Partnership

p. 341 - 350

Study Objectives

1. Define and distinguish a partnership as a business venture

2. Name and discuss the characteristics of a partnership
3. Explain how a partnership is formed
4. Name and discuss the requirements of a partnership contract
5. Name and discuss the rights of partners
6. Name and discuss the duties of partners
7. Name and explain the actions available to partners during litigation procedures
8. Discuss the authority of each partner to bind the partnership to third parties
9. Discuss criminal and delicta liability of a partnership
10. Name and explain the various grounds for dissolution of a partnership
11. Apply the theory to a set of facts to solve unfamiliar but relevant problems.

Definition of a partnership:
A partnership is the coming together of two or more persons who conclude a partnership
contract or agreement with the aim of running a business for the purposes of making a profit
for their joint benefit.

All partners should contribute money, property, services/labour, skills or experience that
will be at the disposal of the partnership for the purposes of running business and all these are
subjected to risk.

Thabo, James and Piet who are professional builders conclude a contract of partnership to build
contemporary houses in the Pretoria East. In the partnership contract, Thabo undertakes to
contribute 1 million and his brick laying expertise, James undertakes to contribute his expertise
as a structural designer and Piet undertakes to contribute his expertise as a general builder.

Characteristics of a partnership:
- Formed by a contract/agreement
- Aim to make a profit
- Association of at least two persons or more.
- Not a juristic person
- Exception during Litigation and Insolvency
- Partners bear the risk of the venture

Formation of partnership:
Partnership contract should have all the essentialia which are characteristics that distinguish it
from others.

Essentialia:

- Each partner must contribute something of value.

- The common business must be carried for joint benefit of partners.

- Purpose is to make profit.

- Partnership contract should be legitimate.

If all are present, then there is proof of partnership.

- however, parties should still have an intention to conclude a partnership.

General requirements:
- parties must reach consensus

- parties must have contractual capacity

- contract and performance must be legal

- performance must be physically possible

- contractual formalities if any, must be complied with.

Rights of partners:
The contractual agreement creates a relationship between parties, and this creates rights and
duties among each other.

- right to profit

- remuneration

- interest on capital (provided there is an agreement)

- indemnity

Control and related matters:

- control - power to take part in management (naturale). Can be varied in partnership agreement

- access to books

- access to partnership's assets

➢ Co-partners have access to the assets of the partnership for the purposes of
promoting the partnership’s business.

➢ No partner can deny other partners access to the assets of the partnership.

➢ No partner can for personal use, take or dispose the partnership’s assets without
consent of partners.

Duties of partners:
Since partnerships are formed by conclusion of a contract, each partner undertakes or commits
to do the following:

- to 1. contribute something of value 2. share the losses 3. maintain bonafide (good faith) which
means to act honestly at all times 4. exercise care
Litigation between partners:
Actio pro socio:

- Compel a partner to make his contribution as per partnership agreement.

- Interdict a partner from misusing partnerships assets.

Actio communi dividundo:

- Used by partners to dissolve an asset that is jointly owned in undivided shares (after
dissolution)

Authority of each partner to bind the partnership to third

parties:
Mutual mandate - Instances where the transaction is within the scope of the partnership.
Naturale (operation by law. p.347

Estoppel - where partners created a false impression that the partner has authority to bind
them. By omission or action (a rule of evidence) if they created false impression the partners will
be prevented to deny the authority because the third party su ered a loss.

Express authority - Instances where the transaction is beyond the scope of the partnership.

Ratification - accepted by partners after the fact where the transaction is beneficial to the
partnership.

Delictual and criminal cases:

As a partnership is not a legal person, thus it cannot commit a crime. However, in terms of the
Criminal Procedure Act of 1977, section 332(7) all partners can be guilty of an o ence
committed by one of the partners when promoting the interests or business of the partnership
(*they are assumed to be guilty*) unless they prove the following:

- They did not partake in the crime

- They could not prevent the crime

- They were not members of the management committee or other committee that committed
the o ence.

The partners go to jail if found guilty.

Liability of partners to third parties

Partners as parties to a contract

- During the existence of the partnership, partners are joint creditors and debtors of third
parties.

- Third parties can therefore institute actions against the partnership not individual partners.
- The parties can agree with third parties that they are jointly and severally liable for debts or one
partner’s liability is limited.

- However, they remain jointly and severally liable to partnership creditors when the
partnership is dissolved but remain co-creditors for debts owed to the partnership.

Litigation
- In litigation such as in actio pro socio (partners are litigating against another; partnership name
is not used) , parties cannot institute actions in the name of the partnership.

- However, in other actions where the partners sue or are sued by third parties, then name of the
firm can be used. This is provided by the rules of court.

- The plainti is not required to name the partners, if she does then an error or omission is not a
defense.

- Execution of judgement (satisfaction/fulfilment of the judgment of the court) will first be

against the assets of the partnership and when they are finished, the assets of individual
partners will then be used to satisfy the judgment of the court.

Various grounds for dissolution of a partnership:

par. 23:49 - 23:60

- Agreement between partners

- Lapse or expiry of time and completion of business

- Change in membership

- Death

- Notice of retirement

- Retirement and admission of a new partner

- Order of court if the court deems it just and equitable for the partnership to dissolve.

- Breach of essential term of partnership agreement

- Irreparable breach of relationship of trust (honesty)

- No prospect of profit

- Personal circumstances (mentally ill)

- Miscellaneous (various) operation of law

- Sequestration of the partnership’s or private partner’s estate.

Company Law:
Ch24 Nagel p 353 - 359

Study Objectives

1. Discuss the company as a business enterprise

2. Define a company, and name and explain the characteristics of this business structure
3. Explain what is meant by legal personality and circumstances where it can be
disregarded
4. Explain the di erence between business entities with legal personality and those
without legal personality
5. Name and explain the types of companies and the uses of each type
6. Briefly discuss pre-incorporation contracts in terms of the common law and in terms of
the Companies Act of 2008
7. Describe the procedure for incorporation
8. Consider how this procedure adheres to Section 7(b)(ii) of the Companies Act
9. Explain how the Companies Act facilitates the participation of individuals in the socio-
economic well-being of the nation
10. Explain the concept of corporate social responsibility and how it resonates with the
concept of Ubuntu
11. Apply the theory to a set of facts to solve unfamiliar but relevant problems.

Introduction:
• In this study unit we will deal with companies as business vehicles that allow one to generate
profit and contribute to the economic development of the country.

• Unlike partnerships, one can incorporate a company for non – profit objectives.

• The main reason entrepreneurs choose companies is because of separate legal personality
that is endowed on companies upon incorporation.

• The life of a company and how it interacts with third parties in the space of business is
governed by the Companies Act 71 of 2008 (‘the Companies Act’) See section 7 for companies
act

• Although there are problems with the Companies Act, it is nonetheless known for its simplicity
and flexibility. See Section 7 of the Companies Act.

