The consequences of failing to submit your annual returns…
Chris is the sole member of a close corporation (ABC CC). Three years ago Chris decided to buy an apartment building as an investment. Wanting to protect the property from creditors and ring fence the rental income which he intended to earn, Chris decided to buy the property in the name of ABC CC. Chris invested substantially in the upkeep of the property and recently received a very lucrative offer for the sale of the property which he, as sole member of ABC CC, decided to accept.
However, before transfer of the property takes place, the buyer’s attorney informs Chris, that ABC CC has been deregistered and that the transfer of property cannot take place. Chris, unaware of such deregistration, is shocked and unsure of what he can do to remedy the situation.
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 or close corporation is no longer doing business or does not intend 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 consecutive 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. Chris, 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 ABC 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 or closed corporation is that its existence as a legal persona ceases. Deregistration puts an end to the existence of a company or closed corporation. Such a company or closed corporation 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 property) 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.
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 Chris found out and can be quite costly to rectify, but if dealt with in an efficient and correct manner and with appropriate advice, these possible risks can be restricted to a minimum.