What is the current status of Close Corporations?
“Since 1 May 2011 no new Close Corporations may be registered in South Africa,” advises Dr John Hendrikse, co-author of the Corporate Governance Handbook (Juta) and the Business Valuations Handbook (Butterworth).
“The New Companies Act in conjunction with amendments to the Close Corporation Act, allows Close Corporations to convert to Private (Proprietary Limited) Companies. This is particularly relevant because new Close Corporations may not be registered any longer.”
How will existing CCs be treated in the new dispensation? “Only Namibia and South Africa have the concept of CCs,” notes Dr John. “With the new Companies Act paving the way for CCs to be converted to companies, those remaining as CCs will have missed the chance to avoid the additional onerous requirements of the amended Close Corporations Act.”
Why your clients should convert their Close Corporations to Companies?
Firstly, most Close Corporations are owner-managed and in terms of section 30(2A) of the Companies Act, owner-managed companies do not require to be audited or independently reviewed, unless their public interest score is in excess of 350 points or between 100 and 350 and their financial statements are compiled internally.
Secondly, on conversion Close Corporations must meet the Solvency and Liquidity Test—a compelling reason to ensure that the company is solvent, liquid and economically viable.
Thirdly, the converted Close Corporation will enjoy the benefits of the Business Judgment Rule of section 76(4), which applies to directors, not members.
Did You Know? The Business Judgement Rule affords protection to directors who have relied on the professional opinions of accountants, attorneys, and other business advisors that influenced their business decisions and that turned out not to be in the best interests of the Company. This protection is not enjoyed by the members of Close Corporations.
“So, it makes economic and legal sense for your clients to consider the benefits of converting their Close Corporations to companies. This, in addition to the cost savings in relation to the trade off between audit fees, independent review fees, or accounting officer fees, could offer your clients’ businesses the credibility they need to succeed in this tough economy,” says Dr John.