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Entrepreneurial Law (University of South Africa)
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Companies
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LEGAL PERSONALITY
S14 (a): A company is a separate legal person = a Registration Certificate will
provide evidence that all requirements of incorporation have been complied
with according to the Companies Act.
 A company has the capacity to get its own rights and obligations separate
from its members = limiting member’s liability.
 It may also acquire ownership in assets and be liable to pay all liabilities.
 A company has a separate legal personality.
 In Dadoo Ltd, the court found that the property vests in the company and
not in the members.
 In Salomon, the court found that once a company is legally incorporated it
must be treated as any other independent person with rights, duties and
liabilities.
The company as a separate entity
• The co, as an association of persons exists from the moment of
registration as a separate legal entity.
• Dhlomo v Natal newspapers: the court allowed the company to sue for
deformation
• Salomon v Salomon and Co Ltd: S (a natural person) held majority shares
in the co, 5% of the shares were held by his wife and 3 sons. 5 years after
the business begun trading, the co went insolvent. X and S were owed
money by the co. X said that S must pay the debt. The court held that S
didn’t have to. Reason: on formation, a co gets the capacity to have its
own rights and duties, it gets legal personality and exists apart from its
members. Salomon’s case decided that a co was legally separate from its
members and the extent of Solomon’s shareholding in the co was
irrelevant in adjudication on their liability of his secured claim as
debenture holder in full.
• Daidoo: originally Indian people were not allowed to own property in
Transvaal, when the co (which was owned by Daidoo) bought land, it was
said that such transaction was not allowed. The court found that a co
could not be a specific race/class of people and therefore the co could
own the property. (property vests in the company and not in the
members)
Consequences of a separate legal personality:
1. The co estate is assessed apart from the estate of individual members –
the debts of the company = the company’s debts and not those of its
members
2. Profits of the co don’t belong to the members but to the co itself
3. The assets of the co = its exclusive prop and the members have no rights
therein
4. No one is qualified by virtue of his membership to act on behalf of the co
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The branches or divisions of a company are part of the company itself and do
not have their own separate legal existence (ABSA Bank Ltd v Blignaut and
Another and Four Similar Cases – 1996)
Disregarding the separate existence of the corporate entity
(when you can say that the owners and the co are one and the same)
This is done to avoid the members, directors and officers of the co from
taking advantage of the separate existence of the co
Piercing the corporate veil
Definition: those exceptional circumstances where the court ignores the
separate legal existence of the company and treats the shareholders as if
they were the owners of the assets and had conducted the business of the
company in their personal capacities or obligations of the shareholders to
the company.
Court decisions:
1. Botha v Van Niekerk: V contracted to buy a house, after the sale
agreement, V decided to incorporate a co, in which he was the sole holder
and director. He nominated the co as the buyer of the house but the new
co didn’t have enough money. The seller applied to the courts for an order
to force the contract of sale – argued that the co was merely V in another
disguise and that the court should lift the corporate veil and enforce the
contract. The court found that the seller must have suffered an injustice
before it would lift the veil and in this case the co had enough funds to
honour the agreement.
2. Cape Pacific Ltd: the court adopted a more flexible approach saying that
you must strike a balance between the need to preserve the separate legal
id of the co and policy considerations. In Cape Pacific, it was held that if a
company has been legally established and operated but is misused for an
improper purpose, its separate personality can be disregarded.
3. Goode: the court held that the corporate veil would only be pierced if
there was evidence of misuse and abuse.
4. In Hulse, the court removed any doubt by stating that the case would be
determined according to the facts that there was no other remedy
available, other than to pierce the corporate veil.
5. Die Dros (Pty) Ltd and another v Telefon Beverages CC and others:
the court held that where fraud, dishonesty and other improper conduct
is present, the need to preserve the separate legal personality of a
company must be balanced against policy considerations favouring
piercing the corporate veil.
6. Le’Bergo Fashions CC v Lee and another: the court will pierce the
corporate veil where a natural person, who is subject to a restraint of
trade uses a close corporation or a company to front to engage in the
activity that is prohibited by the agreement.
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The court will pierce the veil in the following circumstances:
 Company is used to cover up fraudulent or illegal conduct
 Director/shareholder treats company assets as his own
 Statute empowers the court to ignore legal personality
Courts have made it clear that they will not allow the use of any legal entity
to justify wrong = As a result, the courts will pierce the corporate veil and
hold directors and others personally liable for acts committed in the name of
the company.
A plaintiff must show that there is no other remedy available and is a last
resort and would suffer an injustice.
Disregard by the legislature:
S20 (9): provides that if a court finds that the incorporation of a company or
any act by or use of a company constitutes an unconscionable abuse of its
juristic personality, the court may declare that the company will be deemed
not to be a juristic person in respect of the rights, liabilities and obligations
relating to the abuse.
Questions
Explain when a director can be held personally liable for the debts of a
company.
Or
In light of Salomon v Salomon and Co Ltd and Dadoo v Krugerdorp
Municipal council: it’s apparent that our courts won’t lightly disregard
the separate legal existence of a company. Briefly discuss 3 instances
where our courts might disregard the separate existence of a company.
You must refer to relevant case law.
S14 (a): A company is a separate legal person
Court decisions on piercing the corporate veil:
Botha v Van Niekerk: V contracted to buy a house, after the sale agreement,
V decided to incorporate a co, in which he was the sole holder and director.
He nominated the co as the buyer of the house but the new co didn’t have
enough money. The seller applied to the courts for an order to force the
contract of sale – argued that the co was merely V in another disguise and
that the court should lift the corporate veil and enforce the contract. The
court found that the seller must have suffered an injustice before it would
lift the veil and in this case the co had enough funds to honour the
agreement.
Cape Pacific Ltd: the court adopted a more flexible approach saying that you
must strike a balance between the need to preserve the separate legal id of
the co and policy considerations. In Cape Pacific, it was held that if a
company has been legally established and operated but is misused for an
improper purpose, its separate personality can be disregarded.
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Goode: the court held that the corporate veil would only be pierced if there
was evidence of misuse and abuse.
In Hulse, the court removed any doubt by stating that the case would be
determined according to the facts that there was no other remedy available,
other than to pierce the corporate veil.
Die Dros (Pty) Ltd and another v Telefon Beverages CC and others: the court
held that where fraud, dishonesty and other improper conduct is present,
the need to preserve the separate legal personality of a company must be
balanced against policy considerations favouring piercing the corporate veil.
Le’Bergo Fashions CC v Lee and another: the court will pierce the corporate
veil where a natural person, who is subject to a restraint of trade uses a
close corporation or a company to front to engage in the activity that is
prohibited by the agreement.
The court will pierce the veil in the following circumstances:
 Company is used to cover up fraudulent or illegal conduct
 Director/shareholder treats company assets as his own
 Statute empowers the court to ignore legal personality
Courts have made it clear that they will not allow the use of any legal entity
to justify wrong = As a result, the courts will pierce the corporate veil and
hold directors and others personally liable for acts committed in the name of
the company.
A plaintiff must show that there is no other remedy available and is a last
resort and would suffer an injustice.
Disregard by the legislature:
S20 (9): provides that if a court finds that the incorporation of a company or
any act by or use of a company constitutes an unconscionable abuse of its
juristic personality, the court may declare that the company will be deemed
not to be a juristic person in respect of the rights, liabilities and obligations
relating to the abuse.
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TYPES OF COMPANIES:
Two types of companies:
 Profit
 Non-profit companies.
Profit Companies
A profit company is a company incorporated for the purpose of financial gain
for its shareholders and may be incorporated by one or more people and
contains no maximum number of members.
Before: a public company to have at least seven members, while a private
company may be incorporated with only one member but is not allowed to
have more than 50 members.
•
•
•
•
A public company – any profit company that is not state-owned, a
private company or a personal liability company. Shares are offered and
freely transferrable, it may be listed on the JSE Ltd or unlisted and the
status will be found in the Memorandum of Incorporation. A public
company can be formed by one person and has at least three directors.
They must hold an AGM, appoint an auditor, a company secretary and an
audit committee.
A state-owned company – a company, which falls under the meaning of
a state-owned enterprise or is owned by a municipality. It is a national
government business which is a juristic person. They are obliged to
appoint a company secretary and an audit committee. Examples of a SOE
are ACSA, Denel or SA Airways.
A personal liability company – a private company used by professional
associations such as attorneys who wish to exploit the advantages of
corporate personality. Directors are jointly and severally liable together
with the company for all debts and liability incurred. The memo of a
company must state that it is a personal liability company. It can be
formed by one person and must have at least one director. Doctrine of
constructive notice applies.
A private company – a company whose Memorandum of Incorporation
prohibits the offering of its share to the public and restricts transferability
of the shares. Is formed by one person and must have at least one
director.
Non-Profit Companies
Before: A non-profit company was a S21 company.
NOW: Schedule 2:
 Main aim: an object relating to cultural or social activities.
 All assets and income must be used to further the company’s objective.
 Member or director may not directly or indirectly receive a financial
benefit or gain other than reasonable remuneration for work done or
compensation for expenses incurred.
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
A non-profit company does not have to have members. If they do have
members some may have voting rights and others not.
External companies: is a foreign company conducting business or nonprofit activities in South Africa. It must always have at least one office within
the Republic.
Questions
Mandy, Bob, Sue, Sipho and Jake want to incorporate a non-profit
company but they are unsure about the requirements for such a
company. Advise them on these requirements.
•
•
•
•
•
•
It must have a minimum of 3 directors
Must be formed for a lawful purpose
Has the main object of promotion of religion, art etc
Intends to apply its profits or other income in promotion of the main
object
Prohibits the payment of any dividends to its members
Provides in the memorandum that:
• The income and property of the association will be applied solely to
the promotion of its main object
• Upon winding up/deregistration, the remaining assets of the
association shall be transferred to some other association having a
similar object.
One form of Profit company is a personal liability company. Discuss the
features of this type of company.
S53(b): provision for private co wishing to effect unlimited liability of its
directors
Allows a private co to make provision that directors and former directors
shall be jointly and severally liable for the debts of the co, which are or were
contracted during their period of office.
Name ends in = “incorporated”
List two (2) differences between a profit and non-profit company.
•
•
•
A profit company is incorporated with the aim of making a
monetary gain in while a non-profit company is incorporated not
for gain but rather for a cultural / charitable purpose.
In a profit company your directors and shareholders receive a
dividend while in a non-profit organization, nothing is paid to the
members other than their reasonable remuneration.
A profit company needs a statutory minimum of 1 director while a
non-profit company requires a statutory minimum of 3 directors.
Both can be regulated by the company’s MOI.
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COMPANY FORMATION
Incorporation of a company
The Notice of Incorporation and the Memorandum of Incorporation
Incorporation requires the filing of:
 The Notice of Incorporation
 A copy of the Memorandum of Incorporation
 The prescribed fee.
Notice of Incorporation: S13 (1) = a notice in which the incorporators of a
company inform the Commission of the Incorporation of that company, for
the purposes of having it registered.
The Memorandum of Incorporation: S1: the document that sets out rights,
duties and responsibilities of shareholders, directors and others within and
in relation to a company
It’s the founding document of the company that sets out the relationship
between the company and its shareholders; the company and the directors;
the company and other parties within the company as well as the company
and third parties.
Before: the two documents that had to be submitted for incorporation were
the Memorandum of Association and the Articles of Association.
Steps to incorporate a company:
1) For the formation of a profit company, one or more persons may
incorporate.
2) For the formation of a non-profit company, three or more persons may
incorporate.
3) Each of these people must complete and sign the Memorandum of
Incorporation.
4) The Memorandum of Incorporation may be in the form provided for in the
Act or it may be in a form unique to the company.
5) The Notice of Incorporation and a copy of the Memorandum of
Incorporation must be filed with the Commission, together with the
prescribed fee.
The role of the Commission
Once the two documents and the prescribed fee have been filed with the
Commission, the Commission may either accept or reject the Notice of
Incorporation.
The Notice of Incorporation may be rejected by the Commission under the
following circumstances:
 If it has not been completed in full
 If it has not been properly completed
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The Notice of Incorporation must be rejected by the Commission under the
following circumstances:
 If the initial number of directors is less than the prescribed minimum
number
 Where as a result of a director’s disqualification, the initial number of
directors become less than the prescribed minimum number
S66 (2) a private company must have at least one director and a non-profit
company must have a minimum of three directors.
If the Commission realises that one of the directors does not qualify to be a
director, this will reduce the number of directors. If the reduction leads to
the number of directors being less than the prescribed number, the
Commission has no choice. It must reject the Notice of Incorporation!
If there is a deviation in the content of the prescribed form, the deviation will
only invalidate the actions of the person if it affects the substance of the
Notice of Incorporation negatively and materially or if such deviation would
reasonably mislead a person who is reading the Notice of Incorporation
Registration of a company
S14: Once the Notice of Incorporation has been filed, the Commission:
 Assigns a unique number to the corporation.
 Enters prescribed information regarding the company in the
Companies Register.
 Issues and delivers a registration certificate to the company, if all the
other requirements have been complied with.
The date stated on the registration certificate is the date on which the
company acquires legal personality. If the promoters have stipulated a
specific date on the Notice of Incorporation, the date on the registration
certificate will be the later one of that date and the date on which the
certificate is issued by the Commission.
Memorandum of Incorporation
The Act requires that provisions of the Memorandum of Incorporation have
to be consistent with provisions of the Companies Act (s 15(1) (a)). If there
are inconsistencies, provisions in the Memorandum will be void to the extent
of the inconsistency
The Memorandum of Incorporation can include any of the following issues:
- Objectives and powers of company
- Restrictions or limitations on powers of company
- What happens to assets upon dissolution
- Composition of board of directors
- Alternate directors
- Frequency of board meetings
- Personal liability of directors
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-
Powers and rights of directors / shareholders
Disposal of shares
Amendment of MOI
Amending the Memorandum of Incorporation
Changes can be made by
A new Memorandum of Incorporation or
 Amendments to the existing provision of the Memorandum of
Incorporation.

An amendment may be proposed by:
 The board of directors
 By shareholders who exercise not less than 10% of the voting rights
 In terms of the procedure set out in the company’s Memorandum of
Incorporation
 By means of a court order
 Amendment must be adopted by special resolution (no need to convene a
shareholder’s meeting)
Alterations of Memorandum of Incorporation
The following persons may make alterations:
- Board of company
- Authorised individual
For an alteration to be effected:
 A notice of alteration must be published in accordance with the MOI and
the rules
 A notice of alteration must be filed.
Shareholders agreement: The Act allows shareholders to enter into
agreements with each other regarding any matter concerning the company.
Such agreements must not be inconsistent with the Act and with the
Memorandum of Incorporation of the company. Where a provision of the
agreement is inconsistent with the Act or with the Memorandum of
Incorporation, it is void to the extent of its inconsistency.
Ring-fenced companies – Section 15(2)(b) and (c)
The initials (RF) are inserted after a company’s name to warn outsiders
dealing with the company that there are special conditions contained in the
memo which they should check. The Notice of Incorporation filed by the
company must also contain a prominent statement drawing attention to
each such provision and where it is allocated in the Memorandum of
Incorporation.
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Rules made by the Board of Directors
The board of directors of a company may make, amend or repeal any
necessary rules relating to the governance of the company concerning
matters not mentioned in the Act.
The board must publish a copy of these rules according to the Memo and be
filed with the Commission.
The rules are:
- Adopted by the board of directors
- Must be ratified by an ordinary resolution of the shareholders’ meeting
- Subordinate to Memorandum of Incorporation
S15 (3), where both the Act and the Memorandum of Incorporation are silent
regarding certain matters that have to do with the governing of the company,
the board of directors of a company is generally allowed to:
· Make rules;
· Amend any existing rules
· Repeal any rules.
Such rules must not be in conflict with the Memorandum of Incorporation of
the company or with the Act
Before the rules of the board become effective the following must occur:
 Publication of a copy of the rules
 Filing of a copy of the rules with the Commission
The Memorandum of Incorporation and the Rules are binding between:
 The company and each shareholder
 Or among the shareholders of the company
 The company and each director or officer of the company
 The company and each member of the audit committee or member of a
committee of the board.
If there are any contradictions between the Companies Act and the
Memorandum of Incorporation or the rules, this is the order of preference:
- Companies Act 71 of 2008
- Memorandum of Incorporation
- Rules
Pre-Incorporation contracts
Common law does not allow a person to act as an agent for a principal who
does not exist therefore no person can act as an agent for a company, which
has not as yet been incorporated because the company does not exist before
incorporation.
S21 allows pre-incorporation contracts to be entered into on behalf of the
company, which has yet to be incorporated to avoid the chance of entering
into beneficial contracts.
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Section 21: Requirements:
1. It is concluded by a person in the name of, or purporting to act in the
name of or on behalf of a company yet to be incorporated in terms of the
Act.
2. the contract must be in writing
3. the contract must be completely, partially or conditionally ratified or
rejected within three months after incorporation of the company.
Pre-incorporation contract: an agreement entered into before the
incorporation of a company by a person who purports to act in the name of,
or on behalf of, the company, with the intention or understanding that the
company will be incorporated, and will thereafter be bound by the agreement
A person who enters into such a contract is held jointly and severally liable
for liabilities emanating from the pre-incorporation contract if:
 Incorporation does not take place, or
 The company does not ratify any part of the agreement.
The board of the company must ratify or reject the contract. If they do
nothing, the company is regarded to have ratified the agreement.
The person who entered into the pre incorporation contract on behalf of the
company before its incorporation, will be personally liable to the other
contracting party.
Section 21 does not provide for the possibility that the other party may
contractually waive this right to hold the incorporator liable in case of nonratification of the contract and it may therefore be safer for an incorporator
to make use of one of the common-law constructions such as a contract for
the benefit of a third party, to ensure that he will not incur personal liability.
A promoter may also use the common-law alternatives:
 Contract for the benefit of a third party (stipulatio alteri)

A trust or cession
 Delegation. ‘
The common-law constructions have a major advantage over a section 21
contracts because in terms of the common law, the promoter is not
automatically liable if the company is not incorporated or does not ratify the
contract. Once incorporated the board of directors may within 3 months
after date of incorporation, completely or partially ratify any preincorporation contract. If the board does not reject the pre-incorporation
contract within 3 months, it is deemed to have ratified the agreement.
Contract for the benefit of a 3rd party – STIPULATIO ALTERI (a contract on
something that has not yet come into existence)
Person B, undertakes to render a performance to a yet to be incorporated
company C. As soon as C has been incorporated, the company accepts the
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performance stipulated for it by A and B is then bound by the contract. So a 2nd
contract comes into existence between B and C.
Reservation of a name for later use
S12, a name may be reserved for use at a later stage, to be used for a newly
incorporated company or to be used as a replacement for an existing name
of a company.
In order to reserve a name, a form CoR 9.1 must be completed and a filing
fee is payable.
The commission will not reserve a name if:
 It is already the name of another registered company, close corporation or
co-operative.
 It is already a name given to an external company.
 It is a name that has already been reserved in terms of the Act.
Registration of company names
When choosing a company name one must avoid names which:
 Do not imply an associate that does not exist
 Are offensive to people of a particular race, ethnic group, gender or
religion
 Amount to passing off
A name in a foreign language must be accompanied by a certified translation
and certificate of translation.
In Peregrine Group, the applicants sought an order directing Peregrine
Holdings to change their name by excluding the word “peregrine” from their
name and to restrain them from passing off their business as that of the
applicants. The court held that in terms of common law, it could make such
an order where the use of the name was ‘calculated to cause damage to the
objector’. One would have to prove confusion and possible damage. The
court found that, on the evidence, it would be inappropriate to allow either
applicants or the respondents a monopoly on the name since it did not
amount to confusion.
To see if the name amounts to passing off, you need to determine:
• Class of customer
• How the businesses compete
The name of a company may not:
Be the same as the name of another company, close corporation
 Resemble the name of another company to an extent that it may create
confusion or create the impression that the 2 businesses are associated
 Give the impression that the company is associated with the government
 Be the same as the name of a business which has already been registered
in terms of the Business Names Act
 Be the same as a trademark of a business which has been filed for
registration in terms of the Trade Marks Act

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The name of a company may:
 Be the registration number of the company = The number has to be followed
by the words “(South Africa)”
 Be in any language and it may consist of any letters, numbers or
punctuation marks and brackets. In addition, the name of the company
must end with the appropriate expression for that type of company. E.g. (RF)
– ring fencing
Change of Name
Where a name that is to be registered is similar to another registered name,
the Act allows the Commission to make use of the registration number of the
company as an interim name.
The registration number will appear in:
 The Companies Register and on
 The Registration Certificate.
The company is given another opportunity to file a Notice of Incorporation
containing an acceptable name.
On receipt the Commission has to enter the new name in the Companies
Register.
The Act also allows any person who has an interest in the name of a
company to apply to the Companies Tribunal for the Tribunal to determine
whether the name is in accordance with the requirements of the Act or not.
S32: company must provide its full name or registration number to any
person on demand.
Legal relationships arising from the constitution
Between the company and a member
It’s accepted that the memorandum constitute a binding contract between
the company and each of its members.
E.g. the contract arising from the constitution binds the member only in his
capacity as member – if the articles provided that a person who is also a
member of the company is to be appointed as the companies attorney, such
a provision can’t be enforced by him as the appointment as the attorney has
nothing to do with his rights of membership = ELEY (unless he has a
separate service contract)
Questions
Advise your client on one advantage and one disadvantage of using a
stipulation in favour of a third party (stipulatio alteri) instead of the
procedure in terms of section 21 of the Companies Act.
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Disadvantage: the promoter contracts in his or her own name and may incur
personal liability
Advantage: the requirements of section 21 do not have to be met for the
contract to be valid
Discuss the requirements for pre-incorporation contracts contained in
section 21 of the Companies Act 71 of 2008. Also indicate whether you
think its best to use s21 or rather contract for the benefit of a 3rd party
in terms of the common law. Explain your answer.
S21 allows pre-incorporation contracts to be entered into on behalf of the
company, which has yet to be incorporated to avoid the chance of entering
into beneficial contracts.
Section 21: Requirements:
It is concluded by a person in the name of, or purporting to act in the
name of or on behalf of a company yet to be incorporated in terms of
the Act.
the contract must be in writing
the contract must be completely, partially or conditionally ratified or
rejected within three months after incorporation of the company.
Pre-incorporation contract: an agreement entered into before the
incorporation of a company by a person who purports to act in the name of,
or on behalf of, the company, with the intention or understanding that the
company will be incorporated, and will thereafter be bound by the agreement
A person who enters into such a contract is held jointly and severally liable
for liabilities emanating from the pre-incorporation contract if:
 Incorporation does not take place, or
 The company does not ratify any part of the agreement.
The board of the company must ratify or reject the contract. If they do
nothing, the company is regarded to have ratified the agreement.
Section 21 does not provide for the possibility that the other party may
contractually waive this right to hold the incorporator liable in case of nonratification of the contract and it may therefore be safer for an incorporator
to make use of one of the common-law constructions such as a contract for
the benefit of a third party, to ensure that he will not incur personal liability.
Goodbuy (Pty) Ltd is a newly incorporated company. As one of its
directors, you have been given the task to determine who is bound by
the Memorandum of Incorporation and the rules of the company.
The Memorandum of Incorporation and the Rules are binding between:

The company and each shareholder

Or among the shareholders of the company

The company and each director or officer of the company
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
The company and each member of the audit committee or
member of a committee of the board.
The MOI of Six Mix (pty) Ltd provide that Zandile will act as attorney of
the company for the next 5 years. Before the expiration of 5 years the
MOI of the company is amended to provide that the company will refer
legal matters to an attorney of its choice. Discuss whether Zandile will
be able to claim damages from the company on the basis of breach of
contract. Refer to case law.
Here we are dealing with legal relationships arising from the constitution of a
company more in particular between the company and a member.
A contract arising from the constitution binds the member only in his
capacity as member – if the articles provided that a person who is also a
member of the company is to be appointed as the companies attorney, such
a provision can’t be enforced by him as the appointment as the attorney has
nothing to do with his rights of membership = ELEY (unless he has a
separate service contract)
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CAPACITY AND REPRESENTATION OF A COMPANY
General considerations:
To determine if a co will be legally bound to a contract entered into by an
agent, we must first determine if the contract is:
1. Ultra vires (outside the capacity)
2. Intra vires (within the capacity)
Capacity and Representation of a Company
Royal British Bank v Turquand (1856) 6 E & B 327, 119 ER 886
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd
Capacity of a Company and the ultra vires doctrine
Before: the legal capacity of a company was determined by the objects
clause, which the memorandum of every company had to contain.
Common law: a contract is an ultra vires the company when the conclusion
is beyond its legal capacity = a company exists in law only for the purpose
for which it was incorporated.
Ultra vires doctrine:
When an act on behalf of the company falls outside its main object, the
company does not exist in law and consequently such an act is not binding
on the company.
An ultra vires act: act entered into by the company, which is beyond the
legitimate powers of the company as defined by its objects clause.
The purpose of the ultra vires doctrine was to protect both shareholders and
The legal consequences of an ultra vires contract were that as between the
company and the other party to the contract, the contract was null and void
but the directors would be liable to the company for breach of their fiduciary
duty not to exceed their authority.
Ultra vires doctrine: S36 will only apply if:
♦ The capacity or power of the co have been exceeded
♦ The authority of directors have been exceeded only by reason of the
fact that the capacity or power of the co have been exceeded
IF S36 APPLIES THE COMPANY IS BOUND BY THE CONTRACT.
In Attorney-General v Mersey Railway Co, the court explained that whether a
particular contract falls within the capacity and powers of the company is a
question of fact. If the main purpose of the company was to carry on the
business of a hotel, it is clear that acts necessary to achieve this purpose, for
example, the purchasing of furniture and the hiring of staff, are intra vires.
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S36 of the Companies Act of 1973:
 Members may interdict the company from entering into the contract.
 If an ultra vires contract has already been concluded, the contract will be
binding on the company.
 An action can then be brought against directors who have exceeded their
powers by concluding a contract on behalf of the company, which falls
outside the capacity of the company, on the basis that the directors have
breached their fiduciary duty not to exceed their authority.
S19 (1) (b): A company has all the legal capacity and the powers of a natural
person except to the extent that a juristic person is incapable of exercising
any such power or the company’s Memorandum of Incorporation provides
otherwise.
The capacity of a company is therefore no longer limited by its main or
ancillary objects or business.
The company’s Memo may limit the purposes, powers or activities of the
company BUT the contract remains valid and binding on the company and
the other party to the contract.
S20 (6): each shareholder has a claim for damages against any person who
fraudulently or due to gross negligence causes the company to do anything
inconsistent with the Act or a limitation, restriction or qualification on the
powers of the company as stated in its Memo unless ratified by special
resolution in terms of section 20(2). This is in addition to the remedy
provided in section 165.
If the company or directors have not as yet performed the planned action one
or more shareholders, directors or prescribed officers of the company may
obtain a court order preventing the company or directors from doing so.
Representation:
If a company gives an agent authority to act on its behalf, the agent
possesses actual authority and will bind the company in acts, which fall
within the scope of the mandate given to him.
Authority can be given:
 Expressly (in writing or orally)
 Implication.
 A company may also be bound to a contract on the basis of estoppel
where the person purporting to conclude the contract on its behalf lacked
actual authority, express or implied, but the other party to the contract
had been misled by the company into believing that he did have authority
- ostensible or apparent authority.
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The Doctrine of Constructive Notice
The 2008 Act abolishes the doctrine of constructive notice but puts it into
statute.
S20 (7): a person dealing with a company in good faith, other than a director,
officer or shareholder, is entitled to presume the company, in making any
decision in the exercise of power, complied with all the formal and
procedural requirements.
The doctrine of constructive notice provides that third parties dealing with a
company are deemed to be fully acquainted with the contents of the public
documents of the company.
S 19 (4) partly abolishes this doctrine.
S 19 (5): provides for two exceptions:
1. A person is deemed to have knowledge of any provision of a company’s
memo
2. The directors and past directors of a personal liability company are jointly
and severally liable, together with the company, for any debts and
liabilities of the company contracted during their respective periods of
office.
The Turquand Rule
The turquand rule: entitled bona fide third parties to assume that the
company has complied with its internal formalities and procedures as
specified in its constitution unless the third party knows for a fact these
internal formalities and procedures had not been complied
• A person who reads the articles or who is deemed to know the contents
thereof won’t be able to ascertain from the articles whether the GM gave
its approval/not.
• RULE: each outsider contracting with the co in good faith is entitled to
assume the internal requirements + procedures have been complied with
• EFFECT: the co will be bound to the contract even though all matters of
internal management and procedure haven’t been complied with.
• However: this rule cant be relied on by a 3rd party if:
1. He knew of the irregularity and was therefore in bad faith
2. The circumstances were suspicious
WHEN THE TURQUAND RULE APPLIES THE COMPANY IS BOUND BY THE
CONTRACT WHETHER THEY GAVE THE DIRECTOR AUTHROTIY OR NOT –
company can then sue the director for damages for breach of fiduciary duties
 The rule was derived from Royal British Bank v Turquand - according to
the common-law Turquand rule, an outsider contracting with the
company in good faith is entitled to assume that all internal requirements
and procedures have been complied with.
 The company will be bound by the contact even if the internal
requirements and procedures have not been complied with.
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 The exceptions are:
o If the outsider was aware of the fact that the requirements and
procedures have not been complied with
o If the circumstances under which the contract was concluded were
suspicious.
S20 (7): NOW states that a person dealing with a company in good faith, is
entitled to presume the company, in making any decision in the exercise of
power, complied with all the formal and procedural requirements.
This codifies the Turquand Rule and it modifies it by excluding the third
party from invoking the rule where he ‘ought reasonably’ to have known of
non-compliance by the company.
Although the doctrine of constructive notice is to be abolished, the Turquand
Rule will still continue to apply to protect bona fide third parties who are
aware of the failure by the company to fulfil its internal requirements
 For the Turquand rule to come into operation, the person who acted must
have possessed actual authority, which was subject to an internal
formality.
In Wolpert v Uitzigt Properties (Pty) Ltd the articles of the company
provided that the board of directors could authorise anyone to sign
promissory notes on its behalf. Therefore, the board could authorise anyone
to sign promissory notes on its behalf. One of the company’s ordinary
directors signed promissory notes on behalf of the company without
authorisation and the question arose whether the outsider was entitled to
assume that the director was authorised to do so. The court found that an
outsider with express or constructive notice of the articles could assume that
someone was authorised to sign the notes, but not that a specific person was
authorised.
S20 (7): now codifies the Turquand rule = provides that a person dealing with
a company in good faith is entitled to assume that the company has
complied with all of the procedural requirements in terms of the Act, the
company’s Memorandum of Incorporation and any rules of the company
unless the person knew or reasonably ought to have known of any failure by
the company to comply with its formal and procedural requirements.
The Doctrine of Estoppel
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964]
Estoppel applies only when the agent did not have actual authority to bind
the company. Take particular note of the fact that the misrepresentation
must have been made by the company as principal. Based on such
misrepresentation, the company will be estopped from denying liability if the
third party can prove that:
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a)
b)
c)
d)
The company misrepresented, intentionally or negligently, that the
agent concerned had the necessary authority to represent the
company
The misrepresentation was made by the company
The third party was induced to deal with agent because of the
misrepresentation
The third party was prejudiced by the misrepresentation.
Questions
The memorandum of incorporation of Lets Learn It (Pty) Ltd states that
the main object of the company is to provide textbooks, learning
services and computers to students. The MOI of the company provide
that any contract which is to be concluded by the managing director on
behalf of the company and exceeds the value of R10, 000, must first be
authorised by the general meeting, by means of an ordinary resolution.
Graeme, the director of the company, concludes a contract on behalf of
the company with Debbie, the director of We have Books (Pty) Ltd,
without the authorisation of the general meeting of Lets Learn It (Pty)
Ltd. The contract is for the purpose of textbooks to the value of R12
000. Discuss whether this contract will bind Lets Learn It (Pty) Ltd.
In the past, we always had to look whether the act was done intra or ultra
virus (inside or outside) the scope of the company in order to determine
whether the company can be held liable.
The position has since changed:
S19 (1) (b): A company has all the legal capacity and the powers of a natural
person except to the extent that a juristic person is incapable of exercising
any such power or the company’s Memorandum of Incorporation provides
otherwise.
The capacity of a company is therefore no longer limited by its main or
ancillary objects or business.
The company’s Memo may limit the purposes, powers or activities of the
company BUT the contract remains valid and binding on the company and
the other party to the contract.
S20 (6): each shareholder has a claim for damages against any person who
fraudulently or due to gross negligence causes the company to do anything
inconsistent with the Act or a limitation, restriction or qualification on the
powers of the company as stated in its Memo unless ratified by special
resolution in terms of section 20(2).
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CORPORATE FINANCE: SHARES, DEBENTURES AND DISTRIBUTIONS
Lipschitz v UDC Bank Ltd 1979 (1) SA 789 (A) [138]
Company shares
Every company having share capital must have two types of share capital:
authorized share capital and issued share capital.
The class and number of shares of each class to be stated in the
Memorandum of each company.
Before: the share capital of a company may be divided into shares having par
value or non par value
NOW: The concept of ‘par value’ shares has been abolished.
The definition of a share: one of the units into which the proprietary
interest in a profit company is divided.
In terms of the new Companies Act no shares will in future be issued with a
nominal value attached. Only the number of shares must be authorised in
the Memo not their value.
 The memo must set out the classes of shares and the number of each
class that a company is authorised to issue - the ‘authorised share
capital’ of a company.
 The board decides when to issue shares and how many shares must be
issued therefore not all the authorised shares need to be issued.
 A share usually entitles its holder to vote at a shareholders’ meeting, to
share in dividends if declared by the board and to share in any assets of
the company after it has been wound up.
Share:
 Is incorporeal movable property transferable in the manner provided for
in the Act (or any other legislation) and in terms of a Company’s
memorandum.
 Is a measure of a shareholders’ interest in a company. This interest
consists of certain personal rights, which may be disposed of or
transferred to some other person.
In Standard Bank of SA ltd v Ocean Commodities Inc, it was said that a share
in a company consists of a bundle of personal rights entitling the
shareholder to a certain interest in the company, its assets and dividends.
According to this statement, a shareholder has a right to share in profits
that have been declared by the company as a dividend and he or she has a
share in the net assets of the company on a winding-up.
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Classes of shares
The different classes are:
1. Preference shares (convertible or irredeemable preference shares)
2. Redeemable preference shares
3. Ordinary Shares (many different types such as Class A or B)
4. Deferred shares (often referred to as founders’ shares)
1. Preference shares
Their holders enjoy preference over any other class of shares with respect to
the payment of dividends and sometimes the return of capital on a windingup.
Rights attached to them:
• Preferential payment
• Fixed percentage of the nominal value of the share
• Preference shares are paid before ordinary shareholders are paid their
dividend.



A company cannot have preference shares unless it also has ordinary
shares or some other class of shares.
preferent shareholders become entitled to payment of their preferential
share dividend only when a company has made a profit and has
declared a dividend.
S90 Companies Act of 1973 by the Companies Amendment act 37 of
1999, a dividend may, if the articles permit and the company complies
with the solvency and liquidity test, be paid out of capital.
In return for the preferential rights to dividends they generally don’t have the
right to vote BUT the Companies Act provides that they have an irrevocable
right to vote on any proposal to amend the preferences, rights, limitations
and other terms associated with their shares.
Different types of preference shares
Cumulative preference shares: If a dividend is not declared in a specific
year, the shareholder’s right to a dividend is carried over to the next year.
When a dividend is declared the next year, the preference shareholder will
have to be paid two years’ dividends before the ordinary shareholders can
receive their dividends.
Participating preference shares: After receiving their preference dividends,
preference shareholders may be given the right to also receive normal
dividends along with the ordinary shareholders or just after the ordinary
shareholders.
Preferential right to capital on winding-up: Preference shareholders could
be given the preferential right to receive repayment of the capital they
contributed to the company on its winding-up. Additionally they can be
given the right to share in any surplus assets of the company upon its
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winding-up after receiving their capital contributions, but this is the
exception rather than the rule.
Convertible preference shares: The right to convert the preference shares
to shares of another class after a certain date attaches to the preference
shares.
2. Redeemable preference shares:
Generally a co can’t repurchase its own shares, as this would constitute
an unauthorized reduction of capital
S98 of the co act makes special provisions for redeemable preference shares
– a co may issue preference shares, which are redeemable, either at the
option of the co or on or before a given date.
Such preference shares may only be redeemed out of 2 possible sources:
1. Out of the proceeds of a fresh issue of shares
2. Out of divisible profits



3. Ordinary shares
Ordinary shareholders usually receive dividends after the preference
shareholders have received theirs and have the right to receive any
surplus assets of the company after it has been wound up.
The amount of the dividend paid to ordinary shareholders is not fixed as
it is in the case of the preferential shares.
It is usually the ordinary shareholders who enjoy a right to vote at general
meetings of shareholders.
4. Deferred shares:!
Usually only come into consideration for a dividend after a prescribed
minimum dividend has been paid to ordinary shareholders.
They are entitled to dividends only if the dividend amount exceeds a certain
threshold and after the ordinary shareholders have been paid.
Known as “founder’s shares” = they are usually issued to remunerate
promoters of companies for their services in the formation and incorporation
of the Company.
Non-voting share
Is permitted under certain circumstances, they are useful for those who wish
to raise more share capital without wanting to lose control of the company.
The disadvantage of vote less shares is that they are enable shareholders
holding only a small proportion of the shares of the company to exercise
effective control over the company.
BUT: if a company has only one class of shares, all shares shall have a right
to vote; if there is more than one class of share, at least one of those classes
of shares must have voting rights.
Issue of shares
Old Act: the directors of a company do not have the power to allot or issue
shares without the prior approval of the members in general meeting (s221).
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New act: power to issue shares and increase authorised share capital is
exercisable by the board instead of the members.
The decision to increase share capital or a decision to finance the company
through debt, is essentially a management decision for the directors to
make, rather than the shareholders and it is the directors who have the
responsibility to manage the affairs of the company
The board may at any time resolve to issue new shares and should it exceed
the authorised share capital of the company or the authority conferred on
the board by the company’s Memorandum, the issuance of the shares may
be retrospectively authorised by amendment to the Memorandum by special
resolution or in, appropriate cases, by the board itself.
The 2008 Act: circumstances where an issue of shares are to be approved by
special resolution of the company’s shareholders:
•
•
•
Where the shares are issued to directors, future directors, or officers of
the company
Where the shares are issued to a person related to the company or a
director or prescribed officer of the company.
Where the shares are issued to a nominee of a director or prescribed
officer of the company.
No special resolution is required where the shares or securities are:
• Issued under an underwriting agreement;
• In the exercise of pre-emptive rights;
• In proportion to existing shareholdings
• On the same terms and conditions as have been offered to all
shareholders of the company
• In pursuance of an employee share scheme
• Or an offer of shares to the public.
If the voting power of the shares to be issued would exceed 30% of the voting
power of all the shares held by the shareholders prior to issue, a special
resolution of the members is required.
Pre-emptive rights: Shareholders in private companies will enjoy preemptive rights to new shares to be issued by the company except for shares
issued to satisfy the exercise of share options, shares not issued for a cash
consideration or capitalisation shares. The Memorandum of the private
company may limit, restrict such pre-emptive rights with respect to any or
all classes of shares of the company.
Pre-emption: right given to shareholders to subscribe for new shares to be
issued by the company for cash pro rata to their existing shareholders.
Pre-emptive rights protect the existing shareholders they enable existing
shareholders to protect their voting power by preventing any dilution of their
voting rights.
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Shareholders should be given the opportunity to preserve their proportionate
share in the company’s capital and in their voting rights. These rights should
not be diluted without their consent.
Pre-emptive rights cannot apply to an allotment or issue of shares for the
purposes of an employee share scheme or to the issue of capitalisation or
bonus shares.
Disadvantage of pre-emptive rights: restrict the flexibility, which many large
companies require in raising new share capital and in structuring their
share capital.
Debentures
The financing of public companies differs from private companies, as the
latter are not permitted to invite members of the public to subscribe for their
shares or securities
Ways a company may finance its activities:
 A loan from a bank
 Issue notes, bonds and debentures
Advantage: is the flexibility given to it in the range of debt and equity
securities that it may issue as well as hybrids consisting partly of debt and
partly of equity.
A debenture: is a document issued by a company acknowledging that it is
indebted to the debenture holder in the stated amount. This document is
prima facie evidence of title, in the same way that a share certificate is.
(Coetzee v Rand Sporting Club)
The debenture may be secured or unsecured.
 A debenture holder is a creditor of the company
 A debenture holder is not a member or shareholder of the company.
 Debenture holders are entitled to a copy of the company’s annual
financial statements.
Companies act:
A debenture: a debt instrument including any security other than the shares
of a company whether issued in terms of security document or not, but
excluding promissory notes and loans.
The board of directors will have the power to issue secured or unsecured
debentures unless the memorandum provides otherwise.
The board must designate whether the debenture or debt instrument is
secured or unsecured. Such debt instruments may carry with them the right
to attend and vote at general meetings and to appoint directors unless the
company’s memorandum provides otherwise.
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Difference between a share and debenture:
Share:
1. Represents rights and duties which flow from a special relationship
between the shareholder and the co
2. Shareholders participate in the profits of the co, which are available
for distribution in the form of dividends, which must 1st be
declared.
3. Dividends cant be paid out of capital
4. Members generally attend and vote at general meetings
Debentures:
1. Document which is evidence of a debt
2. Debenture holder = specific type of creditor
3. Debenture holder receives interest at predetermined rate and which
is payable at fixed times, irrespective of whether the co has earned
sufficient profits
4. Interest can be paid out of capital
5. Debenture holders aren’t entitled to attend and vote at general
meetings.
Difference between a shareholder and a debenture holder:
Shareholder:
A shareholder has the right to a share in the profits of a company and a
right to a share in the net assets of the company if it is wound up.
However, a shareholder is also under a duty to abide by the company’s
Memorandum of Incorporation.
Debenture holders:
As a debenture is a debt instrument, the holder of a debenture has
effectively loaned a sum of money to the company on certain terms.
Accordingly, the debenture holder is entitled to repayment of the sum of
money loaned to the company and is therefore a creditor of the company.
LIQUIDITY AND SOLVENCY TEST: Section 4
A company satisfies the solvency and liquidity test if, the company’s assets
fairly valued equal or exceed its total liabilities fairly valued and it appears
that the company will be able to pay its debts as they become due in the
ordinary course of business for a period of 12 months after the date on
which the test is considered or within 12 months of the date of the
distribution.
When more than 120 business days have passed since the board’s
acknowledgement that it has applied the solvency and liquidity test and has
reasonably concluded that the company will satisfy it, and the company has
not yet completed the distribution, the board has to reconsider the solvency
and liquidity test.
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Distributions:
Distribution: a direct or indirect transfer of money or other property of the
company (except its own shares) whether out of capital or profits to
shareholders in their capacity as shareholders.
S46: the following are distributions:
1. A direct or indirect transfer of money or other property of the company
(except its own shares) whether out of capital or profits to shareholders in
their capacity as shareholders.
2. Dividend
3. Payment in stead of a capitalisation share
4. Consideration for the acquisition of its own shares or those of another
company in the group
5. Transfer of money or property in respect of shares
6. Incurring a debt for the benefit of a shareholder/another company within
the same group
7. Waiver of a debt to a shareholder or company within the group
Payments for share repurchases and even redemption of redeemable
preference shares would be subject to the same test of solvency and liquidity
that applies to all other distributions.
It will be for the board of directors and not for the members in general
meeting to authorise a ‘distribution’. No special or ordinary resolution of the
members is required. The distribution must, however, comply with the
solvency and liquidity test.
The distribution must be effected or completed within 120 days, failing
which it is subjected afresh to the solvency and liquidity test.
Only the directors who voted for or who had assented to the authorisation of
a distribution exceeded the amount that could have been validly distributed
without contravening the solvency and liquidity test or the recovered by the
company from persons to whom the distribution was made. The directors’
liability is thus limited to the extent of the unauthorised amount.
Capital Maintenance
Companies were required to maintain their share capital = they were not
allowed to return to shareholders funds given in return for their shares, nor
could they issue shares at a discount.
This rule was gradually relaxed through the Companies Act
In Ooregum Gold Mining Company of India ltd v Roper it was said: ‘the capital
is fixed and certain and every creditor is entitled to look to that capital as his
security’.
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A number of rules flowed from the capital maintenance concept, some of
which are as follows:
1. Par value shares may not be issued at discount except in accordance with
S81 of the Previous Act or S82 in the case of no par shares.
2. Dividends may not be paid out of share capital.
3. At common law, interest may not paid on shares out of share capital
4. A subsidiary could hold a maximum of 10% of the shares of its holding
company.
5. A company could not redeem its redeemable preference shares except in
accordance with s98 of the Companies act
6. A company could not purchase its own shares.
7. The prohibition against a company giving financial assistance
One of the foundations of South African company law until recently was the
rule that a company not purchase its own shares. The basis of this rule was
the capital maintenance concept that required the issued share capital of a
company to be maintained. A number of reasons were given for the decision
of the court, some of the more important of which were as follows:
• A company cannot be a member of itself
• The purchase by a company of its own shares is an unauthorised
reduction of capital
• It would enable a company to manipulate the price of its shares on the
market
• It enables directors to maintain themselves in control and to buy-off bona
fide opponents of the management.
Trevor v Whitworth = Companies amendment act finally repealed the
common law prohibition against a company purchasing its own shares.
The amendment act substitutes for the capital maintenance concept the
tests of ‘solvency’ and ‘liquidity’ as a safeguard for creditors.
S48 of the new act: companies will be allowed to repurchase their shares
provided that it reasonably appears that the company will satisfy the
solvency and liquidity test immediately after completing the share
repurchase and the board of directors acknowledges that it has applied the
tests and has reasonably concluded that the company will satisfy the
solvency and liquidity requirements at this point. The repurchased shares
must be cancelled on their acquisition by the company and cannot be held
as treasury shares.
Liquidity and solvency test: a company satisfies the solvency and liquidity
test if, the company’s assets fairly valued equal or exceed its total liabilities
fairly valued and it appears that the company will be able to pay its debts as
they become due in the ordinary course of business for a period of 12
months after the date on which the test is considered or within 12 months of
the date of the distribution.
 A subsidiary would still be entitled to acquire a maximum of ten
percent of the shares of its holding company but it may not vote these
shares (once again, there is no mention of dividend rights).
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An agreement for the acquisition of shares is enforceable if it meets the
liquidity and solvency test, BUT if a company cant fulfil its obligations
under a repurchase agreement:
o Company must apply for a court order – to suspend the repurchase
o The court can make an order that’s just and equitable in the
circumstances
When more than 120 business days have passed since the board’s
acknowledgement that it has applied the solvency and liquidity test and has
reasonably concluded that the company will satisfy it, and the company has
not yet completed the distribution, the board has to reconsider the solvency
and liquidity test.

