Forewarned is forearmed: when deregistration matters most
10/03/2011

Introduction
The deregistration of companies has far reaching consequences for companies and is fast becoming a pressing concern for large scale creditors, such as financial institutions and insurance companies, that none can afford to ignore.
The Duty to Submit Annual Returns
Section 173(1)(a) of the Companies Act, 1973 (“the Act”) provides that in order to assist the registrar of companies (“the Registrar”) to determine whether the information required to be disclosed in terms of the Act by a company has been disclosed and is still valid, every company shall not later than the end of the month following upon the month within which the anniversary of the date of its incorporation occurs, on payment of the prescribed fee, lodge with the Registrar a return in the prescribed form.
Simply put, where a company (“X”) was incorporated on 30 April 1969, it must submit its annual return on or by 30 May each year and pay the prescribed fee. In the unlikely event that the date of incorporation cannot be determined from the documents at the Registrar’s office, the date of incorporation is deemed to be 30 June.
Statutory Reminder by the Registrar
In essence, if X fails to submit an annual return for a period of more than six months after the date on which it fell due, the Registrar is required to send a letter to X by registered post requesting X to submit its annual returns and/or to confirm that it is carrying on business or is still in operation. Thereafter, X will have a month within which to respond. In practice, the Registrar does not strictly adhere to the prescribed time lines and may send the letter at any time after the lapse of the prescribed period.

The Registrar must address the letter or notice to X at its registered office, its postal address and to the care of the directors or officers and the auditor of X (a minimum of three addresses). If there is no director, officer or auditor whose name and address is known to the Registrar per his or her records at the time, it may be sent to each of the persons who signed the memorandum of X, at the address mentioned in the memorandum.

The position can be tricky where X was a shelf company and the directors and officers neglected to update the details on the register, and the directors and auditors have since resigned, as is the case with numerous entities currently on the register, because X may never factually receive any of the Registrar’s letters.

The question as to whether the Registrar is empowered to deregister a company in the absence of proof that the letter or notice was sent by registered post to any of the three aforementioned addresses as required by law is a contentious issue that has been a source of much debate amongst practitioners and disgruntled entities which is not the focal point of this discussion but can well be a subject for a separate heated discussion that is reserved for another day.
Deregistration for Failure to Submit
For argument’s sake, the Registrar will send a letter to X stating the date by which X must respond. Legally, X would have a month within which to respond to a letter that X factually never received.

Be that as it may, if X fails to submit its annual return as required, the Registrar may publish in the prescribed manner and send a notice to X notifying X that on the expiration of two months from the date of the notice, X will, unless good cause is shown to the contrary, be deregistered.
The Effect of Deregistration
Although from a practical point of view, it may be business as usual for X and its creditors who would be oblivious to X’s deregistration, much to their own peril, the legal effects of deregistration could be devastating for all parties concerned.
By nature, a company is a legal entity or a so called fictitious person that exists because the law breathes life into it and confers certain rights and obligations upon it. Registration grants a company the legal capacity to enter into legally binding transactions (vinculum iuris) and engage meaningfully in commerce.

The effect of deregistration is that a company is deprived of its legal existence. That is, it ceases to exist and/or have the capacity to enter into any legally binding business transactions. The law ceases to recognise it as a legal person, all its property vests in the State (bona vacantia) and all claims against it become unenforceable as from the date of deregistration.

For the duration of deregistration, a creditor such as a financial institution, cannot issue summons against a deregistered company based on security provided before the date of deregistration. Similarly, the deregistered company cannot issue summons against a defaulting debtor and any action instituted by or on behalf of or at the instance of the deregistered company during that period will be struck off the roll and any judgment granted against or in favour of a deregistered company during such period is a nullity.

Where a director or officer of X authorises the institution of action on behalf of X after the date of deregistration, such director or officer may be held liable for the defendant’s legal costs. The courts have also been known to grant cost orders against practitioners that bring wasteful actions on behalf of deregistered companies.
Remedies for Deregistration
Section 73(6A) provides a remedy for a company that has been deregistered for failure to submit annual returns to cure such deregistration by applying to the Registrar for restoration on the register with retrospective effect from the date of deregistration. Accordingly, whenever the directors and officers of a company become aware of its deregistration for failure to submit annual returns, they may apply to the Registrar for its restoration. Restoration will be subject to the submission of annual returns and payment of the prescribed fee. Upon restoration, the company will be deemed to have continued in existence as if it had not been deregistered.

