Grow Faster, Smarter

021 674 0365


Company Conversion Conundrums

Does converting a close corporation into a company or vice versa invalidate pre-existing legal obligations?

Company Conversion Conundrums

The Close Corporations Act and Companies Act include provisions for converting a close corporation into a company and vice versa. For the most part this is an administrative technicality, but on occasion it can have material consequences as evidenced by a recent Supreme Court of Appeal judgment.

This unusual case involves a supplier (Eqstra) which sued a client (Maze Products) as well as its sureties. One of the sureties was Masibuyisane Services, which was originally formed as a close corporation but converted into a company only to re-convert into a CC and then back again into a company (!)

Eqstra's straightforward claim should have been wrapped up expediently, but Masibuyisane Services' convoluted governance turned it into an agonising saga because some of the paperwork was addressed to Masibuyisane Services CC while other documents were marked for Masibuyisane Services (Pty) Ltd.

The longwinded farce culminated with the plaintiff's brazen defence that their suretyship was no longer enforceable because they ceased to exist as a close corporation when they converted into a company. Unsurprisingly, Eqstra argued that the suretyship was still binding because Masibuyisane Services was the same entity regardless of its juristic status.

The High Court originally ruled in favour of Eqstra and the Supreme Court of Appeal quickly reached the same conclusion. The Companies Act is very clear: when a close corporation converts into a company, all of its assets, liabilities, rights and obligations are conferred on the company. Anything less would enable unscrupulous business owners to circumvent the law by playing a game of juristic musical chairs.