Close Corporations Amendment Bill: briefing

Meeting report

Close Corporations Act, No 69 of 1984
Mouton and Another v Boland Bank Ltd, 2001(3) SA 877 (SLA) (see Appendix 2)
Close Corporations Amendment Bill [B6-2005]


SUMMARY
The Committee was briefly taken through the Close Corporations Amendment Bill. The Committee discussed the following issues:
- the need for broader consultation and public education on policy matters
- the importance of policy consideration versus courts decisions
- the importance and effect of the exception regarding limited liability on Close Corporations

MINUTES
The Chair noted that they would only be briefed by the Department on the policy context of the Bill, and the discussions thereof would take place at a later stage

Close Corporations Amendment Bill: briefing
The Department delegation included Mr M Moeletsi, Chief Director: Policy and Legislation; Mr M Netshitenzhe, Director and Mr J Strydom, Legal Advisor

Mr M Moeletsi took the Committee through the presentation, noting the background, purpose and object of this proposed Bill (see Appendix). Before calling Mr J Strydom to take the Committee through the Bill, he informed the Committee that the Department would be introducing further amendments at a later stage.

Mr Strydom took the Committee through the provisions of the Bill and noted that the Bill was as the result of the court decision in Mouton and Another v Boland Bank Ltd, 2001(3) SA 877 (SLA). While members of a close corporation have limited liability for the close corporation’s debts, due to the principle of limited liability, however in some exceptional cases they could be held personally liable, jointly and severally for the close corporation’s debts. Thus the Bill aims at addressing the unfairness that comes with the exceptions to the general rule laid down in S2(3) of the Act. It proposes that after the restoration of a close corporation that had been deregistered, the liability of the member of the close corporation so re-registered should be extinguished and reverts to the close corporation on such application, notwithstanding the decision of the court in Mouton case.

Discussion
The Chair asked the Department to give members an indication which provisions in the Act would the further amendments cover.

Mr M Netshitenzhe noted that the later proposed amendments would cover, amongst others, areas relating to trusts as some trusts are not allowed to be treated as close corporations.

Ms F Mahomed (ANC) noted that the provisions of S26(7)(a) in Clause 1 of the Bill would need to be refined so as to eliminate any ambiguity that may result due to its interpretation

Mr Strydom acknowledged the concern, but believed that the present proposed amendment would suffice at the moment.

Ms E Chang (IFP) felt that the Department of Justice and Constitutional Development should have been consulted.

Mr Moeletsi acknowledged that there had not been proper consultation with the Department of Justice and Constitutional Development on this Bill and said that the concern was noted.

However, Mr Strydom pointed out that since procedurally, the Minister was required to distribute a proposed Bill to all departments when submitting it to Cabinet for principal approval, then a consultation with the Justice Department had at least been done at Cabinet level.

Ms B Ntuli (ANC) felt that the general public should have been consulted in the preparation of these amendments as it would have been helpful to ensure that new entrants in business enterprises are kept abreast of new developments in the law of close corporations.

Mr Moeletsi said that the Department took this issue of consultation very seriously. However in this instance they felt that it would be proper to firstly engage the Committee, before going broader, so as to keep it abreast of government’s policy directives.

Mr S Rasmeni (ANC) felt that it would be necessary for the Committee to conduct public hearings on this Bill as the Department had not conducted proper consultation on the matter.

Mr Netshitenzhe said this amendment was part of the piecemeal amendments that would be brought by the Department before the Committee. This Bill merely was providing a remedy and thus it was not necessary to consult since no right was being taken away.

Ms Ntuli (ANC) asked whether would it be fair to say that the amendment proposed in
Clause 1 was instigated only by the Court decision in Mouton case or were there any other factors that compelled the Department to introduce it.

Mr Moeletsi answered that this amendment was indeed the result of the court decision in the Mouton case. The Department, though this legislation, sought to assist courts with decisions which were favourable to persons who acted in good faith. He said that such assistance was important since the majority of the Close Corporations were situated in disadvantaged environments.

Mr Rasmeni said her agreed with the concerns raised by Ms Ntuli. A study could at least have been conducted by the Department in the field of close corporations. This would have been helpful when the Department devised measures that could support emerging businesses and ensured that the close corporation regime positively contributed to the transformation process, especially noting that government had recently launched the Small Enterprise Development Agency (SEDA).

Mr Moeletsi said that the Department had stated from the onset that they aimed at bringing changes to the field of corporate law and a policy consideration on this had been tabled. The Department was in the process of preparing legislative drafting, which, hopefully, would be tabled in Parliament by the year 2007. However, this amendment needed to be dealt with urgently. He acknowledged the importance of educating the public on the effect of the Bill and noted that the Companies and Intellectual Registration Office (CIPRO) would be responsible for running educational campaigns, which it would do as soon as the Bill was adopted.

