What right of recourse exists for creditors wanting to recover their monies from a company that has been deregistered

WHAT RIGHT OF RECOURSE EXISTS FOR CREDITORS WANTING TO RECOVER THEIR MONIES FROM A COMPANY THAT HAS BEEN DEREGISTERED IN TERMS OF SECTION 82(3)(B)(II) OF THE COMPANIES ACT NO. 71 OF 2008

Introduction

Have you ever entered into a verbal or written contract where you rendered services to a company and were not paid? Have you been retrenched and promised severance pay by the company, only to find it has since been deregistered and has closed shop, but they have never paid you a cent?

At this stage, you may have tried recovering your money from the company by utilising all legal remedies available at your disposal. You may have spent time at the CCMA, attending conciliations that have failed, and going to arbitrations in which you may have been successful, but the company still refuses to pay. You may have even taken it to the labour court and exhausted all the options at your local magistrates court in terms of section 65 of the Magistrates Courts Act 34 of 1944 (“the Magistrates Courts Act”), which provides for a financial inquiry process. Yet, unfortunately, you remain unsuccessful in recovering what is rightfully yours. Now you may be left destitute with bills piling up, and you have now reached a point where you may be asking yourself, “What is next?”

Alternative methods

There are some alternative methods for recovering monies from debtor companies that have been deregistered where creditors have been unsuccessful in running the ordinary methods allowed for in law, i.e., warrant of execution against property and financial inquiries in terms section 65 of the Magistrates Courts Act.

Section 82 of the Companies Act 71 of 2008 (“the Act”) sets out the grounds for deregistration of a company. When a company embarks on the deregistration process, it will usually do so in terms of section 82(3)(b)(ii) of the Act, which states the following:

“(82) Dissolution of companies and removal from register. — (1) The Master must file a certificate of winding up of a company in the prescribed form when the affairs of the company have been completely wound up.

(3) In addition to the duty to deregister a company contemplated in subsection (2)(b), the Commission may otherwise remove a company from the companies register only if—

(b) the Commission—

(ii) has received a request in the prescribed manner and form and has determined that the company

(aa) has ceased to carry on business; and

(bb) has no assets or, because of the inadequacy of its assets, there is no reasonable probability of the company being liquidated.”

Loses its legal capacity

Once a company is deregistered, it loses its legal capacity and, with immediate effect becomes, inactive. It can no longer litigate or be litigated against, and all the assets within the company (in the case where there were still assets held within the company) are considered forfeited to the state. The company is not required to give notice of its impending deregistration, so it is possible that a litigating party may only become aware of the deregistration once the company’s assets have been sold off and the deregistration has been finalised.

The act of deregistering the company would almost always prejudice the existing creditors of the company. For instance, a creditor can no longer continue legal proceedings against a company under section 65. Thus, leaving a creditor with no choice but to take additional legal steps.

What legal remedies are available to creditors of a deregistered company?

• Reinstatement

In ABSA Bank v CIPC and others SA 194 (WCC) 2013, the creditor, which was the bank, was unaware that a company whose property they were attempting to attach had been deregistered. Considering the circumstances, the court then had to consider the protection provided by the Act in sections 82(4) and 84(4) of the Act.

Section 82(4) of the Act states the following:

“(4) If the Commission deregisters a company as contemplated in subsection (3), any interested person may apply in the prescribed manner and inform the Commission to reinstate the registration of the company.”

• Court application to declare dissolution void

Section 83(4) states:

Effect of removing a company from the register.

“(4) At any time after a company has been dissolved,

(a) the liquidator of the company, or any other person with an interest in the company, may apply to a court for an order declaring the dissolution to have been void, or any other order that is just and equitable in the circumstances, and

(b) if the court declares the dissolution to have been void, any proceedings may be taken against the company as might have been taken if the company had not been dissolved.”

The consequences of a company deregistering are that creditors may have lost rights that they had against the company, or they may have chosen not to exercise a right against the company because the company had been deregistered and no longer existed. Through the operation of a court order declaring the dissolution void, a company would, however, revive with retrospective effect.

In terms of section 83(4), any creditor can apply to court to have a company reinstated, and the court is free to make any other order that it finds just and equitable.

Retrospective effect

In the case of Newlands Surgical Clinic v Peninsula Eye Clinic SA 34 (SCA) [2015], the Supreme Court of Appeal held that an order under section 83(4) can have retrospective effect from the date of deregistration. This would include validation of litigious proceedings or company activities during that period, and an application can be brought against the Companies and Intellectual Property Commission (“CIPC”) to have the company reinstated.

The purpose of reinstating a company would be to restore the company to its previous position before it had been deregistered. What this means is that the company is deemed to have continued existing as if it had not been deregistered. Thus, you, as a creditor, would be placed in a position to continue pursuing your claim against the company. You may request the reinstatement of the company, either through the administrative requirements as set out in section 82(4) of the Act, or via an application to court in terms of section 83(4).

