ENTREPRENEURIAL LAW
REVISION STUDY PACK
1ST SEMESTER 2016
hewilladd@outlook.com
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Modo is a member of Yapcan CC. He is the oldest of all the members
and is concerned about his deteriorating health. He does not want to
sell his member's interest since the corporation's business is doing very
well. Advise Helmut whether or not he can bequeath his interest in the
close corporation to his daughter.
In addition, advise him whether or not effect will be given to his wishes
if he makes provision in his will for the transfer of his interest to his
daughter. (5)
A member of a close corporation may bequeath his or her members interest
in the corporation in his will to someone. In terms of section 35 of the Close
Corporations Act, the law applies unless it is determined otherwise in an
association agreement. Before the members’ interest may be transferred to
the heir, the other members of the close corporation must consent. If
permission is not granted by the other members, the executor may sell the
membership interest to the corporation, to another member or to a third
party subject to a right of pre-emption in favour of existing members.
Good Food CC’s main business is catering. The corporation has 5
members: Anthea, Bert-Filandro, Carol, Daniel and Elvis. Each member
holds a 20% member’s interest. The association agreement determines
that only Daniel is authorised to represent the close corporation.
Anthea enters into a contract for the purchase of a racehorse on behalf
of the close corporation with Bert-Filandro. Is the close corporation
bound to the transaction? (6)
Section 54(1) of the Close Corporations Act 69 of 1984 determines that any
member of a close corporation will in relation to a person is not a member,
and is dealing with the close corporation, be an agent of the close
corporation.
Section 54(2) of the Close Corporations Act determines that any act of a
member will bind the close corporation whether such act was performed in
connection with the business of the CC or not unless the member has in
fact no authority to act for the corporation in the particular matter and the
contracting party has or ought reasonably to have knowledge of the
member’s lack of authority. The close corporation will not be bound since
Bert is a member of the close corporation. He should know that Anthea
cannot act on behalf of the close corporation. Consequently the other
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contracting party cannot rely on s 54 of the Close Corporations Act to hold
the close corporation liable.
Saraphina is a member of Mend & Sew CC. The other members, Alphi
and Botsego feel that Saraphina has not been complying with her
management duties. Advise them regarding the three grounds upon
which the court may, in terms of the Close Corporations Act 69 of
1984 order that a member shall cease to be a member of a close
corporation. (4)
Section 36 of the Close Corporations Act 69 of 1984 is applicable. The
grounds upon which a court would grant an order for termination of a
member’s interest are:
- Permanent inability to perform her part in carrying on the business;
- Conduct which is likely to have a prejudicial effect on the carrying on of
the business;
- Conduct making it reasonably impossible for the other members to
associate with her in the carrying on of the business or
- It being just and equitable in the view of the court that she should cease to
be a member.
Lesedi and Sipiwe are the members of Private Investigators CC. Upon
formation of the corporation they agree that their respective
membership contributions will consist of cash only. Each member was
required to contribute R100 000 and these amounts were duly recorded
in the founding statement. Apart from the monetary contribution,
Lesedi also entered into a lease agreement in terms of which he rents
out a building he privately owns to the close corporation for use as an
office. Sipiwe, who is a part-time student at UNISA, also enters into an
employment contract with the close corporation. In terms of the
contract of service he is required to be in the office to attend to the
corporation’s day to day business.
At a meeting of the members, Lesedi and Sipiwe decide that due to a
lack of profits generated from sales, the corporation will repay each
member 2% of their respective contributions to enable them to provide
for personal needs. They further agree that the corporation will make
some payments to them in respect of their respective rental and
employment agreements. Advise the members of Private Investigators
CC whether these payments meet the requirements in terms of the
Close Corporations Act 69 of 1984.
(5)
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In terms of s 51 of the Close Corporations Act 69 of 1984 no payment may
be made to members in their capacity as such if the corporation is not
solvent after payment and liquid before and after the payment is made.
Written consent of all members is required.
For purposes of the repayment of the members’ interest s 51 of the Close
Corporations Act applies Section 51 does not apply in respect of payments
made to the members in their capacity as creditors. Therefore, the
requirements of s 51 of the Close Corporations Act need not be adhered to in
respect of the rental agreement and the employment contract.
Johannes, Phineas and Beauty are Mnandi CC’s members. Beauty has
discovered that Phineas concluded a contract on behalf of Mnandi CC
for the purchase of a yacht without consent of any of the other
members. She is of the opinion that Mnandi CC should not be bound to
the contract because the corporation’s main business is catering. In
addition she shows you the association agreement which stipulates
that only Johannes is authorised to conclude contracts on behalf of
Mnandi CC. Advise Beauty whether or not Mnandi CC is bound to the
contract concluded by Phineas. Refer to relevant case law in your
answer. (5)
The doctrine of constructive notice does not apply to close corporations. In
other words, third parties are not deemed to have knowledge of the content
of a close corporation.’s registered documents. The close corporation will
therefore not be able to escape liability in terms of the contract based on the
inclusion of the main business in the founding statement. The ultra vires
doctrine is not applicable to close corporations.
In terms of s 54 van the Close Corporations Act 69 of 1984 every member
has the power to conclude a contract on behalf of the close corporation with
any person who is not a member of the close corporation. Section 54 of the
Close Corporations Act 69 of 1984 reads:
.“(1) Subject to the provisions of this section, any member of a corporation
shall in relation to a
person who is not a member and is dealing with the corporation, be an agent
of the corporation.
(2) Any act of a member shall bind a corporation, whether or not such act is
performed for the
carrying on of business of the corporation, unless the member so acting has in
fact no power to
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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..”
The only reason why a close corporation may not be bound to a contract
that was concluded by one of its members on its behalf is if the outsider was
aware, or reasonably ought to have known that the person who contracted
on the close corporation.’s behalf lacked the necessary authority to
do so.
In J & K Timbers (Pty) Ltd v GL& S Furniture Enterprises CC 2005 (3) SA 223
(N) the court held that a member of a close corporation is an agent even if
he or she has no express or implied authority, unless the third party was
aware, or reasonably ought to have known of the lack of authority.
In the set of facts Phineas is a member. Therefore, he has the power to
represent the close corporation in terms of section 54 of the Close
Corporations Act 69 of 1984.There is also no indication from the facts that
the third party knew or reasonably ought to haveknown for any reason that
Phineas lacked the necessary authority. Therefore the close corporation will
be bound by the agreement.
Prior to 2008 Mazibuko conducted business as 'Wooddoc'. In January
2008 a close corporation was incorporated, of which Mazibuko was a
member. This business was named 'Wooddoc CC'. On 17 October 2013
Mazibuko phoned Precious Mahlangu and ordered timber from her.
Thereafter Theresa, an employee of Wooddoc CC, acting upon
Mazibuko’s instructions, faxed an order form to Precious Mahlangu,
which she had signed. Even though new stationary had been printed for
use by the close corporation, the order was made on old stationery,
reflecting only the name 'Wooddoc.’ This form did not have the
registration number of the close corporation on it either. Upon delivery
of the timber, the close corporation failed to make payment. Precious
Mahlangu alleges that the timber was sold to Mazibuko personally.
Discuss whether or not Mazibuko or Theresa could be held liable for
payment of the purchase price for the timber. (5)
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A member of a close corporation may be held personally liable in certain
circumstances. Section 23 of the Close Corporation Act requires the name
and registration number of a corporation to appear on documents such as
cheques and orders issued by the corporation. According to the set of facts,
the order form which was faxed to Precious Mahlangu did not explicitly
show that the business was a close corporation whence Precious Mahlangu
was not aware that she was conducting business with a close corporation.
