A close corporation (“CC”) is a company with juristic personality where a select few individuals usually perform all of the functions of the corporation and allow it to operate in a similar vein to that of a partnership. The Close Corporations Act No. 69 of 1984 (“CC Act”) created simple and clear regulations to govern CCs.
The Companies Act No. 61 of 1973 (“Old Act”) did not provide for a similar type of business entity that promoted the interests of small business owners and, as a result, CCs became popular in South Africa.
The Companies Act No. 71 of 2008 (“New Act”) which came into effect in May 2011 changed the regulatory framework applicable to close corporations (“CCs”). Although the CC Act is still in force, as of May 2011 no new CC may be formed under the CC Act and no company may convert to a new CC.
It is important to note the New Act preserves CCs that were already in existence as at 30 April 2011. CCs that are in existence can be converted into private companies but it is not compulsory for this to take place.
The New Act therefore observes the phasing out of CCs by regulating the above-mentioned position. The reason for this shift in legislation is that, unlike the Old Act, the New Act now provides for the incorporation of small private companies with director shareholders which are flexible enough for entrepreneurs who wish to start up a small business with juristic personality where such small private companies that offer the benefits previously associated with CCs.
The New Act therefore deemed it unnecessary to continue to make provision for the formation of new CCs.
The conversion from a CC to a company is effected by filing with the Companies and Intellectual Property Commission (“CIPC”) a notice of conversion in the prescribed manner and form along with the required documentation. Registration by CIPC of the converted CC occurs in a similar way to the registration of a new company.
The effect of the conversion of a CC to a company is that the entity that existed as a CC will continue to exist as a company. Anything done by the CC is deemed to have been done by the company. As such, all of the rights, obligations, assets and liabilities of the CC forthwith vest in the company. This also has the result that any legal proceedings instituted by or against the CC may be continued by or against the company.