Process for reinstatement

In order to request the reinstatement of a company, you must comply with the new Practice Note 1 of January 2022 by GN 1654 of Government Gazette 45703 of 31 December 2021 which sets out the documentation, herein listed below, that would be required in support of your reinstatement application.

1. Certified copy of the applicant’s identity document not older than 3 months.
2. Certified identity copy of the owner of the customer code not older than 3 months.
3. Multiple Deed Search (deed search of each of the 10 regional deeds offices).
4. Letter from the Department of Public Works, ONLY if the multiple deed search reflects immovable property.
5. Sufficient documentary proof indicating that the company or close corporation was in business or that it had any outstanding assets or liabilities (e.g., property, intellectual property rights) at the time of deregistration.
6. A mandate from the applicant confirming that the customer may submit on his or her behalf.

CIPC is more likely to reinstate a company or close corporation if the company or close corporation was in business at the time of deregistration. You would need to prove this; hence, there must be sufficient documentary evidence in the form of bank statements for a period of six months before and six months after deregistration showing that the business was operating. Another instance where CIPC is more likely to reinstate a company is where there is immovable property that is registered in the name of the deregistered business or where the court has issued an order re-instating the company or close corporation. It is important to note that if none of the above can be proven by sufficient documentary evidence, then CIPC will not re-instate the company or close corporation.

Piercing the corporate veil in terms of section 20(9)(b) of the Act

“Piercing the corporate veil,” as it is known, is when a court puts aside limited liability and holds directors personally liable for the companies’ actions or debts.

Piercing the corporate veil through which directors of the company may be held personally liable can be done only if it can be proven that there was reckless trading on the part of the company. An example of reckless trading would be if there was intent on the companies’ part to defraud any person or that they had fraudulent motives or purposes.

Proof of fraud or dishonesty

In the case of Kurt Robert Knoop NO and others v Birkenstock Properties (Pty) Ltd and others ZAFSHC 67 [2009], the court held that the corporate veil may be lifted where there is proof of fraud, dishonesty, or other improper conduct on the use of the company or the conduct of its affairs, or whether the transactions complained of were part of a “device”, “stratagem”, “cloak” or “sham”.

Although a court does not have a general discretion to lift the corporate veil if it considers it just or convenient to do so, a court may lift the veil on grounds of fraud, dishonesty, or other improper conduct if these grounds are established.

Take note that the word “may” cited in section 20(9) of the Act indicates that a court has discretion to grant an order to lift the corporate veil of a company in terms of section 20(9) of the Act. However, the courts do not have the general discretion to pierce the corporate veil merely because it is just and equitable to do so.

Unconscionable abuse

Therefore, a creditor would have to show that there has been “unconscionable abuse” of the juristic personality of the company as a separate entity. If this is proven, then a court would be inclined to declare that the company is to be deemed to be a juristic person in respect of any liability and lift its corporate veil.

The act does not define what “unconscionable” is, but there have been examples of what the courts think would constitute unconscionable abuse. For example In Haygro Catering BK v Van der Merwe en Andere 1996 (4) SA 1063 (C), the court held that the members of a close corporation were, together with the close corporation, jointly and severally liable for the debts of the close corporation where the name of the close corporation had not been displayed anywhere on the corporation’s business premises, documents, or correspondence, in contravention of section 23 of the Close Corporations Act. The court found that this failure had constituted a gross abuse of the juristic personality of the corporation as a separate entity under section 65 of the Close Corporations Act.

Conducted business fraudulently or recklessly

In TJ Jonck BK h/a Bothaville Vleismark v Du Plessis NO en ’n Ander 1998 (1) SA 971 (O), a member of a close corporation who had made large loans to the close corporation, despite knowing that it was insolvent, had given written authorisation for the registration of a notarial bond over the movable property of the corporation as security for his loans to it. A few months later, he obtained an order entitling him to take possession of all the movable assets of the corporation in terms of the notarial bond. He thus acquired ownership of the business in his name, without any creditors, and continued to conduct business from the same premises under a new name, using the equipment and stock that had previously been that of the close corporation. The court found that he had conducted the business of the close corporation fraudulently or recklessly under section 64 of the Close Corporations Act, but it stated that, in terms of section 65 of the Close Corporations Act, the member’s actions had also constituted a gross abuse of the juristic personality of the close corporation.

Although piercing the corporate veil is available, it is regarded by our court as a drastic remedy, and it must be resorted to as the very last resort in circumstances where justice will not otherwise be done between two litigants. It is recommended that you seek legal advice if you intend to pursue this remedy.

Conclusion

In conclusion, if you or someone that you know faces the challenge of trying to recover monies owed to them by a company that has been deregistered, then it is imperative that you seek legal representation to assist with instituting the discussed remedies or that you seek further legal advice.