Personal liability of a member of a deregistered Close Corporation
Are you a member of a deregistered Close Corporation? Although no new Close Corporations have been able to be registered since 1 May 2011, there are still Close Corporations in operation. A Close Corporation registered before that date can carry on as usual until it is liquidated or the members decide to close it down, i.e., until it is deregistered for any reason. A Close Corporation differs from a company in that it has members rather than shareholders and directors, and it may have no more than 10 members. The assets of the Close Corporation are separate from its members. Equally, the debt of the Close Corporation belongs to the Close Corporation and is separate from any debt the members may incur in their personal capacities.
Deregistration of a Close Corporation
If a Close Corporation fails to file an annual return for two or more years in succession, the Companies and Intellectual Properties Commission (CIPC) must deregister that Close Corporation, according to section 82(2)(b) of the Companies Act of 2008, following the process contained in section 26(1) of the Close Corporations Act of 1984 (CC Act).
Debts of the Close Corporation
When a Close Corporation is deregistered, it ceases to exist as an entity and all its property, both movable and immovable, is forfeit to the State as bona vacantia. A creditor of a deregistered Close Corporation can accordingly not enforce any debt against the Close Corporation. However, are members of a deregistered Close Corporation personally liable for the debts of the entity?
Section 26 (5) of the CC Act states: “If a corporation is deregistered while having outstanding liabilities, the persons who are members of such corporation at the time of deregistration shall be jointly and severally liable for such liabilities.”
The provisions of section 26(5) of the CC Act were repealed by the promulgation of the Companies Act. Therefore, except for members of Close Corporations who were party to fraudulent or reckless dealings – who can still be held personally liable for the debts of the Close Corporation – members can no longer be held personally liable for the debts of a deregistered Close Corporation.
This unifies the legal position of members and directors of deregistered Companies and Close Corporations under the Companies Act.
SD Law can help
If you are a member of a Close Corporation, either deregistered or still in existence, and you have any questions about your responsibilities, contact Simon on 086 099 5146 or email sdippenaar@sdlaw.co.za to arrange a discussion.
Further reading:
SD Law
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