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Company Law Exam Questions and Answers Semester 2 2018
Bachelors of Law (University of South Africa)
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COMPANY LAW SEMESTER 2 – 2018 EXAM QUESTIONS AND ANSWERS
Question 1
The management of the business and affairs of a company it conducted through meeting. It is
therefore imperative that a company should ensure that its meetings comply with the provisions of
the Companies Act 71 of 2008 to be valid. Carefully read through the two questions below and see
if you are able to provide the correct legal advice by using the following steps:
1. Identify the specific legal problem that appears from the given facts while keeping in mind what
is asked.
2. Identify the applicable principles and provisions of the Companies Act 71 of 2008.
3. Consider whether any case is relevant, and if so discuss the relevant principles.
4. Apply the provisions and legal principles to the given facts.
5. Conclusion: Clearly answer the specific question asked.
Now try to answer the following questions. Remember in this discussion form you may also raise
any other topic related to study unit 1 you wish to discuss.
Question 1(a)
Themba lives in Knysna. He is a shareholder of Electrotech Limited. He received notice of an
annual general meeting of Electrotech Limited to be held in Pretoria. He cannot attend the meeting
on that day, but feels strongly about certain of the proposed resolutions set out in the notice of the
meeting, and wants to express his views on these matters to the board of directors. Themba also
wishes to vote against certain of the resolutions which the company proposed to pass. Advise
Themba of two methods under the Companies Act 71 of 2008 that he could use to exercise his
right to vote and to express his views at the annual general meeting of Electrotech Limited.
Answer
Legal problem/question
It has to be determined whether a shareholder (Themba) can participate in a shareholder meeting
without being physically present.
Identity the relevant provisions in the Companies Act 71 of 2008
a. Section 58 deals with the appointment of a proxy.
b. A person may be appointed to represent the shareholder (Themba) at the meeting. It is
important to note that the person who is appointed as the proxy does not have to be a
shareholder of the company. See section 58(1).
c. The proxy may participate in, speak and vote at a shareholders meeting.
d. The appointment must be contained in a written form dated and signed by Themba. See
section 58(2)(a).
e. The appointment of a proxy is valid for one year. See section 58(2)(b).
Conclusion: Themba can participate in the proposed meeting by appointing a proxy.
In your analysis of the given facts, you should have noted that you are dealing with a public (Ltd)
company. This is important because this brings section 61(10) into play.
a. Meetings of public companies registered in South Africa must be accessible by electronic
participation. See section 61(10).
b. This can take the form of telephone communication or by video conference. See the exact
wording of section 63(2).
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COMPANY LAW SEMESTER 2 – 2018 EXAM QUESTIONS AND ANSWERS
The meeting may be conducted by electronic communication only if all the persons
participating in the meeting are able to communicate concurrently with each other
without an intermediary and to participate reasonably effectively in the meeting.
d. Access to the electronic communication is at the expense of the shareholder unless the
company determines otherwise.
c.
A shareholder could participate in a shareholders meeting by appointing a proxy in terms of
section 58. When dealing with a public company an additional option is available namely the
participation in a meeting via electronic communication. Remember that a proxy may also
make use of electronic communication to participate in a shareholders meeting.
Question 1(b)
Pele (Pty) Ltd calls a meeting of its shareholders to vote on the proposed merger of the company
with another company. The notice of the meeting does not state a record date. Discuss the
relevance of the record date in this instance, and the consequences of the failure to specify the
record date in the notice of the meeting.
Answer
Legal issue/question:
The record date determines certain rights of shareholders.
The names of the shareholders whose names appear on the register of shareholders has the
following rights: - (section 59)
a. The right to receive notice of a shareholders meeting
b. Has the right to participate and vote at a shareholders meeting
How is a record date determined:a. The board sets the record date. Note that this date may not be earlier than 10 business
days prior to the meeting.
b. If the board fail to set a record date, the record date is the date of the last day on which
notice should be given to a shareholder of a shareholders meeting. In respect of public
companies, this will be 15 business days and in respect of private companies this will be 10
business days.
Question 2 - Dr M BEKINK
Sharon is a secretary for a large firm of attorneys. One morning Sharon overhears a conversation
between two of the firm's attorneys who represent Squire Foods Ltd, a listed company. Squire
Foods Ltd was summoned before the Competition Tribunal to answer to allegations of price fixing
of foodstuffs. Sharon can gather from the conversation between the attorneys that Squire Foods
Ltd will have no choice but to admit to the price fixing, which might mean that the company will
have to pay 10 per cent of their annual turnover to the Competition Commission. This will have a
detrimental effect on the share price of Squire Foods Ltd.
Sharon phones her friend, Sizwe, who is a stock broker. Sharon says the following to Sizwe:
“Don’t ask me how I know, but now is not a good time to have Squires Foods’ shares”. Sizwe
immediately sells all shares held in Squire Foods Ltd on behalf of his clients and he instructs all
other clients not to buy shares in the company. Sharon also tells her girlfriend, Pam, what she has
heard, but Pam does not act on the information.
Discuss which of these parties might incur criminal as well as civil liability for insider trading in
terms of the Securities Services Act 36 of 2004.
[15]
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COMPANY LAW SEMESTER 2 – 2018 EXAM QUESTIONS AND ANSWERS
Answer
Information will qualify as inside information if:




it is specific or precise;
not made public;
obtained as an insider;
price sensitive (likely to materially influence the price if made public)
An insider is defined as someone who obtained inside information through being a director, an
employee or a shareholder of an issuer of securities or someone who has access to inside
information by virtue of his/her employment, office of profession. As well as someone who
acquired inside information from a primary source (the secondary insider or the tippee).
o
o
o
Sharon is an insider due to her employment
Sizwe is probably an insider, because he at least had reason to suspect that the information
came from an insider.
Pam is an insider
Three possible offences set out:

Dealing on one’s own account or someone else

Encouraging/discouraging

And disclosing
Application:
Only civilly liable if a profit was made/loss avoided.
Sharon discouraged Sizwe from dealing. Only encouragement leads to civil liability. Sharon
would be guilty of the offence, but not civilly liable for the loss avoided through Sizwe’s
dealing. Sharon can also be criminally liable based on the offence of disclosing information (to
Sizwe).
Sizwe (as an insider) will be criminally liable for dealing (includes buying or selling) on behalf
of his clients by selling the shares. He incurs no civil liability for advising the clients not to buy
shares in Squire Foods Ltd (abstinence).
Sharon is not civilly liable for disclosing the information to Pam, because Pam did not deal.
But, she is criminally liable for disclosing the information to Pam.
Pam is neither criminally liable, nor civilly liable, because she did not act on the advice.
Question 3 - Prof DM FARISANI
Dear students
Thank you to those of you who answered the question. You are on the right track.
Please note that in an exam setting you need to be guided by the mark allocation and as you have
limited time it is best to exclude irrelevant information as that will result in loss of precious time.
We only award marks for relevant information.
The case scenario deals with the company secretary. The following points should be
included in an answer to the question that has been asked:
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COMPANY LAW SEMESTER 2 – 2018 EXAM QUESTIONS AND ANSWERS




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
Every public company and state-owned company is obliged by the Companies Act 2008 to
appoint a company secretary (s 84(4) (a) read with s 86(1).
Each company that appoints a company secretary has to maintain a record of its company
secretaries (s 85).
The company secretary is usually the company’s chief administrative officer.
The company secretary should be someone with knowledge of and experience in relevant
legislation as company secretary (s 86(2)(a).
The company secretary is accountable to the board of directors.
The duties of the company secretary include, among other things, providing the directors of the
company with guidance on their respective duties, powers and responsibilities; making the
directors of any law that is relevant to or that affects the company (s 88(2)) (You may include
the other duties, depending on the mark allocation);
The board may adopt a resolution to remove the company secretary (You should explain the
circumstances);
Application of the law to the scenario: State whether Jombi was acting in accordance with her
duties when she tried to guide the board regarding its decision not to send the financial statement.
Here you will need to explain what the Companies Act 2008 states regarding the provision of
financial statements. You should then indicate whether under the circumstances in the scenario,
the board could or could not make a resolution to dismiss Jombi and explain why.
Answer
Legal question
The appointment of a company secretary and the removal of a company secretary.
Identify the legal principle
1. Duties of a company secretary
2. Resignation or removal of a company secretary
Explain the legal principle and its source
Section 86(1) of the Act. A public company or state-owned company must appoint a person
knowledgeable or experienced in relevant law as a company secretary.
Section 88(2) of the Act. A company secretary’s duties include but are not restricted to
a. Providing the directors of the company collectively and individually with guidance as to their
duties, responsibilities and powers
b. Making the directors aware of any law relevant to or affecting the company.
Apply the legal principle to the facts given to you.
Ringona Ltd is listed as a public company. A company secretary is required for a state owned
company or a public company. Jombi was within her rights as a company secretary to inform the
board that they had to comply with the companies Act. Jombi has to inform the company of any
contraventions of the company law as it states in Section 88(2)(b) of the Act. Inform the company
of any law affecting the company.
Conclusion: This would be an unfair dismissal as Jombi was doing her duties as what is required
of her as a company secretary in Section 88 of the Act.
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COMPANY LAW SEMESTER 2 – 2018 EXAM QUESTIONS AND ANSWERS
Question - Ms R CASSIM
The Memorandum of Incorporation of ABC (Pty) Ltd states that the company’s business is
restricted to poultry farming. In an effort to expand the company’s business to game farming and
breeding, on behalf of ABC (Pty) Ltd the board of directors of ABC (Pty) Ltd purchases a kudu for
R25 million from Mark, a game breeder.
Question 1
Discuss with reference to the Companies Act 71 of 2008 and the Memorandum of Incorporation of
ABC (Pty) Ltd, whether the contract for the purchase of the kudu from Mark is valid.
Answer
In terms of section 19(1)(b) of the Companies Act a company has 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. Therefore,
the capacity of a company is no longer limited by its main or ancillary objects or business.
A transaction is not void merely because it is prohibited or restricted in terms of its
Memorandum of Incorporation. The fact that the company is restricted to poultry farming is
therefore irrelevant. Accordingly the contract for the purchase of the kudu from Mark is valid.
See your Study Guide para 4.2 and prescribed textbook pages 134- 138.
Question 2
Samuel, one of the shareholders of ABC (Pty) Ltd, is unhappy about the purchase of such an
expensive kudu by the company. Assuming that the contract between ABC (Pty) Ltd and Mark for
the purchase of the kudu is valid, discuss whether Samuel has any claim for damages in this
regard in terms of the Companies Act 71 of 2008.
Answer
Even though an ultra vires transaction will be binding on the company, the shareholders are
provided with recourse to claim back their losses from the person who acted beyond the scope of
the company’s capacity.
Section 20(6) of the Companies Act provides that each shareholder has a claim for damages
against any person who intentionally, fraudulently, or due to gross negligence, causes the
company to do anything inconsistent with the Companies Act or a limitation, restriction or
qualification on the powers of the company as stated in its Memorandum of Incorporation, unless
that action has been ratified by special resolution in terms of section 20(2).
The purchase of the kudu is in contravention of the Memorandum of Incorporation of the company.
It has not been ratified by special resolution of the shareholders. Therefore Samuel will have a
potential claim for damages if he can successfully prove that the company intentionally or due to
gross negligence purchased the kudu from Mark.
See further your Study Guide para 4.2 and prescribed textbook pages 140-141.
Memorandum for learning unit 5 – R Cassim
I would advise the board that:
Theory/application
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COMPANY LAW SEMESTER 2 – 2018 EXAM QUESTIONS AND ANSWERS
Section 47 (1) Pof the Companies Act 71 of 2008, provides that subject to the MOI,

