PURCHASING A "SHELF"

Accountancy SA, May 2008 by Shandu, Siyabonga

In the fast-paced business world, to purchase a "shelf company" or "shelf close corporation" has become a norm, simply because acquiring a "shelf is both quicker and more efficient than incorporating the company or dose corporation. The case of Airport Cold Storage (Pty) Ltd v Nizaar Ibrahim and Others (Airport Cold Storage case) reminds us that, as quick as this process may be, it is not without pitfalls, which could have disastrous consequences for a "shelf purchaser.

Generally, when purchasing a "shelf, a purchaser purchases a dormant company or close corporation that has already been incorporated, albeit with the founding documents reflecting the details of the seller. Before the founding documents are delivered to the purchaser, the purchaser provides the seller with all the required particulars to substitute for the seller's details.

This note identifies one of the factors considered by the court in the Airport Cold Storage case in reaching its decision, in order to highlight one of the dangers in purchasing a "shelf. The main issue in the Airport Cold Storage case was the contention by the plaintiff (which contention was, according to Griesel J, proved on the preponderance of probabilities) that the use of Sunset Beach Trading 232 CC (Sunset Beach) by the first defendant (the sole member of Sunset Beach and the son of the second defendant) and the second defendant (the "manager" of Sunset Beach and the father of the first defendant) constituted "a gross abuse of a juristic personality of the corporation as a separate entity" and was in contravention of s 65 of the Close Corporation Act No. 69 of 1984 (as amended) (the CC Act).

Briefly, Sunset Beach was incorporated as a "shelf CC" on 18 June 2004. On 20 January 2005, and presumably on the eve of the first defendant's taking transfer of Sunset Beach secretarial documents, the original sole member of Sunset Beach, one Christian Gouws, resigned from Sunset Beach and was replaced by the first defendant. However, "no other changes to the details contained in the original founding statement were recorded, nor was the new accounting officer appointed".

The first and second defendants were found jointly and severally liable to Air Cold Storage (Pty) Ltd for the debts of Sunset Beach in the sum of R 278,377.19 for reasons more fully outlined in the judgment.

It is submitted that the failure by the first defendant to appoint the new accounting officer might have been due to his being unaware of the provisions of ss 59(3) and 63(h) of the CC Act. section 59(3) provides that "if a vacancy occurs in the office of an accounting officer, whether as a result of a removal, resignation or otherwise, the corporation shall within 28 days appoint another accounting officer". Section 63(h) imposes personal liability for the debts of the corporation on individual members where a vacancy exists for more than six months.

In court, the first and second defendants contended that the founding statement registered in the office of the Registrar of Close Corporations contained the name of one Malherbe Laurens and, by implication, that Sunset Beach had an accounting officer. In response, Griesel J said that the contention by the defendants in this regard was "highly technical and formalistic...", and that:

"It cannot be held that the mere reflection in the founding statement of the name of someone as accounting officer is sufficient compliance with the provisions of the Act".

The lesson in Airport Cold Storage for the purchasers and sellers of "shelf close corporations" and "shelf companies" is to ensure that before a "shelf is transferred to the purchaser, all the necessary changes should be made to reflect the information provided by the purchaser to avoid any future unpleasant repercussions.

In the context of close corporations, it is further important that the seller of a "shelf ensures that the purchaser understands what needs to be changed in the founding statement to comply with the CC Act prior to the delivery of the "shelf to the purchaser. This "social responsibility" is, in my view, further fortified by the fact that the CC Act introduced close corporations to bring about a simplified and cost-effective corporate structure in South Africa; therefore, it is submitted, the majority of people that use close corporations as corporate structures are likely to be people that may not understand minor intricacies of founding statements or the CC Act when purchasing a "shelf close corporation".

Siyobonga Shandu LLB, LLM, is an associate at Hofmeyr, Herbstein & Gihwala Inc.