For a director to incur personal liability to the company for failure to comply
with the solvency and liquidity test, the director must have been present at
the meeting and must either have participated in the decision or failed to
have voted against the share repurchase despite knowing that the solvency
and liquidity test had not been complied with.
If the company acquired shares without meeting the liquidity and solvency
test or any other requirement of S48 – the agreement between the
shareholder and the company remains enforceable BUT in terms of S48 (6)
the company may within 2 years of the acquisition apply to the court for an
order to have the repurchase reversed – the court may order:
 The person from who the shares were bought repay the consideration
and
 The company to issue to that person shares of the same class as those
acquired
Acquisition of own shares
Section 48: a share repurchase is subject to all the requirements for a
distribution, which are:
• the board should authorise the distribution
• it should reasonably appear that the company will satisfy the solvency
and liquidity test after completing the distribution
• the board should acknowledge its application of the solvency and liquidity
test.
If the company acquired shares without meeting the liquidity and solvency
test or any other requirement of S48 – the agreement between the
shareholder and the company remains enforceable BUT in terms of S48 (6)
the company may within 2 years of the acquisition apply to the court for an
order to have the repurchase reversed – the court may order:
 The person from who the shares were bought repay the consideration &
 The company to issue to that person shares of the same class as those
acquired
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Financial assistance for the purchase of shares
Previous Act: S38: it is unlawful for a company to finance the purchase of
its own shares. = A statutory extension of the capital maintenance rule and
originally may have been perceived as offending the rule in Trevor v
Whitworth that a company may not purchase its own shares.
The corporate laws amendment act 2006, amended s38 to align the section
with the tests of solvency and liquidity.
New Act
S44: the board of directors of a company may authorise a company to give
financial assistance if the following conditions are fulfilled:
1. Restrictions in the company’s memorandum have been compiled with.
2. The financial assistance is given in pursuance of an employee sharescheme
3. Done in terms of a special resolution passed within the previous two
years which approved such assistance
4. The board is satisfied that immediately after providing the financial
assistance the company would comply with the solvency and liquidity test
5. The board is satisfied that the terms under which the financial assistance
is to be given are fair and reasonable to the company.
There is no need for authorisation in the company’s memorandum.
Failure to comply with the provision of this section would result in the
transaction being null and void and the responsible directors would incur
personal liability for the loss suffered by the company.
The requirement that the financial assistance given by the company must be
fair and reasonable to the company is commendable, provided that the
courts in applying this provision have proper regard for the interests of
minority shareholders.
Directors who were present at a meeting where the board approved the
financial assistance which was contrary to section 44, are personally liable
for any loss, damage or costs the company suffers as a result.
Lipshitz – look at the transaction in 2 phases
1. Look if there was financial assistance – Gradwell: the impoverishment
test was created = look if the transaction will have the effect of leaving
the company poorer = if so there was financial assistance
2. Look at whether the assistance was for the purposes of acquiring
shares in the company. Fidelity Bank v Three Woman (Pty) Ltd: the fact
that the transaction which facilitated the transfer of shares didn’t serve
a commercial interest, amounts to financial assistance
When a transaction passes these 2 phases it will have to comply with S44 to
be valid
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The courts created a test = impoverishment test (Gradwell):
• If the co financial position has been adversely affected it had been
impoverished and therefore given financial assistance.
• If the co is poorer = financial assistance
• But if the test is negative, it not necessarily that there’s been no
financial assistance – look at the co and the others involved financial
position.
Questions
Explain the difference between authorised share capital and issued
share capital.
Authorised share capital: the amount of capital a company is legally allowed
to raise through the issuing of shares
Issued share capital: the total of the share capital amount and the stated
capital amount.
Mark, a shareholder and director of Stanic (Pty) Ltd, agrees to sell his
shares in the company to Vin for R30 000. In order to enable Vin to
acquire the shares, Stanic (Pty) Ltd agrees to lend Vin the sum of
R30000. Explain whether this loan constitutes a contravention of the
prohibition against financial assistance in the Companies act.
S44: the board of directors of a company may authorise a company to give
financial assistance if the following conditions are fulfilled:
• Restrictions in the company’s memorandum have been compiled with.
• The financial assistance is given in pursuance of an employee sharescheme
• Done in terms of a special resolution passed within the previous two
years which approved such assistance
• The board is satisfied that immediately after providing the financial
assistance the company would comply with the solvency and liquidity
test
• The board is satisfied that the terms under which the financial
assistance is to be given are fair and reasonable to the company.
There is no need for authorisation in the company’s memorandum.
The requirement that the financial assistance given by the company must be
fair and reasonable to the company is commendable, provided that the
courts in applying this provision have proper regard for the interests of
minority shareholders.
It is very clear from the question that Stanic (Pty) Ltd intends to give FA to
Vin in the form of a loan and that the purpose of this FA is to enable Vin to
acquire Mark’s shares in Stanic (Pty) Ltd. Accordingly this loan constitutes a
contravention of the Companies Act.
Unless the giving of financial assistance complies with the liquidity and
solvency test (discuss)
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Jenny one of the members of Meti (Pty) Ltd, wants to know whether the
shares of the company may be listed and dealt with on the stock
exchange. Explain to her whether this is possible or not.
All securities may be listed on the JSE, therefore yes
The Companies Act makes provision for redeemable preference shares.
Name 2 possible sources out of which such preference shares can be
redeemed.
Out of the proceeds of a fresh issue of shares
Out of divisible profits
Briefly discuss the distinguishing features of participating preference
shares.
Participating preference shares: carry the right to both a fixed percentage
preference dividend as well as to a share in the residual distributable profits
Bronwyn is the holder of preference shares in Pink E Ltd. The
Memorandum of the company provided that the holders of preference
shares shall have no voting rights. A resolution is proposed at the
annual general meeting for the winding-up of the company. Advise
Bronwyn under what circumstances she will have voting rights.
The articles provide that preference shares shall not confer the right to vote
unless:
1. Where the preference dividend or any redemption payment remains
in arrears and unpaid &
2. Where any resolution is proposed which directly affects the rights
attached 2 these shares or the interest of their holder.
S holds 24% of the shares in Fake It (Pty) Ltd. At a general meeting held
on 18 March 2011, the directors recommended that a dividend be paid
to the members out of the capital of the company.
Advise S whether the company may pay a dividend out of the capital
and explain the requirements of the Companies Act
Common law rule: a dividend can’t be paid out of share capital
The Co Amendment Act – replaced the common law rule with a statutory
provision.
The Co Act – allows a co to make payment to shareholders, if its provisions
are complied with and the payment is authorized in the articles.
It requires that there must be a belief that the co would after the payment is
able to pay its debts as they become due (liquidity criterion) and it assets will
exceed its liabilities (solvency criterion).
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Payment: any direct or indirect payment of $ or transfer property to share
because of his shareholding, any such payment must be authorized by the
articles.
Barb-wire Ltd plans to issue cumulative, participating and redeemable
preference shares. Explain what is meant by these different types of
shares.
Preference (participating) shares:
They usually enjoy a preferential right to dividends
Dividends may only be declared in accordance with the articles and out of
divisible profits
The memorandum and articles may make provision for issue of the following
specific types of preference shares:
• Participating preference shares: carry the right to both a fixed
percentage preference dividend as well as to a share in the residual
distributable profits
• Convertible preference shares: carry the right, usually after a stated
date, to be converted into ordinary shares
Redeemable preference shares:
Generally a co can’t repurchase its own shares, as this would constitute an
unauthorized reduction of capital
S98 of the co act makes special provisions for redeemable preference shares
– a co may issue preference shares, which are redeemable, either at the
option of the co or on or before a given date.
If a preferential dividend is not declared in a particular year, it is assumed
that the dividend is cumulative or carries over to the following year. This is
the position unless the articles provide that the preference shares are not
cumulative.
Billy is a cumulative preference shareholder of One For All Ltd. He
receives notice of a meeting that informs him that a resolution is
proposed to change the rights of One For All Ltd’s preference
shareholders so that they will not have cumulative rights to dividends.
The terms of issue of his shares read that the shares do not entitle
their shareholders to vote at meetings of shareholders of the co. Advise
Billy on whether he will have the right to vote at the meeting where the
resolution is proposed.
A Cumulative preference shares is a person who if a dividend is not declared
in a specific year, the shareholder’s right to a dividend is carried over to the
next year. When a dividend is declared the next year, the preference
shareholder will have to be paid two years’ dividends before the ordinary
shareholders can receive their dividends.
Non-voting share
Is permitted under certain circumstances, they are useful for those who wish
to raise more share capital without wanting to lose control of the company.
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The disadvantage of vote less shares is that they are enable shareholders
holding only a small proportion of the shares of the company to exercise
effective control over the company.
BUT: if a company has only one class of shares, all shares shall have a right
to vote; if there is more than one class of share, at least one of those classes
of shares must have voting rights.
Explain the difference between a debenture and a share as well as the
difference between the rights of a debenture holder and the rights of a
shareholder.
Share:
• Represents rights and duties which flow from a special relationship
between the shareholder and the co
• Shareholders participate in the profits of the co, which are available for
distribution in the form of dividends, which must 1st be declared.
• Dividends can’t be paid out of capital
• Members generally attend and vote at general meetings
Debentures:
• Document which is evidence of a debt
• Debenture holder = specific type of creditor
• Debenture holder receives interest at predetermined rate and which is
payable at fixed times, irrespective of whether the co has earned
sufficient profits
• Interest can be paid out of capital
• Debenture holders aren’t entitled to attend and vote at general
meetings.
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SHAREHOLDERS AND COMPANY MEETING
A shareholder: is the holder of the shares issued by the company = they get
the right to vote in general meetings of members of the company.
Shareholders do not have any duties towards the company, but they may
have duties or obligations towards each other in terms of a shareholders’
agreement.
Meetings
Notice convening a meeting must be given to all persons who are entitled to
receive notice of the meeting.
• A meeting must be convened at a time, date and place, which is
accessible to the members of the company.
• Quorum must be present = A quorum is the minimum number of
members who have to be present at the meeting before the meeting can
commence.
Notice of meetings: S62:
1. Must be in writing.
2. Include the date, time and place of the meeting.
3. Where the company set a record date for a meeting, the notice of the
meeting must include the record date.
4. The notice should explain the general purpose of the meeting and any
other specific purposes.
5. In a public company and a non-profit company that has voting members,
notice of a shareholder meeting should be given 15 business days before
the date of the meeting. In any other company the notice, convening the
meeting must be sent ten business days before the date of the meeting.
The provisions of the memorandum of Incorporation may prescribe longer
minimum notice.
6. A copy of any proposed resolution received by the company, which is to
be considered at the meeting, must accompany the notice convening the
meeting.
7. The notice must indicate the percentage of voting rights required for the
resolution to be adopted.
8. A notice convening the AGM of a company must contain a summary of
the financial statements that will be tabled at the meeting.
9. A notice convening a meeting must contain a statement that a
shareholder is entitled to appoint a proxy
10. The notice should indicate that meeting participants will be required to
provide satisfactory proof of identity at the meeting.
Where the company has failed to give proper notice of the meeting or there
has been a defect in the giving of the notice, the meeting may proceed if the
persons who are entitled to vote in respect of each item on the agenda are
present at the meeting and acknowledge actual receipt of the notice and
agree to waive notice of the meeting or in the case of a material defect, ratify
the defective notice.
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Representation by proxy
A proxy is a person appointed to represent a shareholder at a meeting.
 At common law: there was no right to appoint a person, speak and
vote on behalf of another.
 The companies Act allow a shareholder to appoint two or more proxies.
Once appointed, a proxy will be allowed to attend, participate in, speak and
vote at the shareholders’ meeting.
Ingre v Maxwell the court held that there must be at least two persons
present to constitute a valid meeting where one person is in attendance and
holds the proxies of all other persons who were entitled to attend the
meeting.
The appointment of a proxy must be in writing and signed by the
shareholder appointing the proxy. The appointment remains valid for one
year after it was signed
A proxy may delegate authority to act on behalf of the shareholder to another
person. A copy of the proxy appointment form must be delivered to the
company prior to the proxy exercising any rights of the shareholder at the
shareholders meeting.
The shareholder who appoints the proxy has the right to revoke the proxies’
appointment at any time by cancelling it in writing, or making a later
inconsistent appointment of a proxy and delivering a copy of the revocation
instrument to the proxy and the company.
At the meeting the proxy is entitled to vote as he or she thinks fit unless the
shareholder has indicated otherwise on the proxy form.
The appointment:
 Must be in writing and signed by the shareholder
 Is valid for one year
 May be for a specific period of time
 May be for two or more persons concurrently exercising voting rights for
different shares
 A proxy may delegate authority to act on behalf of the shareholder to
another person
 A copy of the proxy appointment form must be delivered to the company
before the shareholders meeting
 A shareholder is not compelled to make an irrevocable proxy appointment
 A shareholder may alter proxy by cancelling it in writing, appointing
another proxy and deliver a copy of the revocation to the proxy and the
company.
Demand to convene a shareholders’ meeting
The board or any other person specified in the company’s Memorandum,
may call a shareholders’ meeting at any time
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A meeting of shareholders must be convened if one or more written and
signed demands for such a meeting are delivered to the company:
1. A demand must specify the purpose of the meeting.
2. Must be signed by the holders of at least 10% of the voting rights
3. The memorandum of Incorporation of a company may specify a lower
percentage than 10%.
4. A company, or any shareholder of the company, may apply to a court
for an order setting aside a demand for a meeting on the grounds that
the demand is frivolous, or because it calls for a meeting for not other
purpose than to re-consider a matter that has already been decided by
the shareholders, or is vexatious.
5. A shareholder who submitted a demand for a meeting may withdraw
the demand before the start of the meeting.
Shareholders acting other than at a meeting
A resolution that can be voted on at a shareholders’ meeting may instead be
submitted for consideration to the shareholders and voted on in writing by
shareholders entitled to voting rights in relation to the resolution.
E.g. An election of a director
Within ten business days after adopting a resolution the company must
deliver a statement describing the results of the vote, consent process, or
election to every shareholder who was entitled to vote on the resolution.
The Companies Act of 1973 provides that a particular annual general
meeting need not be held if all the members who are entitled to attend such
a meeting consent in writing.
In Gohlke and Schneider v Westies Minerale the court held that members
may validly appoint a director to the board without any formal meeting being
held because there was evidence of their unanimous consent.
The court in In re Duomatic Ltd held that the unanimous approval of
directors’ remuneration by the two directors holding all the voting shares in
a company could be regarded as a resolution of a general meeting approving
the payment.
NOW: A resolution that can be voted on at a shareholders’ meeting may
instead be submitted for consideration to the shareholders and voted on in
writing by shareholders entitled to voting rights in relation to the resolution.
E.g. An election of a director
Within ten business days after adopting a resolution the company must
deliver a statement describing the results of the vote, consent process, or
election to every shareholder who was entitled to vote on the resolution.
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Annual General Meeting
The first AGM of a public company must occur no more than 18 months
after the date of incorporation of the company.
The subsequent AGM must occur within 15 months of the previous AGM.
The company’s tribunal may grant an extension if good cause is shown.
In terms of section 61(8), the following matters must be discussed at every
AGM:
• Director’s report, financial statements and the audit committee report.
• Election of directors.
• Appointment of the Auditor and the audit committee.
• Any matters raised by the shareholders
Convening a meeting in special circumstances
Where the company cannot convene a meeting because it has no directors,
or because all of its directors are incapacitated, any other person authorised
by the company’s Memorandum of Incorporation may convene the meeting.
If no other person is authorised = any shareholder may request the
Companies Tribunal to issue an administrative order for a shareholders
meeting to be convened.
If a company fails to convene a meeting for any reason, a shareholder may
apply to a court for an order requiring the meeting
The company must compensate the shareholder who applies to the
Companies Tribunal or to a court for the costs of those proceedings. Failure
to hold a required meeting does not affect the existence of a company or the
validity of any action by the company.
Quorum
A shareholders meeting may not begin until sufficient people are present, in
aggregate, exercise at least 25% of the voting rights that are entitled to be
exercised in respect of at least one matter to be decided.
A company’s Memorandum of incorporation may specify a lower or higher
percentage than the 25%. If a company has more than two shareholders and
only two are present, a meeting may not begin until at least three
shareholders are present.
Conduct of meetings
Voting: either by a show of hands or through a poll amongst those persons
who are present at the meeting and entitled to exercise voting rights on that
matter.
Show of hands: any person present and entitled to exercise voting rights
must have only one vote, irrespective of the number of shares held by that
person. Every member has one vote – unless the articles provide otherwise,
person has only one vote on a show of hands even though he is also a
representative of other shareholders.(a rough inconclusive manner)
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Poll: any member including his or her proxy must be entitled to exercise all
their voting rights attached to the shares held by him.
To demand a poll:
- the demand must be made by 5 members having the right to vote or
- by members representing at least 10% of the voting rights, or holding
at least 10% of the issued share capital.
Every member has a vote as set out by S195, which is to the effect that his
votes should be in proportion to the share capital represented by his shares.
A company may provide for a shareholders’ meeting to be conducted entirely
by electronic communication or allow one or more shareholders or proxies,
to participate by electronic communication in all or part of a shareholders’
meeting that is being held by that person. The electronic communication
used must enable all persons participating in that meeting to communicate
concurrently with each other without an intermediary and to participate
reasonably effectively in the meeting.
Where participation in a meeting by electronic communication is allowed the
notice convening the meeting should inform shareholders of the availability
to participate electronically and provide necessary information to enable
shareholders or their proxies to access the available medium or means of
electronic communication.
The shareholder generally bears the cost access to the medium or means of
electronic communication. Where a person abstains or fails to exercise his or
her vote on a resolution such a person is deemed to have voted against the
resolution.
Majority rule
Common-law rule: When a person becomes a shareholder in a company, he
or she agrees to be bound by the decisions of the majority.
The powers of the majority are limited by the provisions of the new Act in
that certain decision require a larger majority that a factual majority.
Such a larger majority is referred to as a special resolution. Decisions taken
by members of a company in general meeting can be either ordinary or
special resolutions.
Exercise of voting rights
Profit company (other than a state-owned enterprise) with only one
shareholder:
 The shareholder may exercise all of the voting rights
Profit company (other than a state-owned enterprise) has only one director,
 Director may exercise any power or function of the board at any time,
except when the Memorandum of Incorporation provides otherwise.
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Company (other than a state-owned enterprise) where every shareholder is
also a director of that company:
 Shareholders may decide on any matter to be referred by the board at
any time without notice or compliance with any internal formalities
except where the memo provides otherwise
Pender: the shareholders unlike the directors don’t exercise their voting
rights for the benefit of the company and can act in their own interests.
Shareholder resolutions
Resolutions
Ordinary resolution: decision with the support of more than 50% of the
vote. The Memo may require a higher percentage on certain decisions.
The act provides there must be at least a margin, at all times, of at least 10%
between the requirements for adoption of an ordinary or special resolution.
Ordinary Resolution:
 formal decision
 simple majority of members present
 who constitute a quorum.
 It comes into operation as soon as the decision is made
Special resolution:
 Requires 75% of the voting rights exercised
 Memo can provide for a lower %
 There must be a margin of at least 10 percentage points between the
requirements for a special resolution and an ordinary resolution
Decisions that require a special resolution
A special resolution is required when taking the following decisions:
• Amendment of the company’s Memorandum of Incorporation
• Approving a voluntary winding up of the company; and
• Approval of a sale of assets, a merger, an amalgamation or a scheme of
arrangement.
Postponement and adjourning of meetings
A meeting may be postponed or adjourned for a week under the following
conditions:
• Within one hour after the appointed time for a meeting to begin, a
quorum is not present;
• When a quorum is not present at an adjourned or postponed meeting,
the members of the company present in person or by proxy will all be
deemed to constitute a quorum; and
• If there is other business on the agenda of the meeting, consideration
of that matter may be postponed to a later time in the meeting without
motion or vote.
The chairperson of the meeting where the quorum is not present within one
hour of the scheduled starting time may extend the one-hour limit for a
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reasonable length of time, on the grounds that exceptional circumstances
affecting whether, transportation or electronic communication have generally
impeded the ability of the shareholders’ to be present at the meeting or that
one or more shareholders, having been delayed, have communicated an
intention to attend the meeting, and those shareholders, together with
others in attendance, would constitute a quorum.
Unless the company’s memo or rules provide otherwise, after a quorum has
been established for a meeting, or for a matter to be considered, so long as at
least shareholder with voting rights entitled to be exercised at the meeting,
or on that matter, is present at the meeting.
A meeting may not be adjourned beyond the earlier of the date that is 120
business days after the record date or the date that is 60 business days after
the date on which the adjournment occurred. The latter is an alterable
provision that can be altered by the previsions of the memorandum of
Incorporation.
Questions
The chairperson of the annual general meeting of XYZ Ltd rejected Mr
Smit’s vote. Advise Mr Smit on the right of a member to vote at a
meeting of the company. You need to refer to relevant case law.
Voting rights
General principle: every member of the company will have a right to vote.
EXCEPTIONS:
The following exceptions to the principle of equal voting rights is permitted:
a) Voting rights of members of a private company must be determined
by the articles, subject to S193 – each share must carry a right to
vote.
b) The chairman of the meeting may be given a casting vote.
c) The articles may specify, that above a stated number, a members vote
will not linger increase in direct proportion to the number of shares
held by him but in some lower proportion = scaling down or ceiling
may be placed on the total number of votes to which any member
may be entitled.
d) The MOI may provide that preference shares shall not confer the right
to vote, except in 2 instances:
1) Where the preference dividend remains in arrears and unpaid
2) Where any resolution is proposed which directly affects the
rights attached to the shares, including a resolution to wind up
the company or reduce its share capital.
The decision in Pender v Lushington confirms that the shareholders, unlike
directors, do not have to exercise their voting rights for the benefit of the
company and may act in their own interests. It shows that a shareholder has a
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right to have his/her vote recorded, even if the vote makes no difference to the
final results of the voting.
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DIRECTORS AND BOARD COMMITTEES
A director is a member of the board and includes director or alternate
director
A person becomes a director only when that person has:
 Given his or her written consent to serve as a director,
 After having been appointed or elected or holding office in accordance
with the provisions of s66.
S66: the business and affairs of a company must be managed by or under
the direction of its board, which has the authority to exercise all of the
powers and perform any of the functions of the company, except to the
extent that the Act or the memorandum provides otherwise.
Kings’ code identifies three types of directors:
Type of
Director
Executive
Director
NonExecutive
Director
Independent
Director
Characteristics
•
•
•
•
•
•
•
•
•
Day to day management
Employee of company
Employee of company’s subsidiaries
Not involved with Day to day management
Not a salaried Employee of company or
subsidiaries.
Non-executive director
Not a representative of a controlling shareholder
Not employed by the company in an executive
capacity
Has no contractual or business or business
interest in the company or group.
‘Shadow directors’: people who are not officially appointed as directors; they
do not complete the consent to act form, they do not comply with other
formalities on appointment and their particulars do not give instructions to
the board and the board does not indeed act on their instructions.
Types of director
Ex Officio Director:
• Holds office as a director of a company solely as a result of that person
holding another office or title of status.
• Not appointed by shareholders.
• Has all the powers and functions of any other director, except to the
extent that the company’s Memorandum restricts such powers and
functions.
• Has all the duties and is subject to the same liabilities as other directors.
Memorandum appointed director:
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•
•
Does not have to be appointed by the shareholders.
Memorandum can specify how and/or by whom such a director is
appointed.
Alternate director:
• May be appointed or elected depending on the memorandum.
• Person elected or appointed to serve as a member of the board of a
company in substitution for a particular elected or appointed director of
that company.
• Can have more than one person as alternate.
• In the case of a profit company, at least 50% of alternate directors must
be elected by shareholders.
Elected director:
• In the case of a profit company, at least 50% of directors must be elected
by shareholders.
Temporary director:
• The memorandum can provide for the appointment of a temporary
director.
• Unless the memorandum provides otherwise, the directors may appoint a
temporary director.
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Directors and managers
Manager: is an employee of a company
Director: does not have to be an employee = code requires a majority of nonexecutive directors, to ensure objective decision making
Directors
Protect assets and reputation.
Managers
Implement decisions and policies
made by the board.
Apply skill and care in exercising
Cannot act contrary to interests of
their duty to the company and are
the employer
subject to fiduciary duties. If they are
in breach of their duties or have
acted improperly, directors may be
made personally liable in both civil
and criminal law.
Directors are accountable to the
shareholders for the company’s
performance and can be removed
from office by them.
Usually appointed and dismissed by
directors or management and do not
interact with shareholders.
Determination of the values and
ethical position of the company.
Take their direction from the board.
Directors are responsible for the
company’s admin.
Company admin can be delegated to
managers, BUT the ultimate
responsibility for them resides with
the directors.
Directors can be disqualified as
directors under the Act or in terms of
the Memorandum.
The control over the employment of a
manager rests with board and
control is exercised in accordance
with a manager’s employment
contract.
King Code: the key functions of the board of directors are the following:
•
•
•
To give strategic direction to the company;
To ensure that management implements board plans and strategies;
To be responsible for the performance and affairs of the company and
to retain full effective control over the company.
Number of directors and consent
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A person becomes a director of a company when that person has been
appointed or elected in terms of the provisions of the memorandum or act or
holds office, title, designation or similar status entitling that person to be an
ex officio director of the company.
A person will only become a director if he or she delivered a written consent
accepting the position of director to the company.
Directors: Act and Memorandum
Number of directors:
Act:
• Private and personal liability company must have at least one director.
• A public and non-profit company must have at least three.
• Where the company does not have the prescribed minimum number of
directors, any act done by the board will remain valid.
Memorandum:
• The memorandum can specify a higher number than the minimum
required.
• A memorandum cannot validate the acts of a board where it acts of a
board without the required number of directors.
Appointment:
S66 (4) (b) provides that the Memorandum of a profit company must provide
that the shareholders will be entitled to elect at least 50% of any alternate
directors.
The Memorandum can provide that any person will have the power to
appoint and remove one or more of the directors, but there must still be the
minimum number of elected directors for a profit company.
Removal:
S71:
• Despite a memorandum or rules;
• Despite any agreement between the company and a director; and
• Despite any agreement between any shareholders and a director,
A director may be removed by ordinary resolution adopted at a shareholders’
meeting.
A Memorandum cannot entrench the position of any director and cannot
override the will of ordinary shareholders as expressed in an ordinary
resolution.
Ex Officio:
S66 (4) (a) (ii) provides that a memorandum may provide for a person to be
an ex officio director. The 2008 act does not insist on the appointment of
such a director.
Remuneration:
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•
•
A director does not have an automatic right to remuneration in terms of
the act of 2008.
S66 (9) provides that a company may pay remuneration to a director,
unless prohibited in a Memorandum.
Remuneration payable, otherwise than in terms of a Memorandum, must be
approved by a special resolution within the previous two years
Ineligible and disqualified persons
S69 provisions apply to those wishing to be a
• Director
• An alternate director;
• A prescribed officer; and
• Any person who is a member of a committee of a board of a company or of
the audit committee of a company, irrespective of whether such person is
also a member of the company’s board.
If a person is ineligible form being appointed as a director, this means that
such person is absolutely prohibited from becoming a director of a company
and there are no exceptions to this prohibition.
The following persons are ineligible to be appointed as a director:
 A juristic person.
 An unemancipated minor or person under a similar legal disability.
 Any person who does not satisfy any requirement in a company’s
Memorandum.
The following persons are disqualified from being appointed as a director:
1. Prohibited by a court of law from becoming a director.
2. Declared a delinquent by the court.
3. Unrehabilitated insolvent
4. Prohibited in terms of any public regulation to be a director
5. Removed from an office of trust because of dishonesty = A
disqualification in terms of this section ends at the later of five years
after the date of removal from office or at the completion of the
sentence imposed for the relevant offence or as determined by a court
from time to time on application by the commission.
6. Convicted and imprisoned of a crime without the option of a fine (for
theft, forgery, perjury and fraud)
7. Disqualified in terms of a company’s Memorandum
8. Prohibited by a court of law from becoming a director.
Director disqualification: Exemptions
Section 69(11) gives a court discretion and s69 (12) gives shareholders of
certain private companies an opportunity to avoid this disqualification.
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Exemptions by a court
In terms of s69 (11) a court may exempt certain disqualified persons from
the disqualifications. The following persons may apply to court for such an
order:
• An unrehabilitated insolvent;
• A person who was removed from an office of trust for dishonest
misconduct; or
• A person who was convicted of a crime with an element of dishonesty.
S69 (11) implies that the relevant person will have to make an ex parte
application to court for permission to act as a director despite the
disqualification.
In an application for permission to accept the position of director despite the
disqualification, the applicant will have to prove to the court that he or she
has been rehabilitated from his or her wrongful ways and can be trusted
with the responsibilities of a director.
In Ex Parte Barron it was held that a court may be more lenient in a case
where a private company is affected than where a public company is
affected. This is due to the fact that a director of a public company deals
with funds in which a vast number of people are involved. Such a director
should obviously be under more scrutiny than a director of a private
company.
Director disqualifications: exemptions for certain private companies:
S 69(12) specifically provides that, despite being disqualified in terms of s69
(8) (b) (iii) and (IV), a person may act as a director of a private company if:
• All the shares are held by that disqualified person alone; or
• All the shares are held by the disqualified person and persons related to
such person and each such person has consented in writing to that
person being a director of the company.
Application to declare a person delinquent or under probation:
S162, a court can order a person to be ‘a delinquent’ or to be ‘under
probation’. The following persons can apply to court for such an order:
1. A company.
2. A shareholder.
3. A director.
4. A company secretary or prescribed officer of a company.
5. A registered trade union that represents employees of the company.
6. Any other representative of the employees of company.
7. The commission.
8. The takeover regulation panel.
Any of the persons from 1-6 can apply of the following grounds:
 The person consented to serve as a director, or acted in the capacity of a
director or prescribed officer, while he or she was ineligible or
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

