The Retrospective Reinstatement of Deregistered Companies

It has become commonplace that companies neglect to file their annual financial returns to ensure that they remain on the register of companies by the Companies and Intellectual Property Commission (CIPC). The issue then surfaces when the company has entered into a contract with another party, and whilst having performed its obligations; the other contracting party refuses to make payment owing to the deregistration from the CIPC’s register of companies. (We note that the CIPC was created in terms of section 185 of the Companies Act 71 of 2008.)

How and why does deregistration take place, and can a deregistered company then be retrospectively reinstated? 
We look at the Companies Act and leading case law, to answer these questions.

Companies Act 71 of 2008 

Section 82 of the Companies Act deals with the dissolution of companies and removal from the register, while section 83 is in respect of the effect of the removal of the company from the register.

For our question, section 82(3) of the Companies Act is relevant to the circumstances. This section states that:

“In addition to the duty to deregister a company contemplated in subsection (2)(b), the Commission may otherwise remove a company from the companies register only if- 

(a) the company has transferred its registration to a foreign jurisdiction in terms of subsection (5), 

1. has failed to file an annual return in terms of section 33 for two or more years in succession; and 
2. on demand by the Commission, has failed to- 

(aa) give satisfactory reasons for the failure to file the required annual returns; or 

(bb) show satisfactory cause for the company to remain registered; …”

When a company has failed to file its annual (financial) return for two consecutive years, and presumably has failed to give satisfactory reasons for the failure to do so, and/or failed to show satisfactory cause to remain registered, the company will be removed from the register of companies by the CIPC. This deregistration, would obviously effect the validity of a contract with another party, seeing that the company would not be viewed as a corporate entity at the time of contracting.

It must be noted that in terms of section 82(4), the company or any interested person, could have applied in the prescribed manner and form to the CIPC to reinstate the registration to the registry of companies. This administrative reinstatement often does not take place.

The CIPC issued a Practice Note which dealt with the requirements for re-instatement of companies. In terms of Practice Note 6 of 2012: 

In order to re-instate a company, the application must comply with the following requirements regardless of the cause or date of deregistration:

(1) “Certified copy of the identity document of the applicant (director or member); 

(2) Certified copy of the customer filing the application; 

(3) Deed search (reflecting ownership of immovable property or not);

(4) Letters from the National Treasury and Department of Public Works, indicating that such departments have no objections to the re-instatement; if it has immovable property; 

(5) Advertisement in a local newspaper giving twenty one 21 days’ notice of proposed application for re-instatement; 

(6) Affidavit indicating the reasons for non-filing of annual returns, if deregistration was due to non-compliance in relation to annual returns; 

(7) Affidavit indicating the reason for the original request for deregistration, if the company or close corporation itself applied for deregistration; 

(8) Sufficient documentary proof indicating that the company or close corporation was in business or that it had outstanding assets (e.g. property or intellectual property rights) and liabilities at the time of deregistration.”

As mentioned above, the effect of the removal from the registry is provided for in section 83 of the Companies Act. This section states:

1. “A company is dissolved as of the date its name is removed from the companies register unless the reason for the removal is that the company’s registration has been transferred to a foreign jurisdiction, as contemplated in section 82(5).

(2) The removal of a company’s name from the companies register does not affect the liability of any former director or shareholder of the company or any other person in respect of any act or omission that took place before the company was removed from the register.

(3) Any liability contemplated in subsection (2) continues and may be enforced as if the company had not been removed from the register.

(4) At any time after a company has been dissolved- 

(a) the liquidator of the company, or other person with an interest in the company, may apply to a court for an order declaring the dissolution to have been void, or any other order that is just and equitable in the circumstances; and 

(b) if the court declares the dissolution to have been void, any proceedings may be taken against the company as might have been taken if the company had not been dissolved.”

This section outlines the effect of the deregistration. It states that a company is dissolved as of the date its name is removed from the companies register. A dissolved company would not have the necessary capacity to enter into a contract, which would render a contract void.

In terms of section 83(4) as stated above, a person with interest in the company may apply for a court order declaring the dissolution to have been void, or any other order that is just and equitable. This may then be the solution for a deregistered company; to make application to a competent court, to order that the dissolution be void, or a just and equitable order, namely that it should be recognised in a contract, and that the third party should perform its obligations in terms of the contract, thus ensuring the validity of the contract. 