Benefits of a company: limited liability; tax benefits

What is a company:
Section 1, of the Companies Act 71 of 2008 defines: (don't worry about this definition-lecturer)

1. a company as a juristic person that is incorporated (founded) in terms of the Companies Act,

2. or the previous Act and

3. close corporations (‘CC’) that were registered in terms of the Close Corporations Act 69 of
1984 and have been converted into companies.

A company is a group of entrepreneurs who come together (accompany each other) to form a
business vehicle in the form of a company

- with the aim of making a profit or

- in some instances, for the common good or betterment of an aspect of the society (Non-profit
company established with the aim of using sports to reform the youth in the society).

Separate legal personality:

(characteristics of the company)

- Once a person or a group of entrepreneurs have complied with the requirements of registering
a company, the certificate will be issued and after that the company will be incorporated.

- This means it comes into existence.

- The Companies and Intellectual Property Commission (‘CIPC’) will issue an incorporation
certificate and registration number that proves that the company is duly registered and has
legally come into being (birthed).

- Once a company is registered as such and the certificate is issued, it acquires the separate
legal personality (separate juristic personality).

- This means it is distinct or exists separately from its founders or incorporators who are known
as shareholders.

- Although it is not a natural person and need organs to represent it, in law it is viewed as a
separate legal person.

- This is what attracts entrepreneurs to choose companies.

several pertinent implications:

- bearer of rights and duties

- The assets of the company are owned by the company.

- A company can sue or be sued in its own name.

- A company is liable for its own debts.

- Shareholders enjoy limited liability.

Explanation:

- Companies exist independently from their shareholders.

- Unlike partnerships, they exist perpetually (indefinitely) regardless of changes in the

shareholding.

E.g. If Sam decides to sell his shares and leave the company, the company does not come to an
end.

- The company is entitled and bound by the Bill of Rights in Constitution.

- Unlike partners in a partnership, shareholders in their capacity do not have the right to
represent companies.

- Companies need organs to represent them; control them. (natural persons who are known as
the directors). = Board of directors

Exception:

in case of criminal activity

unacceptable abuse of the company (fraud)

Piercing the corporate veil

or disregarding the separate legal personality:

- A company ceases to exist upon dissolution or deregistration.

- In some exceptional circumstances, legislation (s20(9) and s22) and courts may disregard the
separate legal personality.

- (Suspend the separate legal personality) of the company in order to establish the real intention
of the actions of those who control companies).

E.g. for purposes of Criminal Procedure or purposes where those in control of companies have
used the company to commit crime or to evade tax.

- The separate legal personality will be disregarded or pierced (torn apart) to see the real
intentions of those in control of companies.

E.g Sam uses his pharmaceutical company to smuggle drugs in the country.

- The Criminal Procedure will disregard the separate legal personality of the company to go after
Sam to prosecute him.

- In other words, the state will not prosecute the company but will prosecute Sam because he
used the company to commit crime.

Let's say the third party buys a car from the company that has to source it somewhere else. The
third party pays upfront, but the company puts the money in an o shore account. There is an
exception; the law allows courts to disregard the separate legal personality. If it was an
employee that did the crime they will be held personally liable.
Companies VS Partnerships
- Unlike partnerships, companies can be formed by one person and non-profit companies can
even exist without members but must be founded by three persons.

- Unlike partnerships, although companies are mainly formed for profit making, they can also be
formed for non-profit purposes.

E.g. to better a certain aspect of the society. (**Partnerships are formed solely for profit
making**)

- Unlike partnerships which are formed by agreement and without formal requirements,
companies are formed through incorporation (formal process and requirements prescribed
by the Companies Act).

- Unlike partners in a partnerships, shareholders in their capacity do not have the right
represent companies.

Types of companies:
1. State owned SOC companies owned by the State/government (National government or
Municipality) e.g. Eskom SOC (name ends with SOC)

2. Private company (Pty) Ltd. small companies created by people who know each other. They
are owner managed; shares cannot be shared to the public. Can be formed by one and directed
by one

3. Public company Ltd. e.g. MTN; shares can be shared to the public, can be created by one but
must be directed by three others.

4. Personal Liability Company Inc. MOI's must provide that directors, past directors and the
company is jointly liable for the liabilities during tenure, you cannot say you are not liable.

5. Non-profit: aim is to make profit but exist for a public benefit (name ends with NPC)

incorporated for public benefit such as cultural advancement or group interests or fighting
social ills. The assets of the company must be used to advance the objective of the company.

- Assets not distributable to stakeholders.

- However, reasonable remuneration may be paid from the assets of the company for
work done or services performed for the company.

- It may not have shareholders (members).

- Upon dissolution of the company, the assets should be transferred to a similar

company or entity pursuing a similar cause.

- It must have three directors. The aim of the latter is to safeguard the sensitive
object/aim of such companies.

- It can generate profit but not as its main aim. Profit should be channelled back to the
main cause. E.g. Establishing a NPC to keep the youth away from the streets through
sports or arts and culture.
Pre-incorporation contracts:
in common law it is impossible to represent a principal (company) that does not exist. (no
principal no agency)

However it may be necessary to conclude contracts on behalf of entities that are not yet
incorporated (established) to avoid a loss of a lucrative deal.

- Stipulation contract.

- Cession of rights under option

- Acting in one’s own name and delegation to the company when it is incorporated. This
means acting or concluding a contract in your own name and transferring rights and
duties to the company when it is incorporated.

- Nomination is e.g. Where Sam concludes a contract of lease with Jack and Jack has
the right to nominate a third party. Upon incorporation of the company, Jack nominates
the company.

In terms of the companies ACT 71 of 2008 Section 21:

Sam and Zac are in the process of incorporating a company. On their way back from CIPC to
register the company, they see suitable premises in which they can run their company. The
premises will save a lot of money for the company and the target market of the company is in
close proximity to the premises. They do not want their company to miss out on this great
opportunity.

Sam and Zac can conclude a written pre-incorporation contract with the owner of the premises
on behalf of a company that is not yet incorporated.

- Upon incorporation of the company, directors should ratify the contract within 3 months or
reject.

- If not the company will be bound.

- And their company will be bound as if it was a party to the pre-incorporation contract.

Incorporation procedure:
(how a company is born into existence)

- A company is incorporated by creation/completion and signing of an MOI (governing

document of the company) by one or more shareholders in private/personal liability and public
companies, three persons in a non-profit company and minister in SOCs.

- The completion and filling of the Notice of Incorporation (‘NOI’) which serves to notify the CIPC
about the incorporation of the company.

- Payment of the prescribed fee.

- All these are submitted at CIPC and if all requirements are complied with, the CIPC will
register the company, assign a registration number and issue the certificate of registration.

Then the company will come into being from the date of its registration.

From that date it becomes a separate legal person. (In law it is viewed as a separate legal
person distinct from its founders (shareholders).

Companies Act
How the companies Act facilitates the participation of individuals in the socio-economic well-
being of the nation:

Section 7 of the Companies Act 71 of 2008 provides that the purpose of the Act is to promote:

- Compliance with the Bill rights.

- To promote the development of the economy through e icient, flexible, transparent

and simple regulation of companies.

