HOW TO MINIMISE YOUR RISK IN A CONTRACTUAL RELATIONSHIP WITH A JURISTIC ENTITY

I have come across numerous matters in practice where clients conclude contracts with Companies and Close Corporations worth exorbitant amounts, sometimes even millions. Then, somewhere down the line, the entity defaults on payment obligations, and is then either liquidated or deregistered for a failure to submit annual returns and a client is left with little or sometimes even no recourse.

In the event that the entity you seek to recover from is liquidated, whether voluntary or compulsory, you would need to ascertain whether the creditors meetings have been held. In nine out of ten cases, the meetings are yet to be held and your attorney will be required to make a judgment call as to whether you should lodge a claim with the liquidator.

In an instance, such as above, you are essentially a concurrent creditor as you do not have security for the debt. This means that your attorney would need to investigate whether there is a risk of contribution towards the costs of the liquidation. If this is the case, is it really worth it for you to prove your claim? The answer lies in the value of your claim as compared against the amount you may be required to fork out for the liquidation costs.

In certain instances, the faces behind the entity deliberately fail to submit annual returns and thus as a result thereof, are deregistered from the database of the Companies and Intellectual property Commission (hereinafter referred to as “CIPC”). Essentially, if you wanted to recover by way of a summons or attempt to liquidate such a company, you will not be able to do so as the entity essentially cannot sue or be sued. It is a non-entity and all its assets would automatically seize to the state without the need for a court order to that effect. I.e. the assets are regarded as bona vacantia. In order to assist you in such a scenario, your attorney would need to bring a high court application to restore the company on the database before any action may be brought against it for the recovery of any money. What then? A liquidation? The answer in this case is NO as in this instance you are regarded as a concurrent creditor and thus it would not be advisable.  You would need to recover on the debt by way of normal summons but only once the restoration application has been granted.

The new Companies Act is unclear in its wording relating to restoration of deregistered entities. At face value one presumes that it is now possible to apply to CIPC for the restoration of an entity as opposed to a high court application. But in practice, one soon realizes that this provision is only available to prescribed officers of the company and not creditors. Creditors will still be required to make a high court application for restoration. High court applications are extremely expensive, a fact that must be borne in mind .

The Close Corporations Act does provide relief to creditors in instances where the CC is deregistered. One would effectively be able to ‘pierce the veil’ and hold the faces behind the CC liable.

A good commercial attorney would have advised you when you were entering into the contract to ensure that a suretyship agreement is concluded to safeguard you against instances such the two mentioned above.

I cannot stress enough the importance of a suretyship agreement in all contracts involving entities. It will save you much time and certainly a great deal of money in legal costs.

This material is copyright and is the sole and exclusive intellectual property of the author hereof. Any unauthorized distribution thereof is not permitted unless prior written approval has been obtained from the author and the author has been cited as the original source.

By Amrisha Raniga    copyright ©




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