Retrospective corporate validity and the Companies Act 71 of 2008 –  legislative  intention or  oversight?

March 23rd, 2016
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By Kershwyn Bassuday

With the enactment of the Companies Act 71 of 2008 (the Act), there was a call for the courts and other bodies, such as the Companies and Intellectual Property Commission (CIPC), to harmonise the changes and differences between the outgoing Companies Act, namely the Companies Act 61 of 1973 (the 1973 Act) and the Act. One such example, Newlands Surgical Clinic (Pty) Ltd v Peninsula Eye Clinic (Pty) Ltd 2015 (4) SA 34 (SCA). This appeal turned on the Supreme Court of Appeal’s (SCA) interpretation of s 82(4) of the Act as juxtaposed with s 83(4) of the Act.

The High Court judgment – the factual matrix

The matter regarding the retrospective validation of corporate activity first came before Binns-Ward J in Peninsula Eye Clinic (Pty) Ltd v Newlands Surgical Clinic and Others [2014] 1 All SA 592 (WCC) (see also Law Reports ‘company law’ 2015 (Sept) DR 43). A company, the respondent, was deregistered due to the non-submission of its annual returns as required by the Act. During this period, the respondent was party to arbitration where the applicant was granted an arbitration award in its favour. The respondent contended that the arbitration award had no bearing or validity, as the company, at the time of the award, had been deregistered, had no legal status, and did not have the authority to enter into the arbitration. In this instance, the fundamental question the court in Peninsula had to answer – was whether on reinstatement of the company by the CIPC, it would make the arbitration award and the participation of the previously deregistered company in the arbitration proceedings retrospectively valid.

The court’s reasoning

Was it now possible to validate corporate activity during the period of deregistration once the company was revived as previously governed by the 1973 Act? (See Insamcor (Pty) Ltd v Dorbyl Light and General Engineering (Pty) Ltd 2007 (4) SA 467 (SCA).) Plainly, and provided for by both incarnations of the Companies’ Acts, a deregistered company is capable of resurrection. However, the legislative uncertainty around retrospective validation, meant that the court had to now decide between probable meanings, since the legislature had left it open for interpretation. Reflecting on Absa Bank v Companies and Intellectual Property Commission and Others 2013 (4) SA 194 (WCC), Binns-Ward J held, that the court made no determinative finding but did make some passing observations about s 82 of the Act, which ‘might support a construction of the provision to the effect that reinstatement in terms of s 82(4) was retrospective in effect’.

In his judgment, Binns-Ward J took the court on an interpretative journey through past judgments, which had tackled this question. Binns-Ward J went on to state that in previous judgments emanating from this court, it was held that the omission of any equivalent in the Act of the express provisions found in the 1973 Act was a plain manifestation of the legislature’s intention to exclude retrospective effect on the reinstatement of the company’s registration (see Bright Bay Property Service (Pty) Ltd v Moravian Church in South Africa 2013 (3) SA 78 (WCC)). While such an omission from ss 82(4) and 83(4) of the Act of any express retrospectivity provisions is a good argument to show the legislature’s intention to depart dramatically from such provisions, Binns-Ward J, however, did not consider the Bright Bay matter to be persuasive in this meaning. With this in mind, the court held that a purposive approach must be used in the interpretation of the provisions since the legislature’s intention is not clear. Sections 5 and 7 of the Act provide that it is acceptable to construe the Act in a purposively manner that would be effective in addressing recognised needs and considerations, unless the language clearly excludes it.

Does this reinstatement of a company’s registration bring with it retrospectivity insofar as the corporate personality and company property is concerned or does it also include any corporate activity carried out during the period it was deregistered? Unfortunately, the court held at para 31 that the jurisprudence available to answer this question did not hold much clarity or fully consider the issue of retrospectivity (see Fintech (Pty) Ltd v Awake Solutions (Pty) Ltd and Others 2013 (1) SA 570 (GSJ); Amarel Africa Distributors (Pty) Ltd v Padayache (GNP) (unreported case no 236/2011, 28-3-2013) (Legodi J); and Nulandis (Pty) Ltd v Minister of Finance and Another 2013 (5) SA 294 (KZP)).

Binns-Ward J went on to analyse the effect that the automatic validation of invalid act may have on third parties. The court, as it will be elaborated below, placed much provenance on the fact that third parties have received no notice of the reinstatement and could suffer prejudice. Practically, held the court, it makes sense in terms of time and legal costs for the automatic validation of invalid act to take place on application to the CIPC as per s 82(4) of the Act. But such an administrative measure does not take into account the need for some sort of judicial process, which is needed to take into account the justness and equity of such retrospective validation. Such a role or duty was meant for the court. The court, hesitant in deeming automatic validation appropriate, highlighted that third parties might have conducted themselves in a manner believing the company was registered, only to be prejudiced once the registration is reinstated and retrospectively validated. This consideration weighs against the ready acceptance of automatic retrospective validation.