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

The board of directors of the company may with a resolution approve the issue of shares
pro rata to shareholders instead of paying cash.
Shares of one class may be used as capitalisation shares in respect of shares of another
class.
Subject to compliance with section 46 of the Act, the board of directors when resolving
to award capitalisation shares, may at the same time resolve to permit any shareholder who
is entitled to the award to elect to instead of capitalisation share to receive cash payment
determined by the board.
Section 47(2) of the Act provides that the board of directors cannot authorise payment of
cash unless it considered the solvency and liquidity test and it is satisfied that the company
has complied with solvency and liquidity.
Yes, the transaction is permitted subject to compliance with the aforementioned requirements.
Secondly, subject to compliance with section 46 of the Act, the board may permit a shareholder
who is entitled to the award to choose instead of capitalisation shares to be paid cash.
Prerequisites of paying cash instead of capitalisation shares.
In terms of section 46 (1) Pof the Act, a company can make a distribution unless:


The board by resolution has authorised the distribution.
It reasonably appears that the company will satisfy solvency and liquidity test immediately after
completing the proposed transaction.
 The board of the company by resolution has acknowledged that it has applied solvency and
liquidity test as provided in section 4
 and reasonably concluded that the company will satisfy solvency and liquidity test immediately
after completing the proposed distribution.
The board must comply with the aforementioned requirements before paying cash to shareholders.
Maximum 10
THIS LEARNING UNIT DEALS WITH DISTRIBUTIONS, THE SOLVENCY AND LIQUIDITY
TEST, SHARE REPURCHASES AND FINANCIAL ASSISTANCE FOR THE PURCHASE OF
SHARES
QUESTION
ABC (Pty) Ltd is a company that specialises in mining. Nozi, an existing shareholder and
employee of the company wants to purchase more shares in the company. She however does not
have sufficient funds, but she offers to sell her vintage crockery collection to the company for R5
million. She will then use the money from the sale of her vintage crockery collection to purchase
more shares in ABC (Pty) Ltd.
1. Advise ABC (Pty) Ltd on whether the purchase of Nozi’s art collection would qualify as financial
assistance in connection with the purchase of its shares. Refer to relevant case law where
applicable.
QUESTION: Would Nozi’s art qualify as financial assistance?
ANSWER:
In terms of section 44 of the Companies Act, the board may authorize the company to provide
financial assistance by way of a loan, guarantee, the provision of security or otherwise to any
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COMPANY LAW SEMESTER 2 – 2018 EXAM QUESTIONS AND ANSWERS
person for the purpose of, or in connection with, the subscription of any option, or any securities,
issued or to be issued by the company.
The transaction in the facts above is not a loan, guarantee or security. It may still constitute
financial assistance as the transaction may fall within ambit of ‘…or otherwise to any person for
the purpose of, or in connection with.
In order to determine whether financial assistance is given the courts have developed various
tests: It must be ascertained whether the intended transaction qualifies as financial assistance. To
determine this, the impoverishment test as formulated in the case of Gradwell (Pty) Ltd v
Rostra Printers Ltd 1959 (4) SA 419 (A) should be relied upon to determine whether or not
financial assistance was provided.
 The impoverishment test considers whether a transaction will have the effect of leaving the
company poorer, and if so, then financial assistance was provided.
 In Lipschitz NO v UDC Bank Ltd 1979 (1) SA 789 (A) the court held that if the company buys
an asset from a person in order to enable that person to buy shares in the company, it will
depend on the facts whether this constitutes financial assistance.
Factors that have emerged from case law to assist in this regard are:
 whether the company needs the asset in its normal business and
 whether the company paid a fair price for it.
It is clear that the business of ABC (Pty) Ltd is to design diamond rings. Arguably, the company
does not require Nozi’s vintage crockery collection in its normal business. Arguably the company
did not pay a fair price for it, but this is debatable.
The purchase of those assets would arguably constitute financial assistance in connection with the
purchase of its shares and the company would need to comply with section 44 of the Companies
Act 71 of 2008.
Question 2
Assuming the purchase of the art collection qualifies as financial assistance, discuss the
requirements that must be satisfied in terms of the Companies Act 71 of 2008 for this transaction
to be validly executed. You must refer to section 44 of the Companies Act 71 of 2008 in
answering this question
Section 44 of the Companies Act 71 of 2008 sets out the requirements to be complied with
when a company provides financial assistance for the purchase of its securities. The
requirements are:
1. The board must authorize the company to provide financial assistance to any person for the
purchase of any securities of the company.
2. The provision of financial assistance must be pursuant to an employee share scheme that
satisfies the requirements of section 97; or the provision of financial assistance must be
pursuant to a special resolution of the shareholders, adopted within the previous two years,
which approved such assistance either for the specific recipient or generally for a category of
potential recipients, and the specific recipient falls within that category.
1. The board must be satisfied that immediately after providing the financial assistance, the
company would satisfy the solvency and liquidity test and that the terms under which the
financial assistance is proposed to be given are fair and reasonable to the company.
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COMPANY LAW SEMESTER 2 – 2018 EXAM QUESTIONS AND ANSWERS
4. The board must ensure that any conditions or restrictions regarding the granting of financial
assistance set out in the company’s MOI have been satisfied.
Learning unit 7 Groups of companies
Discussion forum question
Please study the learning unit and attempt to answer the questions below
Question 1
1.1 Lucky Biscuits (Pty) Ltd holds 31% of voting shares at True Biscuits (Pty) Ltd, while Fruitiful