disqualified. A declaration is unconditional and subsists for the lifetime of
the declared delinquent
The person acted as a director whilst under probation and in
contravention of such order under the Companies Act, 2008 or under s
47 of Close Corporations act. A declaration is unconditional and subsists
for the lifetime of the declared delinquent.
The person, while he was a director, grossly abused the position of
director A declaration of delinquency in terms of s 169 (5) (c) to (f) may be
made subject to any conditions the court considers appropriate. A
declaration subsists for seven years from the date of the order, or such
longer period as determined by the court s 162(6). The 2008 act does not
in any way limit that a court may order, as conditions applicable or
ancillary to a declaration of delinquency or probation, that the person
concerned:
• Undertakes a designated programme of remedial education relevant to
the nature of the person’s conduct as director
• Carries out a designated programme of community service
Pays compensate to any person adversely affected by the person’s
conduct as a director, to the extent that such a victim does not otherwise
have a legal basis to claim compensation
 The person took personal advantage of information or an opportunity
contrary to s 76(2) (a). Delinquency
 The person intentionally or by gross negligence inflicted harm upon the
company or a subsidiary of the company contrary to s 76(2)(a)
Delinquency
 The person acted in a manner that amounted to gross negligence, wilful
misconduct or breach of trust. Delinquency
 The person, whilst serving as a director, was present at a meeting and
failed to vote against a resolution despite the inability of the company to
satisfy the solvency and liquidity test.
A declaration placing a person under probation may be made subject to any
conditions the court considers appropriate and subsists for a period not
exceeding 5 years. Without limiting the powers of the court, a court may
order, as conditions applicable or ancillary to a declaration of delinquency or
probation that the person concerned:
• Undertakes a designated programme of remedial education relevant to
the nature of the person’s conduct as director
• Carries out a designated programme of community service
• Pays compensation to any person adversely affected by the person’s
conduct as a director, to the extent that such a victim does not
otherwise have a legal basis to claim compensation
• In the case of an order of probation be supervised by a mentor in any
future participation as a director while the order remains in force
Be limited to serving as a director of a private company or of a
company of which that person is the sole shareholder.
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

