
An infringement of the creditor’s constitutional rights:
The rights afforded to the Registrar seem to constitute an infringement of creditors’ right to equal protection and benefits under the law and just administrative action.
It is almost inconceivable that preferent and/or concurrent creditors should lose their rights when a company or corporation is deregistered by CIPC. CIPC should not be permitted to set in motion a procedure that effectively expropriates assets belonging to companies and corporations, without any right to challenge this in the courts. There is no doubt that CIPC should be entitled to implement a remedy which is effective, but the powers afforded to them should be in proportion to the mischief that the legislature is trying to prevent.
Henochsberg writes that:
“ Having regard to the rights conferred by sections 9(1) and 33(1) of the Constitution of the RSA 108 of 1996 (which guarantee the right to equal protection and benefit under the law and just administrative action), it is submitted that the rights accorded to the Registrar, in terms of subs (6) are constitutionally questionable (vol 3 issue 20 Com-58. (Insamcor (Pty) Ltd v Dorbyl Light and Engineering (Pty) Ltd 2007 (4) SA 467 SCA at 314 H-J).
A creditor is not afforded an opportunity to be heard:
In the latter case the Court concluded that the aim of the relevant provisions of the Constitution could not be achieved where are party whose rights are materially affected by a decision is not afforded a chance of being heard before such a decision is made and that the protected constitutional right must be properly taken into account from the outset.
Excluding the jurisdiction of the courts:
One should bear in mind the fact that the High Court’s capacity or jurisdiction to grant civil relief may be restricted or excluded explicitly or impliedly by an Act which provides for a specific remedy (Kubheka and Another v Imextra (Pty) Ltd 1975 (4) SA 484 (W)).
Where a provision of an Act excludes the jurisdiction of the High Court such provisions should be interpreted restrictively (see CM van Heerden, A Boraine, C Theophilopoulos, A Rowan Grondbeginsels van Siviele Prosesreg 1ed (Durban: LexisNexis 2007) at 49).
CIPC should be called upon to create an appropriate procedure which permits creditors to reinstate a company or corporation and to recover the cost from the aforesaid company or corporation. It is imperative that access to Justice is made easier rather than more difficult.
Ultimately however, the Constitution of the Republic of South Africa is the supreme law. I therefore submit that we should call for immediate intervention by the Legislator to assist creditors, failing which creditors should seek relief in the Constitutional Court.
Perino Pama BA LLB LLM
Attorney: Mosdell Pama and Cox- Plettenberg Bay Inc