(Pty) Ltd holds 19% of voting shares at True Biscuits (Pty) Ltd. Zirr (Pty) Ltd holds 53% of
voting shares at Lucky Biscuits (Pty) Ltd and 51% of voting shares at Fruitiful (Pty) Ltd.
Explain what groups of companies, holding companies and subsidiary companies mean and with
reasons explain whether Lucky Biscuits (Pty) Ltd, Fruitiful (Pty) Ltd and Zirr (Pty) Ltd are holding
companies of True Biscuits (Pty) Ltd.
[10]
Memorandum for learning unit 7 question
1. The meaning of group companies, holding and subsidiary companies
Group companies mean that two or more companies are related. This happens when one
company directly or indirectly controls another company. The key factor is
control.
(2)
Holding company mean or referrers to a company that controls directly or indirectly the majority
(51% or more) of the voting rights in the general meeting of the company or the in the board
meeting of the company.
(1)
Subsidiary company means or refers to a company that its general meeting or board meeting is
indirectly or directly controlled by the holding company.
(1)
Whether Lucky Biscuits (Pty) Ltd, Fruitiful (Pty) Ltd and Zirr (Pty) Ltd are holding companies of
True Biscuits (Pty) Ltd.
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
Lucky Biscuits (Pty) Ltd is not a holding company True Biscuits (Pty) Ltd as it holds less 51% of
shares.
(2)
Fruitiful (Pty) Ltd is not a holding company of True Biscuits (Pty) Ltd as it holds less than 51% of
the shares.
(2)
Zirr (Pty) Ltd holds the required majority at Lucky Biscuits and Fruitful; this makes it the holding
company of Lucky Biscuits and Fruitful. However, the combined control by Lucky Biscuits and
Fruitiful is less than 51% at True Biscuits. This means that the Zirr is unable to indirectly
exercise control through its subsidiaries at True Biscuits. It thus not a holding company of True
Biscuits.
(2)
Section 1 and 3 of the Companies Act 71 of the Act, part 8 of the textbook and learning unit
7 of the study guide.
See the legal consequences on part 8.1 and 8.3 of the textbook and page 39 – 40 of the
study guide. Make sure that you understand the legal consequences and the reasons why the
legislature prescribes them. [5]
1.2
Explain five legal consequences for group companies.
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COMPANY LAW SEMESTER 2 – 2018 EXAM QUESTIONS AND ANSWERS
1)
Acquisition of Shares Section 48(2).– a subsidiary company may acquire shares in its
holding company provided it does not acquire more than 10% in aggregate of the number of
issued shares of any class of shares of the holding company. No voting rights attached to
those shares may be exercised while the shares are held by the subsidiary.
2)
Director’s conduct Section 76(2)(a) – a director of a company must not use in his position
as a director or any information obtained while acting in the capacity of a director to gain an
advantage for himself or for another person other than the company or a wholly-owned
subsidiary of the company, or to knowingly cause harm to the company or a subsidiary of the
company.
3)
Public offerings Section 95 – employee share scheme in section 95 of the Companies Act
in such a way that an employee of a company is treated also as an employee of a subsidiary
company. A secondary offering of shares is defined in section 95 as meaning an offer for
sale to the public of any securities of a company or a subsidiary made by or on behalf of a
person other than that company or its subsidiary. Thus a secondary offer of shares is treated
as though the shares of one company in a group are those of any member of the group of
companies.
4)
Disposal of all or the greater of assets or undertaking section 112 (1)(i) and (ii) and
section 115 - where a disposal of all or the greater part of the assets or undertaking of
company constitutes a transaction between a wholly owned subsidiary and its holding
company, there is an exemption from having to comply with the approval and other
requirements of section 112 and 115 of the Companies Act. An exemption is also granted
where a section 112 disposal constitutes a transaction between or among
(i)
(ii)
5)
two or more wholly-owned subsidiaries of the same holding company; or
a wholly owned subsidiary of a holding company on the one hand and its subsidiary on
the other hand.
Financial assistance section 44 and 45 of Companies Act - the restrictions on companies
providing financial assistance for the purchase of shares and loans to directors also apply in
relation to other companies in the group.
Learning Unit 8 - Fundamental and Affected Transactions
Development Properties (Pty) Ltd owns an office building in Johannesburg valued by its auditors in
the previous financial year at R18 million and two buildings in Cape Town valued at R4 million and
R5 million respectively.
The board of directors decided that they should focus on acquiring more properties in Cape Town.
Since the company has received an offer of R20 million for the building in Johannesburg, the
directors want to accept the offer. The board regards the decision to sell the property as a
management decision that they can take on their own, but one of the shareholders disagrees.
Question 1
With reference to the Companies Act 71 of 2008, fully advise the board whether they may contract
to sell the Johannesburg property without involving the shareholders of the company, and whether
they need to comply with any specific statutory requirements.

The company is disposing of a major asset.
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COMPANY LAW SEMESTER 2 – 2018 EXAM QUESTIONS AND ANSWERS

The value of the asset is more than 50% of its gross assets fairly valued, irrespective of its
liabilities.
 Therefore the transaction is a fundamental transaction because the company is dispose of all or
the greater part of its assets or undertaking.
 “All or the greater part of the assets” is defined in section 1 of the Companies Act 71 of 2008 as
meaning more than 50% of its gross assets fairly valued, irrespective of its liabilities.
 The valuation of the Johannesburg building is more than the combined value of the two
buildings in Cape Town.
Therefore, if the company sells the Johannesburg building it will be selling more than 50% of its
gross assets.
o
o
o
R18mil (JHB office) + R4mil (Cape Town building) + R5mil (Cape Town building) = R27mil
R18mil (value of the JHB office) / R27mil (total assets of the company) x 100
66.67% of the total assets of the company (greater part or more than 50% of the total
asset value).
The relevant provisions of the Companies Act are sections 112 and 115.



