Reinstatement of deregistered companies has retrospective effect

© Elena Schweitzer – za.fotolia.com

Affected companies that are unaware of their deregistration status also carry on with their business as if the deregistration never occurred. Up until of late it was not clear whether, under the new Companies Act, 2008 (New Act), the reinstatement of deregistered companies has retrospective effect. In other words, what is the effect of actions performed on behalf of a company during its period of deregistration should the company's name later be restored onto the companies register?

The Supreme Court of Appeal, in the recent judgment of Newlands Surgical Clinic (Pty) Ltd v Peninsula Eye Clinic (Pty) Ltd (086/2014) ZASCA 25 (20 March 2015) clarified the position.

Facts of case

The important facts of the Newlands case are as follows: A dispute around a sale of shares between Peninsula and Newlands arose which was submitted to arbitration. Peninsula was successful in the arbitration proceedings. Newlands appealed against the decision of the arbitrator and lost.

In the process of asserting its rights, it came to Peninsula's attention that Newlands had since 4 January 2008 (which was before the commencement of the arbitration proceedings) been deregistered as a company in accordance with the provisions of the old Companies Act, 1973 (Old Act) due to a failure by Newlands to file annual returns. It is a well established legal principle that deregistration of a company puts an end to the existence of a company and its assets become ownerless property and vest in the state.

With the arbitration proceedings and associated award essentially being null and void due to Newlands being deregistered, Peninsula made an application to the registrar of companies for the reinstatement of Newlands' registration. Newlands was reinstated on 3 April 2012. However, during the period of Newlands' deregistration and subsequent reinstatement the New Act, which contained different language to the Old Act, came into effect and rendered the legal effect of reinstatement of deregistered companies under the New Act uncertain.

Old Act v New Act

Under the Old Act reinstatement of companies had full retrospective effect, as the Old Act specifically provided that a reinstated company "...shall be deemed to have continued in existence as if it had not been deregistered...". Unlike the equivalent provisions in the Old Act, the New Act is silent on retrospective application. This led Newlands to argue that its reinstatement did not automatically operate retrospectively so as to validate the arbitration proceedings.

Even though the New Act does not have similar wording to the Old Act, the court held that reinstatement of Newlands under the New Act has automatic retrospective effect and it follows that, the arbitration proceedings and related court proceedings during the period of deregistration, together with the awards, were automatically validated by the reinstatement of Newlands. There is no need for the court to conclusively rule on or affirm the revesting of property or validation of corporate activities.

The court further held that the concept of reinstatement of the company registration, as opposed to re-registration appears to support the notion of placing the company in its former position therefore, reinstatement would hardly serve any practical purpose if it did not at least have the effect of retrospectively revesting the company with title to its property. A conclusion of non-retrospectivity by the court would have had a severely detrimental effect on Peninsula. Accordingly, once a deregistered company is reinstated the affected company does not have to take any corporate action (i.e. pass a resolution) ratifying the actions performed on behalf of that company during its period of deregistration.

Escaping liability

Whilst automatic retrospective reinstatement will prevent a company from escaping contractual or any other form of liability due to deregistration, the restoration of the company's name onto the companies register may also be detrimental to third parties that have in the interim, acquired rights to the property of the company, who will lose those rights when the registration is restored. Reinstatement can also be detrimental to the affected company and theoretically to the state as well.

So what recourse does an affected company or third party who is prejudiced by the retrospective effect of reinstatement have? The legislature anticipated the possible prejudice that might arise as a result of automatic retrospective reinstatement and authorises the court, on application, by any interested party (at any time after deregistration of a company) to grant any order it considers just and equitable in the circumstances. The onus will rest on the third party or company to convince the court not to grant an order in favour of restoration or to grant it subject to certain conditions that will alleviate the consequences of retrospective restoration.

Legal expenses

Unfortunately third parties who wish to enforce their rights against a deregistered company will have to incur legal expenses for reinstatement of a deregistered company by application either to the registrar of companies or to the courts. Similarly, a company or third party that wishes to prevent a restoration or to lessen the retrospective effect of restoration will have to incur legal expenses for exercising its rights.

From a commercial perspective parties should, prior to concluding any business (and during the subsistence of their business relationship) check the registration status of the party they wish to engage or are engaging with. Whilst the law as confirmed by the Newlands case protects a third party that may be prejudiced by non-retrospective effect of restoration of a deregistered company the process of reinstating a deregistered company may be protracted, costly and there is a risk that the third party might, subsequent to the reinstatement, have less rights than it had before deregistration.

Furthermore, it should be noted that the process of reinstating a company is the same irrespective of the reasons (including failure to file annual returns) that lead to the deregistration of a company.