The new Companies Act also makes it difficult for a court to make such an order, as it does not cater adequately for such a restoration of registration, to provide for a deregistered company to be regarded as a corporate entity when its name has been restored on the registry after deregistration.

We note that there is also no coherence between the old Companies Act and the new Companies Act, in that, in terms of section 72 of the old Companies Act, it was clearly stated that restoration of a company’s registration on the register provided it with the retrospective corporate personality. However the new Companies Act is somewhat silent on this, and merely provides for the company to be registered again on the company register, with no proviso on retrospective restoration especially in respect of activity whilst the company was deemed to be deregistered, thus the importance of a court’s interpretation on this piece of legislation.

Case law provides much insight to the questions contemplated.

Case Law

The journal article entitled Deregistration and Reinstatement of Registration of deregistered Companies (Coetzee L, Deregistration and Reinstatement of Registration of deregistered Companies, 2015) is very insightful in this regard, and focused on the cases of Peninsula Eye Clinic (Pty) Ltd v Newlands Surgical Clinic ( [2013] ZAWCHC 156; 2014 (1) SA 381 (WCC); [2014] 1 All SA 592 (WCC)) and Newlands Surgical Clinic v Peninsula Eye Clinic ([2015] ZASCA 25) (Newlands and Peninsula), which led to the Supreme Court of Appeal decision of great precedent, in this type of matter.

The brief facts of this matter is that Peninsula’s ophthalmic surgeons did not have its own clinic, thus made use of the facilities offered by Newlands. Newlands provided incentives to encourage the use of its facilities. However, the Health Professions Council of South Africa forbade the payment of incentives from 2000. As a result, and with the intent of making payment of an amount for incentives, Newlands would buy a share of Peninsula equipment, which was far less value, in order to pay the incentive amount. Newlands then retracted from this agreement stating the value of the equipment was far less. The parties entered into arbitration, and the arbitrator found in favour of Peninsula. It was found, after an unsuccessful appeal, that Newlands was deregistered in 2008, during the arbitration and appeal. The issue then became whether the reinstatement of Newlands corporate personality, validated the arbitration proceedings, and the court was to decide on the retrospective effect of reinstatement in terms of section 82(4) of the new Companies Act.

After much reference to previous cases and legislation, the SCA held that the reinstatement of the registration of a company by the CIPC, in terms of section 82(4) is automatically retrospective. The court mentioned the prejudice to bona fide third parties, if the restoration was not retrospective, especially in light of how companies continue to operate despite being removed from the register. The court further confirmed that the automatic retrospective effect meant that the corporate activities of the company during deregistration, was validated. 

Whilst previous cases differed in its approach to section 82(4) and the overall aspect of reinstatement of registration, the SCA took a wide interpretation of section 82(4) and the decision in the Newlands case is a welcomed decision, especially as it serves to safeguard bona fide third parties. However, this decision should not permit companies to disregard the rules in respect of filing annual returns and other provisions required for continued registration on the company register. 

With a view to the Newlands judgment, a court should order for the automatic retrospective reinstatement of a deregistered company to the registry, with the effect of ensuring its activities during deregistration is validated. This means that its entering into a contract; its performance of its obligations in terms of the contract, and its subsequent demand for the other contracting party’s performance, is also validated. 

Conclusion

Having considered the Companies Act; case law and the journal article, it is safe to deduce that when this type of matter is brought before a court of law, a deregistered company would be automatically retrospectively reinstated, which would mean its activities during deregistration from the company register would be validated. 

The company must take the necessary steps for reinstatement as aforementioned in the CIPC practice directives, in order to be reinstated, and to ensure the validity of a contract, as well as its demand against the other contracting party.

This is a safe approach to the Companies Act, as it safeguards bona fide parties, as companies do seem to continue operating despite deregistration. Companies should, however, be forewarned that they cannot wantonly disregard the rules in place for adherence to the Companies Act, so as to ensure that they remain on the companies registry. A complete disregard in future, may very well result in a court decision that a party should not be automatically retrospectively reinstated.