Legal personality and registration of companies

CHAPTER 2
 Legal personality

 A natural person is a legal subject with certain rights in respect of a legal

object.
 Rights of legal subjects:
 real rights (the right to a corporeal - such as ownership),
 personal rights (the right to claim something from another legal subject
on the basis of a contract or delict),
 intellectual property rights (the right in the physical embodiment of the
intellect of a legal subject, such as a copyright)
 personality rights (the right to privacy, dignity or fame).
 A legal (juristic) person) has the same capacity and powers as a natural
person.
 The capacity and powers of a legal person can be restricted either by the
documents creating the legal person, or by the Act that bestows legal
personality.
 Acts performed outside this capacity or power are ultra vires, but they
are not necessarily void - the enabling Act can provide that those actions
are valid under certain circumstances.
 1.2 Legal personality: specific Act
 Certain Acts expressly provide that the entity formed in terms of the Act has legal
personality. For example, the University of Pretoria (Private Act) 3 provides that the
University is a legal person with certain restrictions on its capacity and powers.

1.3 Legal personality: general enabling Act

 Certain Acts do not give legal personality to a specific entity, but to all entities that
comply with the requirements of that Act, such as the Companies Act

1.4 Legal personality: conduct

 The common law allows the acquisition of legal personality as a result of conduct.
In effect, if persons conduct themselves like a legal person, the common law
recognizes the association of persons as a legal person separate from the persons.
This is only possible if a particular Act does not preclude such an effect, such as,
inter alia, section 8(3) of the Act.

 Requirements to acquire legal personality by conduct:

 The property of the members and that of the legal person must be kept apart.
 The legal person must have the capacity to incur obligations and to have rights.
 A legal person must be capable of having locus standi to sue in its own name and
to be sued in that name.
• These elements will usually appear in the agreement (whether express or
implied) between the legal subjects (persons) who form the association.
• Some Acts preclude the acquisition of legal personality under certain
circumstances. Section 8(3) of the Companies Act provides; that an
association of persons formed after 31 December 1939 for the purpose of
carrying on any business that has for its object the acquisition of gain by the
association or its individual members is or may only be a body corporate if it
is registered as a company in terms of the Act, or is formed pursuant to
another law, or was formed pursuant to Letters Patent or Royal Charter before
31 May 1962.
• So, in common law legal personality is only possible if it falls outside of
this provision.
• In Mitchell's Plain Town Centre v Mcleod, business was defined as 'an
occupation or duty which requires attention’, and 'gain' as 'a commercial
or material benefit or advantage, not necessarily a pecuniary profit',
even if it is indirect or only one of the objects of the association.
 1. 5 Effect of legal personality

 The company is a separate legal subject, independent of its shareholders

even if a person holds all the shares in the company.
 The consequences of legal personality are the following:
 Separate existence _ means that the characteristics of the members
cannot be attributed to the legal entity. EG: a company cannot be said
to be a S. African company merely bs all the members are S. Africans.
 Perpetual existence in the sense that a change in 'members' does not
affect the legal person.
 The entity is a legal subject, and can have all the rights of a legal
subject, including:
 rights of privacy, dignity and fame
 being the owner of assets;
 being liable for debts/obligations;
 having profits/losses, which are the property of the legal person;
 suing and being sued in its own name.
 The entity cannot act in its own name; acts performed in its capacity
as a legal subject must be effected through duly appointed (usually
natural) persons as agents - mere 'membership' does not entitle a
person to act as agent.
 The entity is bound by and entitled to the Bill of Rights in terms of
section 8(2) of the Constitution

 1.6.1 General

 Legal personality is not absolute and can be ignored (by 'piercing’ or

'lifting’ the corporate veil) under certain circumstances.
 Under the common law, this remedy was seen as a remedy of last
resort,
 However, the provisions of s 20(9) of the Companies Act that
expressly recognize the remedy, apparently 'militates' against such
an interpretation and it can be used as a primary remedy.
 1.6.2 Common law

 There are circumstances that require corporate entity to be ignored

(pierced or lifted). The following are some instances corporate entity
will be ignored:

 'Misuse' to perpetrate a fraud, or for a dishonest or improper

purpose.
 'Unconscionable injustice' in the sense that the action of the
company is 'improper' and there is no other remedy available.
 The actions of the 'directing mind and will' of the company will be
that of the company for criminal and delictual liability as well as
for determining the intention of the company for income tax
purposes (for example).
 Discrimination against a company in respect of the race of its
members.
 1.6.3 Statutory law

 In instances where an Act provides that the legal entity may be pierced
or lifted, the rights and obligations of the entity will be those of the
constituents (shareholders/members or others) or their acts or features
will be that of the entity.
 Some examples are:
 Doing business recklessly,
 with gross negligence,
 with intent to defraud any person or for any fraudulent purpose will
result in the personal liability of directors and others.
 In terms of s 20(9) of the Companies Act, the court can declare, if it
finds on application by an interested person, or in any proceedings in
which a company is involved, that the incorporation of the company, or
any act by or on behalf of that company, constitutes a unconscionable
abuse of the juristic personality of the company as a separate entity, that
the company is to be deemed not to be a juristic person in respect of the
rights, obligations or liabilities of the company, or of a member or
another person specified in the declaration.
• The court may give any order as it may deem fit to give effect to such
declaration.
• The Act apparently provides for stages of abuse. Only when the abuse is
unconscionable will it be a basis for an application in terms of section
20(9). The provision brings about that a remedy can be provided
whenever the illegitimate use of the concept of juristic personality
adversely affects a third party in a way that reasonably should not be
countenanced.
• Illegitimacy on its own should be a ground for the application of section
20(9) as it is per se both abuse and unconscionable, and also the basis
for the common law remedy of piercing the corporate veil, and the effect
on a third party should be irrelevant.
• An 'interested person' will be any person with an 'actual and existing
interest' and 'unconscionable abuse' would ordinarily imply that the
remedy must be used as last resort, but the inclusion of section 20(9) in
the Act, that would apply in addition to and not to the exclusion of the
common law, apparently implies that it is not the case Section 34 of the
National Environmental Management Act, for example, provides for the
personal liability of directors for offences and penalties under NEMA.
 2 Types of companies
• 2.1 Profit companies
• Two types of companies, namely profit companies, and non-profit
companies.
• A 'profit company' means a company incorporated for the purpose of
financial gain for its shareholders.
• Profit companies can be categorized as –
 state-owned companies (SOCs);
 private companies;
 Personal liability companies; or
 public companies.

• 2.1.2 Private company

• A private company must not be an SOC,
• its Memorandum of Incorporation (MOI) prohibit offering shares to the
public and restricts the transferability of its shares.
• The abbreviation '(Pty) Ltd’ or 'Proprietary Limited' must be added to the
name.
• The prohibition in respect of the offer to the public must be in respect
of any (and all) securities.
• The provisions proposed in the standard MOI for a private company
in COR 15.1A do not comply with these requirements, inter alia, as
only shares are subject to these restrictions.

• 2.1.3 Personal liability company

• is a profit company that meets the criteria in section 8(2)(c). The
abbreviation 'Inc' or 'Incorporated' must be added to the name.
• Section 8(2)(c) provides that a company is a personal liability
company if it meets the criteria for a private company and
• its MOI states that it is a personal liability company.
• s 19(3), provides that if a company is a personal liability company,
the directors and past directors are jointly and severally liable,
together with the company, for any debts and liabilities of the
company as are or were contracted during their respective periods of
office.
• The doctrine of constructive notice applies to these companies, under the
conditions set out in section 19(5).
• The doctrine of constructive notice _ a person is regarded as having
notice and knowledge of the effect of personal liability.
• An amendment to the MOI which will have the effect that
if a personal liability company is changed into another type of company,
it must be notified to persons who may be adversely affected or who
may
reasonably be considered to have acted in reliance on the joint and
several liability of directors, namely, just about everybody who did
business with the company as clients (professional or otherwise).
• Any professional or industry regulatory authority that has jurisdiction
over the business activities of that company must also be notified.
• 2.1.4 Public company
 is a profit company that is not an SOC,
 a private company or a personal liability company and
 the abbreviation 'Ltd' must be added to the name.