- To promote the creation and regulation of corporate rescue mechanism for financially
distressed companies in order to save jobs and the economy of the country.

- To promote e icient regulation of the governance of all aspects companies.

- To re-establish the role of companies in the development of the society or the public.

- To promote transparency in all aspects of governance in companies.

- To promote the interests of all the stakeholders.

- To promote innovation and investment in companies.

- To balance the rights and obligations of shareholders and directors.

All these aim to ensure that potential entrepreneurs can easily access companies as a vehicle
to run businesses and thereby develop the economy of the country

Concept of corporate social responsibility

and how it resonates with the concept of Ubuntu:

- Section 72(4) of the Companies Act 71 of 2008 provides for the establishment of social and
ethics committee in companies.

- The minister can prescribe for certain companies to appoint the committee.

- The purpose of the committee is to ensure that companies not only focus on generating profits
but are also responsible citizens in the country.

- Although companies aim to make profits, they should also strive to improve the lives of the
people especially those of the community where they operate. E.g. Building sports facilities in
areas where it operates or a mine that provide bursaries for the youth of the community
- They should also strive to be ethical when conducting business, they should comply with
environmental ethics. E.g. A mine that ensures the preservation of the environment or takes
care of the water where it operates.

- This resonates well with the concept of Ubuntu which means humanness (I am because you
are).

- This allows companies to be because of the community where they operate.

- The community also flourishes because of the contribution of the company to the betterment
of the community and by taking care of the environment for the benefit of all in the community.
Memorandum of Incorporation
CH25 p. 361-366

Study Objectives

1. Briefly discuss the functions of the Memorandum of Incorporation (‘MOI’) and the rules;
2. Explain constructive notice, and discuss whether it applies under the Companies Act of
2008
3. Define and discuss the legal status of the MOI, shareholders’ agreements and rules
4. Discuss Alterable and Unalterable provisions of the Companies Act 71 of 2008
5. Briefly discuss the contents of the MOI and the amendment thereof
6. Explain what is meant by the “company’s capacity” and how capacity may be limited
7. Discuss representation and authority
8. Explain the Turquand rule
9. Apply the theory to a set of facts to solve unfamiliar but relevant problems.

MOI
Introduction of the functions of the Memorandum of Incorporation and the rules

- The current Companies Act 71 of 2008 (‘the Act’) which regulates companies in South Africa,
requires one document as the constitutive document of the company.

Regulators of companies

> the Constitution

> Companies Act 71 of 2008

- This document is known as the Memorandum of Incorporation (‘MOI’)

- It is used as the incorporation (establishing) document of the company.

- This is the governing document in the company, and it regulates relations within a specific
company and with third parties.

- However, the MOI must be consistent with the Act, if not, then it is void to the extent of
inconsistency.

Rules of the board and Shareholders' agreements

- Directors may create rules (that will supplement the MOI) and

- Shareholders may create shareholders’ agreements (that will supplement the MOI).

- And they should also be consistent with the Act and the MOI.

Doctrine of constructive notice

and whether it applies under the Companies Act 71 of 2008
- In the past, third parties concluding contracts with the company, were required to know the
contents of the constitutive documents due to the filing and provision of access at the o ice of
the company.

- It has been partly abolished in the current Act. (Act 71 of 2008- known for being flexible)

- Some companies MOI’s contain special restrictive conditions on the capacity of the
company and authority of those who are representing companies and requirements of
amendment and prohibition of the amendment of such conditions in the MOI.

- NOI and NOA should inform third parties about such provisions. Draw their attention.

- Company name must end with RF’. - means you must open your eyes, the MOI contains
restrictive conditions (constraints).

- Compliance with the provision is required when concluding contracts.

For example, shareholders wants to protect against directors, you say in the MOI director can
do.... however if exceed R200 000 we must sit down and approve.

If it exceeds R200 000 and wasn't approved, the contract is void.

Construction notice in personal liability

- In personal liability companies, third parties are also deemed to know that current and past
directors are jointly and severally liable together with the company for debts that were
contracted during their terms of o ice.

- This is how doctrine of constructive notice is partially applicable.

If you wish you can read s19(5), 15(2) b and c and 19(3) of the Act.

Legal status of the MOI and rules

The MOI and the rules of the board are binding:

- Between the company and each shareholder.

- Between shareholders themselves

- Between the company and each directors

- Between the company and prescribed o icers

- Between the company and any member of the board committee or an audit
committee.

- MOI and rules should be consistent with the Act otherwise they are void to the extent of
their inconsistency.

Shareholders’ agreements
- Shareholders may also agree on certain matters and such agreements will regulate relations
between them in the company.

- Should be consistent with MOI and the Act.

Alterable
(can be changed in the MOI) words like “May”

not so crucial in the life of the company

E.g. Section 44(2) of the Act provides the board with authority to authorise financial assistance
for the purchase of company’s shares.

> Such provisions include words such as these. Except to the extent that the MOI provides
otherwise…

Unalterable
(cannot be changed in the MOI) words like “Must"

E.g. Section 76(3)(a) and (c) of the Act provides that directors of the company when representing
the company **must** exercise their powers and perform their functions

- in good faith and for proper purpose

- in the best interests of the company

- with the degree of care, skill and diligence…

Unalterable provisions can only be changed in the MOI if the change provides a more
rigorous or stricter provision.

Memorandum of Incorporation and the amendment thereof:

- The MOI is the constitutive document of the company and it is required when registering a
company.

- It regulates the rights, duties and responsibilities of shareholders, directors and other persons
in the company.

Amendment of the MOI

May (can change) vs Must (cannot change)

Since the MOI is an important governing document in the company, it requires a rigorous
process to amendment.

- The board or

- Shareholders holding an aggregate of 10% or more of the shares/voting rights in the

company can propose an amendment.

- Court order – no special resolution required.

- The amendment will require a special resolution (75% or more of voting rights)

- The NOA must be filed at the CIPC and fee paid.

- The date amendment will be the later date between the acceptance of filing of
amendment by the CIPC or date specified in the Notice of Amendment (NOA).
Company’s capacity
What a company is able to do in the sphere of business. E.g. concluding transactions

Ultra vires doctrine:

-In the past companies had the capacity to conclude contracts that were provided for in their
objects clause.

E.g. If a company was in the catering business, the object clause in its governing documents
would provide that it could only conclude contracts that were in line with catering. This meant
that such a company could not purchase an expensive luxury sports car or horse.

- This was known as the doctrine of ultra vires.

- Transactions that were outside the scope of the company were void.

Section 19

- This was unfair to third parties who contracted with the company.

- Section 19 and 20 of the Current Act remedied the injustice presented by the ultra vires
doctrine.

- Section 19(1)(b) provides that a company has all the legal powers and capacity of a
natural person except to the extent that the company cannot exercise such powers or
cannot have such capacity or the MOI provides otherwise.

E.g. Companies cannot get married.

