The laws of prescription in South Africa are governed by the Prescription Act of 1969 ("the Prescription Act"), which delineates various time limits within which legal claims must be pursued and enforced, failing which they will be extinguished and the debtor's obligation to repay the debt will lapse. The primary purpose of extinctive prescription, as noted by the then Appellate Division in Leipsig v Bankorp Limited (1994), is "to promote certainty in the ordinary affairs of people".
The Appellate Division then further elaborated that the Prescription Act also embodies a principle in section 13(1) which is inconsistent with the promotion of certainty, namely that prescription is delayed in circumstances where an 'impediment' exists. An 'impediment', in this regard, may refer to "some legal or practical problem which makes its difficult or undesirable for a creditor to institute proceedings for the enforcement of his claim against the debtor – which impediment will delay the running of prescription, and that prescription will only commence running again after the impediment has ceased to exist".
Recently, South Africa's Supreme Court of Appeal ("the SCA") heard an appeal from the North West Division of the High Court in the case of Steyn and Another v Venter and Others , which shed guidance on the difference in corporate governance between close corporations and companies. In particular, the issue for determination was whether a close corporation has a 'governing body' as contemplated by section 13(1)(e) of the Prescription Act, and if so, whether this subsection delayed the completion of the prescription of several claims against members of a close corporation.
The claims against the appellants
Ockert Jacobus Steyn and Lieze Van Der Merwe ("the appellants") and Wernich Venter ("first respondent") were all members of Hartzer and Steyn Beleggings CC ("the CC" or "second respondent"). Mr Venter instituted an action against the appellants in terms of section 50 of the Close Corporations Act, 1984 ("the CC Act") based on the appellants' obligation to repay several loans to the CC, alternatively, on the appellants' unlawful misappropriation of the CC's funds.
The first claim related to immoveable property, which was purchased by the CC in 1999 and sold for ZAR4 million in March 2009. The respondents submitted that the purchase price was incorrectly paid to the appellants instead of the CC. The appellants argued that this claim had prescribed since more than 11 years had passed before service of the summons.
The second claim related to rental income earned from 2001 to 2008 on a farm owned by the CC and leased to Abathali Boerdery CC. The respondents similarly argued that this rental income had been incorrectly paid to the appellants instead of the CC, whilst the appellants held that each rental payment claim had since prescribed.
The third claim involved alleged payments made to the appellants from funds belonging to the CC, which commenced in January 2005, with the last payment being made in May 2013. Although each impugned transaction was subject to a different date of prescription, more than 3 years had passed prior to service of summons in 2019 and accordingly had prescribed.
The applicability of section 13 of the Prescription Act
In response to the appellants' plea of prescription to these claims, the respondents argued that since the appellants have at all material times been members of the CC, the completion of prescription had been delayed in terms of section 13(1)(e) of the Prescription Act which provides for such a delay in circumstances where "the creditor is a juristic person and the debtor is a member of the governing body of such juristic person". In such a case, the period of prescription shall not be completed before a year has elapsed after the relevant period of prescription would, but for the provisions of this subsection, be completed before or on, or within one year after, the day on which the relevant impediment has ceased to exist.
This argument was disputed by the appellants, who argued that section 13(1)(e) is only applicable to companies since a close corporation does not have a governing body. The appellants noted the judgment of Northview Shopping Centre (Pty) Ltd v Reveles Properties (2010), where the SCA held that a "... a close corporation is intended to be a simple entity, akin to a partnership, but with limited liability". Further, "The complex requirements of company law are not intended to apply to them" and "it is partnership principles rather than company law principles that govern the relationship between members".
The appellants contended that, unlike the existence of shareholders and a board of directors in a company, there is no distinction in a close corporation between the persons with a financial interest in its affairs and those permitted to take part in its operational decisions. Section 46 of the CC Act entitles, but does not oblige, members of a close corporation to participate in the carrying on of the business. Thus, members of a close corporation do not have to act together to bind the corporation as per section 54 of the CC Act. Accordingly, a close corporation by its very nature does not have a 'governing body' but is rather governed by each individual member, akin to a partnership.
The views of the SCA
The SCA noted that the applicability of section 13(1)(e) is not limited to companies as it refers to all juristic entities. The SCA agreed with the respondents that section 13 covers a wide range of 'impediments', including a situation where, such as in the case of a close corporation and its members, mutual trust is the "lifeblood of the relationship between a creditor and a debtor". Further, the appellants had failed to differentiate between the 'internal management' of a close corporation governed by section 46 of the CC Act, and the powers of a member to bind a close corporation 'externally' as per section 54 of the CC Act. The effect of section 46, as submitted by the respondents, makes every member of a close corporation ipso facto a member of its governing body.
The SCA noted, with reference to the judgment in Jaquire and Another v Oberholzer and Others (2020), that the fundamental nature of a close corporation is entrenched in the relationship between its members who owe their fiduciary duties to the corporation as a separate legal persona and not to each other, as is the case with partners. Accordingly, the purpose of section 13(1)(e) is to protect the close corporation from the actions of its own members and to enhance the trust relationship between them.
The SCA also referred to the judgment in Van Deventer and Another v Nedbank Ltd (2016) where the High Court had held that "if close corporations had existed when the Prescription Act was enacted, there would have been no conceivable reason to treat them differently from sole proprietorships, partnerships, trusts and companies". The High Court also held that if section 13(1)(e) and 13(1)(d) of the Prescription Act delay prescription in relation to a company and a partnership, respectively, there is no reason why a close corporation should not have the same protection. Thus, section 13(1)(e) must apply equally to a close corporation.
The SCA concluded that although the CC Act does not expressly use the term 'governing body', section 46 of the Act outlines the collective responsibilities and obligations of members of a close corporation typically associated with governance. It can therefore be concluded that members of a close corporation comprise its governing body in terms of section 13(1)(e) of the Prescription Act. As a result, the SCA held that the High Court had correctly dismissed the appellants' pleas of prescription.
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