If a company wants to dispose of all or the greater part of its assets or undertaking, the
transaction must be approved by a special resolution of the shareholders.
The assets must be valued as at the date of the proposal.
Therefore the shareholders must be involved in the transaction because the transaction must
be approved by a special resolution of the shareholders.
The special resolution must be taken at a meeting specially convened for this purpose.


A quorum of 25% of all the voting rights that are entitled to be exercised on the special
resolution must be present at the meeting, or any higher percentage required by the company’s
Memorandum of Incorporation.
The notice of the meeting must include a written summary of the precise terms of the intended
transaction.
Something to think about: How would your answer differ if Development Properties (Pty) Ltd
was a public company? Would the transaction then have been regulated differently?
Question 2
Two shareholders of the company who are unhappy about the proposed sale of the Johannesburg
property, have indicated that if the sale goes ahead, they will no longer be interested in owning
shares in the company and that they will expect the company to buy their shares. The directors of
Development Properties (Pty) Ltd want to know if these shareholders can force the company to
buy their shares. With reference to the Companies Act 71 of 2008, advise the directors whether
these two shareholders may force Development Properties (Pty) Ltd to buy their shares.

A proposed fundamental transaction is one of the triggering actions for the appraisal
remedy.

This remedy entails that a dissenting shareholder must send the company a written
notice of his objection to the resolution. The written notice must be sent to the
company before the resolution is voted upon.

The dissenting shareholder must be present at the meeting and he must vote against
the special resolution.
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COMPANY LAW SEMESTER 2 – 2018 EXAM QUESTIONS AND ANSWERS

Accordingly, if the two shareholders who are unhappy about the sale of the Johannesburg
property follow the prescribed procedure, the company will be compelled to acquire their
shares at fair value.

See specifically section 164 of the Companies Act 71 of 2008
LEARNING UNIT 9: BUSINESS RESCUE PROCEEDINGS
Answer the following questions:
i. Discuss the circumstances and the procedure under which the board of directors of a company
may place a company under voluntarily business rescue
Guideline to the answer
In terms of section 129 of the Companies Act the board of the company must pass a board
resolution to place the company under business rescue.
The company may be placed under business rescue by the board only if the board has reasonable
grounds to believe that the company is financially distressed and there appears to be reasonable
prospects of rescuing the company.
Financial distress means that:
It appears to be reasonably unlikely that the company will be able to pay all of its debts as they
become due and payable within the next ensuing six months; or it appears to be reasonable likely
that the company will become insolvent within the immediately ensuing six months.
The board resolution must be passed by a majority vote of the board of directors. The resolution
may not be adopted if liquidation proceedings have been initiated by or against the company. The
resolution has no force or effect until it has been filed with the Companies and Intellectual Property
Commission.
Within 5 days of filing the board resolution the company must publish in the prescribed manner a
notice of the resolution and its effective date to every affected person together with a sworn
statement of the facts relevant to the grounds for the board resolution.
ii.
Discuss whether the approval of the shareholders must be obtained and whether a court order is
required to place a company under voluntary business rescue.
The approval of the shareholders is not required in order for the board to voluntarily place the
company under business rescue. A court application is also not required for the board to place the
company under business rescue.
LEARNING UNIT 10 COMPROMISES - PROF J GELDENHUYS
Scubaria Ltd is experiencing serious financial problems. Scubaria’s board of directors has agreed
to a restructuring of the company’s shareholding by consolidating the preference and ordinary
shares held by shareholders. In order to ward off liquidation of the company, the board of directors
has also held meetings with several of the company’s creditors to find out whether they would be
willing to write off portions of their claims against the company or, at least, to postpone the date of
payment. The majority of the creditors are willing to assist the Scubaria Ltd in this way, but a few
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creditors insist on payment in accordance with the agreements concluded between them and the
company.
Answer the following questions with reference to the set of facts:
1. Explain whether or not the proposed arrangements, i.e. between the company and the
shareholders and the company and the creditors, are regulated under the same provision of
the Companies Act 71 of 2008.
(3)
No. The Companies Act 71 2008 separates schemes of arrangement between the company and
members and schemes of compromise with creditors. Schemes of arrangement in relation to a
company and its members are dealt with in section 114. Schemes of compromise (which can
include an agreement by creditors to write off a portion of their claims/ waive interest on claims or
postpone the payment date) is regulated by section 155 of the Companies Act 71 of 2008.
2. What are the main differences between the procedure in terms of section 311 of the
