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Court ruling: you can’t dodge debt by converting a CC to a company

The debt will follow you, according to the Supreme Court.
Image: Shutterstock

Converting a close corporation (CC) to a company might seem like a clever way of dodging a suretyship, but it won’t work.

That was the finding of the Supreme Court of Appeal (SCA), which last month ruled against Masibuyisane Services (Pty) Ltd, which in 2006 had converted from a CC and in doing so argued that a suretyship signed in the name of the CC was not enforceable.

Masibuyisane could never quite make up its mind whether it wanted to be a company or CC. In 2009, it re-converted to a CC and then in 2013 went back to being a company.

The CC had signed surety for a leasing agreement between Maze Products and Eqstra Corporation, which in 2014 sued Masibuyisane Services as surety for the debt owed by Maze.

“The controversy, in this case, is one that only lawyers could appreciate. It concerns the consequences of a close corporation (CC) converting itself into a company,” reads the judgment.

“What happens if after that conversion a contract is concluded by the directors of the company in which contract the company is described as a close corporation? Can the company repudiate it on the grounds that it was concluded with an entity, ie the CC, that ‘no longer exists’?”

Judgment was originally granted in 2014 against Masibuyisane CC as one of four defendants that had signed surety for the debt. The sheriff serving the writ of execution to recover the owed money found nothing of value and was told the business had changed to Masibuyisane (Pty) Ltd.

A new writ was issued in the name of the company, rather than the CC, and was twice served by the sheriff – in 2016 and 2018. Masibuyisane (Pty) Ltd attempted to have this writ rescinded in 2018 on the grounds that it had left the CC behind, but this attempt failed in the high court, and now again in the SCA.

The SCA pointed to the Close Corporations Act, which makes clear that a CC is a juristic person and continues to exist as such, even though the members may change and the entity converts to a company (in which case it falls under the Companies Act).

The Companies Act, anticipating a dispute such as this, says that when a CC converts to a company, “all the assets, liabilities, rights and obligations of the corporation shall vest in the company.”

The Companies Act also makes provision for legal proceedings launched against a CC to be continued against the business entity, even though it has converted to a company.

The counsel for Masibuyisane (Pty) Ltd argued that the conversion of a CC to a company extinguished the existence of the CC, and any legal contract made with the CC is invalid and unenforceable.

The high court had earlier ruled that “the obligations of the suretyship is not a different person, it is the same person but simply in a different corporate form.”

The SCA found a “singularity of identity” between the CC and company, despite their several incarnations, confirmed by the fact that they retained the same VAT and tax numbers.

The SCA rejected the appeal with costs and ruled that the suretyship is valid and enforceable.

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Tenderpreneur reasoning!

Why would you even need to waste the SCAs time with this?

Pity that Masibuyisane even thought they might get away with this. Still, a satisfying outcome!

This business “logic” is an indictment of our education system!

…to the extent that the legitimacy of their attorneys’ qualifications should be investigated for potential fraud.

End of comments.

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