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Transactions entered into by a deregistered close corporation are retroactively validated if it is restored to the register

The retroactive validation of transactions entered into on behalf of a deregistered close corporation

What are the legal consequences where a deregistered close corporation is restored to the register maintained by the Registrar of Close Corporations in terms of the Close Corporations Act 69 of 1984? This was the issue that arose in Kadoma Trading (Pty) Ltd v Noble Crest CC [2013] ZASCA 52 in which the Supreme Court of Appeal handed down judgment on 28 March 2013.

In particular, the question before the court was whether, properly interpreted, the effect of section 26(7) of that Act is that transactions entered into after deregistration are retroactively validated if the corporation is restored to the register

A close corporation's existence is terminated by deregistration

A close corporation, like a company, is a legal persona in its own right, that is to say, it is an entity that the law recognises as having the capacity to incur legal rights and obligations. In terms of section 2(2) of the Close Corporations Act, a close corporation acquires juristic personality when it is registered and remains in existence as a legal persona until it is deregistered or dissolved in terms of the Act.

It is thus clear that, if a close corporation is deregistered, its existence as a legal persona is terminated, and it is thereafter incapable of entering into any transaction whatever. However, the Act empowers the Registrar of Close Corporations to restore it to the register and section 26(7) provides that, as from the date of such restoration to the register

"the 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."

It frequently occurs that the members and employees of a close corporation that has been deregistered often for technical non-compliance with the Close Corporations Act, such as failure to submit annual returns as required by section 15A of the Act are unaware of the deregistration and allow the close corporation to continue to enter into transactions whilst it is deregistered.

In the present case, Maya J had no difficulty in holding that the plain meaning of section 26(7) of the Close Corporations Act, quoted above, is that when a deregistered close corporation is restored to the register, any transactions entered into by it whilst it was deregistered are retroactively validated.

The similar issue in relation to companies

The Companies Act 2008 has no provision equivalent to section 26(7) of the Close Corporations Act for the retroactive validation of contracts entered into by a deregistered company if it is restored to the register.

Consequently, where a company is deregistered by the Companies Commission (for example, where it fails to register an annual return for two or more years in succession and fails to provide a satisfactory explanation to the Commission as envisaged in section 82(3(a)(i) (ii)) and it is later restored to the register, there is no statutory provision that retroactively validates transactions that it professed to enter into whilst it was deregistered.

Nor can the company validate such transactions by ratifying them when it is restored to the register, for there is a common law principle that it is impossible to ratify a contract entered into by an agent at a time when the principal was not in existence.

It has been held that, where a company does not exist, no claim for damages for breach of warranty of authority lies against a person who professed to act as the agent of the company (see Indrieri v du Preez 1989 (2) SA 721 (C)), inter alia because in these circumstances it is inherently impossible to apply the criterion for the quantification of such damages, namely, the amount required to put the third party into the same position he would have been in if he had had authority.

Until just a few years ago, it was unclear whether, in such circumstances, the third party had a delictual claim against the professed agent of a non-existent company.

However, it was held in Kantey & Templer (Pty) Ltd v van Zyl NO 2007 (1) SA 610 (C) that a claim for damages will lie against a professed agent for a non-existent company if it can be shown that he negligently represented to the other party that the company was in existence. In most circumstances, the negligence of the agent in this regard will be self-evident.

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