Companies Act 61 of 1973 and the procedure in section 155 of the Companies Act 71 of
2008?
(5)
The procedure under the Companies Act 61 of 1973 applies only in instances where the
company is in financial distress, whereas this is not in terms of the Companies Act 71 of 2008 a
requirement. Unlike the provisions in the Companies Act 61 of 1973, section 155 (3) codifies and
sets out in some detail what information must be included in the proposal. In terms of the
Companies Act 71 of 2008 it is not required as it is in terms of section 311 of the Companies
Act 61 of 1973, to apply for leave to the High Court before making a proposal of a compromise
to creditors.
3. Must the scheme of compromise in terms of the Companies Act 71 of 2008 be implemented
against all the creditors, or may some be excluded from its operation? [2]
No. Schemes of compromise can relate to all three classes of creditors (preferent, secured and
concurrent) or only one class, leaving the other classes of creditors unaffected by the scheme.
4. Is it a requirement that all of the creditors must agree to the compromise?
(2)
No, as long as a majority in number of the creditors, representing at least 75% in value of the
claims of the creditors, approve of the proposed compromise, the compromise will become
binding on the dissenting minority of creditors. The High Court has no discretion to scrutinize
the fairness of the proposal.
5. Would the company have to apply to the High Court before the compromise is proposed to the
creditors?
(3)
In terms of the Companies Act 71 of 2008 it is not required to apply for leave to the High Court
before making a proposal of a compromise to creditors. As long as a majority in number of the
creditors, representing at least 75% in value of the claims of the creditors approve of the proposed
compromise, the compromise will become binding on the dissenting minority of creditors. The High
Court has no discretion to scrutinize the fairness of the proposal.
6. What information must be contained in the compromise proposal?
(10)
Section 155(3) of the Companies Act 71 of 2008 codifies and sets out in some detail what
information must be included in the proposal. It contains an itemised list of the information which
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must be contained in the proposal. One of these items is a statement as to whether or not the
proposal of the compromise includes any proposals made "informally" by a company creditor.
What the word "informally" means is unclear. It could mean that the drafter of the proposal needs
to include every single compromise of a claim by a single creditor in relation to their debt however
insignificant or irrelevant in relation to all the creditors.
The list of information that must be contained in a proposal further includes details of all the assets
and creditors of the company, the nature and extent of any proposed moratorium on claims, the
treatment of ongoing contracts to which the company is a party, the order of preference in which
the proceeds of the property of the company will be applied to pay creditors, any conditions
precedent must be satisfied for the proposal to come into operation and be implemented, the
number of employees of the company and their terms and conditions of employment, and a
projected balance sheet and statement of income and expenses for the ensuing three years.
A proposal must be concluded with a certificate by an authorised director or officer of the company
stating that the factual information appearing therein is accurate, complete and up to date and that
the projections provided are estimates made in good faith.
7. When will a compromise proposal be adopted and binding?
(5)
Section 155(6) provides that
"A proposal .... will have been adopted by the creditors of the company .... if it is supported by a
majority in number representing at least 75% in value of the creditors or class, as a case may
be, present and voting in person or by proxy at the meeting called for that purpose".
Section codifies the common law requirement that a scheme of compromise must be approve by
75% of the creditors in number and in value in each affected class.
Section 155 (7)(a) provides that a company "may" apply to court for an order approving the
proposal. This suggests that it is not necessary for the company to obtain the sanction of the High
Court before a compromise becomes binding on the dissenting creditors.
Learning unit 11 Insider trading - Dr M BEKINK
Question 1
Sharon is a secretary for a large firm of attorneys. One morning Sharon overhears a conversation
between two of the firm's attorneys who represent Squire Foods Ltd, a listed company. Squire
Foods Ltd was summoned before the Competition Tribunal to answer to allegations of price fixing
of foodstuffs. Sharon can gather from the conversation between the attorneys that Squire Foods
Ltd will have no choice but to admit to the price fixing, which might mean that the company will
have to pay 10 per cent of their annual turnover to the Competition Commission. This will have a
detrimental effect on the share price of Squire Foods Ltd.
Sharon phones her friend, Sizwe, who is a stock broker. Sharon says the following to Sizwe:
“Don’t ask me how I know, but now is not a good time to have Squires Foods’ shares”. Sizwe
immediately sells all shares held in Squire Foods Ltd on behalf of his clients and he instructs all
other clients not to buy shares in the company. Sharon also tells her girlfriend, Pam, what she has
heard, but Pam does not act on the information.
Discuss which of these parties might incur criminal as well as civil liability for insider trading in
terms of the Securities Services Act 36 of 2004.
[15]
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Information will qualify as inside information if:




it is specific or precise;
not made public;
obtained as an insider;
price sensitive (likely to materially influence the price if made public)
An insider is defined as someone who obtained inside information through being a director, an
employee or a shareholder of an issuer of securities or someone who has access to inside
information by virtue of his her employment, office of profession. As well as someone who
acquired inside information form a primary source (the secondary insider or the tippee).
o
o
o
Sharon is an insider due to her employment
Sizwe is probably an insider, because he at least had reason to suspect that the information
came from an insider.
Pam is an insider
Three possible offences set out:
 Dealing on one’s own account or someone else
 Encouraging/discouraging
 And disclosing
Application:
Only civilly liable if a profit was made/loss avoided.
Sharon discouraged Sizwe from dealing. Only encouragement leads to civil liability. Sharon
would be guilty of the offence, but not civilly liable for the loss avoided through Sizwe’s
dealing. Sharon can also be criminally liable based on the offence of disclosing information
(to Sizwe).
Sizwe (as an insider) will be criminally liable for dealing (includes buying or selling) on
behalf of his clients by selling the shares. He incurs no civil liability for advising the clients
not to buy shares in Squire Foods Ltd (abstinence).
Sharon is not civilly liable for disclosing the information to Pam, because Pam did not deal.
But, she is criminally liable for disclosing the information to Pam.
Pam is neither criminally liable, nor civilly liable, because she did not act on the advice.
LEARNING UNIT 12 TRANSFORMATIVE CONSTITUTIONALISM - PROF J GELDENHUYS
1. What African values comprises the concept of ubuntu?
o
The ability to show compassion
o
Social justice and fairness
o
harmony and humanity
o
Recognising the inter-connectedness of people and the accompanying responsibilities
o
Integrity and ethical behaviour
o
Open channels of communications and transparency
o
Due process and sensitivity in dealings with one another and other similar values
2. What is meant by transformative constitutionalism?
Transformative constitutionalism is a long-term project of constitutional enactment,
interpretation and enforcement to transform the country’s political, legal and social institutions
and power relations in a democratic way. In short, it is the process of adaptation of the common
law by infusion of constitutional values
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3. What does ‘Africanisation’ mean?
Renewing the focus on Africa and ensuring that teaching is adapted to African values, realities
and conditions. Africanisation aims to ensure that people in a particular context such as the
community or family in the case of traditional African societies maintain sound relationships
tailored on accommodating opposing views and conciliating competing interests.
4. Which stakeholders are recognised as being affected by corporate behaviour underlying the
concept of corporate social responsibility?
Stakeholders are persons who can affect or be affected by a business’s actions, objectives and
policies, including creditors, directors, employees, government (and its agencies), owners
(shareholders), suppliers, unions, and the community from which the business draws its
resources.
Corporate governance is the system used to regulate and oversee corporate conduct to
balance stakeholders’ interests and the interests of others that may be influenced by the
conduct, in order to ensure responsible behaviour while ensuring the maximum level of
efficiency and profitability for a corporation.
Directors in performing their functions in companies must consider the interests of other
stakeholders such as the community and the environment in which the company that they
serve, functions.
Different persons are involved and affected by the commencement of the business rescue. One
of the purposes of the Companies Act is providing for the efficient rescue and recovery of the
financially distressed companies in a manner that balances the rights and interest of all relevant
stakeholders (section 7 (K) of the Companies Act). Business rescue proceedings recognise
among others, the interests of employees. This is the first time that stakeholders other than the
shareholder and company creditors have received direct protection in the Companies Act.
5. In what ways would corporate social responsibility be potentially beneficial to companies?
CSR may improve the company’s capability to generate sustainable value through mutually
beneficial relationships with their stakeholders. Various stakeholders such as community
groups, regulators and purchasing bodies will potentially favour socially responsible companies
with business opportunities and this may enhance the profit potential of such companies.
Socially responsible companies may benefit from preferential procurement and government
cooperation in terms of the Broad-Based Black Economic Empowerment policies in South
Africa.
CSR may enhance the company’s reputation and differentiate it from its competitors. A good
reputation is a very valuable asset a company could have.
A company with a good social record, and which treats its employees with dignity, is likely to
attract, motivate and retain a productive, stable and loyal workforce. Increasing employee
satisfaction leads to better performance by employees and this will assist the company to
increase production, quality, reliability and profits.
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6. How is corporate social responsibility reflected in the Companies Act?
The extensive corporate law reform process which culminated in the passing of the Companies
Act recognised the need for South African company law to be sensitive (amongst other things)
to social and ethical concerns.
One of the purposes of the Companies Act is to promote the development of the South African
economy by encouraging transparency and high standards of corporate governance, given the
significant role of enterprises within the social and economic life of the nation (s 7(b)(iii)). This
manifests a realisation that companies play a vital role not only in the economy, but in the social
life of the country as well.
The Companies Act specifically seeks to reaffirm the concept of the company as a means of
achieving economic and social benefits (s 7(d)). The Companies Act seeks to promote the
development of companies within all sectors of the economy, and to encourage active
participation in economic organisation, management and productivity (s 7(f)).
The Companies Act also seeks to encourage the efficient and responsible management of
companies (s 7(j)). Sound management of companies may enhance corporate performance,
lead to creation and retention of jobs and helps to prevent corporate conduct that may have
negative impacts on society. It also prevents corporate collapses due to mismanagement that
may also have dire consequences on society.
The Companies Act provides for non-profit companies that are incorporated for social activities,
public benefits, cultural activities or group interests. The objects for which non-profit companies
may be registered may include prevention and education about HIV and AIDS, assistance of
refugees, protection of the environment and animal welfare or child welfare and protection.
Corporate activities may affect a wide circle of stakeholders. As such, the Companies Act has
extended locus standi to a broad category of stakeholders (not only company shareholders) to
enforce its provisions and to seek redress where company directors have abused their position,
for example, in the context of the derivative action (s 165) and application to declare a director
delinquent or under probation (s 162).
Such stakeholders may include directors, prescribed officers, trade unions or other
representative of employees, persons who have been granted leave by the court, the
Commission or Takeover Regulation panel. Moreover, any person who contravenes any
provision of the Companies Act of 2008 is liable to any other person for any loss or damage
suffered by that person as a result of the contravention (s 218(2)).
The Companies Act requires certain categories of companies to appoint a Social and Ethics
Committee to monitor the company’s activities with regard to matters relating to social and
economic development (includes the company’s standing in terms of the goals and purposes
of the 10 principles set out in the United Nations Global Compact Principles; the OECD
recommendations regarding corruption, the Employment Equity Act; and the Broad-Based
Black Economic Empowerment), good corporate citizenship (includes the company’s
promotion of equality, prevention of unfair discrimination reduction of corruption; contribution to
development of the communities in which the company’s activities are predominantly conducted
or its products or services are marketed; and recording of sponsorship, donations and
charitable giving), the environment, health and public safety, consumer relationships,
and labour and employment issues (s 72 and Regulation 43).
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7. What is globalisation?
Globalisation refers to the integration of nations through the flows of goods, information,
services and capital. It is a process by which businesses develop international influence.
8. What are the main characteristics of the modern corporate world?
There is increased globalisation
• There is increased electronic communication
• There is increased sensitivity to social concerns, corporate governance and ethical concerns
• The markets are rapidly evolving
• There is greater competition for capital, goods and services
• There is an increase in international trade, foreign investment and mobility of international
capital.
9. In what ways does the Companies Act recognise globalisation?



