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18 Oct 2011COMPANIES ACT: Close Corporations in Limbo Under New Companies Act
Recent Gauteng Business News
âThe way small businesses are treated is absolutely critical to the entire economy,â says Bowman Gilfillan corporate lawyer Carl Stein. âThe 1984 Close Corporations Act was intended to create an easier climate for small businesses and itâs been an unqualified success. CCs now outnumber companies by eight or nine to one and the vast majority of businesses are operated via CCs.â
Original Plan for the New Companies Act
The Companies Act originally set out to scrap CCs altogether, says Stein, âbut that changed at the last minute and the Act just forbade new registrations from May 1 when the Act came into force. So CCs can still exist â but their legal status has changed considerably.â
âThe Close Corporations Act has been subjected to major surgery to bring it into line with the Companies Act,â says Stein. âSo even though there is still an entity called a CC, it is now bound by certain rules that werenât designed for it at all.â
The most significant change, says Steinâs co-author Geoff Everingham of UCT, is that CCs are no longer automatically excluded from the need to be audited. âCCs will now have to calculate their Public Interest Score every year, the same as any other company, to see if they must legally be audited,â he says. âThe score is calculated based on the number of employees, the amount of debt owed to third parties, turnover and the number of shareholders.â
âIt basically means CCs no longer enjoy any advantages over companies,â says Everingham. âApart from the potential audit requirement, CCs are also now subject to the same rules relating to business rescue and liquidations.â
Life Going to Get Tough for Close Corporations under New Companies Act
The practical consequences remain to be seen, he says. âThe only certainty is that life is going to get a lot more complex for most CCs. The entire CC Act is just 83 sections and 60 pages long; the new Companies Act is 225 sections, plus a couple of hundred pages of regulations. Most people will probably just go into reaction mode â carry on doing what theyâve always done until thereâs a problem. Itâs a very inefficient way of doing things.â
âIf government wants to encourage small business then this is sending the wrong message,â says Stein. âIn general the new Companies Act is welcome and necessary, but in this one area which affects millions of people, I believe they have erred.â
Stein and Everingham are presenting a series of day-long seminars on the new Act around the country during October. Seminars about the new Companies Act are due to be held in Cape Town on Monday October 17, in Durban on Tuesday October 18 and in Johannesburg on October 25 and 26.
Business News Sector Tags: Local Government|