In terms of section 23 of the Close Corporation Act, any member of, or any
other person on behalf of the corporation commits an offence if the
registration number is not indicated or if the name of the close corporation
is not provided as it supposed to be for instance it must be followed by the
abbreviation CC. If the agreement does not comply with this provision any
member or person will be responsible for the debt incurred.
In addition, section 23 of the Close Corporation provides that any member
or any person on behalf of a corporation commits an offence if he or she,
issues any notice or official publication of the corporation or signed or
authorised signature on behalf of the corporation without indicating the
name or registration of the close corporation as in our scenario the
registration number was not provided. In Byway Projects 10 CC v Masingita
Autobody CC, the court held that s 23 envisage four types of documents (i) a
bill of exchange (ii) a promissory note (iii) order of goods and services. The
order form in our scenario fall under the order of goods.
In the set of facts, Mazibuko and Theresa would be held liable in terms of
section 23 of the Close Corporation Act. It has to be noted that this
provision does not apply to members of the corporation only. In Byway
Projects 10 CC v Masingita Auto body CC, the court held that contravention
of this provision can results in both civil and criminal consequences.
Name the documents which are used in the formation and management
of a close corporation and explain whether or not they are compulsory.
(4)
The founding statement is the sole compulsory registration document for
close corporations. An association agreement is an optional agreement that
can be concluded by members of a close corporation to regulate its internal
affairs.
Ananda, Beauty and Cleo are the members of Maceys CC. The assets of
the close corporation are valued at R500 000 and its total liabilities are
R750 000. Since the close corporation achieved good sales in
September, the members want the close corporation to pay each of
them one-third of the income received by the close corporation during
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September. Advise Cleo on the provisions and requirements of the
Close Corporations Act 69 of 1984 to make such a payment. (5)
Section 51 of the Close Corporations Act determines that payments to
members of a close corporation in their capacity as members are prohibited
unless all the members consent in writing and the solvency and liquidity of
the close corporation is maintained. In this case, the close corporation’s
liabilities exceeds its assets. The solvency requirement is not complied with.
Therefore, it is not possible to make the proposed payment to the members.
Zomo, Sihle and Maria are members of African Paintings CC. The sole
business of the enterprise is the buying and selling of African art. The
members have agreed that only Maria is authorised to represent the
close corporation in the conduct of its business subject to the
condition that Maria may not enter into any contract on behalf of the
close corporation where the value of such a contract exceeds R20 000
without having first obtained permission from Zomo and Sihle. Maria
concludes a contract on behalf of the close corporation to buy two
paintings from De Roche for R40 000. Neither Zomo nor Sihle
consented to the transaction and both were unaware of it.
Explain whether or not African Paintings CC will be bound to the
agreement. (6)
Section 54(1) of the Close Corporations Act 69 of 1984 determines that any
member of a close corporation will in relation to a person who is not a
member, and is dealing with the close corporation, be an agent of the close
corporation.
Section 54(2) of the Close Corporations Act determines that any act of a
member will bind the close corporation whether such act was performed in
connection with the business of the close corporation or not, unless the
member in fact lacked authority to act for the close corporation in the
particular matter, and the contracting party had or ought to have had
knowledge of the member’s lack of authority.
Section 54 of the Close Corporations Act authorises members of close
corporations to act as agents for the close corporation. The doctrine of
constructive notice does not apply to close corporations. Therefore, third
parties or outsiders are not deemed to have knowledge regarding the content
of close corporations’ registered documents. Close corporations are in
general bound to any contract concluded with an outsider by a member,
regardless of whether or not the transaction falls within the scope of the
enterprise’s main business.
A close corporation could, however, escape liability if the third party or
outsider knew, or reasonably ought to have been aware of the fact that the
member who had concluded the contract on behalf of the close corporation,
lacked the necessary authority to do so. J&K Timbers (Pty) Ltd v GL&S
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Furniture Enterprises CC 2005 (3) SA 223 (N) that is referred to in the study
guide is relevant here. In this case, it was held that 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 have known of the
absence of such power. In this scenario, the close corporation will be bound.
Zanasoo CC is experiencing financial difficulties as a result of
mismanagement. The close corporation recently obtained a loan from
Securaloan Bank Ltd for the renovation of its offices despite the fact
that the members were aware of the serious financial problems the
corporation was experiencing. In addition the close corporation’s main
supplier had given notice of cancellation of their contract. The
members failed to disclose the fact that the close corporation was
experiencing problems to the bank. Zanasoo CC is now unable to repay
the loan to Securaloan Bank Ltd. Advise the bank whether or not
it is possible under the Close Corporations Act 69 of 1984 to hold the
members personally liable for the repayment of the loan amount. (3)
Section 64 of the Close Corporations Act regulates personal liability for
reckless or fraudulent trading. For this provision to apply, the business of
the corporation must have been carried on recklessly, with gross negligence,
or fraudulently. The court can declare that any person who was knowingly
party to the carrying on of business in such a manner is personally liable for
debts, or other liabilities of the close corporation as the court may direct.
If the business is carried on when a reasonable business man would in the
circumstances recognise that there was a risk or non-repayment of the loan,
it can be said that the business was being carried on recklessly. The nondisclosure could be considered as being fraudulent. It would have to be
determined whether the members were ‘knowingly’ party to carrying on of
the business.
The facts in the question refer to all the members, consequently they could
potentially all be liable.
Note mention piercing the corporate veil.
END OF CLOSE CORPORATIONS QUESTIONS
Ann, Jack and Sam are three friends who wish to start their own
publishing company. While driving one Sunday afternoon, Jack comes
across the perfect office building. He wishes to purchase this building
on behalf of the proposed company. Advise Jack what the requirements
are that would need to be adhered to in terms of the Companies Act 71
of 2008 in order to conclude a valid and binding contract on the
company’s behalf before its incorporation. (5)
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The definition of ‘pre-incorporation contract’ is contained in section 1 of the
Companies Act 71 of 2008. The requirements are set out in section 21 of the
Companies Act 71 of 2008. For the conclusion of a valid pre-incorporation
contract, a number of requirements have to be met:
contract must be in writing; and
half of the
company by a person who professes to be acting obo yet to be incorporated.
registration.
If the contract is ratified, it will be enforceable against the company as if the
company was a party to the agreement at the time of its conclusion. If the
company is not registered or rejects the agreement, the person who
concluded the contract will be jointly and severally liable together with the
company for performance in terms of the pre-incorporation contract.
Woodinn (Pty) Ltd has two shareholders, Tom and Sue, each holding
50% of the issued share capital. Tom, Sue and Jack are the appointed
directors of the company. The company’s Memorandum of
Incorporation states that Woodinn (Pty) Ltd is mainly established to
manufacture furniture. Further it indicates that Jack is allowed to
enter into contracts not exceeding the value of R500 000 on behalf of
the company. For any contracts exceeding this amount, Jack is
required to first seek permission from the board of directors. The
company was registered early in 2012. It has not yet held an annual
general meeting.
Answer the following questions with reference to the facts provided
above:
(a) Jack buys a load of timber to the value of R2 million from Xander.
Jack does not seek permission from the board of directors as required.
Xander does not take the trouble to find out what the company’s
Memorandum of Incorporation determines, but does not suspect any
irregularity in the agreement. Is the company bound to the transaction
in terms of the common law? (5)
(b) Is the company required to hold an annual general meeting? (2)
(c) What matters must be discussed at a company’s annual general
meeting?
a)The company’s Memorandum of Incorporation authorises a person (Jack, a single
director) to contract on the company’s behalf subject to an internal requirement
(approval from the board of directors -note this is the collective- is required).