Section 20:

- However, section 20(1) provides an imperative provision by providing that in instances

where the MOI of the company prohibits, limits or restricts any actions by the company
or directors do not have the capacity to represent the company because of the
prohibitions, limits or restrictions in the MOI, those actions are nonetheless valid
between the company and third parties.

- In other words, section 20(1) provides that the contract is not invalid because the MOI
prohibits a transaction or director lacks authority because the MOI prohibits a
transaction.

- The transaction is valid between the company and the third party as long as it is not
against the Act.

- Section 20(1) provides that such contracts are only invalid between company and
shareholders, prescribed o icers and director or between shareholders, directors and
prescribed o icers.

- This means that the company can use the fact that the contract is prohibited in the MOI
to hold a director who acted contrary to the MOI personally liable for damages.

- In such circumstances directors will be in breach of their fiduciary duty.

 - In other words, they would have acted dishonestly by not abiding to the MOI.

Ratification
- Section 20(2) allows the general meeting to ratify or accept the contract that is contrary to the
MOI with a special resolution.

Restraint - interdict
- Section 20(4) allows organs and other stakeholders such as unions representing employees to
apply to court to restrain a transaction that is contrary to the Act.

Interdict
(Prohibition from concluding any provision that contravenes the MOI.)

- Section 20(5) provide that organs (shareholders, directors) may apply to the High court to
restrain the company or directors from concluding any transaction that contravenes the MOI.
This does not a ect the damages of the third party, provided the third party acted in good faith
and had no knowledge that the MOI restricts the transaction.

- Section 20(6) Claim for damages by each shareholder:

- Section 20(6) provides that each shareholder has a claim against any person who
intentionally, fraudulently or with gross negligence causes the company to contravene
the Act and MOI unless the transaction is ratified in terms of subsection (2).

Company representation
- In terms of section 66 of the Act, the board of the company has the power to control and bind
the company.

- Companies can also be bound by agents of the company who are granted actual authority
which is express authority or implied.

- Agents can also bind companies based on ostensible authority where the company created an
impression that the agent has authority whereas this is not the case.

- Express authority is granted to an agent in the MOI or by a board resolution.

- Agents must accept delegation of powers.

- Implied authority is when an o icer in the company performs the functions of the o ice.

- The board may appoint one director to represent the board in concluding contracts or appoint
another o icer.

Instances of ostensible authority

The MOI of the company provides that Sam is the only director who has the authority to
conclude contracts on behalf of the company. For the past 5 years the company has allowed
Ronnie another director to conclude contracts and the board of the company has honoured
those contracts despite the fact that Ronnie lacked authority. In the year 2023, the board
refuses to pay one of the contracts concluded by Ronnie with the third party and argues that
Ronnie lacks authority to conclude contracts . Is there a recourse for the third party?

Yes, the company has granted Ronnie an **ostensible authority**, thus **estoppel** is
applicable to prevent the company from relying on the truth because it created the
**impression** that Ronnie has authority.

4 requirements

1. The company must have intentionally or negligently misrepresented to the third party.

2. The misrepresentation must be serious enough to reasonably mislead the third party.

3. The third party must have been lead to act because of the misrepresentation.

4. The third party must have su ered damages due to acting based on misrepresentation.

Ratification
(see the discussion on the discussion of company’s capacity)

Section 20(2) provides that shareholders may with a special resolution ratify (accept) a contract
that is concluded by a director who lacks authority due to MOI.

Turquand rule
in terms of Common law and Statutory Turquand rule

Common law

- In some companies, authority to bind companies is dependent on internal

management requirements or indoor management requirements.

- This places a burden on the shoulders of the third parties who want to contract with
the company to inquire as to whether the internal requirement was complied with.

- This is unfair to third parties concluding contracts with companies as they have to
spend money to find out whether internal requirements have been complied with.

The board of directors of Yim Furnitures (Pty) Ltd has authorised Tim the managing director to
conclude contracts on behalf of the company. However, where the contract exceeds R 100 000,
the board must hold a meeting and grant authority to Tim. Tim concludes a contract that
exceeds R100 000 on behalf of the company with Zweli logistics CC for Zweli logistics to deliver
the company’s furniture in Durban. Zweli logistics delivers on its undertaking and claims the
money for the service rendered to the company. The board claims that Tim does not have the
authority because the meeting of the board did not grant him authority as the contract exceeds
R100 000. The board refuses to pay Zweli’s logistics CC. Is this fair to Zweli logistics?

> Obviously not as it is di icult for Zweli logistics to know whether or not the internal
requirement was complied with.
> Turquand rule comes into the picture to ensure that there is fairness to Zweli logistics.

Common law Turquand provides that:

- A third party (Zweli logistics CC) when acting in good faith when concluding a contract
with the company (Yim furnitures),

- Can assume that the internal requirement has been complied with in the company (the
meeting of the board was held and authority was granted to Tim to conclude a contract
that exceeds R 100 000)

- In terms of Turquand rule, Yim Furnitures will be bound even though Tim did not have authority.

- Zweli logistics should not make further inquiries.

- Good faith means that Zweli logistics should not have been aware that the meeting did not
take place and Tim did not have authority or could not be deemed to have known.

- And Turquand rule is available only when the third party contracted with the person who
actually has general authority to bind the company.

> The board, Managing director with authority or o icer of the company but there was an
internal requirement.

- Turquand rule will not be available when people pretend to be members of the board.

Statutory Turquand rule (please refer to the same example above)

Section 20(7) of the Act provides:

- That Zweli logistics CC when acting in good faith when contracting with the Yim Furnitures,

- Is entitled to presume that all internal requirements in terms of the Act, MOI or rules of
the company (Yim furnitures) have been complied with. (The meeting took place and Tim
was granted authority to conclude a contract that exceeds R 100 000)

- Zweli logistics cannot presume if they knew or ought to have reasonably known that the
meeting did not take place and Tim did not have authority.

- The common law and statutory Turquand rule are applicable side by side. The plainti can
choose either one.
Capital:
Definition

Companies have various ways of raising funds that are used to achieve their objectives.

The ways are:

- Investment of assets by founding shareholders.

- The issuing (selling) of shares to existing and new shareholders. (Share capital)

- The profits made from services o ered by the company.

- Reserves or savings saved in the company’s bank account.

- Loans and debentures are other ways of raising funds.

The totality of all the aforementioned is known as the CAPITAL of the company. It must be used
with utmost care and honesty.

Share Capital
The authorised share capital and issued share capital.

- The MOI will also provide di erent classes of shares, the number of shares and rights and
limitations of those shares.

Authorised share capital

- It simply refers to the classes of shares and the number of shares that the company is
authorised or allowed to issue (sell) in order to raise capital/money. Money that the company
can raise.

Issued share capital

Let’s use an example.

- Let’s say 3 months after incorporation, Silver Bank Ltd has issued (sold) 2000 shares for R 1000
each to new shareholders. It will have R2 million.

- Issued share capital is money that the company has collected or made through the sale/issue
of shares so far.

Shares:
What is it?

