Is your company still “alive”? The consequences of failing to submit your annual returns

Pam is the sole member of a close corporation (PK Investments CC). Three years ago Pam decided to buy property as an investment. Wanting to protect the property from creditors and ring fence the rental income, Pam decided to buy the property in the name of PK Investments CC. Pam invested substantially in the upkeep of the property and recently received a very lucrative offer for the sale of the property which she, as sole member of PK Investments CC, decides to accept. However, before transfer of the house takes place, the buyer’s attorney informs Pam, that PK Investments CC has been deregistered and that the transfer of property cannot take place. Pam, unaware of such deregistration, is shocked and unsure of what she can do to remedy the situation.

The requirement

All companies and close corporations are required by law to submit their annual returns with the Companies and Intellectual Properties Commission (“CIPC”) within 30 days of the anniversary date of its incorporation. Failure to do so will result in the CIPC assuming that the company and/or close corporation is no longer doing business or is not intent on doing business in the near future.

A company or close corporation may be referred for deregistration in the following circumstances:

  • Upon voluntary application by the company / close corporation itself.
  • If the CIPC believes that the company or close corporation has been inactive for seven years or more.
  • If annual returns are outstanding for more than two successive years.

Non-compliance with the submission of annual returns can accordingly lead to deregistration of a legal entity without consent of the members or directors of such a legal entity. Pam, was unaware of the requirement for submitting annual returns with the CIPC and failed to do so for the last three years, leading to the deregistration of PK Investments CC.

The effects of deregistration of a company or closed corporation

The deregistration of a legal entity can have severe and far-reaching consequences. The effect of deregistration of a company is that its existence as a legal persona ceases. Deregistration puts an end to the existence of a company.  Such a company has no legal capacity to transact and therefore any agreements concluded with or by such a deregistered entity may be negatively affected.

The Act furthermore states that “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. Any liability continues and may be enforced as if the company had not been removed from the register.”

Perhaps the most detrimental effect of a company or close corporation being deregistered due to non-compliance with annual returns, is the fact that all of its assets (including fixed assets such as houses or buildings) vests in the state as bona vacantia (ie as goods that are unclaimed and/or without an apparent owner).

Fortunately the Act makes provision for “any interested person” to apply in the prescribed manner and form to the CIPC, to re-instate the registration of the company or corporation. Such a re-instatement can revive the company or closed corporation to such an extent, that all of its rights and obligations are as enforceable as before its deregistration.

As re-instatement is a long and burdensome procedure, it is advised that assistance be sought from an attorney, especially if immovable property such as a house is involved.

What is apparent from the above is the necessity to verify the status of your company or close corporation with CIPC as well as that of any entity you intend to enter into an agreement with prior to entering into any agreement. The same principle will also apply with regards to litigious matters, whether defending or issuing summons, as any action by or against a deregistered company or close corporation will not be valid.

Courts have even in the past granted punitive cost orders against legal practitioners who bring wasteful actions on behalf of deregistered entities. There is accordingly an obligation on legal practitioners to confirm the legal status of an entity before instituting legal action on behalf of such an entity.

The deregistration of a company or close corporation can have detrimental legal consequences as Pam found out and can be quite costly to rectify, but if dealt with in an efficient and correct manner and with appropriate legal advice, these possible risks can be restricted to a minimum.

September 30, 2013

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