The person acted in a manner materially inconsistent with the duties of a
director. Probation
The person acted in or supported a decision of the company to act in a
manner contemplated in s 163 (1) (acted in an oppressive or unfairly
prejudicial manner) Probation
Application to the court
A person, who has been declared delinquent, other than where the
declaration is unconditional and subsists for the lifetime of the person
declared delinquent, may apply to a court:
• To suspend the order of delinquency and substitute an order of
probation, with or without conditions at any time more than 3 years after
the order of delinquency was made;
• To set aside an order of delinquency at any time more than 2 years after
it was suspended as contemplated in above paragraph.
On considering an application the court may not grant the order applied for
unless the applicant has satisfied any conditions that were attached to the
order and may grant an order if, satisfied that the applicant has
demonstrated satisfactory progress towards rehabilitation and there is a
reasonable prospect that the applicant would be able to serve successfully as
a director of a company in the future.
First directors of a company
Every incorporator of the company is deemed a director until sufficient
directors have been appointed to meet the required minimum number of
directors. If the number of incorporators of a company, together with any ex
officio directors and appointed directors is fewer than the minimum number
of directors required for that company, the board must call a shareholders’
meeting within 40 business days after the date of incorporation for the
purpose of electing sufficient directors to fill all vacancies on the board at the
time of the election.
Vacancies on the board
A person ceases to be a director and a vacancy arises on the board of a
company in any of the following circumstances:
• When the period of the fixed term contract expires as provided by the
Memorandum.
• Person resigns
• Person dies
• Position of an ex officio director becomes vacant if the person ceases to
hold the office or title that entitled the person to be such a director
• Ceases to reside in South Africa, when no other directors are resident in
South Africa
• Person becomes incapacitated to the extent that the person is unable to
perform the functions of a director and is likely to regain that capacity
within a reasonable time
• Declared delinquent
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•
•
•
Placed on probation under conditions that are inconsistent with
continuing to be a director
Becomes ineligible or disqualified from being a director
Removed from office by resolution of the shareholders or by the board, or
by order of the court.
Filling of vacancies
If a vacancy arises in the board other than as a result of an ex officio director
ceasing to hold that office, it must be filled by a new appointment or by a
new election conducted at the next annual general meeting of the company if
the company is required to do so.
Where as a result of a vacancy, there are no remaining directors or no
remaining director’s resident within the republic. Any shareholder with
voting rights may convene a meeting to elect directors.
A company must file a notice within 10 days after a person becomes or
ceases to be a director.
Removal of directors
Removal by shareholders
A director may be removed by shareholders by an ordinary resolution
adopted at a shareholders meeting.
Notice of the meeting and the resolution must be given to the director prior
to considering the resolution to remove the director. The period of notice that
should be given is equivalent to that which a shareholder is entitled to
receive when convening a meeting. The director must be allowed the
reasonable opportunity to make a presentation, in person or through a
representative, to the meeting, before the resolution is put to a vote.
Removal by the board of directors
The grounds upon which a director may be removed by a resolution of the
board are as follows:
1. If a company has more than two directors and it is alleged by a
shareholder or by a director that a director of the company has
become ineligible or disqualified
2. Where a director has become incapacitated to the extent that the
director is unable to perform the functions of a director and is unlikely
to regain that capacity within a reasonable time
3. The director is no longer resident within the republic in circumstances
in which there are no other directors resident within the republic
4. The director has neglected or been derelict in the performance of the
functions of the director or the board.
Where the board has taken a resolution to remove the director, the director
may apply to a court to review the decision
Such application for review must be brought within 20 business days from
the date the decision is taken by the board. The court may confirm the
determination of the board or remove the director from office, if the court is
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satisfied that the director is ineligible or disqualified, incapacitated or nonresident.
Removal and breach of contract
Removal as a director in terms of the 2008 act could constitute breach of
contract. The particular director will retain the right to institute any claim
that he or she has in terms of the common law for damages or other
compensation for loss of office as a director or loss of any other office as a
consequence of being removed as a director.
Board Committees
S72 of the companies act provides that except to the extent that a
memorandum provides otherwise, the board of directors may appoint any
number of committees and it may delegate any of the authority of the board
to a committee.
The King Code, however, makes clear that the board is the focal point of the
corporate governance system and whilst the board may delegate authority,
there is an important distinction to be made between a ‘delegation’ and an
‘abdication’ of powers. In other words, the board is responsible for carrying
out its duties properly and a director cannot avoid responsibility, for
example, by shielding behind a committee.
S72 (3) thus provides that the board of directors or the particular director
will remain liable for the proper performance of a director’s duty despite the
delegation of a duty to a committee.
A committee may include persons who are not directors of the company, but
s 72(2) (a) provides that such a person cannot be a person who is not
ineligible or disqualified to be a director.
Committees and the King Code
The king code proposed that the board committees should be established to
assist the directors by giving detailed attention to important areas. In terms
of the King Code, a public listed company should, at the least, have both an
audit and a remuneration committee.
Remuneration committee:
• Make recommendations to the board on specific remuneration packages
for each of the executive directors.
• Make recommendations as to the fees to be paid to each non-executive
director.
Audit Committee:
• Recommend to the board, for acceptance by shareowners, the
appointment of external auditors.
• Set principles for recommending using the accounting firm of the external
auditors for non-audit services.
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•
•
•
•
•
Consider whether or not an interim report should be reviewed by an
external auditor.
Internal audit should report at all audit committee meetings.
The appointment or dismissal of the head of the internal audit should be
with the concurrence of the audit committee.
If the external and internal audit functions are carried out by the same
firm, the committee has a duty to ensure that there is adequate
segregation between the two functions to ensure that independence is not
impaired.
The internal audit plan should be based on a number of matters
including issues highlighted by the audit committee.
Nomination committee:
• Assist the board in the formal and transparent procedures leading to
board appointments
• Assist the board in the formal and transparent procedures leading to the
appointment of the company secretary
• Review and evaluate other qualities of the board such as its
demographics and diversity
• Review and evaluate the boards mix of skills and experience
• Review and evaluate all committees and the contribution of each director.
Board Meetings
A director authorised by the board of a company may call a meeting of the
board at any time. A directors’ meeting must be called in certain
circumstances:
• If required to do so by the number or percentage of directors specified in a
company’s memorandum.
• If required to do so by at least 25% of the directors, where the board that
has at least 12 members.
• If required to do so where the board has less than twelve members and
the meeting is requested by at least two directors.
Duties of directors
The 1973 Companies act did not contain clear rules regarding corporate
governance and the duties and liabilities of directors.
These matters were largely left to common law and to codes of corporate
practice, such as the king report.
S76 of the act introduces new law, entitled ‘standards of directors’ conduct,
in the form of a codified regime of directors’ duties, which includes a
fiduciary duty and a duty of reasonable care. The provisions governing
directors’ duties are supplemented by other new provisions addressing
conflict of interests, director’s liability and indemnities and insurance.
Directors need to know what their duties are and must be aware of what is
expected of them, because the standards of a director’s conduct can
influence the profitability of a company, determine the extent of foreign and
domestic investments and ultimately determine the success of a company.
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Whilst some of the directors’ common law duties are stated in the
Companies act, 2008, one must bear in mind that the provisions in the 2008
act are subject to and not in substitution for any duties of a director under
the common law. The courts may still have regard to the common law,
including past case law when interpreting the provisions of the act and it
has been made clear that the reform of company law in South Africa does
not seek to discard the foundation laid down for company law over the
century, but to introduce new legislation, where necessary that is suitable
and apt for the unique constitutional and culturally diversified South African
economy.
Therefore, to create certainty, certain duties of directors have been codified.
Codification does not entail a rigid fixation of law but a proposed code with
provisions that, if used correctly by the courts, can ultimately lead to
development of the law.
A distinction should be made between complete codification and partial
codification. Complete codification entails the use of a body of fixed rules; it
cannot accommodate an environment that keeps changing, as would a
statutory scheme that is based on broader principles. Partial codification
entails adopting the general principles of law but allows some room for the
development of the common law. The provisions in the company’s act 2008
relating to directors duties are a partial codification of company law.
Standards of directors’ conduct
Previously the law regulating the duties of directors was found in the
common law. At common law a director was subject to the fiduciary duties to
act in good faith to the benefit of the company as a whole and to avoid the
situation where the director’s personal interest conflicts with that of the
company. The company’s act 2008 introduces new provisions where
necessary to ensure harmonization with other legislation; for example, the
Securities Services Act 36 of 2004 and Auditing Profession act 26 of 2005
but also introduces a statutory standard for directors’ conduct.
Briefly summarised, the newly codified duties of directors in the
Companies Act of 2008 are the following:
(1)
To disclose to the board any personal financial interest in matters of
the company
(2)
Not to use the position of director or information obtained as director
to gain an advantage for himself or another person, or to knowingly
cause harm to the company or a subsidiary
(3)
To disclose to the board of directors any material information that
comes to a director’s attention
(4)
To act in good faith and for a proper purpose
(5)
To act in the best interests of the company
(6)
To act with a reasonable degree of care, skill and diligence
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Directors must not abuse their position or information and must act in
a certain way when there is a personal financial interest
A director must not use the position of director, to gain a personal
advantage, for himself or any other person other than the company itself.
Nor must the director cause harm to the company.
S75 deals specifically with a directors’ personal financial interests and
provides that if a director’s personal interests conflict with those of the
company, the director should disclose the conflict of interest to the
shareholders or the board of directors’ of the company.
The director may disclose any personal financial in advance by delivering a
notice in writing to the board of directors or shareholders.
The written notice should set out the nature and extent of the personal
interest and will be valid until changed or withdrawn by further written
notice from that director.
If a director of a company has a personal financial interest in respect of a
matter to be considered at a meeting of the board or knows that a related
person has a personal financial interest in the matter, the director must
disclose the interest and its general nature before the matter is considered at
the meeting.
The director is compelled to disclose to the meeting any material information
relating to the matter that is known to the director. The director may
disclose any observations or pertinent insights relating to the matter if
requested to do so by the other directors if present at the meeting but must
leave the meeting immediately after making any disclosure. The director is
not allowed to take part in consideration of the matter.
During a director’s absence he or she will still be considered present for
purposes of determination of the quorum. However, the director is not
regarded as being present at the meeting for the purposes of determining
whether a resolution has sufficient support to be adopted. The relevant
director may not execute any document on behalf of the company in relation
to the matter unless specifically requested or directed to do so by the board.
If a director or a person related to a director acquires a personal financial
interest in an agreement or other matter in which the company has a
material interest after the agreement or the company approved other matter,
the director must promptly disclose circumstances relating to the director or
related person’s acquisition of that interest.
A decision by the board or an agreement approved by the board is valid
despite any personal financial interest of the director or related person, if it
was approved and ratified by an ordinary resolution of the shareholders.
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Any interested party may apply to court for an order validating a transaction
or agreement that was approved by the board or shareholders, despite the
failure of the director to satisfy the disclosure requirements.
For the purposes of disclosure of directors’ personal interests the term
director has an extended meaning. It includes an alternate director, a
prescribed officer or a person who is a member of a board committee or of
the audit committee, irrespective whether the person is also a member of the
company’s board.
The requirements discussed above do not apply to a director in respect of a
decision that may generally affect all the directors of the company in their
capacity as directors or class of persons unless the only members of the
class are the director or persons related to the director.
These requirements also do apply in respect of a proposal to remove that
director from office or to a company or its director, if one person holds all the
beneficial interests of the company and is the only director.
Where a company has only one director, but the director does not hold any
beneficial interest in the company, the director may not approve or enter into
any agreement in which the person has a financial interest unless the
agreement is approved by an ordinary resolution of the shareholders after
the director has disclosed the nature and extent of that interest to the
shareholders.
A director must communicate to the board any information that comes to his
attention, unless the director reasonably believes the information is:
• Immaterial
• Generally available to the public
• Known to the other directors
A director is not compelled to disclose information where a legal or ethical
obligation of confidentiality prevents him from disclosing the information.
Conflict of interest:
• A person in a fiduciary position has a legal duty to prevent a conflict
between his own interests and those of the person he serves
(Robinson)
• So a director can’t get a benefit other than that which has entitled to
by means of director’s remuneration. (secret profits)
• Secret profits include profits that were obtained openly, in good faith
and no way at the expense of the co.
• Decisive factor is if the advantage arose from the director’s
occupation of his office (Regal Hastings)
• Director can't for personal gain make use of information he got in his
capacity as director (Cooley)
• This principle applies even if one has resigned as director and then
gets a benefit based in information he got while acting as director.
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Robinson v Randfontein estate Gold Mining co:
Facts: the co wanted to buy a farm, but couldn’t come to an agreement with
its owner. Robinson, the chairman of the board bought the farm in his own
name for R120 000 and sold it to the co for a profit of R550 000
AD held: Robinson wasn’t justified in making a profit from his office or
placing himself in a position where his personal interests conflicted with his
duties. He was ordered to repay the co the profit of R430 000 which he had
made.
Regal (Hastings) ltd v Gulliver:
Facts: regal was unable to buy all the shares in another co X, so the
directors and their friends took up the balance of the shares in X – 3000 of
the 5000 shares
Thereafter all the shares in Regal and in X were sold to a 3rd party. The
shares in X, which had been taken by the directors, were sold at a profit.
Regal instituted action against its former directors for the improper profits
they had made out of their directorship. Their action succeeded.
Atlas Organic Fertilizers (Pty) ltd:
MD had breached his fiduciary duties where he sabotaged his co chances to
get a contract, he later left the co, and took over the contract for his new co.
General rule: director isn’t prohibited from serving as director of other
company’s, even if that co is a competitor, but he can’t use confidential
information of the 2 co for the benefit of the other.
Cooley case:
Facts: the MD Cooley tried to get a building contract for his co, but the other
party didn’t want to do business with the co but indicated they would do
business with Cooley himself. Cooley resigned as MD and accepted work
from the other party.
Held: even though the other party wasn’t prepared to contract with the co,
Cooley was held liable to pay the co, all the profit he made in terms of the
contract, because they were made as a result of information Cooley got in his
capacity as MD.
Magnus Diamond Mining Syndicate v MacDonald & Hawthorn
Directors may not use information acquired in capacity as director for own
personal benefit.
Acting in good faith and with a certain degree of care, skill and
diligence
A director of a company must exercise the powers and perform the functions
of director in good faith and in the best interest of the company.
The company’s act 2008 has partially codified the duty of care and skill and
provides that the director must exercise that degree of care and skill with
diligence that may reasonably be expected of a person carrying out the same
functions in relation to the company as those carried by that director. An
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objective test is applied to determine what the reasonable director would
have done in the same situation.
The objective test applied contains subjective elements in that the general
knowledge, skill and experience of the particular director in question are
taken into account.
A director satisfies his or her obligations if he or she has taken reasonably
diligent steps to become informed about a particular matter. The company’s
act 2008 introduces the business judgment rule into our company law.
A director will not be held liable for breach of the fiduciary duties and will
have satisfied his or her obligations as director if he or she can prove that
they have taken reasonably diligent steps to become informed about the
matter and either the director had no reasonable basis to know that any
related person had a personal financial interest in the matter. The particular
director will also not incur liability if he or she disclosed the conflict of
interest required by the act.
The director will be excused from liability if the director had a rational basis
for believing and did believe that the decision was in the best interests of the
company. A director is entitled to rely on:
• One or more employees of the company whom the director reasonably
believes to be reliable and competent in the functions performed;
• The information, opinions, reports or statements provided by legal
counsel, accountants or other professional persons retained by the
company;
• The board or a committee as to matters involving skills or expertise that
the director reasonably believes are matters within the particular person’s
professional or expert competence or as to which the particular person
merits confidence or a committee of the board of which the director is not
a member, unless the director has reason to believe that the actions of
committee do not merit confidence.
Remedies against a breach of the duty of care and skill may be based on
contract if a contract was concluded between the company and the director.
Alternatively, a delictual claim for damages exists. In order to claim for a
delict, all the requirements must be proven.
Section 77(2)(a) and (b) provides that a company may recover loss, damages
or costs sustained by it from the directors in terms of the common law
principles relating to breach of fiduciary duties or a breach of the duty to act
care and skill.
The court in Fisheries development Corporation v Jorgensen held that the
extent of a director’s duty of skill and care largely depends on the nature of
the company’s business, that the law does not require of a director to have
special business acumen and that directors may assume that officials will
perform their duties honestly.
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Fisheries Development Corp. v Jorgenson:
1. The extent of a directors duty of care and skill depends on the nature of
the company’s business
2. A director isn’t required to have special business expertise or even
experience – he’s expected to exercise the care which can reasonably be
expected from a person with his knowledge and experience
3. In respect of all duties that may be properly left to some other official, a
director is justified in trusting that official to perform such duties
honestly
4. A director isn’t bound to give continuous attention to the affairs of the co
5. A director, who doesn’t observe his duties of C+S, is liable for damages.
Liability of directors and prescribed officers
The company may recover loss, damage or costs sustained by the company
from the director under the following circumstances:
• In terms of the principles of common law or the provisions of the law of
delict relating to breach of fiduciary duties;
• Where a director acted in the name of the company or signed anything on
behalf of the company while the director knew that he or she lacked the
necessary authority;
• The director conducted the company’s business in contravention of the
provisions in the 2008 act relating to pre-incorporation contracts;
• The director is a party to an act or omission by the company despite
knowing that the act or omission was calculated to defraud a creditor,
employee or shareholder of the company or had another fraudulent
purpose;
• The director signed, consented to or authorized the publication of a
prospectus or a written statement that contained an ‘untrue statement’ or
a statement to the effect that a person had consented to be a director of
the company when no such consent had been given despite knowing that
the statement was false, misleading or untrue;
• Where the director was present at a meeting or participated in the making
of a decision other than at a meeting or participated in the making of a
decision other than at a meeting where there was non-compliance with
the formalities prescribed in the act;
• Where a director failed to vote against the issuing of any unauthorized
shares, despite knowing they were unauthorized;
• Where the director participated in the granting of options to any person
despite knowing that any shares for which the options could be exercised
or into which any securities could be converted had not been authorized;
• The acquisition by the company of any of its shares or the shares of its
holding company, despite knowing that the acquisition was contrary to
s46 or s48. A company may acquire its own shares provided the company
passes the solvency and liquidity test. Any subsidiary of a company may
acquire shares of that company. Subsidiaries may not acquire more than
10%, in aggregate, of the number of shares issued by the holding
company. No voting rights attached to shares are acquired by
subsidiaries;
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•
Allotment of shares contrary to any provision of chapter 4 of the 2008 act.
The director will be jointly and severally liable with any other person who is
or may be held liable for the same act. Proceedings to recover any loss,
damages or costs may not be commenced more than 3 years after the act or
omission that gives rise to that liability occurred.
The Business Judgment Rule (Section 76(4))
In any proceedings against a director other than for willful misconduct or
breach of trust, the court may relieve the director either wholly or partly
from any liability or on any terms the court considers just. The court may
relieve a director from liability if it appears to the court that the director has
acted honestly and reasonably. A director may apply to a court for relief.
This provision introduces the business judgment rule into South African
company law. The law entails that a director should not be held liable for
decisions that lead to undesirable results where such decisions were made
in good faith, with care and on an informed basis, which the director
believed was in the interest of the company.
The rule provides that a director can be excused from liability where the
latter made a decision in circumstances based on adequate information and
where the decision was arrived at in good faith and made in the interest of
the company. In support of the business judgment rule it is argued that
apart from the exemption from liability, the rule also serves as a motivation
for capable persons to undertake the position of directorships and that it
encourages directors to engage safely in risk-taking activities.
Arguments against the introduction of the business judgment rule are firstly,
the degree of the duty of care and skill is below a level standard and
secondly directors cannot be held liable for mere errors in judgment just
because the court disagrees with the decision that a director has taken.
Courts are reluctant to engage in judicial second-guessing. Thirdly, the exact
content of the business judgment rule is difficult to define and the difficulty
in the codification thereof is evident in the various attempts undertaken in
the United States of America.
Section 77(3): A director may be held personally liable for any loss, damages
or costs sustained by the company as a result of such actions, when:
1. Acting on behalf of the company despite knowing he lacked authority.
2. Agreeing to the co carrying on business while knowing it was done
recklessly, with gross negligence, with intent to defraud any person or for
any fraudulent purpose, or by trading under insolvent circumstances.
3. Being a party to an act or omission knowing that it was calculated to
defraud a creditor, employee or shareholder of the company or for
another fraudulent purpose.
4. Signing or consenting to the publication of any financial statements that
are materially false or misleading, or a prospectus or written statement
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containing an untrue statement while knowing that the statement was
misleading or untrue.
5. Being present at a meeting and failing to vote against a decision in
contravention of a number of provisions (e.g. issuing of unauthorised
shares).
Indemnification and directors’ insurance
The company cannot undertake not to hold a director liable for breach of
duties and any provision in an agreement, the memorandum or rules of the
company, a resolution adopted by a company, whether express or implied, is
void to the extent that it directly or indirectly purports to relieve a director of
a duty.
Except to the extent that a company’s memorandum provides otherwise, the
company may advance expenses to a director to defend litigation in any
proceedings arising out of the director’s service to the company.
The company is entitled to take out indemnity insurance to protect a director
against any liability or expenses for which the company is permitted to
indemnify a director.
S78 dealing with indemnification and directors’ insurance applies also to
former directors of the company. A company may not directly or indirectly
pay any fine that may be imposed on the director of the company or of a
related company, who has been convicted of an offence in terms of any
national legislation.
A company may not indemnify a director in respect of any liability arising in
the following circumstances:
• Where a director acted in the name of the company or signed anything on
behalf of the company or purported to bind the company or authorize the
taking of any action on behalf of the company while knowing that he or
she lacked authority to do so.
• Where the director acquiesced in the carrying on of the company’s
business in insolvent circumstances while knowing that it was being so
conducted.
• Where the director was a party to an act or omission by the company
despite knowing that the act or omission was calculated to defraud a
creditor, employee or shareholder of the company, or had another
fraudulent purpose.
• Where the company’s loss or liability arose from willful misconduct or
willful breach of trust on the part of the director.
• Where the director is liable to a fine for an offence in contravention of any
national legislation.
Finally, s78 (8) entitles the company to claim restitution from a director of
the company or of a related company for any money paid directly or
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indirectly by the company to or on behalf of that director in any manner
inconsistent with the above restrictions.
Questions
Paul is a director of Truckers (Pty) Ltd. The main object of the company
is to manufacture and sell tyres. Paul gets information that a limited
quantity of rubber is being sold cheaply by a foreign company. Paul
resigns as director, and forms his own company with the same object.
He then concludes a contract with the foreign country to purchase the
rubber on behalf of his newly formed company. Advise him whether he
has breached his fiduciary duties that he owed to Truckers (Pty) Ltd.
A directors fiduciary duties are:
1. Should prevent conflict of interests
2. May not exceed the limits of their powers
3. Maintain an unfettered discretion
4. Should exercise their powers for the purpose for which they are
conferred.
Conflict of interest:
• A person in a fiduciary position has a legal duty to prevent a conflict
between his own interests and those of the person he serves
(Robinson)
• So a director can’t get a benefit other than that which has entitled to
by means of director’s remuneration.
• While these advantages are often referred to as secret profits, the
rule applies equally even if the advantage was obtained openly, in
good faith and no way at the expense of the co.
• Decisive factor is if the advantage arose from the director’s
occupation of his office (Regal Hastings)
• Director can't for personal gain make use of information he got in
his capacity as director (Cooley)
• This principle applies even if one has resigned as director and then
gets a benefit based in information he got while acting as director.
This case is similar to that of the Cooley case:
The MD, Cooley, tried to get a building contract for his co, but the other party
didn’t want to do business with the co but indicated they would do business
with Cooley himself. He resigned + accepted work from other party.
Held: even though the other party wasn’t prepared to contract with the co,
Cooley was held liable to pay the co, all the profit he made in terms of the
contract, because they were made as a result of info he got in his capacity as
MD
Therefore the director in our question was guilty of breaching his fiduciary
duties.
Discuss the directors duty of care and skill, refer to case law.
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Duty to act with care and skill:
A director must exercise his powers and carry out his office bona fide and for
the benefit of the co. in so doing he must exercise the required degree of care
and skill, which varies from person to person.
Fisheries Development Corp. v Jorgenson:
Summarized care and skill:
1. The extent of a directors duty of care and skill depends on the nature of
the company’s business
2. A director isn’t required to have special business expertise or even
experience in the business of the co – he’s expected to exercise the
care which can reasonably be expected from a person with his
knowledge and experience)
3. In respect of all duties that may be properly left to some other official,
a director is justified in trusting that official to perform such duties
honestly
4. A director isn’t bound to give continuous attention to the affairs of
the co
5. A director, who doesn’t observe his duties of care and skill towards
the co, is liable to it for damages.
Blue Crane is a construction company. The company wants to purchase
a crane and instructs T, one of the directors to buy one. T can’t reach
an agreement with the owner of the crane. T then buys the crane for
himself for R60 000 and then sells it to the company for R80 000.
Consider whether T’s conduct is a breach of his fiduciary duties to the
company.
A
•
•
•
•
directors fiduciary duties are:
Should prevent conflict of interests
May not exceed the limits of their powers
Maintain an unfettered discretion
Should exercise their powers for the purpose for which they are conferred.
Conflict of interest:
• A person in a fiduciary position has a legal duty to prevent a conflict
between his own interests and those of the person he serves
(Robinson)
• So a director can’t get a benefit other than that which has entitled to
by means of director’s remuneration.
• While these advantages are often referred to as secret profits, the
rule applies equally even if the advantage was obtained openly, in
good faith and no way at the expense of the co.
• Decisive factor is if the advantage arose from the director’s
occupation of his office (Regal Hastings)
• Director can't for personal gain make use of information he got in
his capacity as director (Cooley)
• This principle applies even if one has resigned as director and then
gets a benefit based in information he got while acting as director.
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Robinson v Randfontein estate Gold Mining co:
Bought farm and sold it to the company at a profit. Had to repay the co the
full amount of profit made.
The Companies Act 71 of 2008 has partly codified directors’ duties. List
the 6 codified duties of directors as contained in the Companies Act.
(1)
(2)
(3)
(4)
(5)
(6)
To disclose to the board any personal financial interest in
matters of the company
Not to use the position of director or information obtained as
director to gain an advantage for himself or another person, or
to knowingly cause harm to the company or a subsidiary
To disclose to the board of directors any material information
that comes to a director’s attention
To act in good faith and for a proper purpose
To act in the best interests of the company
To act with a reasonable degree of care, skill and diligence
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AUDITORS AND COMPANY SECRETARY
The compulsory disclosure of financial information concerning the company
plays an important role in protecting the interests of shareholders, investors
and creditors.
The annual financial statements, which must be placed before the annual
general meeting, consist of the following:
 A balance sheet
 An income statement
 A statement of cash flow information
 A directors' report
 An auditor's report.
S24 (3) sets out a number of records that must be maintained by the
company, including copies of all accounting records for the current and
previous seven financial years.
S28: a company is required to keep accurate and complete accounting
records, in one of the official languages, as necessary to enable the company
to satisfy its obligations under the Companies Act and any other law with
respect to the preparation of financial statements.
The accounting records must be kept in the prescribed manner and form
and must be kept at, or be accessible from, the company’s registered office.
S29: states that the financial statements of a company must satisfy the
financial reporting standards, present fairly the state of affairs and business
of the company and must also show the company’s assets, liabilities and
equity, as well as its income and expenses and any other prescribed
information.
S30: all public or state-owned enterprises to prepare annual financial
statements within six months after the end of its financial year.
S44: of the Auditing Profession Act 26 of 2005, it is the duty of an auditor to
examine a company’s financial statements and accounting records and to
express an opinion as to the truth and fairness, in all material respects, of
the statements and the accountant’s adherence to financial reporting
standards.
Appointment of an auditor
A public company and some private companies must appoint an auditor
every year at the AGM.
To be appointed as an auditor
 A person or firm must be a registered auditor and