Personal right that represents proprietary interest in the company. It entitles the holder the
following rights:

- Dividends when declared

- Net assets when company is dissolved/wound up – winding up.
- Information
- Vote
Classes of shares
1. Ordinary shares – vote – dividends not fixed or fixed and right to net assets on winding
up.
2. Preference shares – preferred in terms of dividends and usually fixed 20% of R2. 40cents
3. Participating preference shares – Shareholders can share in residual profit after
receiving preference.
4. Redeemable preference shares – Shares can be repurchased/redeemed by the
company.
5. Term/Period shares – shares issued for a specific term or subject to a condition. If the
term expires or condition is fulfilled, the shares can repurchased by the company or
converted to another class of shares.
6. Cumulative preference shares – The shareholders will enjoy missed dividends if
provided in the MOI.

Variation of rights
- The rights of shares in the MOI can only be amended by a special resolution of shareholders
(75% votes or more in favour of the amendment).

- Where the amendment materially changes the rights of shareholders

Where it limits the rights of shareholders to their detriment, such shareholders have the right to
use a remedy known as the dissenting shareholders’ appraisal right in terms of section 164 of
the Act. (remedy to compel the company to purchase their shares)

- Resolutions of amendments of MOI’s where rights of shares are materially changed are likely
to negatively a ect minority shareholders.

- In terms of this section they have to notify the company that they intend to oppose the
proposed resolution.

- And they must actually vote against or oppose the resolution in the meeting.

Raising capital
- Companies may raise capital by accessing loans from Banks or individuals.
- Rendering services or providing products
- Issuing of shares

- Private companies cannot issue shares to the public.

- Public companies can issue shares to the public.

- Public companies can issue shares that are not listed in the JSE or can issue shares
that are listed in the JSE. (Issued through JSE)

- Shares of public companies which are not listed (not issued through the JSE) must be
issued together with a document known as the prospectus.

- A prospectus contains comprehensive information about the finances and adequately

informs potential investors to make informed decisions whether they would like to
invest in the company or not.
Listed shares - no prospectus. However, Initial public o ering –prospectus required
Solvency and Liquidity test:
- Before indirect or direct transfer of money to anyone e.g. to provide financial assistance to
employees of the company to purchase the shares of the company for the sake of employee
empowerment.

- The company MUST comply with the EXTREMELY important test of company law which is
known as the solvency and liquidity test in terms of section 4 of the Act.

The test entails that:

 The assets of the company when fairly valued must be equal or exceed the liabilities of
the company (Solvency).
 The company must be able to pay its liabilities that fall due in the ordinary course
business of the company in the next 12 months after test is considered (Liquidity)
 IF THIS IS NOT COMPLIED WITH, THE COMPANY CANNOT TRANFER OR USE ITS MONEY
OR ASSETS. Let’s look at specific circumstances where this test should be applied:

Distribution in terms of section 46 of the Act:

What is distribution?

Payment of dividends, waiver of debts and repurchase of shares by the company.

- Payment of dividends to shareholders.

- In a company where the company usually issues shares to shareholders instead of

paying dividends and the company decides to pay money instead of providing shares.
(capitalisation shares/shares used to raise capital)

- Company repurchase its shares.

- Company gets into debt for the benefit of the shareholder

- Company forgives a debt owed to it by its shareholders or another person in the

company or group of companies.

The company can only make a distribution if it is only: (Requirements of a distribution)

- In terms of an existing obligation (owes dividends) OR

- In terms of order of court (court gives a verdict that the company should make a
distribution)

- Or where the board of directors authorise such a distribution.

- It must reasonably appear that the company will comply with solvency and liquidity
test.

- The board must take a resolution confirming that it has applied the solvency and
liquidity test and reasonably confirm that the company will comply with the test after
distribution.
 - Distribution must be e ected within 120 days after the application of the solvency and
liquidity test.

- A director who is present at a meeting but fails to vote against the resolution where the
company will not comply with the test will in terms of common law of Delict be held personally
liable for damages to the company in terms of section 77.

Acquisition of shares of the company by the company

(repurchase of shares)
The company may repurchase its shares in terms of section 48 of the Act.

The same requirements of section 46 (distribution) should be applied.

The repurchase of shares is regarded as a distribution as it entails transfer of company’s money

to the shareholders.

The requirements particularly solvency and liquidity test are aimed at protecting the company’s
finances or capital for sake preserving the wealth of shareholders, protecting interests of other
stakeholders and the development of the economy.

Financially healthy companies can promote the economic development of the country.

Directors who are present at a meeting and fail to vote against the resolution that does not
comply with section 46 and 48 will be liable for the loss or damage incurred by the company in
terms of section 77.

A subsidiary of another company is a company that is controlled by another company e.g Where
City Light (Ltd) controls 51% of shares or more at Venon Ltd. Venon Ltd is a subsidiary of City
Light Ltd and City Light is the holding company of Venon.

Venon Ltd can only acquire not more than 10% shares of any class of shares at City Light Ltd.
Such shares do not entitle Venon Ltd any voting rights.

Financial assistance in terms of section 44 of the Act

- The board may if the MOI allows, authorise financial assistance by way of a loan, guarantee, or
provision of security to any person for the purchase of the company’s shares or related
company.

- Financial assistance does not include circumstances where the company’s business is to
provide financial assistance.

E.g. Absa Bank Ltd providing loans in the ordinary course of business.

- The financial assistance must be in line with employee share scheme or

- In terms of a special resolution adopted by shareholders within the previous 2 years wherein
they resolved that financial assistance will be provided to a particular person or a group of
people.
- The board must ensure and confirm that the company will comply with solvency and liquidity
test after the financial assistance is provided

- And the proposed financial assistance will be provided under terms that are fair and
reasonable to the company.

- This section enables companies to assist employees or other stakeholders to purchase shares
in the company.

- This will empower them economically and consequently promote economic development of
the country

- On the other hand, the requirements provided by section 44 are aimed at safeguarding the
capital of the company.

Accounting practices
- Companies are required to provide accounting records in one o icial language in their
registered o ices in order to comply with the Act.

- The company must prepare its annual financial statement within 6 months after the
end of the financial year.

- In public companies’ annual financial statements must be audited.

- The latter must include the directors’ report on the financial and business a airs of the
company for shareholders to be informed about the state of the company.

- The annual financial statements must be approved and signed by the authorised
director before being presented to shareholders.

Auditor
- Public companies financial statements must be audited.

- Annual financial statements of certain private companies and non-profit companies

must also be audited e.g. if it is in the public interest to do so considering the economic
and social significance of the company.

- A typical example would be where a private company employs a large number of

people. E.g. a mine.

- The auditor must be appointed upon the registration of the company and each year at
the annual general meeting.

- The auditor must be registered in terms of the relevant legislation.

- The auditor must be acceptable to the audit committee.

- The auditor must be independent from the company.

