Close Corporation Amendment Bill: briefing

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Meeting report

ECONOMIC AND FOREIGN AFFAIRS SELECT COMMITTEE

ECONOMIC AND FOREIGN AFFAIRS SELECT COMMITTEE
21 June 2005
CLOSE CORPORATION AMENDMENT BILL: BRIEFING

Chairperson
: Ms N Ntwanambi (ANC, Western Cape)

Documents handed out:
PowerPoint Presentation on the Close Corporations Amendment Bill
Close Corporations Amendment Bill [B6B-2005]

SUMMARY

The Committee was briefed on the Close Corporation Amendment Bill. The Bill was intended to address the unfairness to a member or members in relation to the termination of member’s liabilities on restoration or re-registration of a close corporation. It would also broaden the definition of a firm to allow a close corporation to perform the duties of an accounting officer. The amendments would allow a trustee of a trust inter vivos to be a member of a Close Corporation.

MINUTES
The Department delegation included Mr M Moeletsi, Chief Director: Policy and Legislation; Mr M Netshitenzhe, Director and Mr J Strydom, Legal Advisor.

Mr Moeletsi noted that the Department was doing a major corporate law reform. The initial thinking was to incorporate the law that governed Close Corporations into the reform. However, it was decided that this should not be done since the law that governed Close Corporations was satisfactory. A major law reform in relation to Close Corporations might be done in the future. The Bill was necessitated by a court judgement in Mouton and Another v Boland Bank Ltd. The decision would affect the way small businesses conducted their business. The amendments were also to make clear the Department’s policy position on the issue.

Mr Netshitenzhe made the briefing (see document attached). He explained that there was an urgent need to effect the amendments. The Bill was intended to address two important issues:
- unfairness to a member or members in relation to the termination of member’s liabilities on restoration (reregistration) of a close corporation and
- broadening the definition of a firm so as to allow a close corporation to perform the duties of an accounting officer for another close corporation.

In terms of the principle of limited liability the liabilities of a Close Corporation were transferred to the members upon its dissolution. Members became jointly and severally liable for the debts. It might happen that only one of the members had assets or money. The creditors would be forced to go after that member for the full settlement of the debt. The question was what should happen should the Close Corporation be reregistered. Did reregistration terminate the members’ liabilities? The court held that liability remained with the members. The Mouton judgement could lead to unfairness against a member who had discharged the liabilities of the Close Corporation should it be reregistered. Other members could still be members of the reregistered Close Corporation without having paid a cent towards the settlement of the Close Corporation’s outstanding liabilities.

The Bill would also allow membership of inter vivos trusts of close corporation. The Close Corporations Act as it stood prohibited membership of a trust to be a member of Close Corporation. No reason existed why membership was denied. The exclusion was based on tax considerations and these no longer applied.


Clause 1: Amendment of Section 26 of Act 69 of 1984, as amended by Section 6 of Act 38 of 1986
Mr Strydom referred to Section 2(3) of the Close Corporations Act. It provided for the limited liability for Members of the Close Corporation for the liabilities or obligations of the corporation. Section 26(5) provided an exception to the rule of limited liability. In terms of Section 26(5) "if a corporation is deregistered while having outstanding liabilities, the persons who are Members of such corporation at the time of the deregistration shall be jointly and severally liable for such liabilities". In terms of subsection (7) a corporation, should, upon re-registration and issue of notice of re-registration by the Registrar, continue to exist and be deemed to have continued in existence as from the date of deregistration as if it were never deregistered.

Mr Strydom said that in Mouton and Another v Boland Bank Ltd. the question arose whether the restoration of the registration of a close corporation affected a Member’s liability under Section 26(5) of the Act if the liability remained undischarged at the date of restoration of the close corporation’s registration. The court found that the Member’s liability was not extinguished upon the restoration of a close corporation’s registration. The Department was of the view that this could lead to prejudice to certain Members. For example, if a Close Corporation had three Members and it was deregistered, all Members would be jointly and severally liable for the liabilities. It might happen that only one of them would be in a position to settle the debt. As a result the creditors would seek to recover the whole debt from the Member who had enough money to settle the debt. The Department was proposing that should the Close Corporation be re-registered, the Member who was in a position to pay the debt should be able to approach the court for an order that the Close Corporation should be liable for the debt or that the corporation compensate the member who had lawfully paid the claim.