Must not be a director, company secretary or prescribed officer of the
company, employee or consultant of the company or has been engaged in
the company’s financial documents.
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
Must be acceptable to the company’s audit committee as being
independent of the company.
The Thoroughbred Breeders case would probably be decided differently today.
The Supreme Court of Appeal held that, although the negligence of the
Breeders’ Association had also contributed to their loss, their claim against
the auditors was based on contract, and the Apportionment of Damages Act
only applied to claims based on delict. However, in terms of section 58(2) of
the Auditing Profession Act, which was enacted subsequently to the
Thoroughbred Breeders’ Association case, contributory negligence now
applies to claims based on either delict or contract. This section provides
that in respect of damages suffered by any person as a result of an act or
omission of a registered auditor, the reference in the Apportionment of
Damages Act, 1956 to “damage” must be construed as a reference also to
damage caused by a breach, by the registered auditor, of a term of a contract
concluded with the registered auditor.
The same individual may not serve as an auditor for more than five
consecutive years.
A retiring auditor may be automatically re-appointed at an AGM without any
resolution being passed, unless any of the following are present:
 Retiring auditor is no longer qualified for appointment
 Retiring auditor is no longer willing to accept appointment
 Retiring auditor is required to cease serving as auditor in terms of
section 92
 The company’s audit committee objects to the reappointment
 The company has notice of an intended resolution to appoint some
other person or persons in place of the retiring auditor.
If an AGM of a company does not appoint or re-appoint an auditor, the
directors must fill the vacancy in the office within 40 business days after the
date of the meeting.
Resignation and vacancies
S91 resignation becomes effective when the notice is filed.
If a vacancy arises in the office of auditor of a company, the board of that
company must appoint a new auditor within 40 business days.
Rights and restricted functions of auditors
S93 the company auditor has a right to access, at all times, to the
accounting records and all books and documents of the company.
The auditor may attend any general meeting held by the company.
S44 (6) of the Auditing Profession Act provides that a registered auditor may
not conduct the audit of any financial statements of an entity, whether as an
individually registered auditor or as a member of a firm, if the registered
auditor has or had a conflict of interest in respect of that entity, as
prescribed by the Independent Regulatory Board for Auditors (IRBA).
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Audit committees
At each AGM, a public company, state-owned enterprise or any other
company that has voluntarily determined to have an audit committee must
elect an audit committee comprising at least 3 members, unless the
following apply:
 The company is a subsidiary of another company that has an audit
committee
 An audit committee of that other company will perform the functions
required in terms of the Act.
Each member of an audit committee of a company must be a director of the
company but must not be involved in the day-to-day management of the
company’s business or have been so involved at any time during the
previous 3 financial years.
Must have at least 2 members and consist only of non-executive directors of
the company who must act independently. A non-executive director is one
who isn’t involved in the day-to-day management of the business and has
not in the previous 3 financial years been a full-time salaried employee of the
company.
An audit committee of a company has the following duties:
1) Nominate a registered auditor who is independent of the company.
2) Determine the fees to be paid to the auditor and the auditor’s term
3) Ensure the appointment of the auditor complies with the provision of
the Act and any other legislation
4) Determine the nature and extent of non-audit services that the auditor
may provide to the company
5) Pre-approve any proposed agreement with the auditor for the provision
of non-audit services to the company.
6) Prepare a report for that financial year describing how the audit
committee carried out its functions
7) Receive and deal with any concerns or complaints relating to
accounting practices and internal audits, content of financial
statements, internal financial controls or any other related matter.
8) Make submission to the board concerning the company’s accounting
policies, financial control, records and reporting.
9) Perform other functions determined by the board.
The company secretary
The company secretary is the principal administrative officer of his or her
company.
 Every public company or state-owned enterprise must appoint a
company secretary who is knowledgeable or experienced in the
relevant laws
 A private company, personal liability company or a non-profit
company may voluntarily appoint a company secretary.
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Disqualification as company secretary
A person, who is disqualified in terms of section 69(8) to serve as a director
of a company, may not be appointed as a company secretary. A person is
therefore disqualified from being appointed as a company secretary if such a
person  Has been prohibited to be a director or has been declared to be
delinquent by a court order
 Is an unrehabilitated insolvent
 Is prohibited in terms of any public regulation to be a director of the
company
 Has been removed from an office of trust, on the grounds of misconduct
involving dishonesty
 Has been convicted and imprisoned without the option of a fine, or fined
more than the prescribed amount, for theft, fraud, forgery, perjury, or an
offence
o Involving fraud, misrepresentation or dishonesty
o In connection with the promotion, formation or management of a
company
o Under the Companies Act or some other Acts listed in the section.
Duties of company secretary
 Providing the directors of the company with guidance as to their duties,
responsibilities and powers
 Making the directors aware of any law affecting the company
 Reporting to the company’s board any failure on the part of the company
or a director to comply with this Act
 Ensuring that minutes of all meetings are properly recorded in
accordance
 Certifying in the company’s annual financial statements whether the
company has filed required returns and notices in terms of this Act
 Ensuring that a copy of the company’s annual financial statements is
sent to every person who is entitled to it
Resignation or removal of company secretary
A company secretary may resign from office by giving the company one
month written notice, or, with the approval of the board, less than one
month written notice.
If the company secretary is removed from office by the company’s board, the
secretary may require the company to include a statement in its annual
financial statements relating to that financial year setting out the secretary’s
contention as to the circumstances that resulted in the removal.
Registration of company secretaries and auditors
S85: requires every company that appoints a company secretary or auditor
to file a notice of the appointment, or the termination of service of such an
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appointment, with the Registrar within ten business days after the
appointment or termination, as the case may be.
The record must include:
- The name, including any former names of each person; and
- Date of every such appointment
Questions
Name the three office-bearers of a company who are regarded as
“officers” of a company in terms of section 1 of the Companies Act 61
of 1973.
Company secretary, director, employees
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REMEDIES, ENFORCEMENT AGENCIES AND ALTERNATIVE DISPUTE
RESOLUTION (ADR)
Remedies against directors who have abused their position
Application to declare a director delinquent or under probation
S162: A court may declare a director to be a delinquent director or place a
director under probation = the following may bring such an application:
- Company
- Shareholder
- Director
- Representative of employees of the company
- The commission
Any person placed under probation or declared a delinquent may not serve
as a director. Disqualification normally subsists for a period of 5 years
subject to the court order.
Derivative action in terms of section 165
According to Foss v Harbottle, it was accepted that the company itself must
act to have a wrong against the company redressed. The company is unlikely
to act where the wrongdoers control the company.
Rule in Foss v Harbottle is based on 2 principles:
1. separate legal personality
2. majority rule.
Common law: a member could institute court proceedings on behalf of a
company (derivative action)
Section 165: abolished the common-law right of a person other than the
company to bring legal proceedings on the company’s behalf and is in
substitution of the abolished right.
In TWK Agriculture Ltd v NCT Forestry Co-operative Ltd the court examined
the nature of the derivative action, and held as a general rule, where a wrong
is alleged to have been committed against a company, it is the company that
must seek redness in respect thereof.
In Thurgood v Dirk Kruger Traders (Pty) Ltd the applicant, a shareholder,
brought an application in terms of s266 of the 1973 Act for the appointment
of a curator ad litem in respect of a claim which the applicant alleged the
company had against one of its directors, for causing loss to the company by
virtue of his breach of trust. The court found that there were prima facie
grounds for such proceedings envisaged by the applicant and that a
provisional curator ad litem should be appointed to investigate such
grounds.
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Instead of a curator ad litem appointed by the court, the new procedure
provides for the appointment of an independent and impartial person or
committee by the company to investigate the demand and report back to the
board.
The following steps are to be taken:
 Person wishing to pursue the derivative action has to serve demand on
company
 Company must appoint an independent and impartial person or
committee to investigate the demand and to report to the board.
 The company within 60 days of receiving the demand must either initiate
or continue legal proceedings or serve a notice on the person who made
the demand, refusing to comply with it.
 The person who made the demand may then apply to court for leave to
bring or continue proceedings on the company’s behalf.
 The court must be satisfied that the company dealing with the demand
and the report has failed to comply with statutory requirements and that
the applicant for leave is acting in good faith.
Remedies available to shareholders to protect their own rights
Relief from oppressive or prejudicial conduct in terms of section 163
and section 20(9)
Section 163 provides a remedy similar to the old statutory personal action of
section 252. However, directors are also given the right to apply for relief on
the basis of oppression or unfairly prejudicial conduct.
Before: S252 of the 1973 Act = remedy to minority shareholders who were
the victims of oppressive conduct by the majority
• This remedy was in addition to the personal action, which minority
shareholders could bring against the company under the common law
Section 163 of the 2008 Act: retains the remedy provided for in S252 but
with a number of refinements
 In Donaldson Investments (Pty) Ltd v Anglo-Transvaal Collieries Ltd
preference shareholders were unsuccessful in their action under S252
where they were deprived of certain rights but granted additional
privileges, because an order in terms of S252 would have resulted in
the shareholders receiving a price for their shares that was far in
excess of their actual market value
 Robson v Wax Works (Pty) Ltd: The applicant held 30% of the issued
share capital of a company. The agreement in terms of which the
applicant acquired his shareholding in the company did not, however,
provide for his appointment as a director of the company. In his
application for winding-up in terms of s344, the applicant alleged that
he had been effectively excluded from the decision-making process by
the other shareholders. He also alleged that no proper shareholder’s
meetings had taken place. The court held that as a dissatisfied
minority shareholder the applicant was not entitled to achieve his
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escape from an unhappy investment. It also held that since it was
apparent that the other shareholder desired the company to continue
and the interests of the dissatisfied shareholder could be addressed
under s252, it seemed that it would be inappropriate to wind up the
company against the wishes of the other members.
Dissenting shareholders’ appraisal rights in terms of section 164
Before: S102 of the 1973 Act permitted dissenting shareholders of a
company with different classes of share who were aggrieved by a decision of
the company to vary their class rights to apply to court for relief under S252,
which could include the purchase by the company of their shares.
S252: a member can approach the court for relief under the following
circumstances:
1.
2.
3.
4.
If he complains that a particular act or omission of the company or
The affairs of the company are being conducted in a manner which is
Unfairly prejudicial, unjust or inequitable
To him or to some part of the members of the company.
The court may then:
If satisfied of the above and if it considers it’s fair and equitable, make an
order that it thinks fit, with a view of bringing an end to the matters
complained of.
S163 of the 2008 Act retains the remedy provided for in S252 and the
current Act provides for an independent remedy for dissenting shareholders,
called dissenting shareholders’ appraisal rights (S164)
 An appraisal right is the right of a shareholder to require his company
to buy his shares at their fair value if his company takes any of the
listed actions; a specific procedure must be followed by the
shareholder once his company has taken a triggering action.
 The remedy is available to shareholders who consider themselves
aggrieved through the company adopting a special resolution to amend
its MOI
 Class rights may be altered in one of two ways:
o By an amendment to the Memorandum by a special resolution
o Or by the board
Procedure:
Dissenting shareholders may send a written objection to the resolution of a
company prior to the meeting.
Within 10 business days after adoption of the resolution, the company must
send a notice that the resolution has been adopted to each security holder
who filed an objection and has not withdrawn the objection, or voted in
favour of the resolution.
The shareholder may then demand payment of a fair value for the shares
held by him or her.
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The demand must be sent within 20 business days after receiving notice
from the company that the resolution has been adopted or within 20
business days after learning that the resolution has been adopted if no
notice is received.
The company must then make a written offer to pay an amount considered
by the company’s directors to be a fair value, accompanies by a statement
showing how the value was determined within 5 business days.
The offer made by the company to dissenting shareholders must all be on
the same terms.
The offer must be accepted within 30 business days after it was made.
The company must pay the agreed amount within 10 business days after the
shareholder accepted the offer.
If the company fails to make an offer of the offer is considered to be
inadequate the shareholder may apply to the court to determine a fair value
and for an order requiring the company to pay the shareholder that fair
value.
The tendering of shares under S164 and the payment by the company does
not qualify as an acquisition of shares under S48 or as a distribution, with
the result that the solvency and liquidity test in S4
If there are reasonable grounds for believing that payment by the company
of the fair value would results in the company being unable to pay its debts
as they fall due in the ensuing 12 months, the company may apply to court
for an order varying the company’s obligations. The court may make an
order that is just and equitable to ensure that the dissenting shareholders
received payment at the earliest possible date compatible with the company
satisfying its other financial obligations.
Application to protect the rights of securities holders in terms of
section 161
The holder of issued securities may apply to court for a declaratory order
about his rights or for an appropriate order to protect his rights or to rectify
any harm done to him by the company as a result of an act or omission
Liability for abuse of separate juristic personality of company
Lifting of the corporate veil and holding members personally liable.
Enforcement agencies and ADR
Before: the Act provided for criminal sanctions
NOW: the 2008 Act uses a system of administrative enforcement.
The enforcement of the Act is done by the Companies and Intellectual
Property Commission (the Commission)
The Companies Tribunal: two main functions are to
1. Serve as a forum for voluntary ADR in any matter arising under the
Act and
2. To carry out reviews of administrative decisions made by the
Commission.
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Four alternatives for addressing complaints regarding alleged contraventions
of the Act or for the enforcement of rights, whether in terms of the Act or
under a company’s MOI or rules.
The aggrieved party can:
 Attempt to resolve the dispute using ADR procedures
 Apply to the Companies Tribunal for adjudication but only in respect
of any matter for which such an application is permitted in this Act
 Apply to the High Court
 File a complaint with the Commission.
Questions
Briefly discuss the two principles on which the rule in Foss v Harbottle
is based?
Principle one: majority rule. Minority shareholders are bound by the
decisions of the members who hold the majority of the votes in the company.
The court will not interfere in company management at the instance of the
member who holds the minority of votes, as long as the majority acts
lawfully.
Principle two: proper plaintiff. In this case, unlawful acts have been
committed against the company. The company itself must institute the
action. The company is a separate legal person with its own rights and
duties.
Section 165 of the Co’s Act 71 of 2008 expressly abolishes the common
law derivative action. All derivative actions on behalf of a co will have
to be brought under the new statutory provisions which provide for a
wider statutory derivative action that the one provided for in s266 of
the Co’s Act of 1973. Discuss the new statutory derivative action in
s165 of the Co’s Act 71 of 2008 in respect of
a.)
The person
b.)
The basis
c.)
The prescribed procedure
a. the following may bring such an application:
- Company
- Shareholder
- Director
- Representative of employees of the company
- The commission
b. Section 165: abolished the common-law right of a person other than
the company to bring legal proceedings on the company’s behalf and is
in substitution of the abolished right. Instead of a curator ad litem
appointed by the court, the new procedure provides for the
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appointment of an independent and impartial person or committee by
the company to investigate the demand and report back to the board.
c. The procedure is as follows:
 Person wishing to pursue the derivative action has to serve demand
on company
 Company must appoint an independent and impartial person or
committee to investigate the demand and to report to the board.
 The company within 60 days of receiving the demand must either
initiate or continue legal proceedings or serve a notice on the
person who made the demand, refusing to comply with it.
 The person who made the demand may then apply to court for
leave to bring or continue proceedings on the company’s behalf.
 The court must be satisfied that the company dealing with the
demand and the report has failed to comply with statutory
requirements and that the applicant for leave is acting in good
faith.
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Some random points of information to note:
Minerax (Pty) Ltd is …
A private company
The following persons/entities are disqualified to be a director, but may be
appointed as a director of a company with the permission of the court?
An unrehabilitated insolvent
Fraud, dishonesty or improper conduct in the establishment of a company
can be regarded as an instance where the separate legal personality of a
company may be disregarded by…
The court
A person who is not disqualified from the appointment as auditor of Gee Ltd?
A person who resigned as a director of the company the previous
year
!
This is true regarding a non-profit company
The companies articles must prohibit the payment of dividends to
its members
When is a contract for the benefit of a third party (stipulatio alteri) used to
conclude a pre-incorporation contract for a yet to be incorporated company?
The promoter concludes a contract on behalf of a yet to be
incorporated company with the intention of creating rights and
obligations for that as yet unincorporated company.
The memorandum of association of Innox Ltd makes provision for the issue
of a class of shares which will entitle its holder to a fixed percentage
preference dividend in each financial year as well as a right to share in the
residual distributable profits. This class of shares may be best described as:
participating preference shares
In Cape Pacific v Lubner Controlling Investments (Pty) Ltd 1995 (4) SA
790 (A) the court held that the corporate veil can be pierced…
if the circumstances of a particular case justify it, even if there is
another remedy at the disposal of the plaintiffs.
According to Lipchitz v UDC Bank 1979 (1) SA 789 (A), for the purposes of the
Companies Act 71 of 2008, the following is correct:
•
providing security or otherwise exposing the co to risk qualifies
as financial assistance.
•
The financial assistance must relate to the acquisition of shares
in the co.
•
Assistance to secure a loan does not qualify as financial
assistance.
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Michelle is in the process of forming a new co. She wants to enter into a preincorporation contract. The following are things to note:
•
pre-incorporation contracts are entered into on behalf of a co
which is not yet in existence.
•
The Co’s Act requires the pre-incorporation contract to be in
writing.
•
A person entering into a pre-incorporation contract has the
intention that the co will be bound by the provisions thereof,
once it is incorporated.
For the incorporation of a co the following document must be filed together
with the prescribed fee: the Memorandum of Incorporation and the
notice of incorporation
The board of directors of Ring Surface Ltd resolved to pay a dividend to
shareholders in October 2010. At that time, the directors considered the co’s
solvency and liquidity and decided that Ring Surface Ltd complied with the
requirements of section 46 of the Co’s Act 71 of 2008. However, Ring Surface
Ltd could not proceed immediately with the dividend payment. Finally in
November 2011, Ring Surface Ltd is in a position to pay the previously
declared dividend to its shareholders.
The board must consider the solvency and liquidity of the co
again and must adopt a new resolution to issue the dividend.
In a personal liability co
the directors are jointly and severally liable, together with the co,
for all debts and liabilities incurred during their terms of office.
In Regal (Hastings) Ltd v Gulliver 1942 (1) All ER 378 (HL) the court held
that ….
A director is liable if he derives an advantage from his office as
director even if it is done openly and at no expense to the co.
Incorporation of a co has various consequences for shareholders and
directors, including:
• shareholders are generally not held liable for the debts of a
private co.
• shareholders are generally not held liable for debts of a public
co.
• directors are generally not held liable for the debts of a state
owned enterprise.
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Close
Corporations
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DISTINCTIVE FEATURES
•
•
•
•
•
•
•
•
•
•
•
•
Acquire legal personality upon incorporation.
A juristic person that is distinct from its members and has perpetual
succession
Sometimes the court can be called upon to “pierce the corporate veil”
Powers and capacities of a natural person in so far as these are
appropriate
Only natural people can be members of a cc
Can be formed by a single person
Doesn’t have to be for gain
No shares
No strict rules relating to maintenance of capital
All members have equal say in the management
No directors
At common law the duties of care and skill and fiduciary duties were
codified
!
FORMATION AND CONVERSIONS
A close corporation, like a company, acquires legal personality upon
incorporation.
 A legal person is regarded as an entity that can acquire rights and duties
separate from its members.
 Have perpetual succession = it would remain in existence even if the
members should change.
Future of CC’s
New Companies Act 2008 this business form will no longer be an option for
businesses. Although existing close corporations will continue to exist
alongside companies, no further registrations in terms of the Close
Corporations Act will be permitted.
Formation of a close corporation and members’ interests
A CC gets legal personality and corporate status by registration in terms of the
Close Corporation Act. Before a close corporation can be registered a name has
to be reserved. After name reservation, the founding statement must be lodged
at the registration offices in Pretoria, accompanied by a letter of the accounting
officer accepting his or her appointment as such and payment of the
prescribed fee.
The juristic person which comes into existence continues to exist,
notwithstanding a change in membership until deregistration or dissolution.
For registration, the following are required:
• A founding statement on a CK1 Form
• If the form has been signed by someone else on behalf of the member,
there must be a power of attorney authorising it
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•
•
The written consent of the accounting officer of his appointment
A copy of the form confirming the acceptance of the CC’s name
reservation
The constitutive documents of a CC
Founding Affidavit: This sets out the written the principles upon which a
cc is based and its main object / scope.
Association Agreement: This is not compulsory but it sets out the duties and
powers.
The founding statement indicates the following particulars of the business:
1.
The full name /translations/ any abbreviation of the business name
2.
The principle business of the CC
3.
Date of the end of the financial book year
4.
The number of members and their aggregate contribution
5.
Postal address and the physical address of the CC’s registered office, an
address at which all documents for the CC’s attention may be addressed
6.
Particulars of the contribution of each member, usually an amount of
Money, property or service to be rendered, together with a description
and statement of its estimated value
7.
The name and postal address of the accounting officer
8.
Particulars of the founding members (Name, copies of Id Docs, Address).
10. Member’s interest of each member expressed as a percentage.
The CC must keep a copy of its Founding Affidavit at its registered office and
same must be kept available for anyone to see, upon request.
Name of a close corporation:
Name of a CC can be changed by the registrar within one year of registration
only if it is undesirable.
The High Court can also change a cc’s name within two years.
A CC can also change its own name by amending its founding statement.
The following additional requirements apply to the name:
a. The name must end with CC or BK
b. The registered name and number must be:
1. Displayed outside its registered office and every office where it
carries on business
2. Mentioned in all notices of the CC and on all cheques, orders,
invoices, letters etc.
If the name and registration number isn’t stated on everything in point 1
and 2, the member or person acting on behalf of the CC will be:
- Guilty of an offence
- Liable to the holder of the cheque, for the amount on it
Unless its paid by the CC
!
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Questions
Angie and Jacky consider starting a small business selling educational
toys for infants and toddlers. They approach you for advice regarding
setting up a close corporation as a form of business.
Distinctive features
• A juristic person that is distinct from its members and has perpetual
succession
• Powers and capacities of a natural person in so far as these are
appropriate