Fortunately or unfortunately for some, this process of restoration by the Registrar is only available to the deregistered company. The question then arises as to what happens if X experiences some turbulence in its business operations while deregistered for failure to submit annual returns and the bank elects to foreclose on certain security that X provided for its banking facilities. At that point, the timing and possibility of foreclosure on security becomes pivotal for purposes of mitigating the bank’s losses. It provides little or no assistance, save for academic purposes, to note that the debts due by a deregistered company are not extinguished.

In such circumstances, the practical and legal effect is that the bank cannot issue summons against a non-existent company and the claim is rendered unenforceable by the courts. In fact, any judgment issued against X after the date of deregistration will be a nullity. It also follows that the likelihood that troubled X and its directors and officers will be first in line to assist the bank in applying for restoration in order to enable the bank to sue X, is remote.

The only available remedy for the bank or any creditor will be to apply to a competent court for a restoration order under section 73(6)(a) before it can issue summons against X. In order to obtain an order for restoration, the bank would have to prove that at the time of deregistration, X was still carrying on business or still in operation or otherwise that it is just that registration be restored. The court has the discretion to grant the order based on any one of the aforesaid grounds and may refuse to grant an order even in those instances where all three grounds have been proved.

The courts usually grant a rule nisi calling upon all interested persons to show good cause why the company should not be restored. Public notice may be given in the Government Gazette and a newspaper circulating the area where X carried on business, providing a period within which submissions must be made. Therefore, nonsensical though it may seem, under the current Act all debtors of X whose debts become unenforceable as a result of X’s deregistration would be entitled to make representations as interested persons that may be prejudiced by X’s restoration.

Where a creditor’s claim had not prescribed on the date of deregistration and the circumstances require, the court may, when granting a restoration order, provide that prescription shall not run during the period between deregistration and restoration.
As one can gather, this can be a cumbersome, costly and tedious exercise for any creditor to engage in for purposes of foreclosing on security provided by a deregistered company. In the meantime, nothing prevents the deregistered company from factually disposing of movable property belonging to the business.

As a pre-emptive measure, the cautious approach would be for banks to incorporate a clause in the loan documents, facility letters, undertakings and/or warranties that places a duty on X to submit a copy of the Registrar’s certificate, confirming that X has submitted its annual return for the year in question, by no later than thirty days after the lapse of the anniversary of its incorporation as part of its annual compliance requirements while the security and the facility remains in place.
The Position under the Companies Act, 2008
Under the Companies Act, 2008 (“the New Act”), the issue of deregistration for failure to submit annual returns is dealt with under section 82(3)(a) which empowers the Commission to remove a company from the register only if the company has failed to file its annual return in terms of section 33 for two or more years in succession and on demand by the Commission the company has failed to give satisfactory reasons for the failure to file the required annual return or to show satisfactory cause for the company to remain registered. This means that the Commission will have to comply with stricter and longer time lines and requirements before deregistering a company, much to the relief of companies and creditors alike.

As regards the remedies available to an aggrieved party, unlike the limitations presented by section 73(6A) of the Act, section 82(4) of the New Act makes it possible for any interested person to apply to the Commission to reinstate a company that has been deregistered in terms of section 82(3). Guided by existing case law, an interested person would include a member of the company, a creditor or the company itself. Hopefully that will make it easier for creditors to get their own back.
Liability of Directors and Officers
Section 73(5) of the Act provides that the liability (if any) of every director, officer and member of the company shall continue and may be enforced as if the company had not been deregistered. Accordingly, a creditor is not precluded from taking action against any of the directors and officers of the company based on liability imposed on them for running the affairs of the company in a reckless manner. The position will essentially remain the same under the New Act.
Deregistered Companies Regarded as Associations
The courts have expressed the view that if the business is still carried on after deregistration, the company will not be regarded as a company per se, but rather as an association of persons without legal personality, whereupon the members will be held personally liable for the debts of the association. That said, the courts have also held that personal liability shall not be visited upon a director or officer that enters into an agreement with a third party on behalf of a company unbeknown to both parties that the company was deregistered at the time, which could potentially muddy the waters.
Conclusion
Based on the aforesaid, it is imperative for companies, directors, officers and creditors such as financial institutions to run periodic background checks to determine the status of a company on the register. As the old adage says, prevention is always better than cure and forewarned is by all means forearmed.
Mamarame Matsela
Professional Assistant
mamarame-m@adamsadams.co.za