Further, the constitutionally of s 73(6A) of the 1973 Act, which relates to automatic retrospective validation, can be questioned (see PM Meskin, B Galgut, JA Kunst, P Delport and Q Vorster Henochsberg on the Companies Act 71 of 2008 vol 1 (Durban: LexisNexis 2011)  at 144(3)). This would too, no doubt, apply to the current provisions in the Act. This observation highlighted the potential prejudicial effect automatic retrospective validation might have on unknowing third parties.

While the court recognised the possible prejudice to third parties by virtue of automatic validation by administrative action (see Kadoma Trading 15 (Pty) Ltd v Noble Crest CC 2013 (3) SA 338 (SCA) at paras 13 and 14), the court held that it did have the inherent power to supplement or vary any action of the CIPC and act in accordance with s 83(4) of the Act, and this could may well be an automatic validation.

The court held that an interested person may apply to the CIPC under the guise of s 82(4) of the Act, and once reinstatement has been given, then apply to a court to ask for validation of the corporate activities in terms of s 83(4) of the Act. As one might see this places an ‘interested person’ in the onerous and unenviable position of having to use two avenues to not be prejudiced. This cost and length envisioned here by the court itself – it can be opined – is on the face of it prejudicial to interested third parties. Strangely though, no notice is given to third parties before a company is deregistered.

The court’s finding

The court, after consideration of all of these factors, that s 82(4) has the effect of administrative reinstatement of a company’s registration and retrospectively re-establishes its corporate legal personality and gives title to its property, but does not validate automatically corporate activities during that period of deregistration. The court took a piecemeal approach and in the present case, the court decided that it was just and equitable to make an order declaring that the conduct of the arbitration proceedings were valid and effective. It did not, however, with reference to s 83(4) of the Act, think it would be appropriate in the circumstance to declare all the corporate activity valid especially without notice to third parties.

The reasoning of the SCA

On appeal, Newlands Surgical Clinic contented that the court a quo was correct in its finding that s 82(4) did not automatically operate retrospectively so as to make the arbitration proceedings valid – but rather that the court erred in finding that it was authorised in that it was authorised in terms of s 83(4) to afford the reinstatement under s 82(4) with such retrospective effect.

The SCA once again, as the court a quo did, conducted a thorough examination of the law and jurisprudence of the relevant provisions in the 1973 and indeed, the Act. The SCA evaluated the prejudices highlighted by the court a quo, which might exert itself on third parties. The court held that despite these concerns of prejudice the 1973 Act had consequences, which resulted in automatic retrospective validation – the consequences, the court held, could not be avoided.

Where the SCA diverted from the judgment of the court a quo was in its view regarding the legislature’s intention and the idea of there being an omission. The court held, that on the face of it, it could agree that the omission of the deeming provision may be regarded as a pointer to a change of intent on the part of the legislature, but the SCA held that this was more than just an indication and was outweighed by counter-indications. The SCA stated that ‘the indication of a different intent that usually follows from a change of wording in amending legislation, is diluted by the fact that the new Act is not merely an amendment to the 1973 Act.’ The court held that the 2008 Act is a complete reinvention of South African corporate law. The issue lies, really, on whether the intention of the legislature should be determined or whether the court should have tried to ascertain the meaning of the words of the provisions. ‘Legislation intention’, it has been held, in a previous judgment emanating from the SCA, is not the approach a court should take in its evaluation of a provision. The ‘correct approach’ per Wallis JA in Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA), at 603 – 605 can be summed up in a sentence: ‘A sensible meaning is to be preferred to one that leads to insensible or unbusinesslike results or undermines the apparent purpose of the document.’

The SCA relooked at the issue of prejudice to third parties as highlighted by the court a quo, in its determination of whether automatic validation should be justifiability limited. The court held that the more significant view point was the consideration that refusal to validate corporate activity of a company during its period of demises could be ‘equally devastating to the interests of bona fide third parties who were unaware of a company’s deregistration.’ At para 26 the court held: ‘Potential prejudice to third parties therefore affords no reason to interpret s 82(4) so as to exclude retrospective validation in principle.’ The SCA cottoned on to the fact that should reinstatement of corporate activities be granted in a piecemeal fashion as envisioned by the court a quo – this would mean that the interested party must be burdened by a costly exercise of a court application. The court also highlighted the requirement that pursuant to the regulations, published as GenN 204 GG36225/15-3-2013, third parties are given the opportunity to prevent reinstatement by making representations.

Conclusion

The SCA’s judgment on the practical effect of s 82(4) is, in my view, correct. However, despite being in agreement with Brand JA, I submit that the reasoning and logic used to show the legislature’s intention or lack thereof, regarding s 82(4), seems to be somewhat shaky and unclear. The court, could have used a more common sense approach (as envisioned by Wallis JA in Natal Joint Municipal Pension Fund) in coming to the conclusion that the provisions allow for automatic corporate validation rather, than this idea that a complete change of wording in legislation shows no change of intention.

Kershwyn Bassuday LLB (UKZN) LLM (UCT) is a lecturer in law at the University of Cape Town.

This article was first published in De Rebus in 2016 (April) DR 24.