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Restoration of companies

May 2015

Section 82 of the Companies Act 71 of 2008 (the New Act) has replaced section 73 of the Companies Act 61 of 1973 (the Old Act). 

In terms of section 73(1) of the Old Act the Registrar was required to send to the company a letter enquiring about a company's status if it failed to lodge an annual return within six months of being required to do so, or if the Registrar reasonably believed it was no longer operating. If the Registrar did not receive an answer within one month of sending the letter or if the response confirmed that the company was no longer active, then the Registrar would publish a notice to that effect in the Government Gazette, send a copy of the notice to the company in question, whereafter the company would be deregistered.

Where an interested party might have had a claim against the company prior to its deregistration, section 73(6) of the Old Act provided recourse to restore the company. The interested party was required to, inter alia, satisfy the High Court that the company was carrying on business or was in operation at the time of its deregistration and that an order should be made to restore the company's registration. If this was granted, the company was deemed to have continued in existence as if it had never been deregistered. Furthermore, the court was empowered to apply conditions it deemed necessary to place the company and interested parties in a position as close to those that would have existed had the company have not been deregistered.

Section 82(3) of the New Act provides that in the event that a company fails to file its annual return for two or more consecutive years, or if the Commissioner has reasonable cause to believe that the company is no longer continuing business, it may be deregistered. Section 82(4) of the New Act provides that if the Companies and Intellectual Property Commission (CIPC) deregisters a company in terms of section 83(3), any interested person may apply to CIPC to restore the company.

However, the New Act dispensed with the express provision that a restored company is deemed to have continued in existence as if it had never been deregistered, which is problematic. The ability to restore a company with retrospective effect was, and continues to be of paramount importance to, inter alia, creditors of a company and bona fide third parties who have had business dealings with a deregistered company and wish to enforce their rights. Once a company is deregistered it ceases to exist as a legal entity and all actions pursuant to its deregistration are void and of no legal effect. In addition, upon deregistration the assets of the company become bona vacantia (ownerless goods) and are forfeited to the state (see Rainbow Diamonds (Edms) Bpk & andere v Suid-Afrikaanse Nasionale Lewensassuransiemaatskappy 1984 (3) SA1).

During mid-2010 the then Companies and Intellectual Property Registration Office (CIPRO) markedly increased its use of section 73 of the Old Act to deregister companies that had failed to submit their annual financial returns timeously. As a result a large number of active companies were deregistered in terms of the Old Act but, because they neglected to rectify the situation prior to 1 May 2012, their restoration was governed in terms of the New Act.

The questions that followed were predictable: did the court have the power to restore a company, deregistered under the Old Act, under the New Act? And, if a deregistered company was restored, did the restoration have a retrospective effect?

These questions were brought to the fore in Peninsula Eye Clinic (Pty) Ltd v Newlands Surgical Clinic and Others (21325/11) [2013] ZAW- CHC 156 (the First PEC case). Pursuant to a dispute between the parties, it became apparent that before the commencement of arbitration proceedings, Newlands Surgical Clinic (NSC) had been deregistered as a company in terms of section 73 of the Old Act for failure to submit its annual returns. Peninsula Eye Clinic (Pty) Ltd (PEC) then applied to the Commissioner in terms of section 82(4) of the New Act to have NSC restored to the company register. After some toing and froing between CIPC and the court, PEC obtained the restoration of NSC and sought a declarator from the court to confirm that the restoration had retrospective effect to validate the arbitration proceedings during the period of NSC's deregistration.

In the First PEC case the court sought to clarify the uncertainty surrounding the restoration of a deregistered company in terms of the New Act. It held that it could order the restoration of a company and that this did not rest solely with CIPC. In deciding the position under the New Act, the court held that although the restoration of a company re-established the company's legal personality and its title to its assets, it did not have an automatically retrospective effect insofar as it neither ratified nor validated the company's actions while deregistered. The court proceeded to muddy the water by inferring that in certain circumstances it may be able to order the retrospective effect of actions taken by a deregistered company, but this would be on an ad hoc basis.

Unsatisfied with the outcome in the First PEC case, PEC took the decision on appeal to the Supreme Court of Appeal in Newlands Surgical Clinic v Peninsula Eye Clinic (086/2014) ZASCA 25 (the Second PEC case). The SCA held that the decision in the First PEC case was in part correct but added that a company reinstated in terms of section 83(4) of the New Act had retrospective effect from the date of its deregistration, which included the retrospective validation of it corporate activities during the period of deregistration.

The SCA provided three main reasons for making its order. First, the restoration of a company would have no practical effect if it did not retrospectively re-vest the company with title to its assets; it would become no more than a name on the company register and previously secured creditors would remain unsecured. Second, the different wording in the New Act could not be interpreted to indicate a complete turnaround of the intent of the Old Act. Third, the notion of restoration of a company's registration, in contrast to a mere re-registration, supports the argument of returning the company to its previous position.

The decision in the Second PEC case appears to have filled an apparent lacuna that existed in our company law and has brought certainty to the law concomitant to the restoration of a deregistered company under section 82(4) of the New Act. The case creates the certainty that section 82(4) of the New Act now has an automatic and fully retrospective effect, not only in restoring the company's property but also in validating its corporate activities during the period of its deregistration.

The team

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