Which foreign companies should register as external companies? What are the requirements of registration and what are the ramifications if the company fails to register?
In terms of the Companies Act of 2008 (the “Act”), a foreign company is distinguished from an external company by the nature of its registration requirements.
A foreign company is defined simply as an entity incorporated in some other jurisdiction outside the Republic of South Africa.
An external company is one which was incorporated outside the Republic and which conducts its activities within the Republic, irrespective of whether it is a profit or a non–profit entity. If this is the case, then it needs to be registered as an external company under the Companies Act of 2008.
The question that determines whether registration is necessary is: when is a foreign company conducting business or non-profit activities within the Republic?
According to section 23 of the Act, a foreign company is deemed to be conducting business or non–profit activities within South Africa if it:
(a) is a party to one or more employment contracts within the Republic; or
(b) subject to subsection (2A), is engaging in a course of conduct, or has engaged in a course or pattern of activities within the Republic over a period of at least six months, such as would lead a person to reasonably conclude that the company intended to continually engage in business or non-profit activities within the Republic.
A foreign company is conducting business or non-profit activities in the Republic if it has engaged in or is engaging in one or more of the activities set out in section 23(2)(a)–(f) of the Act — as listed below. However, these are not the only grounds to regard the company as conducting its profit or non-profit business.
(a) Holding a meeting or meetings within the Republic of the shareholders or board of the foreign company, or otherwise conducting any of the company’s internal affairs within the Republic;
(b) establishing or maintaining any bank or other financial accounts within the Republic;
(c) establishing or maintaining offices or agencies within the Republic for the transfer, exchange or registration of the foreign company’s own securities;
(d) creating or acquiring any debts, within the Republic, or any mortgages or security interests in any property within the Republic;
(e) securing or collecting any debt, or enforcing any mortgage or security interest within the Republic; or
(f) acquiring any interest in any property within the Republic.
If a foreign company qualifies as an external company under the Act it may be required to register as such. The Company and Intellectual Property Commission (CIPC), formerly known as CIPRO, may issue a compliance notice instructing the company to comply with the provisions of section 23(6) of the Act.
If the company fails to comply with the notice, the CIPC will issue an instruction to cease trade in the Republic.
Regardless of the CIPC enforcement and the repercussions associated with enforcement, there may be serious implications for businesses that contract with an unregistered foreign company.
South African entities that contract with unregistered foreign companies may find themselves left with agreements that are void or voidable, or legally valid agreements for which they have no practical redress. Litigating against a foreign entity is very costly and filled with challenges. These could include difficulties with obtaining the necessary information to serve process; or ensuring compliance with the laws of the relevant foreign country when issuing process. These matters, with the additional financial considerations and time constraints, make practical enforcement almost impossible.
If you are considering contracting with a foreign company, it is advisable to conduct thorough due diligence, ensuring, among other things, that it is registered in terms of the Act.
According to an article published in Ghost Digest 22 September 2011, if the company owns any fixed property in the Republic, then the matter becomes more complicated. In this case, the company’s registration is regulated by the Act and also the Deeds Registries Act 47 of 1937, and specifically in terms of regulation 44 A (d)(ii)(aa).
If this is the case, then there is a question over whether it is the conveyancer’s responsibility to register the company — as set out in Regulation 44 A (d) (ii) (aa) and (bb) — or whether the Registrar of Deeds now holds that responsibility.
In addition, there may also be instances where a foreign company could register a title deed without being registered as an external company.
There is a large degree of prevailing uncertainty in these situations, which will only be resolved by legal reform. Before you acquire a property as a foreign or external company, we recommend that you consult with your attorney who must also be a conveyancer.
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