In terms of the common law, there a rule that applies in instances where internal
requirements are set before someone has the required authority:
The Turquand Rule. The Turquand Rule originated as a result of the decision in
Royal British Bank v Turquand . The purpose of this rule is to counteract the drastic
effects of the doctrine of constructive notice. The Turquand Rule determines that an
outsider who conducts business with a company in good faith is entitled to assume
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that the company complied with all internal requirements and formalities as set out in
its Memorandum of Incorporation. Unless the outsider was aware of the fact that the
formalities or requirements had in fact not been complied with, or suspected that
they were not complied with, this will be the case. The effect of the Turquand Rule is
that the company will be held bound to contracts despite the fact that the
Memorandum of Incorporation includes internal requirements, except if one of the
exceptions applies. The common law rule also has the effect of excluding the need
for third parties to investigate whether or not the company has complied with the
internal requirements.
Xander can in this case rely upon the common law Turquand Rule. He can assume
that Jack had received the necessary permission. Consequently, the company is
bound to the transaction.
b) Only public companies are obliged to hold annual general meetings. From the
name (“(Pty) Ltd”) it is clear that this is a private company. Consequently, it is not
obliged to hold an annual general meeting.
c) The relevant provision is section 61(8) of the Companies Act 71 of 2008.
At an annual general meeting the following matters must be discussed:
- Election of directors
- Appointment of auditors for the next financial year
- Appointment of the audit committee
- The directors’ report
- The audit committee’s report
- The audited financial statements of the preceding year
- Any matter raised by the shareholders.
List 3 grounds on which an application can be brought against a
director for an order declaring him or her delinquent in terms of
section 162 of the Companies Act 71 of 2008.
(3)
A director may be declared delinquent in terms of s 162 of the Companies
Act 71 of 2008 if he or she had:
d as a director while disqualified;
opportunity;
or in a grossly negligent way caused harm/ damage to a
company or its subsidiary; or
misconduct or breach of trust.
The main object of ABC (Pty) Ltd is manufacturing furniture. The
Memorandum of Incorporation provides that the board of directors may
appoint a managing director who will be authorised to enter into
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contracts on behalf of the company. Should the contract, however,
exceed the amount of R150 000, prior consent of the general
meeting is required. Godfried, one of the directors, buys a beach house
for R350 000 from Nomagugu on behalf of ABC (Pty) Ltd.
Explain whether or not ABC (Pty) Ltd can raise the restrictions to its
capacity as contained in its Memorandum of Incorporation as grounds
to avoid being bound to the contract. (5)
Section 19(1) of the Companies Act 71 of 2008 stipulates that a company
will enjoy the powers and capacity of an individual for as far as it is possible
for a juristic person to exercise such power and enjoy such capacity. The
company.’s Memorandum of Incorporation may place additional
restrictions upon the company.’s capacity.
The doctrine of constructive notice determines that a third party is deemed
to be aware of the content of a company.’s registered documents as they are
public documents. Regardless of whether or not the person in fact inspected
them the knowledge is inferred. In terms of the doctrine of constructive
notice Nomagugu would therefore have been deemed to be aware of the fact
that the Memorandum of Incorporation stipulates that the board of directors
may appoint a managing director who is authorised to contract on behalf of
the company. She would also be deemed to know that a contract, like the
one in casu which exceeds the amount of R150 000 must first be consented
to by the shareholders in general meeting.
However, the doctrine of constructive notice has a large extent been
abolished in terms of s 19(4) of the Companies Act 71 of 2008.
Exceptions to this rule is personal liability companies and ‘ring-fenced.’companies. In this scenario neither of these exceptions apply. This is a
private company without special conditions.
In addition s 20 of the Companies Act 71 of 2008 determines that no
agreement will be invalid for reason only that it exceeds the company.’s
capacity. Shareholders may ratify a transaction which exceeds the
qualifications or conditions relating to a company.’s capacity by means of a
special resolution (section 20(2)). Shareholders, directors or prescribed
officers may prevent conduct contrary to such limitations or qualifications,
but the rights of third parties who contracted with the company in good
faith and was unaware of the conditions of qualifications, may not be
prejudiced. Shareholders may institute a claim against anyone who
fraudulently or as a result of gross negligence acted contrary to the
limitations and qualifications relating to capacity if the general meeting does
not ratify such a transaction. Therefore in this instance the company should
not be able to escape liability on the basis of lack of capacity
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Figozo Ltd showed an increase in profits for the 2012 financial year. At
a board meeting, the directors decide that dividends should be paid out
to the company’s shareholders. Indicate what the requirements are in
terms of the Companies Act 71 of 2008 that must be adhered to before
the dividends may be declared and paid. (6)
The requirements as set out in section 46 of the Companies Act 71 of 2008
apply. Payment of dividends qualifies as a distribution. The board of
directors must authorise the distribution. It must reasonably appear that
the company will be able to satisfy the solvency and liquidity test
immediately after the distribution has been made. The board must
acknowledge by means of a resolution that it has applied the solvency and
liquidity test and has reasonably concluded that the company will satisfy
the test immediately after completion of the proposed distribution. Payment
must be made within 120 days after the solvency and liquidity test done
otherwise test needs to be redone.
Explain the difference between the common law principle that
company decisions can be taken by unanimous assent and the
procedure as prescribed in section 60 of the Companies Act 71 of 2008
for taking a decision without convening a meeting of shareholders. (5)
The common law principle that company decisions can be taken by
unanimous assent provides that decisions may be valid without a meeting
being held provided that all the member are aware of the facts and they all
assented thereto. However, this need not to be in writing hence a resolution
can be passed by means of unanimous provided that all the shareholder
have consented. This common law rule of unanimous assent was explicitly
supported in Gohlke and Schneider v Westies Minerals (Ptd) Ltd, 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 uniamous
consent.
Conversely, if all shareholder do not agree the process provided in section 60
of the Companies Act of 2008 must be followed. This provision changed the
common law rule of unanimous assent in the sense that , even if the
shareholders exercise their rights through resolution at meetings, a
resolution may be submitted to shareholders and if adopted in writing by
the required majority will have the same effect as if had been adopted at a
meeting of the shareholders. Section 60 of the Companies Act 71 of 2008
provides that only the required majority of shareholders as required for the
specific resolution must consent and the vote in order to pass a resolution.
After the adoption of the resolution the company must within ten business
days notifies the shareholders providing the process followed and the vote
outcome.
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The Memorandum of Incorporation of X Range (Pty) Ltd, a company
that bakes and sells a wide range of pies and cakes, provides that any
contract which is concluded by a managing director on behalf of the
company of which the value exceeds R10 000 needs to first be
approved by the general meeting by means of an ordinary resolution.
Hlongwane, the managing director of the company, concludes a
contract on behalf of X Range
(Pty) Ltd with Dough 4 U (Pty) Ltd without the authorisation of the
general meeting. The contract is for the purchase of dough to the value
R120 000. Discuss whether or not this contract will bind X Range (Pty)
Ltd.
(5)
In this scenario, the managing director who had concluded the
agreement was indeed authorised to enter into contracts on behalf of
the company. There was an internal limit set for the conclusion of
agreements. Contracts that exceed the amount of R10 000 had to first
be approved in general meeting by way of an ordinary resolution. The
facts make it clear that Hlongwane, the managing director, concluded
an agreement for R120 000 without complying with the internal
requirement (to obtain permission from shareholders).
