Companies Act creates issues for “close corps”

“The way small businesses are treated is absolutely critical to the entire economy,” says Bowman Gilfillan corporate lawyer Carl Stein. “The 1984 Close Corporations Act was intended to create an easier climate for small businesses and it’s been an unqualified success. CCs now outnumber companies by eight or nine to one and the vast majority of businesses are operated via CCs.”

The Companies Act originally set out to scrap CCs altogether, says Stein, “but 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 – but their legal status has changed considerably.”

“The Close Corporations Act has been subjected to major surgery to bring it into line with the Companies Act,” says Stein. “So even though there is still an entity called a CC, it is now bound by certain rules that weren’t designed for it at all.”

The most significant change, says Stein’s co-author Geoff Everingham of UCT, is that CCs are no longer automatically excluded from the need to be audited. “CCs 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,” he says. “The score is calculated based on the number of employees, the amount of debt owed to third parties, turnover and the number of shareholders.”

“It basically means CCs no longer enjoy any advantages over companies,” says Everingham. “Apart from the potential audit requirement, CCs are also now subject to the same rules relating to business rescue and liquidations.”

The practical consequences remain to be seen, he says. “The 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 – carry on doing what they’ve always done until there’s a problem. It’s a very inefficient way of doing things.”

“If government wants to encourage small business then this is sending the wrong message,” says Stein. “In general the new Companies Act is welcome and necessary, but in this one area which affects millions of people, I believe they have erred.”