One of the purposes of the Companies Act is to provide for the creation and use of
companies, in a manner that enhances the economic welfare of South Africa as a partner
within the global economy (s 7(e)). This manifests a realisation that South Africa is one of
the participants in the wider global economy. The harmonisation of South Africa’s corporate
laws with the laws of other countries is, therefore, essential.
The courts are allowed to consider foreign company law (to the extent appropriate) when
interpreting and applying the provisions of the Companies Act (s 5(2)).
The effects of decisions by English courts may be seen in a number of common law
principles and statutory provisions, for example, Salomon v Salomon, Royal British Bank v
Turquand, Attorney-General v Mersey Railway Company and Regal Hastings Ltd v
Gulliver (See, for example, the statutory version of the Turquand rule in section 20(7) of the
Companies as well as the common law and partially codified duties of company directors).
The influence of corporate laws of other modern jurisdictions such as the United States, United
Kingdom, New Zealand, Canada and Australia may be seen in a number of concepts, for
example the appraisal remedy (s 164); an objective duty of care, skill and diligence (s
76(3)(c). Note that this test has some subjective elements); the business judgment rule (s
76(4); and the statutory derivative action in terms of the Companies Act (s 165).

The provisions relating to appointment of proxies (s 58) and electronic communication at
shareholder meetings (s 63(2)) are a manifestation of greater sensitivities to globalisation.

The Companies Act provides for the registration of domesticated companies and external
companies.

The Companies Act seeks to provide for increased standards of corporate governance,
shareholder and investor protection (s 7). The purpose is to encourage both local and
foreign investment in order to stimulate economic growth in South Africa.
10. What does the audi alteram partem rule entail?
One of the rules of natural justice is the audi alteram partem-rule. This principle means that
before any judicial functionary takes a decision on a matter, both sides of the story must be
heard. It originates from the natural desire of man to be fair to his fellow human beings.
11. What does corporate social responsibility entail?
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Corporate social responsibility seeks to make today’s companies responsible members of the
community. The term CSR is generally understood to mean integrating economic, social and
environmental imperatives into the company’s activities while at the same time addressing
shareholder and stakeholder expectations. It is premised on the idea that the modern company
has a wide and diverse range of stakeholders, that is, both business and socio-economic
stakeholders.
12. Explain whether it is possible to enforce the principles of ubuntu and the
constitutional principles in a court of law.
Yes, it is. This can be done either directly or indirectly. In Everfresh Market Virginia (Pty) Ltd v
Shoprite Checkers (Pty) Ltd 2012 (1) SA 256 (CC) the court considered whether the common
law should be developed to require that parties to a contract should be legally required to
contract with each other in good faith and on reasonable terms. The respondent argued that
good faith is too vague a concept to enforce. The court disagreed.
The court paid regard to the fact that the development of the South African economy and
contract law has been shaped predominantly by colonial legal tradition founded in English,
Roman law and Roman Dutch law. The common law of contract regulates the environment
within which trade and commerce take place. Its development must take into account the values
of the vast majority of people who can after democratisation of the country participate in trade
and commerce.
The court commented that the majority of South Africans places a higher value on
negotiating in good faith than would have prevailed under colonial legal
tradition. In Mohamed’s Leisure Holdings (Pty) Ltd, counsel for the respondent, albeit in the
alternative, had raised and argued on the basis of ubuntu and fairness. The court
recognised ‘the desirability and necessity of infusing the law of contract with
constitutional values’.
13. Explain the test that is used by the court to determine whether it is necessary to develop the
common law.
In deciding whether the common law must be developed, the court must in each case
determine whether the common law fails to give effect to the section 39(2) objectives, and if so,
the court must decide what development would appropriately address the shortcomings
(Everfresh Market Virginia (Pty) Ltd v Shoprite Checkers (Pty) Ltd par 30).
ACTIVITY
Access the recent case of Mohamed’s Leisure Holdings (Pty) Ltd v Southern Sun Hotel Interests
(Pty) Ltd 2017 (4) SA 243 (GJ). (Note: This case is also placed under Additional Resources for
your convenience). Answer the following questions:
14. Identify the constitutional rights that the court consider in deciding whether the lease
agreement is enforceable.
Sections 34 (access to justice) and 39 (duty to develop the common law) of the Constitution of the
Republic of South Africa, 1996
15. What factors did the court consider or what test did the court apply in order to make its
determination?
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The court in this type of assessment must make a value judgment based on constitutional rights
and values. This must be done in a manner which is objective, taking into consideration the facts
of the particular matter, and the various values and constitutional principles.
Finally, the court must decide what needs to be done to address the identified problem. The
rights of the respective parties and the prejudice that they could suffer must also be weighed up.
Having done so, the court concluded that ‘[a]pplying the value of ubuntu, “carrying with it the
ideas of humaneness, social justice and fairness to the facts of this matter’ that implementing
the eviction of the respondent would offend the Constitution’s values. Therefore, the
application failed.
16. Is this an example of a direct/indirect application of the constitutional values to enforce
rights?
Counsel for the respondent, albeit in the alternative, had raised the concepts of ubuntu and
fairness. However, ultimately both parties proceeded to argue exclusively on these grounds. So,
direct.
Discussions: postponement and adjournment
Where a quorum is insufficient for a matter (not the meeting per se) to be decided by the meeting,
the meeting may be adjourned, even though, it has not really started, i think it qualifies to be a
postponement, may someone enlighten me here, why this is considered adjournment.
To answer your question, if there is no quorum for a particular matter to be considered, it may well
be the case that the meeting had already started but that particular matter required a specified
quorum which was not present.
For this reason, if there is no other business on the agenda of the meeting, then the meeting will
be adjourned for one week. If, on the other hand, there is no quorum present for a particular
matter, but there is other business on the agenda of the meeting, then the consideration of that
particular matter will be postponed to a later time in the meeting.
You must distinguish between the case where there is other business on the agenda of the
meeting, which results in that matter being postponed to a later time in the meeting, and where
there is no other business on the agenda of the meeting, which results in the meeting being
adjourned for one week.
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