Clyde & Co has successfully represented Peninsula Eye Clinic (Pty) Ltd ("PEC") in a ground-breaking judgment dealing with the restoration of companies under the Companies Act 71 of 2008 (the "Act").
On Friday, 20 March 2015, in the matter of Newlands Surgical Clinic v Peninsula Eye Clinic  ZASCA 25, the Supreme Court of Appeal of South Africa ("SCA") ruled that reinstatement of a company in terms of section 82 (4) of the Companies Act 71 of 2008 (the "New Act") has full retrospective effect.
The circumstances giving rise to the appeal can be summarised as follows: in 2006, a dispute around the sale of shares arose between Newlands Surgical Clinic (Pty) Ltd ("NSC") and Peninsula Eye Clinic (Pty) Ltd ("PEC"), which was ultimately submitted to arbitration. PEC was successful in the arbitration proceedings, successfully resisted an application to review the single arbitrator's decision and successfully resisted an appeal of that decision to a three-member appeal panel. In the process of seeking to assert its right, PEC learnt that NSC had been deregistered on 4 January 2008 as a result of a failure to submit annual returns, as legislated in section 73 of the Companies Act 61 of 1973 (the "Old Act").
Facing the prospect of a pyrrhic victory, and as forerunner to an application for declaratory relief, PEC applied to the Companies and Intellectual Properties Commission ("CIPC") in terms of section 82(4) for the reinstatement of NSC so as to enforce the arbitrator's award. That registration was reinstated on 3 April 2012. But the legal status of the company in the intervening period was rendered uncertain given the differences in the language between the Old and New Companies Act.
Under the Old Act, an affected company or third party could in terms of section 73(6) or 73(6A) apply either administratively (i.e. via an application to CIPRO) or judicially (i.e. via an application to court) for reinstatement which would have had full retrospective effect ("thereupon the company shall be deemed to have continued in existence as if it had not been deregistered"). However, the relevant provisions of the New Act are devoid of any reference to retrospective application. This led many to argue (including NSC) that the omission signalled an intention on the part of the legislature to abandon the regime of retrospective reinstatement.
In its application for declaratory relief, PEC asked the court to declare that the reinstatement of NSC occurred with retrospective effect both as regards the revesting of its property as well as a validation of "all acts done by or against it from the date of its deregistration until the date of its reinstatement". In the alternative, PEC asked for an order in terms of s 83(4) of the New Act (which authorises a court to make "any other order that is just and equitable in the circumstances") directing that the reinstatement should have the aforementioned effect.
NSC resisted the application arguing that whilst reinstatement to the Companies Register by the CIPC has the effect of restoring its legal personality, it did not retrospectively validate any of its 'corporate activity' during the period of its deregistration.
The court a quo held that while reinstatement under s 82(4) retrospectively re-establishes a company's corporate personality and restores its assets to it, the section does not validate acts carried out during the period of deregistration. However, Binns-Ward J went on to opine that once reinstatement has been obtained under s 82(4), the courts retain the ability to validate 'corporate activity' during the period of reinstatement by granting additional relief under section 83(4), when it would be just and equitable in the circumstances to do so.
This turned out to be one of several conflicting High Court decisions on the issue, reflecting an intermediate position where others have reflected either no retrospectivity or full retrospectivity.
Brand JA, writing for a unanimous bench, reasoned that having regard to the various judgments, the following is evident:
- Only one judgment suggests that the section 82(4) connotes no retrospectivity but is incorrect because it, wrongly, assumes that this section is simply a reincarnation of the equivalent section in the Old Act which does not explicitly reference retrospective reinstatement – in fact the New Act provides a whole new framework insofar as re-registration and reinstatement is concerned;
- Prejudice to third parties may follow whether one retrospectively validates the corporate activities of a company, or if one declines to do so;
- An application in terms of section 83(4) – a costly exercise which entails an application to court – cannot be what was contemplated to remedy an administrative deregistration;
- Complete retrospectivity resulting from an administrative process was a feature under the Old Act;
- An application for reinstatement under section 82(4) does, indirectly, require an advertisement process which allows third parties the opportunity to contest such reinstatement; and
- The very wording of section 82(4) suggests that reinstatement under that section has automatic retrospective effect.
The SCA therefore ruled that NSC's reinstatement occurred retrospectively through the operation of section 82(4).
In a final act of clarification, the SCA went on to opine that even where a company is reinstated retrospectively through the operation of section 82(4), any aggrieved party may apply, in terms of section 83(4), for relief from the potential prejudicial effect of such an outcome.
The judgment has important implications for commerce in South Africa as administrative deregistrations are commonplace. As a rule, neither the affected companies nor the public at large are made aware of the deregistration with the consequence that many third parties continue to transact with these companies on a business-as-usual basis. It goes without saying that this could lead to significant prejudice for those contract unwittingly with a deregistered company.
Not only does the judgment alleviate the position of those parties seeing to reinstate a company's registration but it has definitively clarified an important aspect of the New Act, which to date, has caused considerable confusion and uncertainty.
*Clyde & Co's Cape Town office acted, successfully, for PEC in this matter
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.