The Chair noted that members unanimously agreed that the close corporation regime be favourable to all its participants. It was important for the Department to ensure that relevant stakeholders are brought on board. However it was equally important that they should take cognisance of court decisions. He asked the Department to consult widely in its preparation of the broader corporate legislation to ensure that the process was enriched.

The Office of the State Law Advisors noted that they welcomed the amendments proposed in the Bill as they would give courts the power to make orders which are just and fair.

Ms Chang was concerned that the Bill might have the impact of overloading the court system.

Mr Strydom acknowledged that this might overload the court system but this was a burden that the courts would have to bear since government had a duty to remedy prejudice exisitng in its law and policies.

Mr L Laubschangne (DA) asked the Department to clarify the implications of S26(7)(b(iii) in Clause 1.

Mr Moeletsi noted that what the provision said was simple: a person who had, whilst the corporation was still deregistered, bona fide, lawfully paid the corporation’s debts then s/he should after its re-registration, be reimbursed by the corporation accordingly.

Mr Netshitenzhe added that whilst the Bill deals with the law of corporation, however there were other principles involved in the matter, such as those relating to the law of enrichment. In terms of the latter if a person has, bona fide, unjustifiably enriched another then the law in fairness should require that a person to be compensated for that loss.

Ms Mahomed proposed that members should have a workshop on this Bill so that they could fully understand the implications of the proposed amendment relating to S26(7).

Mr Strydom noted that the proposed Bill had retained the words "as from the date of deregistration". The reason for this was that they want to create a continuous line of liability for a Close Corporation. Thus it was always liable for its debts from its registration up to the date of deregistration - that is when the liability went to the members in terms of S26(5). Then it should revert back to it on its restoration under S26(7)(a).

Mr Laubschangne (DA) asked whether this meant that if an interim procedure had been issued by the Court in terms of S26(5) then such a process would have to be halted and be deemed to have been broken by the re-registration of the corporation.

Mr Strydom agreed and further noted that there were three scenarios where S26(7)(a) would find application. Firstly, where no legal action has been instituted, secondly, where a legal action is pending and lastly, where an action had been instituted and the judgement executed. Thus in all these instances a person who has a material interest in the matter can approach the Court for any of the orders mentioned in S26(7)(b).

Mr S Mshudulu (ANC) asked whether the concept of liability as used in the Bill include factors such as wages, overheads and other expenses incurred by the close corporation.

Mr Netshitenzhe replied that liability in this instance referred to ordinary debt of the Close Corporation in whatever form that it may be.

Mr J Maake (ANC) asked about the legal status of a Close Corporation.

Mr Netshitenzhe said that a Close Corporation is a juristic person, which could sue and be sued in its own name. However the moment it ceases to exist then its liabilities go to its members, individually and jointly.

Mr Maake (ANC) noted that if a Close Corporation is a legal person, just like a Company, then why should its liabilities jump to its individual members while that is not the case with Companies.

Mr Strydom replied that while a Close Corporation is a legal person, there are a few clear distinctions between it and the Company. Amongst others is the fact that it is easier to register a Close Corporation than to register for a Company. As the result, an exception to the general rule of limited liability of members of the Close Corporation had to be provided in the Act. This shows that the corporate veil in the case of the Close Corporation is much thinner than that in Companies as policy considerations consider such necessary.

Mr T Godi (PAC) asked if that is the case, what relevance does the provisions of S2(3) of the Act serve.

Mr Strydom said that S2(3) simply states the general principle of limited liability in corporate law while S26(5) provide an exception to that general principle. He referred members to the court decision in the Mouton case, where it was held that the exception in S26(5) holds members responsible for his/her co-operation in the running of the business. The Court conceded that this is a new rule in corporate law, which had been introduced for the first in 1994, and thus dilutes the corporate law principle of limited liability due to the nature of Close Corporations. Seeing the necessity of S26(5) in the corporate governance of Close Corporations, the Department asked the Committee to shuffle the harsh effect laid down in Mouton case, especially where the party was bona fide. Fairness and equity required that.

Ms Ntuli (ANC) noted that some people, in the field of agriculture, had been given land to own and also provided with strategic partners. She asked who would bear the liabilities in that scenario should the business fail.

Mr Netshitenzhe replied that the Department had noted the question. They were not quite sure whether such people work under the provisions of the Close Corporations Act. They would have to investigate the matter before responding to it.

Mr M Moss (ANC) came with the practical case of a fishing quota, where people had been encouraged to form Close Corporations before they apply for a fishing rights quota. Having done so, they were excluded from sharing in the profit of the close corporation. He asked whether the provisions of S26(5), regarding personal liability of members, would apply against these people should the venture fail and have incurred liabilities.