At common law there is a rule that applies in circumstances where there is
an internal requirement before someone would have the requisite authority,
namely the Turquand rule. The rule came about as a result of the judgment
in Royal British Bank v Turquand . The purpose of this rule is to serve as a
counter to the strict application of the doctrine of constructive notice. The
Turquand rule provides that an outsider, acting in good faith, who does
business with a company, is entitled to assume that the company has
complied with all the internal formalities and requirements as set out in its
Memorandum of Incorporation. Unless the outsider was aware of the fact
that the formalities and requirements were indeed not complied with, or if
the circumstances were suspicious and outsider suspected that not all the
requirements were met, this will be the case. The effect of the rule is that the
company will be bound to contracts despite the fact that the Memorandum
contains internal requirements, unless one of the exceptions applies. The
common law rule has the effect that the duty of third parties to inquire
whether the company complied with its internal requirements is excluded.
In this case, Dough 4 U (Pty) Ltd can rely on either the common law
Turquand rule or on section 20(7).
Conclusively, the company would be bound to the agreement.
(NOTE > Discuss Turquand rule and section 20(7) of the Companies
Act 71 of 2008.)
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Name the documents that must be lodged with the Companies and
Intellectual Property Commission in order to obtain registration as a
company. (2)
The two documents that have to be lodged with the Companies and
Intellectual Property Commission in order to register a company are the
Memorandum of Incorporation and the Notice of incorporation.
Anna, John and Nthabiseng wants to form a company. They do not
know what does the Memorandum of Incorporation contains. As a law
student who have studied entrepreneurial law furnish them the MOI
contains.
The Memorandum of Incorporation contains the following information:
 Details of Incorporators
 Number of directors and alternate directors
 Share capital (maximum issued)
 Content of Memorandum of Incorporation
The Companies Act 71 of 2008 provides for a special type of company
that regulates the liability of its directors for debts of the company.
Briefly discuss the distinctive features of this type of company. (3)
This type of a company is known as a personal liability company. In this
type of company directors are held jointly and severally liable for the
contractual debts of the company contracted during the period of their
office. The name of this company must be followed by
‘Incorporated’ or ‘Inc’.
Capricorn Construction (Pty) Ltd wishes to purchase a crane. Michael,
one of the company directors, is instructed to buy the crane on behalf
of the company. However, he fails to reach an agreement with the
owner of the crane on behalf of the company. He resigns as a director
of Capricorn Construction (Pty) Ltd and then concludes an agreement
with the owner of the crane in his personal capacity. He purchases the
crane for R50 000 and then sells it to Capricorn Constructions (Pty) Ltd
at a fair price of R70 000. Discuss whether or not Michael’s conduct
would qualify as a breach of his duties towards the company. (6)
Director has a duty to act bona fide and in the best interest of the company.
They should avoid a conflict of their own interests and those of the
company. A director who has resigned can nevertheless be held liable for
profits that he or she had made in the course of his performance of duties in
company. It makes no difference if the profit is made in good faith and/or
with full disclosure and whether or not the company had suffered any loss
as a result of the director’s actions.
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A director may not for personal gain make use of any information acquired
in his or her capacity as a director. If the company suffers a loss as a result
of the director’s breach, or if the director had benefited, the amount of that
loss/ benefit can be recovered by the company and the transaction can be
set aside.
The duties of directors as contained in the Companies Act 71 of 2008 do not
substitute their common law duties. In the Companies Act, the duties are
described as follows:
To disclose to the board any personal financial interest in matters of the
company (section 75).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 (section 76(2)(a).To
disclose to the board of directors any material information that comes to a
director’s attention (section 76(2)(b)) To act in good faith and for a proper
purpose (section 76 (3)(a)) (1) to act in the best interests of the company
(section 76 (3)(b)) To act with a reasonable degree of care, skill and diligence
(section 76 (3)(c)).
Conclusively Yes, he would be in breach of his fiduciary duties.
Busi wishes to conclude a contract for the purchase of a property on
behalf of a company which she intends to incorporate next year. Advise
Busi of the requirements that need to be adhered to in terms of the
Companies Act 71 of 2008 in order for the contract to be binding on
the company when it is formed. (4)
This scenario is dealing with a pre-incorporation contract as the company is
not yet incorporated hence it is impossible to represent a non-existent
principal in terms of the common-law rules of agency.
Section 1 of the Companies Act 71 of 2008 provides a definition for ‘preincorporation contract’. The requirements for the valid conclusion of a preincorporation contract is contained in section 21 of the Companies Act 71 of
2008. To conclude a valid pre-incorporation contract the following
requirements must be complied with:
The contract must be in writing; and
Concluded by a person who declares to be acting in the name of or on
behalf of a company that is not yet incorporated.
The agreement must be ratified by the company within three months of its
registration.
If the agreement is ratified it will be enforceable against the company as if
the company was originally a party to the conclusion thereof. If the company
rejects the entire contract or a part thereof, the person who concluded the
contract on behalf of the company will together with the company be jointly
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and severally liable for performance of the rejected part of the agreement. If
the agreement is not rejected within the three month period, it will be
deemed to have been accepted/ratified by the company.
Briefly explain the operation of the Turquand Rule with reference to an
example. Also refer to the exceptions to the rule. (5)
The Turquand rule was derived from Royal British Bank v Turquand – case to
counter the negative effect of the doctrine of disclosure. This rule protects
outsiders (third parties) who contract with a company in good faith. He or
she is entitled to assume that all internal requirements as contained in the
Memorandum of Incorporation have been complied with.
Example: X may conclude contracts of a company up to limit of R150 000
after which consent is required from shareholders in general meeting.
If contract concluded by A exceeds R150 000, a third party acting in good
faith may assume that the internal requirement (consent as needed) was
complied with and the contract will be binding.
Exceptions: If the circumstances were suspicious or if the third party knew/
was aware or ought to have been aware that the internal requirements were
not complied with.
Capri (Pty) Ltd manufactures telephones. Nonhlanhla, the managing
director of Capri (Pty) Ltd, enters into a transaction to purchase a
holiday apartment on behalf of Capri (Pty) Ltd for the use of the
directors. Discuss whether or not the company would be bound to this
transaction although it has nothing to do with the company’s business.
(5)
Section 19(1) (b) of the Companies Act 71 of 2008 determines that a
company is a juristic person from the date of registration of its
Memorandum of Incorporation, and that it has all the legal powers and
capacity of a natural person, except those that a juristic person cannot
exercise or that are excluded by the company’s Memorandum of
Incorporation.
A company’s Memorandum of Incorporation may limit, restrict or qualify the
purposes, powers or activities of that company. However, if a contract is
concluded in contravention with a restriction in capacity in the
Memorandum of Incorporation (ultra vires) section 20 of the Companies Act
71 of 2008 would apply to this ultra vires act. If a company’s Memorandum
of Incorporation contains a restriction, no action would be void by reason
only that it falls outside the company’s capacity or that as a consequence of
that limitation, the directors had no authority to authorise the action of the
company. Section 20(1)(b) of the Companies Act determines that no persons
other than the company, its shareholders, directors of prescribed officers
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involved in legal proceedings between them may rely on the limitation in
order to assert that the conduct is void merely because of the fact that it is
ultra vires. In a nutshell, the contract will be binding.
Joseph, a shareholder and director of Jobi (Pty) Ltd agrees to sell his
shares in the company to Moses for R50 000. In order to enable Moses
to purchase the shares, Jobi (Pty) Ltd agrees to lend Anna the R50 000.
