Post-deregistration corporate activity: valid or void?
The Companies Act, No 71 of 2008 (Act) provides that the Companies and Intellectual Property Commission (CIPC) may deregister a company where it fails to file annual returns for two or more years in succession and doesn't provide adequate reasons for the failure. The Act also provides that, where CIPC deregisters a company on these grounds, an interested party may apply to reinstate the registration of the company.
Very often, deregistration in the above circumstances results from administrative negligence on the part of the company rather than the company having ceased its corporate activities. The question that arises is what the effect of reinstatement to the register is? More particularly, are the acts performed by the company during the period of deregistration validated? This was the issue brought before the Western Cape High Court in the recent matter of Peninsula Eye Clinic (Pty) Ltd v Newlands Surgical Clinic and others.
The previous Companies Act, No 61 of 1973 contained an express provision that, upon restoration of a company's registration, all corporate activity which occurred during its period of deregistration was validated retrospectively. These express provisions were repealed by the current Act.
The facts of the Peninsula Eye Clinic case are briefly as follows: Newlands Surgical Clinic (Respondent) failed to submit its annual returns and was subsequently deregistered by CIPC. During this period of deregistration, the Respondent actively defended and subsequently lost arbitration proceedings against Peninsula Eye Clinic (Applicant). An arbitration award was made against the Respondent ordering the company to pay the Applicant a substantial sum.
The Respondent refused to pay the amount awarded, contending that the arbitration award had no bearing since the company had no legal status at the time and could not have had the authority to participate in the arbitration.
The Judge stated that the automatically retrospective provisions of the old Companies Act had potentially prejudicial consequences for third parties and that where a company's acts are to be retrospectively validated, a judicial process, which affords affected third parties the right to be heard, was far preferential to an automatic administrative one.
The court accordingly held that administrative reinstatement of a company's registration would automatically restore its corporate personality and title to its assets, but would not validate its corporate activity during the period that it was deregistered. A reregistered company or interested party would have to apply to court for an order to that effect.
In the particular circumstances of this case, the court found that it would be just and equitable for the arbitration proceedings to be declared valid and accordingly for the respondent to be bound by the terms of the arbitration award.
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