The end of close corporations

Owners invested in a close corporation are certain to have heard of the new Companies Act of 2008 that published in the Government Gazetteer in April 2009. This new act is set to come into effect by early 2010 and holds many changes for close corporations and larger organisations as well. Building on previous Acts, the new Companies Act may have a profound effect on the future of close corporations.

The new Companies Act will make amendments to Companies Act 61 of 1973 and Close Corporations Act 69 of 1984. For the first ten years the new act will run concurrently with the Close Corporations Act to gauge the effect of the Act on small and medium businesses. If the results are favourable, the Close Corporations Act will be repealed and the new Companies Act fully implemented.

From the moment the New Companies Act is implemented, new close corporations will not be allowed to register and existing companies can no longer convert to a close corporation. Existing close corporations will continue to exist indefinitely but may be forced to convert should the Close Corporation Act be repealed.

Provisions have been made under the new Act to assist existing close corporations with the conversion process. All that is required is an official notice of conversion, a certified copy of the special resolution to approve the conversion and a new Memorandum of Incorporation along with the necessary fee. Once this is supplied, CIPRO will cancel the registration of the closed corporation and give notice to the Gazetteer to change the name and status of the company as well as allowing the Registrar of Deeds to make the necessary changes.

The conversion will affect the legal status of the close corporations but the following provisions have been made under the new Companies Act.

  • Members of the close corporation will be entitled to become shareholders in the converted company.
  • All assets, liabilities, rights and obligations of the close corporation will continue to be vested in the new company.
  • Any legal proceedings against or instituted by the close corporation may be continued.

These provisions are made to allow the company to continue its operations despite changes that need to be made to comply with the new Companies Act.

The new Companies Act was published in the Government Gazetteer in April 2009 but will only be implemented in early 2010. There is a general provision of about ten months to allow CIPC to prepare for the changes and to give companies an opportunity to either convert or to comply with the dual standards now expected from the new Companies Act and the Close Corporations Act. It is important to reiterate that once the new Companies Act is implemented in 2010, no new close corporations can be registered.

The new Companies Act aims at simplifying incorporation and at providing more flexible regulation of corporations. Detractors argue that by repealing the Close Corporation Act, government is making it harder for small and medium business owners to survive as they are forced to compete in the public sphere where the market and shareholders determine the success of a company. Only time will tell what the long term effects of the new Companies Act will be on the corporate landscape of South Africa and the effect it will have on small and medium businesses.

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