Explain whether this loan would be valid in terms of the Companies Act
71 of 2008. (6)
Section 44 of the Companies Act 71 of 2008 determines that a company may
give financial assistance by means of a loan, guarantee, the provision of
security or otherwise to a person for the purpose of or in connection with,
the acquisition of shares and other securities in the company, provided that
such assistance is not prohibited by the Memorandum of Incorporation and
that certain requirements are met. Assistance may be given in terms of an
employee share scheme; or if the shareholders by way of a special resolution
have agreed that specific persons or persons falling in a specific class of
persons may be assisted to acquire shares in the company. In this case, the
persons receiving the financial assistance must then fall in the agreed upon
class of persons.
The company’s board must authorise the provision of financial assistance.
The resolution of the board to provide financial assistance must be passed
within two years of the shareholders’ resolution, if applicable. The board
must be satisfied that the solvency-and-liquidity test is complied with and
that the assistance is provided on terms that are fair and reasonable to the
company. Any further restrictions or limitations in the company’s
Memorandum of Incorporation must also have been complied with.
Themba alleges that JZ (Pty) Ltd has contravened some of the
provisions of the Companies Act 71 of 2008. Indicate the four
alternatives provided by the Companies Act 71 of 2008 that can be
used to address the alleged contraventions of the Act. (4)
It has to be noted that a contravention of the Companies Act 71 of
2008 could, depend on the nature of the contravention, be referred
either to the court/ High Court, the Companies and Intellectual
Property Commission, the Companies Tribunal, the Take-Over
Regulation Panel, or to another accredited entity.
In the given facts, the dispute could have been referred for conciliation
and arbitration.
The Memorandum of Lynton (Pty) Ltd is silent on the issue of
resolutions and the quorum requirements for meetings. In a general
meeting it was proposed that Lynton (Pty) Ltd should enter into a joint
venture with another company to tender for the building of a new
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railway. A special meeting was convened at which this matter would be
voted on. Mr Khumalo, who holds 5% of the votes, Mr Selepe also
holding 5% of the votes, Mr Moleke who holds 20% of the votes and
Mrs Mbatha who holds 15% of the votes were in attendance. Mr Phiri,
attending as a representative of Lincol Ltd that holds 40% of the votes
and Mr Moloi as proxy for Mr Hurter who holds 5% of the votes were
also present. On a vote by poll Mr Moloi, Mrs Mbatha and Mr Moleke
voted in favour of the resolution while all the others in attendance
voted against the resolution except for Mr Khumalo who abstained
from voting.
Indicate by considering the votes on this matter, what type of decision
would have been taken. Also explain the different majority
requirements for the two types of decisions that may be passed in
companies. (4)
For an ordinary resolution to be passed, the general rule is that 50% plus 1
of exercised voting rights must be in favour. The default position for a
special resolution to be passed is that 75% of the exercised voting rights
must be in favour of the decision being passed. A company’s Memorandum
of Incorporation may indicate a different percentage of voting rights to
approve any special resolution. The difference between an ordinary and
special resolution must remain at least 10 percent. In this case, an ordinary
resolution could have been passed.
Jacob, one of the shareholders of Incola (Pty) Ltd, wants to know
whether the shares of Incola (Pty) Ltd may be listed on the stock
exchange. Explain to him whether or not this is possible. (2)
No. Incola (Pty) Ltd may not be listed on the stock exchange. This is a
private company in which the transfer of shares to the public is prohibited.
Only public companies are permitted to list shares on the stock exchange
Pans Ltd plans to issue preference shares. Explain what preferences
may be connected to these types of shares
Different rights can be attached to preference shares. They can be
cumulative, non-cumulative, participating, convertible, redeemable, carry a
preferential right to refund of capital on winding up, or convey a preference
in payment of dividends.
Corns (Pty) Ltd owns a building in Ethekwini. At a meeting of the
company a resolution is proposed to sell the building, because the area
in which the building is situated is becoming rather run down. The
directors who are also the majority shareholders vote in favour of the
resolution, but Siyabonga a minority shareholder wishes to prevent the
transaction from taking place as it would not be in the company’s best
interest. Explain what action Siyabonga could institute to protect the
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company’s interests and set out the first two steps that must be taken
in terms of the Companies Act 71 of 2008. (5)
A derivative action has to be instituted as the right that is being protected is
the company’s and not the shareholder’s personal right. Section 165 of the
Companies Act 71 of 2008 is applicable. Siyabonga is a shareholder and
may institute the action. He must in writing request the company to
institute legal action to protect its interests. If the claim is not frivolous or
made without merit, an independent person or committee must be
appointed to investigate the claim, and to report on whether the action
should proceed.
The company secretary is the principal administrative officer of the
company and has fiduciary relationship with the company. List the
statutory duties of the company secretary.
Guiding directors as to their duties.
· Making directors aware of the law and legislation affecting the company
and reporting to meetings.
· Ensuring the recording of minutes of all meetings.
· Certifying in the company's annual financial statements that the returns
required have been lodged.
· Ensuring a copy of the company's annual financial statements is duly
served on every person entitled in law to have them
The members of Marmarus (Pty) Ltd have passed a special resolution
that was held on 3 October 2013. Advise the members of Marmarus
(Pty) Ltd on the procedure to be followed in order for the special
resolution to take effect and explain to them what will happen to the
special resolution if this procedure is not followed. (3)
A special resolution must be lodged with the Registrar within 30 days after it
was passed, following which penalties become payable. Any special
resolution not lodged within 6 months will lapse and be void. The Registrar
may refuse to register a special resolution which appears to be in conflict
with the Act. Once the special resolution has been registered, a copy thereof
must be attached or embodied in every copy of the articles issued thereafter
and every member becomes entitled to a copy of the resolution on request.
You are an attorney acting on behalf of Bonsave Group (Pty) Ltd. Your
client wishes to apply to Court for an order directing that another
company, which has recently been registered with the name of Bonsave
Holdings (Pty) Ltd, changes its name. On what grounds could you apply
to Court for such an order and what are the factors, which the Court
will consider in deciding whether to grant such an order.
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In Peregrine Group (Pty) Ltd v Peregrine Holdings Ltd the Court held that the
grounds on which the court can order such a name change are:
· If the name is undesirable, where undesirable means that there is a
likelihood that the public or section thereof may be misled by the similarity
of names or there is a risk of confusion; or
· If the name is calculated to cause damage, where the courts will look at the
fields of business, the nature of the target markets and products offered.
Bonsave Group (Pty) Ltd will, therefore, have to prove that Bonsave Holdings
(Pty) Ltd is attempting to mislead the public and that the passing off or
misleading is calculated to cause damage to them, in order to succeed with
an order ordering such a name change.
Busi wants to conclude a contract for the purchase of property on
behalf of a company which she intends to incorporate in the future.
Advise Busi on the requirements that need to be complied with in
terms of S21 of the Companies Act in order for the contract to be
binding on the company after its incorporation. (5)
In terms of section 21 of the Companies Act a pre-incorporation contract will
be binding on a company if:
(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 Companies Act;
(2) The contract was concluded in writing; and
(3) The board of that company ratifies the transaction or does not
reject the contract within the stipulated three month period after
its incorporation. In other words, if the above two formal
requirements are complied with and after the company’s
incorporation the board ‘does nothing’ about the transaction (i.e.
neither ratifies nor rejects it), the contract will become binding on
the company.
The Memorandum of Incorporation of ABC (Pty) Ltd contains the
following provisions:
(1) If the company issues new shares, it must first be offered to existing
members.
(2) Directors hold their office for life.
