Reinstatement of Deregistered Companies: Are they and Directors Liable for their Actions During Deregistration

ON 21 OCTOBER 2015.

In terms of the current Companies Act, companies and CCs can be deregistered for administrative reasons (in the vast majority of cases for not lodging annual returns and paying annual duty) and can apply to be reinstated. An anomaly exists in the Act in that it is not clear if reinstatement means that the decisions and actions taken by the company, while it was deregistered, are legally binding. This leaves the business and third parties unsure if the company and its directors are accountable for their decisions and activities after deregistration.

The situation is important as 750,000 businesses were deregistered in 2010 by the CIPC (Companies and Intellectual Property Commission) for failure to pay annual duty. Many of these entities are unaware they have been deregistered and have continued trading.

In the old Companies Act, there was no doubt that retrospectivity applied – the business was accountable for its actions whilst it was deregistered.

Various High Courts have differed in their interpretation of the current Companies Act which has increased uncertainty. However, the Supreme Court of Appeal (SCA) has now definitively ruled on this.

What did the Supreme Court of Appeal say?

The Court confirmed firstly that when a company is deregistered it effectively ceases to exist –

1. It loses its status as an entity and
2. All of its assets are forfeited to the State.

The current Companies Act allows for deregistered entities to be reinstated. This, ruled the SCA, is retrospective which means that a reinstated company gets its assets back, it effectively never stopped trading, and its activities in this period are valid and binding.

In this case company A won an arbitration award against company B after B had been deregistered. The High Court ruled that the reinstatement of B was not automatically retrospective. Company A appealed to the SCA which upheld the appeal.

There is also a section in the current Companies Act which allows third parties prejudiced by a company’s reinstatement to seek relief from the courts. When the CIPC decides to reinstate a company, the application must be advertised to the public. Prejudiced parties can make representation against reinstatement or for any other order “just and equitable in the circumstances” (note the company itself could seek relief if it is prejudiced by reinstatement). The SCA found that a prejudiced party can appeal to the courts for relief even after a company is reinstated, thus giving additional avenues to prejudiced third parties.

The situation has now been clarified and will be a relief to all entities that could have suffered losses whilst trading with an entity that had been deregistered. 

Prepared By Representatives of PKF South Africa