Mr Netshitenzhe replied that the Department has noted this case and would confer and consult for proper advice.

Ms Mahomed (ANC) proposed that the following words "and equitable" be inserted after "appropriate" in S26(7)(b)(iv) of Clause 1.

The Chair thanked the Department for its presentation and appealed to it to forward the Committee with those further amendments it proposed to introduce so that members would be able to prepare themselves for the deliberations.

The meeting was adjourned.

Appendix 1:
CLOSE CORPORATIONS AMENDMENT BILL, 2005 Director: Policy and Legislation February 2005

Chief

16

1. Introduction

Why a Need to effect the Amendments?

• unfaimess to a member or members in relation to termination of member's liabilities on restoration (reregistration) of a close corporation.
• broadening of the definition of a firm so as to allow a corporation to perform the duties of an accounting officer.
• member's should not be exempted from their liabilities incurred during their tenure.

Economic principles does the Bill seek to address?

• Fairness to the prejudiced members.
• Good corporate Governance (no exemption to members' liability)
• More opportunities created for CCs to participate as entities in the economy.

• The Bill will bring fairness to potentially prejudiced members of a restored CC.
• Good corporate governance will be created in the CC regime.

Presentation of clause by clause follows: Read the Bill.

Close corporation-Members-Liability of for debts of close corporation upon deregistration Close Corporations Act 69 of 1984, s 26(5)-Section 26(5) providing that, if corporation deregistered while having outstanding liabilities members liable therefor-Such liability of members not extinguished upon registration of corporation in terms of s 26(6) and (7).

Statute-Interpretation of-Deeming provision-Approach to-Intention of deeming provision, in laying down hypothesis, that hypothesis to be carried as far as necessary to achieve legislative purpose, but no further Section 26(7) of Close Corporations Act 69 of 1984 providing that upon its reregistration corporation ‘deemed to have continued in existence from date of deregistration as if it were not deregistered'- Deeming provision not having effect that personal liability of member of corporation) imposed in terms of s 26(5)upon deregistration, extinguished.

Section 26 of the Close Corporations Act 69 of 1984 regulates the deregistration and reregistration of close corporations. Section 26(5) provides as follows:

"If a corporation is deregistered while having outstanding liabilities, the persons who are members of such corporation at the time of deregistration shall be jointly and severally liable for such liabilities".

Section 26(6) provides that the Registrar of Companies may under certain circumstances restore the registration of a corporation. Section 26(7) provides as follows:

'The Registrar shall give notice of the restoration of the registration of a corporation in the Gazette, and as from the date of such notice the corporation shall continue to exist and be deemed to have continued in existence as corporation shall continue to exist and be deemed to have continued in existence as from the date of deregistration as if it were not deregistered.'

There is no provision in s 26(5) limiting its operation or making its operation subject to s 26(7). Nor is there any provision in s 26(7) to reverse the one-time operation of s 26(5) in respect of a member. In s 26(7) the Legislature created a statutory fiction that a corporation never ceased to exist, when in fact it did .But that does not mean that the Legislature actually intended to recall time passed. The intention of a deeming provision , in laying down a hypothesis, is that the hypothesis shall be carriedas far as necessary to achieve purpose, but no further. The borad purpose of s 26(7) is that a corporation which has been dissolved because of a misrepresentation by its members will have its assets and law, whether in the course of continued carrying on of business or in the course of liquidation. Nowwhere is there any indication of a purpose to relieve from liability a member responsible for presenting creditors with a vacuum in place of a corporation. Accordingly there is no need to extend the bounds of an imaginary state of affairs ,nor any justification for doing so (Paragraphs [10], [12j, [13] and [14] at 882A/B-B and 882G-883B.) It follows that s 26(7) does not operate, upon reregistration of a corporation to release from personal liability a member who became liable for the corporation's debts in terms of s 26(5) upon its prior deregistration (Paragraphs [1] and [10] at 879E-F and 882A/B.)

The decision in Boland Bank Ltd v Mouton and Another [1997] 4 B All SA 67 (C) confirmed but order supplemented.

Appendix 2:
MOUTON v BOLAND BANK LTD

SUPREME COURT OF APPEAL

Schultz, JA, SCOTT JA and ZULMAN JA

Conclusion

Which

TRADE AND INDUSTRY PORTFOLIO COMMITTEE

16 February 2005
CLOSE CORPORATIONS AMENDMENT BILL: BRIEFING

Chairperson: Mr B Martins (ANC)

Documents handed out:
Close Corporations Amendment Bill, 2005: Presentation (see Appendix 1)