Azaria is a director of ABC (Pty) Ltd. The board of directors removes
Azaria as director. Can she invoke the provisions in the Memorandum
of Incorporation to prevent her removal or to claim damages for her
premature removal? (4)
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Section 71 of the Companies Act 71 of 2008 determines that despite any
provision to the contrary contained in the Memorandum of Incorporation or
any agreement between the company and the director, a director may be
removed. Therefore, Azaria cannot avoid the dismissal. But, the Act makes it
very clear that section 71 does not detract from any right to claim
compensation or damages resulting from the loss of office. Azaria may be
able to claim damages based on breach of contract for the premature
termination of her employment.
Instead of applying for relief to a court, a person entitled to relief or to
file a complaint may refer it to various other forums in terms of the
Companies Act 71 of 2008. Name 3 alternatives provided for in the Act.
(3)
Except for referring a company law dispute to the court, there are other
forums and processes prescribed in terms of the Companies Act 71 of 2008.
Corporate law disputes may be referred to the Companies and Intellectual
Property Commission or, where relevant, to the take-over regulation panel
for adjudication. Some matters can be referred to the Companies Tribunal.
The Act also provides for the possible referral of a dispute to an accredited
entity or to ‘any other person’ for mediation conciliation or arbitration
(alternative dispute resolution).
List 3 duties of the audit committee in terms of the Companies Act 71
of 2008. (3)
The duties of the audit committee are to nominate or appoint a registered,
independent auditor; To determine the fees to be paid to the auditor and the
auditor’s terms of engagement; To ensure the appointment of the auditor
complies with the Companies Act 71 of 2008 and other legislation; To
determine the nature and extent of non-audit services that the auditor may
provide or must not provide; To pre-approve any proposed agreement with
the auditor for the provision of non-audit services; To prepare a report to be
included in the annual financial statements describing how the audit
committee carried out its functions, stating whether the committee is
satisfied that the auditor was independent from the company and
commenting in any way considered appropriate; To deal with complaints; To
make submissions to the board on accounting policies, financial control,
records and reporting; To perform other functions as determined by the
board including development of policy to improve governance; To consider
whether the auditor’s independence may have been prejudiced and to
consider compliance with other criteria relating to independence or conflict
of interest as prescribed by the Independent Regulatory Board for Auditors.
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List the requirements that must be met by a company to provide
financial assistance for the acquisition of its own shares in terms of the
Companies Act 71 of 2008. (6)
Section 44 of the Companies Act 71 of 2008 provides that it is, subject to
certain requirements, possible for a company to provide financial assistance
for purposes of acquisition of the company’s shares. The provision requires
that financial assistance must not be prohibited by the company’s
Memorandum of Incorporation.
The decision to assist a person to acquire shares in the company rests with
the board of directors. Financial assistance may only be provided in terms of
an employee share scheme or where a special resolution by the shareholders
authorised such assistance to a specific person or persons that fall in a
specific class or category. In the latter case the person to whom the
assistance will be given must fall in that class and the resolution must have
been taken within the two years preceding the board’s decision to assist.
The board must be satisfied that the solvency and liquidity requirements are
met and that the assistance is given under terms that are fair and
reasonable to the company. The Memorandum of Incorporation may place
further restrictions on the provision of financial assistance and the board
must ensure that these requirements are also met.
A company’s Memorandum of Incorporation may confer different
rights to shareholders, particularly regarding the payment of dividends.
Name the different classes of shares that companies may issue in terms
of the Companies Act 71 of 2008. Do not discuss the various categories
of these classes of shares in your answer. (3)
There are 3 main classes of shares, namely preference shares, ordinary
shares and deferred shares.
Phumudzo is a newly appointed director of Teebo Ltd. He has no
previous experience as a director and no special management
qualifications. His son, Siphiso is a second year law student. Siphiso
told Phumudzo that he need not be concerned about his new
appointment since the business judgment rule has been adopted into
the South African corporate law. Phumudzo requires some additional
information regarding the application of this rule. Briefly explain what
this rule entails and what needs to be proven to rely upon this rule. (6)
The business judgment rule was introduced into South African corporate
law in section 76(4) of the Companies Act 71 of 2008. This rule relieves a
director of liability in instances where his actions or decisions have led to
undesirable results. A director will be regarded as having acted in the best
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interest of the company and with the required degree of care, skill, and
diligence if the director:
e matter
decision or knew anybody else having a personal financial interest or
disclosed his or her other interest
best
interest of the company
A director may also rely upon information acquired from certain persons
(section 76(4)(b)).
Indicate whether the following statements are true or false. Please
substantiate each of your answers.
1 If a company failed to give proper notice of a general meeting it is
impossible to proceed with a meeting.
2 It is no longer possible to convert a close corporation into a
company.
3 The aggregate members’ interest in a close corporation must at all
times be 100%
4 The issued share capital of the company is the number of shares
which directors are permitted by the Memorandum of Incorporation to
issue to shareholders.
5 Shareholders are not generally held liable for the debts of a public
company.
ANSWERS
1 False. It is possible for the meeting to proceed if every person who is
entitled to vote on an issue on the agenda is present at the meeting despite
the defective notice, and the defective notice is ratified
2 False. It is impossible to register a new close corporation. However,
schedule 2 of the Companies Act 71 of 2008 provides the procedure for
conversion of close corporations into companies.
3 True. Members’ interest is expressed as a percentage in the founding
statement. It can never be below 100% in total.
4 False. This is a description of ‘authorised’ share capital. Issued share
capital is that part of the authorised share capital that has already been
issued.
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5 True. A company is a separate legal person and its shareholders/
members enjoy limited liability.
Indicate whether the following statements are true or false. Please
substantiate each of your answers.
1 No close corporations are required to have their financial statements
audited.
2 Members of a close corporation are jointly and severally liable for all
debts of the corporation.
3 It is no longer possible for a close corporation to be converted into a
company.
4 It is possible to ratify a breach of a close corporation member’s duty
to act with care and skill.
5 It is impossible for a member of a close corporation to arrange in an
association agreement what will happen to his members’ interest if his
estate is sequestrated.
6 The court may sometimes pierce the corporate veil to hold a member
of a close corporation liable for losses incurred as a result of his or her
actions.
7 A member of a close corporation has a fiduciary duty towards the
close corporation and not to the other members.
8 There may not be more than 20 members in a close corporation.
3.4.9 It is possible for a close corporation to be formed and function
without an association agreement.
10 A member of a close corporation will be liable for a breach of his or
her duty of care and skill despite the fact that the corporation did not
suffer a loss because of his or her actions.
ANSWERS
1 False. The general rule is that only an accounting officer needs to be
appointed. However, some close corporations are required to audit their
financial statements.
A close corporation will be required to audit its financial statements in the
same circumstances as those under which a private company is obliged to
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audit its financial statements. Close corporations exceeding the threshold
PIS as indicated or those acting in a fiduciary capacity are required to audit
their financial statements.
2 False. Close corporations have separate legal/ juristic personality.
Members enjoy limited liability for debts.
3 False. It is no longer possible to convert a company into a close
corporation. However, provision is made in the Companies Act 71 of 2008
for the conversion of close corporations into companies.
4 True.
5 True.
6 True.
7 True.
8 False. There may generally be no more than 10 members in a close
corporation.
9 True.
10 False. Section 43(1) of the Close Corporations Act is applicable. The
close corporation must suffer a loss as a result of the breach.
FIRST TEN QUESTION ARE FOR ASSIGN PURPOSES
QUESTION 1
Choose the CORRECT option:
Partnerships are formed…
(1) by registration in terms of the Close Corporations Act 69 of 1984.
(2) through a testament or trust deed.
(3) by registration in terms of the Companies Act 71 of 2008.