- The aim of this is to ensure that the books of companies are examined to determine
whether they represent the actual financial state of the companies.
Shareholders, organs and officers
CH27 p. 373-379

Study Objectives

1. Define a Shareholder
2. Discuss certificated and uncertificated securities as well as the securities register
3. Explain how securities are transferred
4. Explain the statutory remedies
5. Describe the Role of the organs and o icers of a company of a company
6. Briefly discuss the meetings of shareholders and how resolutions are passed
7. Briefly discuss directors and their standards of conduct
8. Explain the concept of corporate social responsibility and how it resonates with the
concept of Ubuntu.
9. Apply the theory to a set of facts to solve unfamiliar but relevant problems.

Organs of companies
- The natural persons who represent and control companies in the commercial world are
directors.

- Natural persons who incorporate (start) companies and invest in companies are known
as shareholders.

- Juristic persons can also be shareholders.

This study unit deals with the law that regulates the relationship between the shareholders,
between shareholders and companies and between directors and companies

Shareholders
A shareholder is a person who holds a share or shares issued by a company and who is
registered as such in the certificated or uncertificated shares register of the company.

How a person ceases to be a shareholder.

- Death.
- Insolvency.
- Dissolution of the company.
- Transfer and sale of shareholder’s shares to another by a company (quasi lien).

Securities (shares)
Certificated and uncertificated as well as the securities register

- Certificated shares are shares that are evidenced by a certificate and uncertificated shares are
shares that are not evidenced by a certificate.

- A share certificate will provide the name of the company, name of the shareholder, number
and class of shares held by the shareholder and restriction on the transfer of those shares.
- The record of uncertificated shares is also administered and maintained by the central
securities depository (‘CSD’ which STRATE Ltd) or participant at CSD.

- Nominee shareholders and Beneficial shareholders and requirements.

- nominee: entitled to nothing, except his professional fee.

- beneficial: entitled to all gains, profits and benefits accruing to such shares.

How securities (shares) are transferred.

A share as a personal right is transferred by cession – ceding of personal right by cedent to a

cessionary.

- the right to share in the dividends when they are declared,

- right to participate in meetings and votes

- and the right to share in the net asset value upon winding up of the company.

❖The transfer of shares and registration of the transfer of shares are not the same and
take place separately. Registration of shares is not a requirement for the transfer of
shares.

Statutory remedies for unlawful conduct by majority

shareholders;
- Section 20(4) - restrain the company from transgressing the Act.

- Section 20(6) – each shareholder has a claim against anyone who intentionally, fraudulently or
due to gross negligence causes the company to transgress the Act or MOI. \

- Section 218 – any person who transgresses the Act is liable to a person who su ers loss or
damage due to the transgression.

- Section 161 Declaratory order (available to shareholders)

Court can declare, protect, rectify harm done by company or directors in contravention
of the Act, MOI, rules or violation of any right.

- Section 163 Relief from oppressive, or unfairly prejudicial conduct or unfairly disregards the
interests of the applicant.

Shareholder or director may apply to court for relief if an act or omission of the
company, business or powers directors are exercised in a manner that is oppressive
(tramples), unfairly prejudicial or disregards interests of the applicant.

- Section 164 Dissenting shareholders appraisal rights

The shareholder may serve a written demand that the company pay a fair value for the
shares of the shareholder if the shareholder opposes and opposed the resolution that
materially and adversely a ect their shares.
E.g. a resolution to embark on a fundamental transaction. E. sale of substantially all
assets or undertaking.

- Section 165 Statutory derivative action

 - A shareholder, director, prescribed o icer, trade union or any other representative of
employees or any person granted leave by court (locus standi)

- may serve a demand on a company

- to commence or continue legal proceedings or related steps

- to protect the legal interests of the company.

Role of the organs and officers of a company

- The organs of companies are directors and shareholders.

- Social and Ethics committee ensures that companies are responsible citizens. Companies like
natural persons in the community, should subscribe to the principle of Ubuntu (humanness)
which means “I am because you are”. Companies should contribute to the betterment of the
community and the community should reciprocate. They should also conduct their a airs
ethically E.g. adhere to environmental ethics.

- Audit committee members ensure proper appointment of an auditor and that the auditor
execute his or her duties properly.

Shareholders’ meetings
and how resolutions are passed.

- Shareholders have their say in shareholders’ meetings.

- General Meetings and Annual General Meetings (‘AGM’)

- In public companies, AGM’S are held within 18 months after incorporation of the company and
subsequent AGM should be held once every calendar year and but not more than 15 months
after the previous AGM.

- Decisions taken at shareholders’ meetings are known as resolutions. There are two types
of resolutions:

 Ordinary resolutions (51% or more) the method by which members approve routine
company decisions, traditionally in general meetings.
 Special resolutions (75% or more) (Be able to distinguish) a method of passing a
company decision that requires at least 75% of the votes cast by shareholders to be in
favour of it.

Directors and the standards applicable to directors’ conduct

- Since companies cannot represent themselves in transactions, directors as controlling minds
of companies serve that purpose.

- Directors’ common law and statutory duties are standards that should be complied with by
directors when representing companies.

- These are directors’ common law fiduciary duty to act in good faith and in the best interest of
the company.

- Directors’ common law duty of care and skill. common law and statutory law looks similar
- Statutory duty to act in good faith, in the best interest of the company and for proper purpose
and duty of care, skill and diligence.

- Business judgment rule section 76(4). (Safe habour for directors)

Duty to act in good faith in terms of common law (Fiduciary duty)

- Directors are entrusted or hold assets for companies.

- This means they are in a relationship of trust with the company.

- Thus, when representing a company they must act in good faith and in the best interests of
the company.

- Good faith means to act honestly at all times and best interests means that directors must
always promote the interests of the company.

- Good faith requires directors to avoid a conflict of interest, exercise powers for the purposes
they are granted, act with uninfluenced discretion and not exceed the limits of the powers.

Common law duty of care and skill.

Duty to apply skill and experience in the a airs of the company.

- Directors are not held liable for mere errors of judgment

- The duties may depend on the size and the nature of the company.

- The duties may depend on the obligations of the director.

- Directors are not required to give continues attention to the matters of the company where
they are entrusted to another o icial and may assume in the absence of fraud that the duties
have been fulfilled honestly.

- A director who breaches his duty is held liable in terms of Delict. (All elements should be
proved)

Statutory duty to act in good faith

In terms of section 76(3) (a) and (b) of the Act, directors must act in good faith, for proper
purpose and in the best interests of the company:

- Must act honestly (Good faith)

- Exercise their powers for the intended purposes (Proper purpose)

- Always promote the interests of the company. (Best interests of the company)

Statutory duty of care, skill and diligence

- In terms of **section 76(3)(c) of the Act,** directors when executing their duties must act with
the duty of care, skill and diligence that is reasonably expected of a person carrying out the
same functions in relation to the company as those that are carried by that director of the
company and having the general knowledge, skill and experience of that director.

- This duty provides the reasonable director’s test. (Objective elements)

- The words ‘having the general knowledge, skill and experience of that director bring (Subjective
elements).

Think of a director with one year experience vs a director with 15 years of experience. The one's
fault would be seen as an accident, but the other would be held liable for their fault.