The amendments would introduce fairness to the prejudiced members and promote good corporate governance (no exemption to members’ liability). They would also create more opportunities Close Corporations to participate as entities in the economy.


Clause 2: Amendment of section 29 of Act 69 of 198, as amended by section 3 of Act 64 of Act 1988 and Section 1 of Act 17 of 1990.
The clause would allow a natural person (trustee of a trust inter vivos) to be a member of a close corporation. He said that Section 29 of the Act specifically provided that no trustee of a trust inter vivos could in that capacity directly or indirectly hold a Member’s interest in a corporation. However, a trustee of a testamentary trust could hold such interest. The question was why the trustee of a trust inter vivos was excluded from holding a Member’s interest. The exclusion was based on tax considerations that no longer applied in the present moment.

Clause 3: Amendment of Section 60 of Act 69 of 1984, as amended by Section 9 of Act 81 of 1992
Mr Strydom said that the current Act had no provision that allowed a Close Corporation to become an auditor of another Close Corporation. The Bill was intended to make it possible for a Close Corporation to become an auditor of another Close Corporation.

Clause 4: Substitution of certain words in Act 69 of 1984
The amendments were intended to make the Act gender sensitive.

Discussion
The Chairperson asked if it was not better for the Department to draft a new Bill on Close Corporations instead of making piecemeal amendments.

Mr Moeletsi replied that the intention was to first complete the company law reform. There was no intention of bringing more amendments to the Close Corporations Act in the near future. The current Bill was necessitated by the court judgement in Mouton case.

Mr T Sibiya (ANC)(Limpopo) asked what would happen to members or the Close Corporation’s liabilities should the Close Corporation be reregistered in a different name.

Mr Netshitenzhe replied that the amendments would apply to the reregistration of the original Close Corporation with the same name.

Ms P Themba (ANC)(Mpumalanga) asked if the Department had consulted widely in drafting the Bill. Were communities in deep rural communities also consulted? There were a number of women in rural areas who were using a Close Corporation as business entities. It was important for them to understand the amendments.

Mr Moeletsi replied that they had place adverts in newspapers and radio stations requesting people to comment on the proposals that related to the policy on the reform of corporate regime. It did not go to rural areas because the process would have taken a very long time. The Department had conducted research in rural areas and the views of different communities were accommodated. The Department was busy drafting a Bill to regulate companies and members of the public would be given opportunities to air their views. The amendments in the Close Corporations Amendment Bill were technical and not policy based. They did not require extensive consultation.

Mr Netshitenzhe added that the Portfolio Committee had called for public hearings on the Bill and only one institution had made a submission. This indicated that the Department’s judgement in relation to the Bill had been correct.

Ms Mchunu said that the Department was promoting the use of Co-operatives. There were people on the ground who had been going around telling others that the Department was doing away with Close Corporations.

Mr Moeletsi said that Co-operatives and Close Corporations were two different entities. He agreed that there were people with sinister motives who had been telling others that the Department was doing away with Close Corporations. They were encouraging people to register companies and not Close Corporations. They were engaged in fraudulent activities and belonged behind bars. The Companies and Intellectual Registration Office (CIPRO) was still registering Close Corporations. It was not true that the Department was doing away with Close Corporations.

Mr Z Kolweni (ANC)(North West) asked if there would be any need to make regulations as a result of the amendments. There should be greater consultation should it be necessary to make regulations.

Mr Moeletsi replied that there would be no need to make any regulations. The amendments were only intended to clarify the Act.

The meeting was adjourned.

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