(4) through the conclusion of a valid contract.
QUESTION 2
Which of the following sets of parties CANNOT form a valid partnership?
(1) Alpha (Pty) Ltd and Zedco CC
(2) Endor Ltd and Zenac (Pty) Ltd
(3) Zedco CC and Frenal CC
(4) Jordaan Trust and Fourie CC
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QUESTION 3
Ten people decide to form a partnership to build a shelter for abandoned
cats and dogs. One of them will provide the labour of a bricklayer who works
in his construction business. Another person’s business which sells building
equipment will provide building material at a reduced price. The other eight
will contribute money to cover building costs. To cover the operational costs
of the shelter, they will allow non-partners to use the facilities as a kitty
hotel and kennels.
Has a valid partnership come into existence?
(1) Yes, because all the essential elements have been met.
(2) No, because the building materials still have to be paid for and cannot
therefore be regarded as a valid contribution.
(3) No, because the main object of the agreement is not to make a profit.
(4) No, because a partner cannot contribute the labour of others as his
contribution to the partnership
QUESTION 4
Choose the INCORRECT statement:
If a partnership is sequestrated…
(1) because partners are co-owners of partnership assets only one
liquidation and distribution account needs to
be prepared for all the partnership assets and the partners’ personal estates
(2) the ordinary partners’ estates are sequestrated at the same time, but
separately.
(3) the partnership is dealt with as a separate entity.
(4) partners may avoid sequestration of their personal estates by
undertaking to pay partnership debts and providing security.
QUESTION 5
The actio pro socio is best described as…
(1) an action with which co-partners effect physical division of tangible
things which they hold in joint ownership.
(2) an action which a partner can bring after dissolution of the partnership
to obtain physical division of jointly
owned partnership assets.
(3) an action of a personal nature with which an aggrieved partner enforces
his rights against co-partners.
(4) a derivative action which a partner institutes on behalf of the
partnership.
QUESTION 6
Which one of the following is NOT a feature of a business trust?
(1) Only natural persons may be parties to a trust.
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(2) The debts of a trust are normally payable out of the trust estate.
(3) A trust may be given perpetual succession.
(4) A trust enjoys greater confidentiality than some other forms of enterprise.
QUESTION 7
Dingaan and Buthi are partners in a painting business. Their partnership
agreement stipulates that only Buthi may contract in the name of the
partnership. Dingaan purchases a holiday home in the name of the
partnership.
Indicate the CORRECT statement:
(1) The partnership will be bound to the contract to purchase the holiday
home if Buthi gave his consent.
(2) Even if Buthi gave his consent, the partnership will not be bound
because the contract falls outside the scope of the partnership business.
(3) Even if Buthi gave his consent, the partnership will not be bound
because the contract is contrary to the restriction in the partnership
agreement.
(4) The partnership will be bound to the contract to purchase the holiday
home regardless of whether Buthi gave his consent, in terms of the principle
of mutual mandate.
QUESTION 8
Indicate the INCORRECT statement:
(1) A trust cannot conclude a contract in its own name.
(2) A trustee is under a legal duty to prevent the assets from his or her
estate mingling with those of the trust.
(3) The trustee is the owner of the trust property for purposes of
administration of the trust.
(4) The trustee’s personal property is subject to claims against the insolvent
trust estate.
QUESTION 9
Which one of the following is NOT a ground for the automatic dissolution of
a partnership?
(1) Death of a partner.
(2) Retirement of a partner.
(3) Expiration of the term for which the partnership was established.
(4) Breach by a partner of his or her fiduciary duties.
QUESTION 10
Paarl Bank Ltd granted two loans to Cox & Co, a partnership consisting of
Cox and Mokgadi. Cox resigned from the partnership and it was dissolved.
Cox settled one of the two loans from Paarl Bank Ltd. Paarl Bank Ltd seeks
to recover the outstanding second loan amount.
Indicate the CORRECT statement(s):
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(1) Paarl Bank Ltd cannot sue Cox and Mokgadi jointly because the
partnership has been dissolved.
(2) Paarl Bank Ltd cannot sue Cox because he settled the first loan.
(3) Paarl Bank Ltd can sue Cox & Co, and not the individual partners.
(4) Paarl Bank Ltd can sue Cox, and Cox can recover
ANSWERS
QUESTION 1
Answer: (4)
(1) is INCORRECT. Close corporations are regulated by the Close
Corporations Act 69 of 1984.
(2) is INCORRECT. A trust is formed by means of a trust document or trust
deed.
(3) is INCORRECT. A company is incorporated in terms of the Companies
Act 71 of 2008.
(4) is CORRECT. A partnership is formed by concluding a valid partnership
agreement
QUESTION 2
Answer: (4)
(1), (2) and (3) are INCORRECT options. Two juristic persons can conclude a
partnership agreement.
(4) is the CORRECT option. Two persons (either natural or juristic persons)
are required to conclude a partnership agreement.
QUESTION 3
Answer: (3)
(1) is INCORRECT. The purpose of a partnership must be to make a profit
for the partners. In this instance it is clearly not the purpose, therefore all
the essential elements are not present.
(2) is INCORRECT. A contribution must have an economical value. As the
building material was acquired at a discount, a money value can still be
attached to such a discount.
(3) is CORRECT. The main purpose is to provide a shelter for stray dogs and
cats. The purpose is not to make a profit to be divided between the partners.
(4) is INCORRECT. As long as the contribution has an economical value and
is exposed to the risks of the business, it will be valid. In this instance the
contribution will be valid.
QUESTION 4
Answer: (1)
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(1) is the incorrect statement and therefore the CORRECT option. When a
partnership is sequestrated the partnership estate and the estate of the
ordinary partners must be sequestrated simultaneously.
(2) is correct and therefore the INCORRECT option. Section 13(1) of the
Insolvency Act 24 of 1936 determines that sequestration of a partnership’s
estate is to be treated as distinct from the estates of the individual members.
(3) is correct and therefore the INCORRECT option. As explained above, the
partnership estate is viewed as separate from the estates of the partners for
purposes of insolvency.
(4) is correct and therefore the INCORRECT option. Ordinary partners’
estates are usually simultaneously sequestrated when a partnership is
sequestrated. However, if a partner provides security for the payment of the
partnership’s debts, he or she may escape sequestration of his or her
personal estate.
QUESTION 5
Answer: (3)
(1) & (2) are INCORRECT. The actio communi dividundo is an action with
which partners can apply for physical division of corporeal things which
they hold in co-ownership. A partner may institute this action after
dissolution of a partnership to effect a division of the communal partnership
assets. Although this action is normally used to divide corporeal things, it
may also be utilised to divide the good name (reputation) of a partnership
after dissolution of the business.
(3) is CORRECT. The actio pro socio is a personal action that may be
instituted by partners to protect their own rights. It is a very versatile action
which may be used to enforce performance in terms of the partnership
agreement, to obtain an interdict or apply for recovery of partnership assets.
(4) is INCORRECT. The actio pro socio is a personal action that partners may
use to enforce their rights against each other. A derivative action may be
instituted on behalf of another person. Partnerships do not enjoy separate
legal (juristic) personality. Therefore partnerships do not qualify as ‘persons’.
QUESTION 6
Answer: (1)
Reason:
(1) is incorrect and therefore the CORRECT option. Any person, whether a
natural or juristic person, may be a party to a trust.
(2) is correct and therefore the INCORRECT option. Although a trust does
not enjoy separate legal personality, trust debts are usually payable only
from the trust estate.