In terms of BJR

Sam (Director) can escape liability for breach of the duty of care, skill and diligence and duty to
act in the best interest of the company provided the four elements of BJR were present in the
decision-making process:

- Sam (Director) took reasonably diligent steps to become informed about the matter.
(conducted reasonable research about the trucks)

- Had no financial interest in the decision (did not stand to gain in the decision or make a profit
or a related person had no financial interest)

- If Sam had a personal interest, he disclosed it

- He did believe on rational basis that the decision was in the best interest of the company.

IF ALL THESE ARE PRESENT, THEN HE WILL ESCAPE LIABILTY.

OTHER STATUTORY DUTIES

- Directors have the duty to disclose personal financial interests in terms of section 75 of the
Act.

Where the director of the company is shareholder of ANOTHER company that is in business with
the company where she serves as a director.

- Directors should not run the company recklessly, with gross negligence, with the intention to
defraud any person or fraudulently Section 22 of the **Companies Act** 71 of 2008

E.g. concluding contracts knowing that the company is insolvent, this will defraud creditors or
concluding contracts while ignorant of whether the company is insolvent or not.

LIABILITY FOR BREACH OF STATUTORY DUTIES

- A director will be liable for the breach of statutory duty of good faith in accordance with
common law breach of the duty to act in good faith. (s77 of the Act)

- Liability for breach of statutory duty of care, skill and diligence, or failure to comply with the
provisions of the Act or MOI will be based on Delict in accordance with common law. (s77 of the
Act)

Statutory vs Common law duties are not independent, they are used jointly. one would use a
clearer source which is statutory. Common law is only applicable to directors, Statutory is
applicable wider (ex. elderly workers) and is still applicable after resignation
Winding up, Bus rescue and
Deregistration
CH29 p. 385-389

Study Objectives

1. Explain the role of winding-up

2. Describe the various methods of winding-up
3. Define and discuss the term “business rescue”
4. Explain how the business rescue procedure aims to preserve companies and
employment
5. Explain the meaning of deregistration.
6. Apply the theory to a set of facts to solve unfamiliar but relevant problems.

Introduction
- Companies exist from incorporation to dissolution.

- Company will have debtors and creditors.

- When a company is about to be dissolved, its assets must be collected, converted into cash
and paid to the creditors in accordance with their order of preference.

- The remainder of the money/assets will be shared among the shareholders of the company.

- This process is known as winding up.

- This study unit deals with this process and it will also deal with the mechanism that aims to
rehabilitate financially distressed companies and deregistration of companies.

Role of winding-up
- To wind up a company is the process of dissolving a company.

- The role of winding up is to collect all the assets of the company, convert them into cash
and pay creditors of the company what is due to them as per their order of preference and
use the residue to distribute to shareholders

- Solvent companies – Companies Act 71 of 2008.

- Insolvent companies – Companies Act 61 of 1973 and Insolvency Act 24 of 1936 is applicable
to supplement the Companies Act 61 of 1973 and applies mutatis mutandis

Winding up of a **solvent** companies

1. Voluntary winding up

2. Winding up in terms of the order of the court.

- The winding up of solvent companies is regulated by the **Companies Act 71 of 2008** (‘the
current Act’) and the winding of insolvent companies is regulated by the **Companies Act 61 of
1973** (‘the old Act’)
Why would shareholders dissolve a financially viable company?

1. Voluntary winding up in terms of the shareholders’ resolution

Voluntary winding up of solvent companies is initiated by shareholders with a special
resolution.

- The reason for a special resolution is that this is a major decision.

- Special resolution requires 75% or more voting rights.

- The process is simpler and faster and creditors do not su er any loss as the company
is solvent.

Process:

- The special resolution should be filed, with the notice and prescribed fee at CIPC.

- Prior to filing, the company should furnish security to the Master for payment of
company’s debts within the maximum of 12 months after the commencement of the
process.

- Or obtain consent from the Master to dispense with security.

- A liquidator will have the powers that are the same as those of a liquidator in winding
up in terms of the court order.

2. Winding up of solvent companies in terms of the order of the court

Company

- Special resolution or applied to court to have its voluntary winding up to be continued

by the court. Business rescue practitioner,

- Apply to court because there is no reasonable prospect of success in saving a

financially distressed company.

Creditors,

- Apply to court to wind up the company because the business rescue has terminated or
business rescue plan has been rejected and it appears just and equitable for the
company to be wound up or it is otherwise just and equitable for the company to be
wound up.

Company, Shareholders, Directors may apply to court on the grounds that:

- Directors are deadlocked and shareholders are unable to solve the deadlock as a
result, there is an irreparable harm to the company or business cannot conducted for
the benefit of the shareholders.

- Shareholders are deadlocked in voting power and for a period of 2 consecutive AGMS
have failed to elect directors to replace those whose terms have expired.

- Or it is otherwise just and equitable to do so.

Shareholders
 - A shareholder with leave of court has applied on the ground that directors or
prescribed o icers or those in control are acting fraudulently or illegal or assets are
mismanaged or wasted.

CIPC or the Panel

- Those in control are acting fraudulently or illegal and the CIPC or Panel has issued a
compliance notice and the company has failed to comply.

- And within the previous five years, enforcement procedures in terms of the Act or CC’s
Act were taken against company and those in control for substantially the same
conduct, resulting in a fine or conviction.

Winding up of **insolvent** companies

Like winding up of solvent companies, insolvent companies can be wound up voluntarily by

creditors or by an order of court.

1. Voluntary winding up of insolvent companies by creditors

Voluntary winding up of insolvent company is initiated by shareholders’ special resolution and it
is known as creditors voluntary winding up.

- The resolution has to be registered.

- Directors have voting power in the election of the liquidator and are subjected to less
prosecution than when the company is wound by the court order.

2. Winding up by order of court

This is the common way of winding up insolvent companies.

- The application can be brought by the company, creditor of the company, shareholder,
~~the Judicial manager~~ Business rescue practitioner (similar procedure as business
rescue in terms of the old Act) or the minister.

- The control of the company will be <mark style="background: #FFF3A3A6;">taken from

directors and vest on the Master</mark>, the provisional liquidator and ultimately the
liquidator.

- The liquidator is supervised by the Master of the High court.

Grounds of application

- Special resolution

- If company starts to run business before the certificate to commence business is

issued or granted.

- The company has failed to start business within a year after incorporation or
suspended its business for a year.

- 75% of the share capital of the company is lost or has become useless for the
company.

- If the company is unable to pay its debts.

 - If external company (e.g. company incorporated in the US) is dissolved in the country
where it was incorporated.

- It appears to court that it is just and equitable for the company to be dissolved

Business Rescue
- One of the objectives of the current Companies Act 71 of 2008 is to develop the
economy.

- Financially sound companies and employment of the people in the country contribute
significantly to the economic development.

- Thus, the Act has introduced Business rescue proceedings to rehabilitate financially
distressed companies to restore them to financial viability for the purposes of
developing the economy and to ensure that there is employment for the people of the
country.

a mechanism that is aimed rehabilitating financially distressed companies by

- Granting companies a moratorium or grace period from the claims of creditors.