• Can be formed by a single person
• Doesn’t have to be for gain
• No shares
• No strict rules relating to maintenance of capital
• All members have equal say in the management
• No directors
• At common law the duties of care and skill and fiduciary duties were
codified
!
Can a company be a member of a CC?.
No a co may not be a member of a cc but a cc may be a shareholder of a
company
!
Name the constitutive documents of a close corporation and indicate
whether they are optional or not.
Founding statement: (not optional): set out the corporate structure of the
business.
Association agreement: (optional): deals with the internal arrangements
within the business.
!
Discuss the transitional provisions in the Companies Act 71 of 2008
that deal with the status of close corporations after the Companies Act
comes into force.
Section 23 states that close corporations which are already in existence will
remain valid and will be controlled by the existing Close Corporations Act.
But since the coming into operation of the 2008 Company’s Act a CC will no
longer be registered.!
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!
MEMBERSHIP AND MEMBERS INTEREST
1.MEMBERSHIP
a) Number of members:
A CC may be formed with one or more members BUT at no time may there
Be more than 10 members,
Members can’t be joint holders of the same members interest in the CC.
b) Requirements for membership:
Only natural persons can be members – but there are some exceptions:
The trustee of an inter vivos trust can’t hold members interest (however
a person holding membership for the benefit of such a trust may)
Juristic persons CAN’T hold a members interest (i.e... A co can’t be a
member - as they risk personal liability for the debts of the CC)
However, a CC can be a shareholder in a company and a CC can enter into
partnerships with other CC’s / Companies.
A natural person will qualify for membership under the following
Circumstances:
1. If he’s entitled to a member’s interest.
2. If in his official capacity as a trustee of a testamentary trust (as long
as not juristic person = beneficiary of that trust)
3. In his official capacity as trustee, administrator, executor or curator
of an insolvent, deceased of mentally disordered member's estate of
his duly authorized legal representative
So even minors, insolvents and other legally incapacitated people may
become members of a CC if they qualify to hold member’s interest.
But: in contracting to become members, they must be represented or
assisted by their legal guardians, trustee etc.
Such members cant however take part in the management of the CC
despite this their names must be stated in the founding statement.
Juristic person only qualify for membership under the following
circumstances:
1. In his official capacity as trustee of a testamentary trust (as long as that
juristic person isn't controlled by a beneficiary of the trust and that no
juristic person is a beneficiary of the trust)
2. In his official capacity as trustee, administrator, executor or curator of the
estate of an insolvent, deceased or mentally disordered person or of a
person otherwise incapable of managing his own affairs
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!
c) Commencement of membership:
Membership commences on the date of the registration of the founding
statement. On the admission of a new member – an amended founding
statement must be registered within 28 days.
The founding statement must contain the names of members
d) Additional members:
A person who qualifies for membership may become a member by
making a contribution to the CC.
Then: a percentage of the member’s interest is allotted to him.
This percentage is determined by the agreement between him and the
existing members. The existing members interest will have to be reduced
in order to retain the total members interest at 100%
Contributions to an existing CC may be in the form of:
Money / Property but not services rendered.
e) Cessation of membership:
a)
Voluntary disposal of that members interest
b)
Forced disposal because of insolvency of that member
c)
Disposal of a deceased member’s interest in terms of his will.
d)
Forced disposal of members interest after attachment and sale of
interest in execution.
e)
By order of the court: S36
i.e.: any member may apply to the court to order that a member shall
cease to be a member on one of the following grounds:
1. Permanent inability to perform his part in carrying on the business
2. Being guilty of conduct likely to have a prejudicial effect on the
carrying on of the business
3. Conduct making it impossible for other members to associate with
him in carrying on the business
4. If its just and equitable in the courts view
2. MEMBERS INTEREST:
Each member gets a member interest in return for his contribution.
It’s a single interest expressed as a % of the total (total=100%)
The members interest doesn’t necessarily have to correspond with the
percentage which his contribution relates to the total contribution of all
members.
If a CC gets members interest from one of the existing members, this must
be added proportionally to the members interest of the remaining members
a) Nature of a members interest:
CC = juristic person, i.e.: its assets are held by it and members aren't
co-owners of them.
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BUT: members do have a financial interest in the CC itself
Members interest = a personal right against the CC entitling the holder to:
a. a pro rata share in the aggregate of members interest
b. participate in distribution of profits
c. participate in distribution of the remaining assets after all creditors
have been paid on liquidation.
b) Acquisition of member interest:
Acquisition and Disposal of Member’s Interest
If new members join after the registration of the corporation must acquire
their member’s interests either from an existing member, or by making a
contribution, in the form of money or other assets, to the corporation.
Characteristics of member’s interest:
 Member’s interest is expressed as a percentage
 Member’s interest may not be jointly held
 The aggregate member’s interests must at all times be 100%
 A member’s interest in a close corporation is similar to a share in a
company
 Member’s interest is an incorporeal, moveable thing
 Member’s interest is a personal right to share in the profits of the close
corporation after its creditors have been paid.
From corporation (founding members):
Founding member must make initial contribution where after he gets
members interest.
Contribution: money, property, services in connection with the formation
or incorporation of the CC
Money/property must be paid/delivered within 90 days after registration
An undertaking to make /increase contribution can be enforced by CC
in legal proceedings.
Failure to make promised contribution may lead to - personal liability
The size of the contribution doesn’t have to correspond with the % of the
members interest.
Percentage determines the extent of his vote and participation in
"divided payments" UNLESS association agreement says otherwise.
From existing member:
By purchase, donation, exchange etc, which must be in accordance with
the association agreement: every other member of the CC must CONSENT
The court may under certain circumstances order the cessation of a
member’s membership.
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!
c) Insolvency or death of a member:
Insolvency of member:
Trustee must sell member interest to:
1. CC, remaining members or an outsider who qualifies for membership
- here the trustee must give CC and remaining member written
notice of name and address of purchaser, purchase price and terms
of payment and has given them a 28 day option to buy the whole
of the members interest at the same price and on the same terms.
Death of member:
Executor must sell the members interest i.t.o the provisions of the
association agreement.
If no association agreement: executor may only transfer members interest
to heir if he qualifies for membership AND if remaining members consent.
If they refuse to consent within 28 days - executor must sell it to the CC,
remaining members or an outsider on the same terms as on insolvency.
Any transfer of a members interest should be reflected in the amended
founding statement.
There are no formalities set out in the Act regarding the transfer.
However common sense dictates that:
a) Instrument (i.e. document) of transfer must be in a form approved by
members ( similar to share transfer form)
b) such instrument must be signed by the transferor and transferee
c) Such instrument plus certificate of members interest held by the
Transferor must be lodged at the CC's register office.
Attachment and sale in Execution
Section 34A of the Close Corporations Act applies in instances
where a member’s interest has been attached after judgment is
taken against the member. The members interest may then be sold
to the close corporation, other members or an outsider subject to
the right of pre-emption in favour of the close corporation and other
members.
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Questions
Owen is a member of Kimber CC. Advise Owen on the three grounds on
which the court may, in terms of section 36 of the Close Corporation
Act 69 of 1984, order that a member shall cease to be a member of a
close corporation.
1. Permanent inability to perform his part in the business
2. Being guilty of conduct likely to have a prejudicial effect
on the carrying on of the business
3. Conduct, making it impossible for other members to
associate with him
4. It is just and equitable in the courts view
The personal estate of Ivan, a member of Inwazi CC, is about to be
sequestrated. Explain to him the effect that this sequestration will have
on his involvement in the CC.
When a member of a CC’s estate is sequestrated, his members interest has
to e sold and the proceeds place in the insolvent estate for distribution
among his creditors. In terms of a CC the interest can be sold to either, a
third party, the CC itself or its remaining members. If there is an option of a
third party buyer, the remaining members of the CC must first receive
notification of who is the purchaser, what is the purchase price and what are
the terms. The remaining members then have 28days to decide whether to
allow the sale or to buy the interest themselves.
Name the 2 circumstances under which a juristic person will qualify to
hold members interest in a CC.
Juristic people only qualify for membership under the following:
♦ In his official capacity of a testamentary trust
♦ In his official capacity as trustee, administrator, executor or curator of
an estate.
Danny wants to sell her members interest in the CC, but cant find a
suitable buyer. The other members of the CC decide that it would be
best if the CC itself buys the member’s interest back from Danny.
Advise Danny the requirements for the acquisition of a members
interest by the CC
From existing member: by purchase, donation, exchange,
which must be in accordance with the association agreement.
Every other member of the CC must CONSENT, in writing
to the acquisition. The court may under certain circumstances
order the cessation of a member’s membership.
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Summer Holidays CC has 10 members. One of the members Mark wants
to bequeath his members interest to his 2 adult children. Advise Mark
whether he can bequeath his members interest to his 2 children as joint
holders in equal shares.
A member of a CC’s interest may be bequeathed to whom ever such a person
wishes, however, it does not mean that such a person will get the members
interest, they may only receive the value of the interest. In terms of what
happens to a members interest when one dies it is dealt with as agreed in
terms of the association agreement. If there is no clause in the agreement
then the CC or its remaining members have the choice whether to allow the
inheritance or to buy out the heir, if they so decide, the remaining members
then have 28days to decide whether to allow the sale or to buy the interest
themselves.
Discuss the initial contribution, which a founding member must make
to the close corporation in order to get members interest in the CC.
Founding member must make initial contribution where
after he gets Member’s interest.
Contribution: # Money, property, services in connection
with formation or incorporation of the CC
The details of the contribution must be stated in the founding
statement (if not money - description and fair value must be stated)
It may be increased or decreased by agreement - details in the
amended founding statement
Money/property must be paid/delivered within 90 days after
registration. An undertaking to make/increase contribution
can be enforced by the CC in legal proceedings.
Failure to make promised contribution - personal liability
Three friends, Sello, Terry and Brad want to form a CC. Sello and
Terry are adults but Brad is still a minor. Advise Sello, Terry and
Brad on the rules regulating Brad’s membership of the CC.
Although Brad is a minor he is entitled to become a member of a cc if he is
entitled to hold members interest – with the courts consent. He however
can’t take part in management despite this, their names must be stated in
the founding statement. The only time he can take part in management is if
such a minor has been emancipated.
But: in contracting to become members, they must be represented
or assisted by their legal guardians, trustee etc.
!
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INTERNAL RELATIONS
The fiduciary duties and duties of care and skill:
The Close Corporations Act (s 42) provides that a member should:
 Act honestly and in good faith
 Avoid a conflict of interest between his or her own interests and those of
the close corporation
 Exercise powers in the interest of the corporation
 Disclose any interest in a transaction to the other members of a close
corporation
 Not gain any financial gain by virtue of being members of the close
corporation.
a. Fiduciary position of members:
• Members stand in a close relationship to each other (akin to partners)
• BUT: they owe fiduciary duties to the CC as a separate legal person, and
not to each other (unlike partnerships)
• There is nothing to prevent a fiduciary duty owed to each other being
imposed by the association agreement.
The fiduciary relationship includes:
1. Each member must act honestly and in good faith towards the CC i.e.: he
must exercise the powers he has to manage/represent the CC in its
interests and for its benefit – he mustn’t exceed his powers or act without
them.
2. He must avoid any material conflict between his own interests and those
of the CC
• He mustn’t compete with the CC in its business activities
• He mustn’t get unwarranted personal economic benefit from the
CC/someone else (i.e.: one to which he isn’t entitled to by reason of his
membership/service to the CC
• He must disclose the nature and extent of any interest in a contract of
the CC to all other members.
• If he doesn’t, the contract is voidable at the option of the CC
• BUT: but even if the CC chooses not to be bound the court may, on
application by an interested party, order that the contract is
nevertheless binding on the parties – if the court is of the opinion that
it’s fair in the circumstances.
If a member has breached his fiduciary duty, he’s liable to the Corporation
for any loss suffered by the CC as a result thereof.
• BUT: members may ratify the breach by approval in writing as long as
they are fully aware of all the material facts.
• Approval may even be granted in advance in the association agreement.
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b. Duties of care and skill (S43):
The member’s conduct is measured against the conduct, which could
reasonably have been expected from a person with the same skill and
knowledge as the member (to establish negligence).
In case of a breach, another member may institute action against the close
corporation or its members in his or her personal capacity.
• Members must carry on the business with the degree and skill that may
reasonably be expected from a person of his knowledge and experience.
• If he fails to do so – members liable to the corporation for loss caused by
the failure to carry on the business with the degree of care and skill that’s
expected.
• 1. Prove loss to the corporation 2. Member is only liable if he never acted
with the degree of care and skill that’s expected.
• BUT: members may ratify a breach of this duty by written approval.
2. Association agreement and other agreements:
Association agreement – is a written agreement between members regulating
the internal relations between them inter se and between them and the CC.
It’s not a requirement for the formation of the CC
BUT: advisable as it can be tailored to the needs of a particular CC
a. General principles applicable in the absence of the association agreement:
The following principles apply unless altered by an association agreement:
1. Every member is entitled to participate in carrying on the business of CC
2. Members have equal rights in regard to the management of the business
and in representation of the CC
3. Differences between members in connection with the business of the CC
shall be decided by majority vote.
4. A member shall have the number of votes corresponding with his %
interest
5. Every member will be indemnified in respect of expenditure incurred in
connection with the conducting of business and the preservation of the
business or assets of the CC
6. Payments by the corporation to its members by reason only of their
membership shall be in proportion to their respective interest in the
corporation.
However: the consent in writing of a member holding a members interest of
at least 75% or of a member holding together at least that % shall be
required for:
a. A change in the principal business carried on by the CC
b. A disposal of the whole undertaking of the CC
c. A disposal of all, or greater portion of the assets of the CC
d. Any acquisition of immovable property of the CC
An association agreement must be signed by or on behalf of each member
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NB: only a member can inspect it- any person doing business with the CC
will not be deemed to know the contents of the association agreement.
b. Other agreements between members:
•
•
•
Members may enter into any other agreement in respect of matters which
may be regulated by a association agreement – as long as it isn’t
inconsistent with the association agreement or the Act
BUT: this other agreement doesn’t affect any person other than the CC or
a member of the CC
The association agreement and other agreements constitutes a contract
between them;
a) The CC and the members
b) Between the members inter se
Differences between the association agreement and other agreements:
Association agreement:
•
•
•
•
Must be in writing
Must be signed by/on behalf of each member
New members automatically bound without signing even when they cease
to be members
Amendments/cancellation must be in writing and signed by/on behalf of
all the members, including new members
Other types of agreements:
• Need not be in writing
• Need not be signed by the parties to it
• Need not be kept available at registration office for inspection
• Only binds parties to it as long as they remain members of the CC
• New members/members ceasing to be members aren’t bound by it.
• Subordinate to association agreement if they have conflicting provisions
3. Alterable and unalterable provisions:
a)
1.
2.
3.
4.
5.
Matters, which may be regulated by the association agreement:
Participation of members in management
Voting at meetings
Procedure at meetings
Repayment of contributions
Sale/transfer of members interest by member
b) Unalterable provisions
The following matters can’t be altered by the association agreement:
• The manner in which an insolvent members interest may be disposed of
• Members who are disqualified from taking part in management
• The power of a member to call a meeting of members
c) Written consent of each member:
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•
The acquisition of a members interest
Financial assistance in respect of the acquisition of a members interest
The granting of loans/furnishing of security
The ratification of pre-incorporation contracts
The ratification of a breach of fiduciary duty/duty to act with the
necessary care and skill
The appointment of an accounting officer
•
Management:
•
•
•
•
•
a) General rule: every member is entitled to participate in the carrying on of
the business of the CC and to exercise rights – rights in respect of
management of the business.
Members may elect whether to conduct the management of the corporation
according to the provisions of the Act or within the framework of the
association agreement
BUT: S47 excludes certain persons from participating in the management of
the CC:
1. People under legal disability EXCEPT: minors over 18 who have obtained
written consent from guardian to participate in the management may
participate
2. People disqualified by the court in terms of the Companies Act from being
appointed as directors
Certain people can only take part in the management if authorized by the
court:
1. Unrehabilitated insolvent
2. People removed from an office of trust due to misconduct
3. People convicted of certain crimes involving dishonesty or in connection
with formation/management of a co/CC and who have been sentenced to
imprisonment for at least 6 months without the option of a fine
b) Unless the association agreement provides otherwise, matters concerning
the CC are decided at meetings of the CC by majority vote, each member
having the number of votes corresponding with the % of his interest
• Certain matters require the written consent of a member/members
together, holding at least 75% of the total members interest in the CC
c) Any member of the CC may call a meeting of members by notice to every
other member, for the purpose disclosed in the notice.
•
Only members present in person at meetings may vote
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5. Redress by the court
S49: Any member of the CC, who alleges that any act or omission of the CC
or of one or more of the members is unfairly prejudicial, unjust or
inequitable to him, may apply to the court to rectify the matter.
Gattenby: 2 brothers each had 50% interest in a CC. the one brother, A,
shared his interest with his wife (each held 25%) a company wanted to buy
the assets of the CC but A and his wife were against this. The relationship
between the members deteriated to such an extent that it was no longer
possible for them to work together. The other brother, B, applied to the court
for a relief in terms of S49 saying that the failure of the CC to accept the
offer was unfairly prejudicial to him. Ito S49 the court ordered the sale of the
CC’s assets to enable B to be paid out for his interest and terminate his
membership.
In De Franca v Exhaust Pro CC, the court held that it enjoyed discretion to
order the purchase of any members interest by other members or by the
corporation if the court finds it just and equitable to do so. The court
however requires proof of the value of the member’s interest in order to
establish a fair price for the member’s interest.
6. Proceedings against fellow members:
S50 statutory derivative action
Any member may institute proceedings on behalf of the CC against a
member/former member in certain circumstances where the corporations
own rights are affected – after notifying all the members of his intention to do
so:
• Where a member/former member = liable to make initial contribution as
agreed
• Where member/former member is liable because of Breach of fiduciary
duty to the CC OR negligence in handling the CC’s affairs
If the proceedings are instituted without prima facie grounds – the member
may be ordered to pay the costs of the CC and of the defendant
But ordinarily the CC is liable for the costs
The CC can itself institute action if the majority is in favor
7. Payment to members
S51 The following rules govern payments to members in order to maintain
solvency
Any payment by the CC to a member by reason of his membership, including
a distribution of income or repayment of a contribution may be made only:
1. After such payment, the CC’s assets exceed its liabilities – solvency
criterion
2. The CC is able to pay its debts as they become due – liquidity criterion
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3. Such payments will in particular circumstances not render the CC
unable to pay its debts
A member is liable to a corporation for any payment received contrary to
these requirements.
8. Prohibition on loans and security:
Without prior consent in writing of all its members, the CC may not make a
loan to:
• Any of its members
• Any other CC in which 1 or more of its members together hold more than
50% interest
• Any company controlled by one or more of its members OR
• Provide security to its members and juristic persons controlled by them
Questions
A, B and C are members of Lazy Bee CC. A and B are sisters and they
each hold 45% member’s interest in the close corporation. The
relationship between A, B and C deteriorates to such an extent that C
withdraws from the management of the close corporation. C wants the
corporation to acquire his member’s interest, but A and B told him that
there are insufficient funds for this. D offers to buy the movable assets
of the close corporation. A and B refuse to consent to the sale. C feels
that their refusal is unfair because the sale would give the close
corporation enough funds to acquire his member’s interest. Advise C
whether it is possible for a court to order the sale o the assets of the
close corporation so that it may acquire his member’s interest. Refer to
relevant case law.
Section 49 or the statutory personal action provides that if any particular act
or omission of the CC or of one or more of the other members is unfairly
prejudicial, unjust or inequitable to one or more members, the latter may
apply to court for an order to rectify the matter.
If the court considers it just and equitable, the court may make such an
order as it thinks fit, whether for regulating the future conducting of the
affairs of the CC or for the purchase of the interest of any member of the CC
by the other members thereof or by the corporation.
In Gatenby v Gatenby the court had to decide what order should be made in
determining how the affairs of the corporation should be regulated in future.
The court held that it had the power to order the sale of the CC’s assets in
order to enable a member who is being prejudiced to be paid out his/her
interest and to bring about the termination of his/her membership.
It would be possible for the court to order the CC to sell its assets in order to
acquire C’s members interest.
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Bobby, a member of Sweet Dreams CC, wants to know whether the
income of the CC can be distributed amongst the members. Explain to
him the requirements for distribution of a CC’s income to its members.
Payment to members
S51 The following rules govern payments to members in order to maintain
solvency
Any payment by the CC to a member by reason of his membership, including
a distribution of income or repayment of a contribution may be made only:
(a) After such payment, the CC’s assets exceed its liabilities –
solvency criterion
(b) The CC is able to pay its debts as they become due – liquidity
criterion
(c) Such payments will in particular circumstances not render the
CC unable to pay its debts
Name any 4 matters concerning a CC that require the written consent
of each member of the CC?
•
•
•
•
•
•
The acquisition of a members interest
Financial assistance i.r.o the acquisition of a members interest
The granting of loans/furnishing of security
The ratification of pre-incorporation contracts
The ratification of a breach of fiduciary duty/duty to act with the
necessary care and skill
The appointment of an accounting officer
Under which circumstances may a member of the CC institute
proceedings in terms of S50, on behalf of the CC against a fellow
member?
Proceedings against fellow members:
S50 statutory derivative action
Any member may institute proceedings on behalf of the CC against a
member/former member in certain circumstances where the corporations
own rights are affected – after notifying all the members of his intention to do
so:
• Where a member/former member = liable to make initial
contribution as agreed
• Where member/former member is liable because of breach of
fiduciary duty to the CC OR negligence in handling the CC’s affairs
Name FOUR matters that cannot be altered by an association
agreement between members of a close corporation.
•
•
The manner in which an insolvent members interest may be disposed
of
Members who are disqualified from taking part in management
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•
•
The power of a member to call a meeting of members
The number of members
Stephen and Tumo are members of Kamohelo CC. They do not agree on
what the fiduciary duties of a member of a CC entail. Briefly explain the
fiduciary position of the members of a CC to Steven and Tumo.
The Close Corporations Act (s 42) provides that a member should:

Act honestly and in good faith

Avoid a conflict of interest between his or her own interests and
those of the close corporation

Exercise powers in the interest of the corporation

Disclose any interest in a transaction to the other members of a
close corporation

Not gain any financial gain by virtue of being members of the
close corporation.
a. Fiduciary position of members:
•
Members stand in a close relationship to each other (akin to
partners)
•
BUT: they owe fiduciary duties to the CC as a separate legal
person, and not to each other (unlike partnerships)
•
There is nothing to prevent a fiduciary duty owed to each other
being imposed by the association agreement.
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EXTERNAL RELATIONS
1. PRE-INCORPORATION CONTRACTS
a) Statutory arrangement:
• S53 of the Close Corporation Act is a simplified version of S35 of the
Companies Act
• So it constitutes an exception to the common law principle that there can
be no representation of a person not yet in existence
• S53- allows a CC to ratify a pre-incorporation contract concluded by an
agent, if certain requirements are met.
• Thus: A CC can ratify or adopt as its own, AFTER its incorporation a
written contract entered into by someone purporting to act as the CC’s
agent/trustee BEFORE its incorporation at the time the contract was
entered into.
• This provisional contract can only become binding on the CC if the
following requirements are met:
1. The contract must be in writing: This is wide enough to include
ORAL contracts subsequently reduced to writing.
2. The contract must have been entered into by a person professing to
act as an agent/trustee for a CC not yet formed
3. The contract must be duly ratified or adopted by the CC after its
incorporation: by consent in writing of all members within the time
specified in the contract. And if no time is specified the consent
must be given within a reasonable time after incorporation.
• If (1, 2, 3) are complied with – the contract comes into existence between
the CC and the other contracting party.
• The CC is under no obligation to ratify or adopt the contract.
• If the contract isn’t ratified in time the contract lapses.
• In principal the agent incurs no personal liability, but the contract may
provide that in such event the agent will be liable in his personal capacity
for the due performance of the contract.
b) Alternative arrangements:
The statutory arrangement is allowed but isn’t compulsory! So other
arrangements may be used.
1. Stipulatio alteri (a contract for the benefit of a 3rd party:
Here: the 3rd party doesn’t have to exist when the contract is concluded in
favor of it. E.g. acting in his own name, as principal – enters into a
contract in favor of the CC still to be formed.
2. EG: A enters into a contract in his personal capacity BEFORE the CC is
incorporated, then after its incorporation:
a. Cedes his rights under the contract to the CC ….. OR
b. Transfers assets he acquired under the contract to the CC …OR
c. Cedes his rights under an option (which he acquired on the basis that
he can either exercise it himself or transfer it to someone else) to the
CC, which can then exercise the option.
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2. CAPACITY AND REPRESENTATION OF A CLOSE CORPORATION:
• NB: the common law doctrines – Ultra vires and doctrine of constructive
notice DON’T APPLY TO CC’S
• The power of a member to bind a CC is dealt with in S54
Capacity and powers of the CC
The CC had the capacity and powers of a natural person of full capacity in
so far as a juristic person is capable of having such capacity or exercising
such powers.
So …. Ultra vires doctrine doesn’t apply in respect of CC’s
The statement of their main business of the CC in the founding statement
DOESN’T AFFECT the CC’s capacity and powers.
3rd parties are not deemed to know the contents of the founding statement
(IE Doctrine of constructive notice doesn’t apply)
Thus:
Generally: CC’s legal capacity is unlimited i.e. 3rd parties
Don’t run the risk of validity of contract being affected by internal
relations on the CC’s legal capacity
BUT: CC can’t perform acts associated with the physical being of a
natural person (entering into a marriage)
ALSO: CC is restricted from participating freely in some commercial
transactions EG: CC can't practice as a doctor, advocate, etc
(CC can carry on the business as a pharmacist, estate agent, vet etc)
Representation of the close corporation
1. Members as agents:
S54: of the CC Act has been amended as follows:
• S54 (1): in relation to outsiders dealing with a CC, any member is an
agent of the CC
• S54 (2): any act of a member shall bind a corporation whether or not
such act is performed for the carrying on of the business if the
corporation UNLESS:
• The member so acting has in fact no power to act for the corporation
in the particular matter AND
• The person with whom the member deals has, or ought reasonably to
have, knowledge of the fact that the member has no such power
• Previously any member could bind the CC if and when he
concluded a contract that fell within the scope of the corporations
business.
• S54 now states that its irrelevant to ascertain whether a particular
transaction concluded between a member of the CC and an
outsider falls inside the CC’s sphere of business or not.
• Such transaction will ALWAYS bind the CC unless:
1. The member didn’t have the power to bind the corporation &
2. The outsider knew or ought reasonably to have known this.
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•
•
•
•
The importance is thus no longer whether the transaction falls
inside the CC’s scope of business or not
The test is now to establish whether the person who is purporting to
act on behalf of the CC is in fact a member of the CC.
REMEMBER: Bona fide outsiders are entitled to assume that each
member has the necessary authority to act on behalf of the CC.
Obviously an act of the member binds the CC if:
1. The act was expressly authorized
2. The act was impliedly authorized
3. The act was subsequently ratified
J & K Timbers (Pty) Ltd v GL & S Furniture Enterprises CC: a member is
an agent, even though no authority, express or implied, has been conferred
upon him by the close corporation and the corporation is bound by the
related act, unless the third party knew or reasonably ought to know of the
absence of such power.
S54 doesn’t apply where:
a. A non-member acts as agent of the corporation
b. The person dealing with the corporation isn’t an outsider but a member
c. The outsider is aware of the existence of the corporation at the time of the
conclusion of the contract
d. The outsider is aware of the existence of the corporation but deals with
the member in his personal capacity and not as an agent of the
corporation.
2. Non-members as agents (S54 not applicable)
•
•
A cc can authorize a person who isn’t a member to act as its agent
Then: CC is bound by a contract entered into on its behalf by a nonmember if:
1. A non-member has express or implied authority from the CC
2. CC subsequently ratifies the agreement OR
3. CC is precluded from denying authority/ratification because of the
doctrine of estoppel.
3. Contracts with members: (S54 not applicable)
•
•
The contract will be voidable (i.e. can be set aside) at the option of the CC
if the member breached his fiduciary duties, by failing to disclose his
interest in the contract at the earliest opportunity.
Without prior consent of all the members, loans and provisions of
security by a CC to its members or to juristic persons controlled by them
are prohibited and invalid.
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Accounting officer, records and financial statements
Close corporations are not exempt from financial reporting.
An annual financial statement must be drawn up. The annual financial
statement must be approved by or on behalf of members holding at least
51% of the member’s interest in the close corporation. A report must be
drawn up by the appointed accounting officer.
In terms of section 58(2A), section 30(2)(b) and (3) to (6) of the Companies
Act, apply to a corporation that is required by regulations made in terms of
section 30(7), to have its annual financial statements audited. A close
corporation will thus be compelled to have its financial statements audited
in the same circumstances as a private company.
Questions
Explain whether Moripe CC has to appoint an auditor to examine its
annual financial statements.
Section 59(1) of the Close Corporations Act provides that every corporation
must appoint an accounting officer. The accounting officer must determine
whether the annual financial statements are in agreement with the
accounting records of the corporation.
In terms of section 58(2A), section 30(2)(b) and (3) to (6) of the Companies
Act, apply to a corporation that is required by regulations made in terms of
section 30(7), to have its annual financial statements audited. A close
corporation will thus be compelled to have its financial statements audited
in the same circumstances as a private company.
The founding statement of Ikhaya CC describes the principal business
of the CC as “buying of residential homes for the purposes of resale”.
Asanda, one of the members of the CC, concludes a contract to buy
construction equipment on behalf of Ikhaya CC. The other members of
Ikhaya CC reject the contract as invalid on the basis that it goes
beyond the scope of the corporation’s business.
Explain what the capacity of a CC is and what consequences a
transaction outside of such capacity hold for 3rd parties
•
•
S54 (1): in relation to outsiders dealing with a CC, any member is an
agent of the CC
S54 (2): any act of a member shall bind a corporation whether or not
such act is performed for the carrying on of the business if the
corporation UNLESS:
• The member so acting has in fact no power to act for the corporation
in the particular matter AND
• The person with whom the member deals has, or ought reasonably
to have, knowledge of the fact that the member has no such power
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•
Previously any member could bind the CC if and when he concluded a
contract that fell within the scope of the corporations business.
S50 statutory derivative action
Any member may institute proceedings on behalf of the CC against a
member/former member in certain circumstances where the
corporations own rights are affected – after notifying all the members
of his intention to do so:
• Where a member/former member = liable to make initial
contribution as agreed
• Where member/former member is liable because of Breach of
fiduciary duty to the CC OR negligence in handling the CC’s affairs
If the proceedings are instituted without prima facie grounds – the
member may be ordered to pay the costs of the CC and of the
defendant
But ordinarily the CC is liable for the costs
Allen, Roger and Minkie are members of Husky CC. In terms of the
founding statement the main aim of the business is to make and sell ice
cream. The association agreement states that only Minkie can
represent the CC and she may not conclude contracts on behalf of the
CC exceeding R200 000, without the permission of Allen and Roger.
Without the permission of Allen and Roger, Minkie concludes a contract
with Motors 4 U (Pty) Ltd for the purchase of a sports car valued at
R400 000. Discuss whether the CC will be bound by this contract?
When determining whether a CC will be liable for an act of one of its agent
we refer to S54:
• S54 (1): in relation to outsiders dealing with a CC, any member is an
agent of the CC
• S54 (2): any act of a member shall bind a corporation whether or not
such act is performed for the carrying on of the business if the
corporation UNLESS:
• The member so acting has in fact no power to act for the
corporation in the particular matter AND
• The person with whom the member deals has, or ought reasonably
to have, knowledge of the fact that the member has no such power
S54 doesn’t apply where:
a. A non-member acts as agent of the corporation
b. The person dealing with the corporation isn’t an outsider but a
member
c. The outsider is aware of the existence of the corporation at the
time of the conclusion of the contract
d. The outsider is aware of the existence of the corporation but
deals with the member in his personal capacity and not as an
agent of the corporation.
Therefore the CC will be bound and will have recourse against the member
who breached his fiduciary duties.
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PERSONAL LIABILITY
Circumstances when members and others can be liable for a
corporation’s debts
S23: Failure to use proper name or registration number = Any member or
any person who authorised or issued the document will be liable to the
holder of the bill, note, cheque or order for the amount unless it is paid by
the corporation
S52: If certain loans are made without the consent of all members = Any
member who authorised the loan or was party to the making of such loan
must make good any loss to the corporation or loss to any other person who
incurred loss
General rule: the members aren’t liable for the debts of the CC BUT in terms
of S63, liability may arise with the CC in the following circumstances:
1. If the name of the CC is used without the abbreviation CC, the member
will be liable for the debts resulting from such a transaction, with a
person who can show he was unaware that he was dealing with a CC
2. If the member fails to make his contribution
3. If the number of member exceeds 10 for more than 6 months
4. If the CC gets members interest without complying with S39, every
member who was aware of the payment, will be liable
5. If the CC give financial assistance for the acquisition by a member of his
interest without complying with S40
6. If a person disqualified from taking part in management does so, he will
be liable for the debts incurred as a result of his participation
7. If the office of the accounting officer is vacant for a period of 6 months.
S64: if at any time it appears that any business of the CC was carried on
recklessly, fraudulently or with gross negligence, the court can declare that
anyone who was knowingly a party to such carrying on of business, shall be
personally liable for the debts of the CC = See S424 of the Companies Act
S65: the court can be called on to find that the corporation, or any act of the
CC, constitutes a gross abuse of its juristic personality.
If the abuse is found, the court can declare that the CC is deemed not to be
a juristic person = members are personally liable
In the following circumstances, members can be held liable for the debts of
the CC or they can be compelled to compensate the CC:
• If the CC is deregistered while having outstanding liabilities
• If a member breaches his fiduciary duty or duty of care and skill
• If loans are made or security given in breach of the CC Act
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Questions
S63 of the Close Corporations Act contains provisions in terms of which
members of the CC can be held jointly and severally liable for the debts
of the CC in certain situations, name 4 of these situations.
General rule: the members aren’t liable for the debts of the CC
BUT in terms of S63, liability may arise with the CC in the following
circumstances:
1. If the name of the CC is used without the abbreviation CC, the
member will be liable for the debts resulting from such a
transaction,
2. If the member fails to make his contribution
3. If the number of member exceeds 10 for more than 6 months
4. If the CC gets members interest without complying with S39, every
member who was aware of the payment, will be liable
5. If the CC give financial assistance for the acquisition by a member
of his interest without complying with S40
6. If a person disqualified from taking part in management does so, he
will be liable for the debts incurred as a result of his participation
7. If the office of the accounting officer is vacant for a period of 6
months.
Ashley is a member of Bling CC who wishes to sell his members interest
to Simphiwe. Simphiwe qualifies for membership but doesn’t have
sufficient funds to pay the purchase price. Discuss whether and when
the CC can give financial assistance to Simphiwe to assist him in
purchasing the members interest
Section 63 states that you cannot give financial assistance unless it complies
with the requirements as set out in section 40. The requirements are:
The CC’s assets must exceed its liabilities and all the members of the CC
must agree in writing.
Explain the consequences of signing a cheque on behalf of a close
corporation without the corporations name and registration number
appearing on the cheque.
If name & registration number isn't stated on everything
the member or other person acting on behalf of the CC will be
# guilty of an offence
# liable to the holder of the cheque, for the amount of it
unless its paid by the CC
Explain the powers of the court when it makes a finding that the
juristic personality of a close corporation is being abused
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S65: the court can be called on to find that the corporation, or any act of the
CC, constitutes a gross abuse of its juristic personality. If the abuse is
found, the court can declare that the CC is deemed not to be a juristic
person = members are personally liable
In the following circumstances, members can be held liable for the debts of
the CC or they can be compelled to compensate the CC:
• If the CC is deregistered while having outstanding
liabilities
• If a member breaches his fiduciary duty or duty of care
and skill
• If loans are made or security given in breach of the CC
Act
John, Tumi and Steve are members of Success CC, a close corporation
registered in November 2006. Both John and Tumi have paid their
initial contributions, while Steve has not. Due to the slowing down of
the economy, Success CC has defaulted on the payment of its debt to
Alex, one of its creditors.
Advise Alex who can be help liable for the payment of the debt:
General rule: the members aren’t liable for the debts of the CC BUT in terms
of S63, liability may arise with the CC where a member fails to make his
contribution. The Creditor can go beyond the separate legal existence of the
CC and that member personally liable for all debts incurred up until such
member makes their contribution.
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Some random points of information to note:
Until two months ago, Thabang held a 60% member’s interest in Cold Star
CC, while Reggie and Lerato each held 20%. The day-to-day running of Cold
Star CC’s business was entrusted to Thabang. Thabang then decided to sell
a third of her member’s interest, i.e. 20% of the total member’s interest, to
Simphiwe. Since Simphiwe did not have sufficient funds, Thabang arranged
that Cold Star CC lend Simphiwe the money. The CC complied with the
solvency and liquidity requirements. The loan to Simphiwe was not formally
approved by Reggie and Lerato as required by section 40 of the Close
Corporations Act of 1984. In fact, Lerato was not even aware that the loan
was being made to Simphiwe. Reggie knew that the CC was assisting
Simphiwe, but since she and Simphiwe were good friends, she did nothing to
prevent payment of the money to him.
Who of the above persons can be held personally liable for the debts of the
CC?
Only Tshepang, Simphiwe and Refilwe
An association agreement…
Is not a prerequisite for the formation and running of a close
corporation
A, his wife B and their 16 years old daughter C, Dozo (Pty) Ltd and X an
adult male with a criminal record for driving under the influence, intend
forming Exec CC. A’s estate has been sequestrated and he has not yet been
rehabilitated. Indicate who can acquire valid membership into the CC:
B
Anna, Birgitte, Cleone, Divine, Ellie and Farrel want to form a close
corporation to run a motor vehicle repair shop. They all wish to
become members of the close corporation on its registration.
a. Divine has been working for Cleone as a motor vehicle mechanic for the
last three years and she agrees to offer her services as a mechanic in
exchange for a member’s interest in the close corporation.
b. Anna had made a large profit on a previous business venture and she
agrees to contribute R 50 000 which will be used to buy the tools
necessary for repairing vehicles in exchange for a member interest in
the close corporation.
c. Cleone has been running a motor vehicle workshop as a sole proprietor
and she agrees to contribute the premises she owns in exchange for a
member’s interest in the close corporation.
d. Ellie and Farrel have just won some money on the Lotto and they agree
to contribute R50 000 which will be used for the general running of the
business in exchange for a member’s interest in the corporation which
they will hold jointly.
e. Birgitte is an attorney and she agrees to do all the legal work involved in
the incorporation and registration of the close corporation in exchange
for a member’s interest in the close corporation.
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Indicate which of the above constitute valid contributions to a close
corporation in exchange for a member’s interest:
A, B and C only
The membership of a close corporation may be terminated by an order
of court if
the conduct of the member makes it reasonably impossible for
the other members to associate with him in carrying on the
business of the close corporation
Jo is a member of Best Bikes CC. The business of the close
corporation is to manufacture motorcycles. The association agreement
of Best Bikes CC provides that Jo may not enter into contracts on
behalf of the close corporation where the value of the contract exceeds
R1000. Jo, a keen sportsman, concludes a contract on behalf of the
close corporation with Dina for the purchase of soccer balls to the
value of R1200.
The contract will not bind Best Bikes CC, because the contract
falls outside the close corporation’s business sphere.
It is a characteristic of a close corporation that…
it need not be an undertaking for gain.
Oliver is a member of Bosbok CC. He is also an engineer with 15
years experience in mineral exploration. He was instructed by Bosbok
CC to do an exploration of minerals on property owned by Bosbok CC.
Oliver negligently reported that there were no minerals on the
property. The property was sold and subsequently it was discovered
that there was coal present. Bosbok CC would have sold the property
as a much higher price had it known of the presence of coal.
Oliver acted in breach of his…
fiduciary duty.
The Registrar of Close Corporations may order a change of a name of a close
corporation if
in his or her opinion, a name is undesirable.
The members of Zero CC are Jane, Peter and Christo. Peter takes care of
most of the day to day management functions. The association agreement
states that Jane and Peter shall manage the corporation and have authority
to contract on behalf of the CC.
If Christo concludes a contract on behalf of the CC, the contract
would be binding on the CC unless the 3rd party knew or
reasonably ought to have known that Christo didn’t have the
authority to contract on behalf of the CC.
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Trusts
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TRUSTS
A trust can be used for business purposes instead of a company or CC.
An advantage of a trust is that it is flexible and lacks statutory formality of
its creation, administration and operation.
In Land and Africultural Bank of South Africa v Parker and Others the
background to the law of trusts in SA were essentially designed to protect
the weak and safeguard the interests of those who are absent or dead. The
principle provided the foundation for this court’s major decisions over the
past century in which the trust form has been adapted to SA law: that the
trustee is appointed and accepts office to exercise fiduciary responsibility
over property on behalf of and in the interest of another.
A trust is a legal relationship that:
 Has been created by a person
 Through placing assets under the control of another person
 During the founder’s lifetime or on the founder’s death
 For the benefit of the third persons.
Parties to a Trust
Three main parties to any type of trust are as follows:
- The founder of the trust
- The trustees
- The beneficiaries
A trust has been described as a creation of a document. A trust is created by
a document called a trust deed.
Types of Trusts
Testamentary trusts - formed upon the death of the founder as part of his
Will
Trusts inter vivos - formed while the founder is still alive, often as part of an
estate plan to avoid payment of estate duty and other taxes
Business trusts - give trustees wide powers to carry on business, while
granting the beneficiaries the right to sell their interests in the trust. They
can be either public or private
Public trading trusts - the public is invited to become income beneficiaries
by contributing money or assets to the trust and then issued with
certificates as proof of their share
Private trading trusts – created by private individuals wishing to channel
funds towards a business and used to drive the business. Act as alternatives
to entities such as companies and close corporations.
Realisation trusts - formed specifically for developing and selling fixed
property
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Statutory trusts - created by a particular statute to achieve a specific
objective
Court order trusts - set up in terms of an order of court
Offshore (or International) trusts - established outside of South Africa and,
therefore, exempt from the jurisdiction of the Master of the High Court.
Legal Nature of Trusts
A trust is either created by a contract (inter vivos trust) or through a Will of
a testator (testamentary trust). It must be reduced to writing and its
existence evidenced by a document.
Crookes NO and Another v Watson and Others is a leading case regarding
inter vivos trusts which is simply a ‘contract’.
Braun v Blann and Botha NNO and Another held that a testamentary trust is
not a fideicommissum but has its own unique legal nature and
characteristics.
Legal attributes of a trust include:
 A trust has no separate existence and cant contract in its own name.
 Trustee is legally the owner of the trust assets; a distinction is drawn
between the trust’s assets and the private assets of the trustee.
 Insolvency of any of the two estates does not entitle its creditors to attach
the assets of the other estate
 The trust deed may provide for continued existence of a trust despite
changes in trustees.
 Both natural and legal persons may be parties to a trust
 Parties to a trust enjoy protection against liability for the debts of the
trust.
Essential elements for the creation of a valid trust:
1)
2)
3)
4)
5)
6)
7)
There must be intention by the founder to create a trust
The object must be lawful.
The trust property must be defined with certainty.
The trust object must be sufficiently certain.
There must be at least one beneficiary.
The trust should be reduced to writing in a trust deed or deed of trust.
At least one trustee should be appointed in terms of the trust deed, or, if
no appointment is made or is possible in terms of the trust deed, the
appointment must be made by the Master.
In Estate Price v Barker and Price a will gave the surviving spouse a usufruct
so that she may be better enabled to maintain their children. It was held
that no trust was created in favour of the children since the words expressed
a desire. The surviving spouse was ‘enabled’ but not ‘compelled’ to use the
income for the children. She was not under ‘an obligation’ to maintain the
children, it is therefore clear that a trust must ensure that a trustee or the
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trustees are under a legal obligation to manage the assets on behalf of
others.
Authorisation of Trustees
 Only after a written authorisation by the Master can a trustee act
 The trustee of a trust can be a beneficiary of that trust, but the roles of
‘trustee’ and ‘beneficiary’ must not be confused or merged.
 Only a ‘trustee’ can control and manage a trust acting as a trustee.
 If there is more than one trustee, the trustees must act together.

A ‘beneficiary’ as a beneficiary cannot manage or control trust assets.
Duties of Trustees
 Act with care, diligence and skill, which can reasonably be expected of a
person who manages the affairs of another.
 Open a separate trust account.
 Duty to indicate in his bookkeeping the property he holds as trustee.
 Must make any account or investment at a financial institution
identifiable as a trust account or investment.
 A trustee must administer and protect trust property and collect debts
due in respect of the trust property.
 Must give effect to the terms of the trust deed.
 Act with utmost good faith.
 Exercise an independent discretion at all times with respect to trust
matters.
 Must not expose the assets of a trust to undue risk.
 Must invest the trust property productively.
 Must take remuneration only to which he is entitled.
 Must account to the beneficiaries.
•
•
•
Sackville West v Nourse and Another - the duty not to expose trust assets
to risk;
Administrators Estate Richards v Nichol and Another - a trustee’s duty to
invest the trust property productively;
Doyle v Board of Executors - on the duty of good faith and to account to
beneficiaries.
Powers of a Trustee
The powers of a trustee are stipulated in the trust deed. No other powers not
provided for in the trust deed may be inferred. A trustee derives his or her
powers from the trust deed.
Rights of Beneficiaries
A trust must have a beneficiary otherwise it will fail. The whole purpose of a
trust is usually for trustees to managed and control trust assets on behalf of
beneficiaries. The extent of the beneficiaries’ rights is set out in the trust
deed. Unless otherwise prohibited by the trust deed, these rights can be
ceded or otherwise disposed of. The founder of the trust can be a beneficiary
and the trustee a beneficiary.
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Business or Trading Trusts
Although a trustee is usually precluded from exposing trust assets to risks,
a trustee in a business trust is empowered to carry on a business or to
trade. This implies authority to expose the trust to risks inherent in the type
of business concerned. The main advantage of a business trust is that the
beneficiaries enjoy limited liability without the complexities and expenses of
a company or close corporation. Its disadvantage is the danger of being
deemed a partnership due to the two entities often sharing similar elements.
In order to avoid ‘the trust’ being regarded as a ‘partnership’ and not as a
‘trust’, it is important for the trustees to be persons independent of, and
different persons from, the beneficiaries.
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Partnerships
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Definition of a partnership
In Pezzutto v Dreyer and Others partnership is a legal relationship created by
way of a contract between two or more persons, in terms of which each of
the partners agrees to make some contribution to the partnership business
which is carried on for the joint benefit of the parties, the object of which is
to make a profit.
Types of partnership
Universal partnerships: are not restricted to a particular transaction or a
specific business.
Two types of universal partnerships:
- The societas universorum bonorum is a partnership of all property that
generally will take place within the context of marriage.
- The societas universorum quae ex quastu veniunt is a partnership of all
profit, which occurs within the context of commercial undertakings.
Particular partnerships: established in respect of a specific project
In Bester v Van Nieker it was held that if persons who are not partners in
other business share the profits and loss of one particular transaction, they
become partners as to that transaction but not as to anything else.
Extraordinary partnerships: the liability of certain of the partners to third
parties may be limited.
Three types of extraordinary partnerships can be distinguished:
 The silent partnership: the business is conducted by one of the partners in
his own name while an anonymous or silent partner is not disclosed to the
public, he is not liable to third parties for the debts of the partnership, but
he is liable to his partner for his proportional share of the partnership
losses.
 The partnership en commandite: the business of the partnership is also
carried on in the name of one or more of the partners, but every partner
whose name is not disclosed is only liable to the other parties to the extent
of the fixed amount of the agreed capital contribution made by him.
 Special partnerships: which were registered under the now, repealed
Special Partnerships Limited Liabilities Act of the Cape Province and Natal.
The essentials of a partnership: are those elements that must form part of
an agreement in order for such agreement to constitute a partnership
agreement.
Joubert v Tarry and Co
1. Contribution by partners: Each partner must contribute something, or
give a binding undertaking to make some contribution to the partnership
that has commercial value, like money, property, skill, knowledge,
expertise, contacts, experience, etc.
2. The business should be carried on for the joint benefit of the parties:
Each partner must be entitled to share in the net profit of the
partnership, but partners need not receive equal shares in the profit. One
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partner cannot be entitled to all the benefits while another has to bear all
the losses. A partner can be excluded from sharing in a net loss.
3. The business should be carried on with the object of making a profit:
Ally v Dinath the profit motive does not refer to purely pecuniary profit,
but also to the achievement of another material gain such as a joint
exercise for the purpose of saving costs.
4. The contract should be a legitimate contract: A partnership is
established by means of a valid agreement and the contracting parties
must have the intention of establishing a partnership.
In Harrington v Fester and Others there was no written partnership
agreement and the applicant claimed the existence of a partnership,
but certain correspondence indicated that the applicant had treated
the respondent as an employee, which is totally inconsistent with the
existence of a partnership.
Other legal formalities:
 A partnership must comply with the law and cannot conduct business
that is prohibited by law or public policy.
 There is no limit on the number of partners in any partnership.
 At least two partners are required for a partnership to come into
existence.
 There are no formal requirements for the actual partnership agreement
and, therefore, the agreement may be concluded in writing or orally or be
implied by conduct, unless the partners agree on certain formalities.
 A valid contract must be lawful, parties must have contractual capacity,
they must reach an agreement and the agreed performance must be
possible.
Legal nature of a partnership
No association formed for the purpose of acquisition of gain by the
association or its members will be a legal person unless it is registered as a
company under this Act or formed pursuant to another law.
There are two exceptions to the general rule that a partnership does not exist
independently of the partners. The first refers to insolvency and the second
to litigation.
Exceptions to common law:
Insolvency: sequestration of a partnership estate is to be treated as distinct
from the estates of the individual members. If the estate of an insolvent
partnership is sequestrated, the partnership estate, the estates of the
partners must be sequestrated simultaneously.
Litigation: The rights and obligations of the partnership are the rights and
duties of partners jointly. Therefore, an individual partner cannot be sued for
a partnership debt during the subsistence of the partnership and an
individual partner cannot generally enforce a partnership claim.
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Relationship between partners
Naturalia: which ensue from a partnership agreement. If these consequences
are not altered by the partners, the naturalia are the legal rules, which will
apply to the partnership.





Partners need not receive equal shares in the profits. In the absence of an
agreement on how profits are to be shared, profits are shared between the
partners in proportion to the value of their contributions and if the value
of the contributions cannot be ascertained, the partners share the profits
equally
The losses of the partnership are shared in the same proportion that the
profit would have been divided.
Each partner has the power to represent the partnership in transactions
which fall within the usual scope of the business
A partner is not entitled to compensation for his contribution to the
partnership.
The assets of the partnership belong to the partners jointly.
A close mutual fiduciary relationship exists between partners. In Purdon v
Muller the court held that under our common law a partnership is
considered to be a contract of the utmost good faith.
The requirements of the fiduciary relationship are not strictly defined, but
three broad categories of duties may be distinguished, namely:
1)
That a partner must comply with his duties in terms of the
partnership agreement
2)
A partner must further the interests of the partnership
unselfishly and avoid a conflict between his personal interests and the
interests of the partnership
3)
That a partner must disclose to his co-partners all information, which
affects the partnership.
The rights of partners between themselves include:
 A right to share in the profits of the partnership
 A right to participate in the management of the business
 The right to compensation
 The right to inspect the partnership books
 The right to distribution of assets on dissolution.
The duties to the partnership include:
 The duty to make a contribution to the partnership
 A duty to share in the losses
 A duty of care and skill: No basic level of expertise or any qualifications
are required. Partners choose each other and have only themselves to
blame if they take into the partnership an incompetent partner without
restricting his management powers BUT if a partner undertakes to
contribute any particular skill or expertise to the partnership, he will be
liable for loss caused by any failure to display such skill or expertise
 A duty of full disclosure or a duty to account;
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Separate duties that flow from the principle of utmost good faith
include:
 A duty to accept and fulfil the obligations of the partnership agreement –
Purdon v Muller
 A fiduciary duty to fellow partners and a duty not to compete with the
partnership – Mattson v Yiannakis
 A duty to guard against a conflict of interest – De Jager v Olifants Tin ‘B’
Syndicate
 A duty to disclose to all co-partners all information in his or her
possession, which affects the partnership.
There are two actions with which a partner can enforce his rights as a
partner against any of his co-partners:
1. The actio pro socio = partners can enforce their mutual rights.
2. The actio communi dividundo is an action with which co-owners effect
physical division of tangible things, which they hold in joint ownership.
After dissolution of the partnership, a partner can bring this action to
obtain physical division of jointly owned partnership assets.
The relationship between partners and third parties
 Each partner is liable jointly and severally for partnership debts.
However, during the existence of the partnership, creditors of the
partnership cannot sue partners individually for partnership debts.
 When a partner contracts with a third party on behalf of the partnership,
he binds all his partners, provided that he acts within the scope of his
authority = mutual mandate. If a bona fide third party wishes to hold the
partnership liable in terms of a contract concluded by a partner, it is
sufficient for him to prove that the contract fell within the scope of the
business of the partnership. If it can be shown that a transaction fell
outside the scope of the partnership business, then the contracting
partner has exceeded his implied authority.
 If a partner has been granted express authority to contract on behalf of
the partnership, the partnership will be bound even if the transaction
falls outside the scope of the partnership business
Dissolution of partnerships
 Effluxion of term
 Completion of partnership business
 Mutual agreement
 Change in membership = death/retirement or the admission of a new
partner
 Death of a partner
 Insolvency and sequestration of partnership estate or the estate of any
partner
 Bona fide notice of dissolution by any partner
 Where partners become alien enemies on or after the outbreak of war
 Order of court: may be given upon application of one or more of the
partners for good cause.
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Entrepreneurial Law Notes
117
Consequences of termination of a partnership include:
A proper rendering of an account must be completed before amounts
owed to the individual partners can be claimed
 Upon termination, any creditor of the partnership can sue the partners as
individuals, jointly and severally, for partnership debt – Lee en ‘n Ander v
Maraisdrif (Edms) Bpk.
 No partner has implied authority to bind the partnership
 Each partner may demand an account from his partners.

REMEMBER THAT TRUSTS AND PARTNERSHIPS ARE NOT EXAMINABLE!!!
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