(3) is correct and therefore the INCORRECT option. It is possible to provide
for the continued existence of a trust despite a change of the trustee or
beneficiary of the trust. Therefore trusts may enjoy the benefit of perpetual
existence.
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(4) is correct and therefore the INCORRECT option. Trusts are not regulated
by the same legislation as companies and close corporations. There are no
disclosure requirements applicable to trusts. Therefore trusts enjoy a greater
measure of privacy.
QUESTION 7
Answer: (1)
(1) is CORRECT. If express authority is provided to a partner to contract in
the name of the partnership and he or she acts within the scope of such
authority, the contract will be binding.
(2) Is INCORRECT. As long as a partner acts within the scope of his or her
authority it does not matter whether or not the agreement falls inside or
outside the scope of the partnership’s business.
(3) is INCORRECT. For the reasons indicated above in (1).
(4) is INCORRECT. Mutual mandate only applies where a transaction falls
within the scope of the partnership business. In agreements like the one in
this set of facts, that has nothing to do with the partnership business, this
type of authority will not apply
QUESTION 8
Answer: (4)
(1) is correct and therefore the INCORRECT option. A trust is not generally
considered to be a juristic person. Therefore agreements cannot be
concluded by trusts in their own name.
(2) is correct and therefore the INCORRECT option. A separate trust account
must be opened for every trust and assets of different trusts may also not be
mixed. The trustee is also obliged to keep record of all the trust assets that
is held by him or her in trust.
(3) is correct and the INCORRECT option. The trustee enjoys ownership of
the trust property, but only to the extent that he or she administrates the
assets in favour of the beneficiaries of the trust in accordance with the trust
deed. This is a type of non-beneficial ownership.
(4) is incorrect and therefore the CORRECT option. Trust assets does not
form part of a trustee’s personal estate, except for in as far as he or she is
also a beneficiary of the trust and this is provided for in the trust deed.
QUESTION 9
Answer: (4)
(1) is INCORRECT. The death of a partner will result in automatic
dissolution of a partnership.
The partners have the option of concluding an agreement to the effect that
they will continue using the name, but a new partnership must nevertheless
be formed.
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(2) is INCORRECT. Any changes in membership will consequence the
dissolution of a partnership. If a partner retires, the partnership will
therefore automatically dissolve.
(3) is INCORRECT. If a partnership is formed for a specific period of time
only, the partnership will dissolve automatically once the specified time has
elapsed.
(4) is CORRECT. The court enjoys discretion to decide whether or not a
partnership should be dissolved if a partner has breached his or her
fiduciary duties.
QUESTION 10
Answer: (4)
(1) is INCORRECT. Partners are co-debtors and co-creditors in relation to
partnership debts.
They must be sued jointly in the course of the partnership’s existence.
However, the legal position changes when the partnership is dissolved. Then
a partnership creditor may claim the total amount from any one of the
individual partners. Therefore Paarl Bank may choose whether to claim from
Cox or from Mokgadi.
(2) is INCORRECT. After the dissolution of a partnership the partners may
be held jointly and/ or severally liable for the payment of the partnership
debts. It makes no difference if Cox already repaid the first loan amount.
(3) is INCORRECT. Before the dissolution of the partnership of partnership
may be sued, but after its dissolution the partners may be sued jointly or
severally. Therefore a creditor of the partnership may claim the total amount
from both or either of the individual partners.
(4) is CORRECT. A partner who repaid the entire loan amount, may after the
full amount is paid, reclaim the proportionate part of the debt from his or
her co-partners.
QUESTION 1
Indicate the INCORRECT statement:
According to the decision in Lipschitz v UDC Bank 1979 (1) SA 789 (A), for
purposes of the
Companies Act 71 of 2008…
(1) Providing security or otherwise exposing the company to risk could
qualify as financial assistance.
(2) The ‘‘impoverishment test’’ is conclusive in deciding whether or not
financial assistance was provided.
(3) The financial assistance must relate to the acquisition of shares in the
company.
(4) If a transaction qualifies as financial assistance section 44 of the
Companies Act would need to be complied with. (2)
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QUESTION 2
Which one of the following persons/ entities may be appointed as director of
a company only if the appointment is authorised by the court?
(1)
(2)
(3)
(4)
A woman married in community of property.
A minor.
A juristic person.
An unrehabilitated insolvent. (2)
QUESTION 3
Indicate the CORRECT statement:
(1) A debenture holder is not entitled to demand the agreed upon interest on
his or her debenture unless the company has made a profit.
(2) A shareholder is entitled to payment of a dividend even if the company
would not be solvent after such payment is made.
(3) A debenture holder will not be entitled to claim payment of the debenture
amount if it would render the company unable to pay its debts in the
ordinary course of business.
(4) A shareholder would only be entitled to payment of a dividend if the
company would still remain solvent and liquid. (2)
QUESTION 4
Indicate the INCORRECT statement:
(1) In a close corporation no division exists between the providers of capital
and management.
(2) A close corporation may repay its capital to its members, provided that it
maintains the required solvency and liquidity.
(3) A close corporation must have as its object the pursuit of gain.
(4) A close corporation has a share capital which is managed by its directors.
(2)
QUESTION 5
Indicate which one of the following entities qualifies as a public company:
(1) Desimate Incorporated.
(2) Labia Investment (Pty) Ltd.
(3) Glam-Gooroo Ltd.
(4) Nimyou CC. (2)
QUESTION 6
Which one of the following persons may be appointed as the auditor of
Mayibule Ltd?
(1) Felicity, the company’s managing director.
(2) Bonke, who resigned as director of Mayibule Ltd at the end of the
previous financial year.
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(3) Phindi who was previously the auditor of Mayibule Ltd, who wishes to
return after five years.
(4) Calvin, a German auditor. (2)
QUESTION 7
Thulos was elected as a director by the shareholders of Mtshini Ltd. In
terms of the company’s MOI a director is elected for a period of five years.
However, after three years of poor financial results by the company for
which Thulos is blamed, the shareholders want to remove him as
director.
Indicate the CORRECT statement:
(1) Thulos cannot be removed, because of the provision contained in the
Memorandum of
Incorporation.
(2) Thulos cannot be removed from office because he is an executive director
and has an employment contract with the company.
(3) It is only possible for the other directors to remove Thulos by special
resolution.
(4) The shareholders can remove Thulos by means of an ordinary resolution.
(2)
QUESTION 8
Indicate the INCORRECT statement:
The Memorandum of Incorporation binds…
(1) The company and its directors.
(2) The company and its shareholders.
(3) The company and each member of the audit committee.
(4) The company and each of its creditors. (2)
QUESTION 9
Anton, his wife Bonny, their fifteen year old son Cleo, Donwayne (Pty) Ltd
and Carlos, an adult male with a criminal record for drunken driving want
to buy a shelf close corporation, Exec CC and run it together. Anton’s estate
has recently been sequestrated and he has not yet been rehabilitated.
Indicate who would be able to qualify to be members of Exec CC:
(1) Only Anton.
(2) Only Anton, Bonny, Cleo and Donwayne (Pty) Ltd.
(3) Only Anton, Bonny, Cleo and Carlos.
(4) Only Bonny. (2)
QUESTION 10
Thandeka and Beauty wish to invest in a company by purchasing preference
shares. Which one of the following statements regarding this class of shares
is CORRECT?
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(1) Preference shareholders receive payments from the company every year
even if no dividends are declared.
(2) A company can pay out dividends to preference shareholders even if the
company will not remain liquid or solvent.
(3) The holders of preference shares are paid their dividends after the
holders of ordinary shares are paid theirs.
(4) The holders of preference shares usually only have limited voting rights.
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