- Putting the company under temporary supervision and ‘

- Developing and implementing a rescue plan to rehabilitate the company or if not

possible, allow creditors and shareholders to receive a better return upon liquidation of
the company.

The main aim is to rehabilitate financially distressed companies.

- The company can be placed under business rescue by the board resolution or by order of court
when there is a reasonable prospect (reasonable grounds) of saving the company.

- Creditors, shareholders and employees are a ected persons and can apply for an order of the
court to place the company on business rescue.

- Creditors of the company have to consider the merits of the business rescue plan, amend it if
necessary and vote for its implementation.

- The plan to save the company is developed by the Business rescue practitioner.

- Employees of the company that is under Business rescue plan are a ected by the Labour
Relations Act.

Role of deregistration

self-study?
Internal and External Relations &
Maintenance of Capital and Liability of
Members
The internal relationships between the members of a CC
Closed corporations are less regulated than companies

- Internal relations between members of the CC are regulated by the association

agreement.
- This is where the CC has two or more members.
- It is not compulsory for members to create an association agreement.
- In the association agreement, members can agree on matters that are provided for in
the **Close Corporations Act 69 of 1984** (‘CC Act’) and any other matter that may be
regulated in accordance with the Act.
- The association agreement must be in writing and signed by each member.
- Must not be inconsistent with the CC Act

Dry cleaning, 4 people in cc

>Regulated by association agreement - comes in to supplement the founding statement

>Founding Statement is compulsory for CC (same as MOI in companies) - states main business
(to provide dry cleaning service)

Unalterable Provisions

- Disposal of the insolvent member’s interest in terms of section 34.

- Members who are disqualified from taking part in the management of the CC in terms of
section 47. (Persons under legal disability, minor, unrehabilitated insolvent, person who is
disqualified from being a director, and person removed from o ice of trust due to misconduct
etc.)

- The power of every member to convene a meeting by notice in terms of section 48.

Alterable provisions

(provisions that can be changed)

- Section 46 all members of the CC are entitled to participate in the management of the CC.

- The CC shall indemnify members for expenditure incurred in running of business of the CC or
preservation of the business of the CC.

- Payments to members because of their membership shall subject to the agreement of the
members, be paid in proportion to the member’s interest.

The management of a CC
- Parties have equal right to participate in the management of the CC.
- Certain members may be excluded. E.g Members of a CC with 10 members may agree that
only two of the members are responsible for management.

- Decisions are adopted by 51% or morepercent.

The following crucial decisions require written consent of a member or consent of members
holding 75% of the member’s interests:

o Change of the main busines of the CC.

o The disposal of the whole undertaking or business or a greater part of the assets of the
CC.

o The acquisition or disposal of an immovable property by the CC.

Members who are excluded form management

o Persons without legal capacity are disqualified from taking part in the management of the CC.

o The following persons are not allowed to take part in the management of the CC unless the
court grants permission:

- Unrehabilitated insolvent
- Any person removed from an o ice trust due to misconduct
- Any person convicted for crimes involving dishonesty such as theft, perjury, fraud and
forgery.
- Any person convicted under the Prevention of Corruption Act 6 of 1958.
- Any person convicted for an o ence involving dishonesty.
- Any person convicted for an o ence involving the formation and management of a
company or CC and imprisoned for at least 6 months without the option of a fine.
- Any person who in terms of an order of the court is disqualified from being a director of
the company may not participate in the management of the CC.

The capacity of members to represent the CC in contracts with third parties; Section 54

- Every member of the CC has an equal power to represent the CC.

- Other members can be excluded in the association agreement.

- Exclusion relevant internally not externally with third party. Thus all members are agents of the
CC.

- Any contract concluded by a member with the third party regardless of whether it is in line with
the business of the CC or not, will bind the CC unless:

- The member has no authority.

- And the third party knows or ought to have reasonably known that the member has no
authority.

The relationship of the members vis-à-vis the CC

Duty to act in good faith section 42

- To act honestly at all time.

 - To exercise the power in the best interest of the CC

- Not to exceed the power.

- Members interests should not be in conflict with the interests of the CC.

- Members should not make a secret profit.

- Members should not compete with the CC. ‘

- A member that has personal financial interest must notify.

- Failure to notify members, contract is voidable at the option of the CC and any
interested person may apply to court for an order in relation to the personal financial
interest.

- The CC will claim loss or CC may ratify.

Duty of care and skill

- Like in companies, members of the CC when managing the a airs of the CC owe the
duty to act with the degree of care and skill that is reasonably expected from a person of
the member’s skill and experience of the member.

- This is an objective test which includes subjective elements.

- When members are contracting with third parties they are expected to act as provided
above. In other words, their conduct should meet the test or the standard provided
above.

The acquisition of a member’s interest

Like in companies, the finances of the CC are also regulated by protective provisions to ensure
that CCs achieve their objectives. Finances can be used:

- When all members provide consent.

- When solvency and liquidity test is complied with after the payment for acquisition of
the member’s interest.

- Failure to do so, every member who was a member before the acquisition of the
member’s interest and the former member to whom money was paid will be liable for all
the liabilities of the CC before the transaction.

Financial assistance in respect of the acquisition of a

member’s interest
CCs like companies can provide financial for the acquisition of the member’s interest provided
these requirements are complied with:

- Consent from all members

- Compliance with Solvency and Liquidity test after financial assistance

- Failure to do so, members and beneficiaries will be liable for all the debts of the CC
before the financial assistance.
Payments to members
- CC may pay members by virtue of their membership.

- This may happen many times in the financial year.

- Approved by the support of members holding 51% or more of member’s interest.

- The CC must still be solvent and liquid after pay.

- Failure to do so, the member should pay back

- If the CC is wound up, payments made within 2 years before the CC is wound should
be repaid to the CC by the member unless the member can prove that after the
payments, the CC could still comply with solvency and liquidity test.

The circumstances in which the members of a CC incur personal liability for the debts of
the CC

Study the table on 33.11 on your own. Note that section 39 and 40 of CC Act provide the
requirements that must be complied with before payment by the CC:

- All members should consent

- Solvency and liquidity test must be complied with.

The abuse of a CC
When the business of the CC is carried:

- Recklessly, negligently, with intent to defraud or fraudulently

Member concluding contracts with third parties while ignorant of the fact that the CC is
insolvent (recklessly or negligent trading) or with intent to defraud creditors where the members
know that the CC is insolvent,

- The master, liquidator or creditor may apply to court to declare the person who willfully
participated in the running of the CC as such to be personally liable for the debts of the CC.

- Abuse of legal personality, the court can disregard separate legal personality.

The accounting practice of a CC

- CC must keep financial records.

- In the founding statement, CC must put the date on which its financial year will end.

- All members of the CC must within nine months of the financial year end make sure
the financial statement is out in one o icial language.

- Note what should be in the annual financial statement.

- Every CC must appoint an accounting o icer and the o icer must provide written
consent to be appointed, this must be lodged with founding statement to the
Registrar/CIPC.

- Note the duties of the accounting o icer