• 2.1.5 State-owned company ‘SOC’

 is a company registered in terms of the Act as a company, and
 is listed as a public entity in Schedule 2 or 3 of the Public Finance
Management Act,
 is owned by a municipality, as per the Municipal Systems Act and
 All shares in the SOC are owned by those entities or a combination of
them.
 The abbreviation SOC Ltd must be added to the name.
 All the provisions of the Act apply to SOC, except to the extent that the
minister has granted an exemption.
 All SOC fall within the ambit of the PFMA
• 2.2 Non-profit companies
• A non-profit company (NPC) is incorporated for a public benefit or other
object as required by item 1(1) of Schedule 1, and the income and
property of which are not distributable to its incorporators, members,
directors, officers or persons related to any of them except as reasonable
compensation for services rendered.
• The abbreviation 'NPC' must be added to the name.
• Item 1(1) provides that the MOI of a NPC must set out at least one
object of the company, and each such object must be either a public
benefit or an object relating to one or more cultural or social activities or
communal or group interests.
• These objects and the operations of the NPC must, also be consistent
with item 1(2) to (9) of Schedule 1.
• NPCs without any members can also be incorporated.
• Incorporation as a NPC, does not qualify that NPC, for any particular
status, ito the Income Tax Act or any other legislation, except to the
extent that any such legislation provides otherwise.

 An NPC is subject to provisions in Schedule 1

 it must utilize assets and income to advance or attain its objects

 it may acquire and hold securities issued by a profit company if

allowed by its MOI
 in a case of its winding-up its entire residual value (net assets) must
be transferred to an organization with similar object. No past of
present members or director or person appointing the director is
entitled to any part of the net asset value after the company has met
its obligations and satisfied its liability
 atleast three person are required to incorporate a non-profit company
 It may not merge with or be converted into a profit company
 2.3 External companies

• An external company is a foreign company conducting a business or non-

profit activities within the Republic.
• A 'foreign company’ is an entity incorporated outside the Republic,
irrespective of:
• (a) whether it is a profit or non-profit entity; or
• (b) whether it is carrying on business or non-profit activities, as the case
may be, within the Republic.
• A foreign company will be regarded as conducting business if it is party
to atleast one employment contract within the Republic or is engaging in
or has engaged in a course or pattern of activities within the Republic
over a period of at least six months, such as would lead a person to
reasonably conclude that the company intended to continually engage in
business or non-profit activities within the Republic.
• However, it is not to be regarded as conducting business, or non-profit
activities, as the case may be, within the Republic, merely because it is
or has engaged in one or more of the following activities within the
Republic –
 creating or acquiring any debts, or mortgages, or security interests in
any property;
 securing or collecting any debt, or enforcing any mortgage or security
interest;
 acquiring any interest in any property
 establishing or maintaining offices or agencies for the transfer,
exchange or registration of the foreign company's own securities;
 holding a meeting or meetings of the shareholders or board of the
foreign company, or otherwise conducting the internal affairs of the
company;
• A foreign company also includes any other entity incorporated outside
the Republic, like a business trust, if it is incorporated.
• An external company must register with the CIPC within 20 business
days after it first begins to conduct activities within the Republic as an
external
• NPC or as an external profit company (if it meets legislative or
definitional requirements comparable to a non-profit or profit company
incorporated under the Act) and then becomes a registered external
company.
• The CIPC must assign a unique registration number to each external
company that has been registered.
• In the case of an external company whose name is a foreign registration
number that does not indicate the name of the foreign jurisdiction in
which it was incorporated, the CIPC must append the name of that
jurisdiction to the company's name in the registry.
• If an external company has failed to register within three months after
commencing its activities within the Republic, the CIPC may issue a
compliance notice to the company requiring it to register as required
within 20 business days after receiving the notice, or, if it fails to register
within this time, to cease carrying on its business or activities within the
Republic.
 2.4 Domesticated companies
• A foreign company may apply to transfer its registration to the Republic
from the foreign jurisdiction in which it is registered, and thereafter
exists as a company in terms of the Act as if it had been originally so
incorporated and registered
• A foreign company may transfer its registration if –
• the law of the jurisdiction in which the company is registered permits
such a transfer, and the company has complied with those requirements
in relation to the transfer; and the transfer has been approved by the
company's shareholders in accordance with the law of the jurisdiction in
which the company is registered, if that law imposes such a requirement,
or otherwise by the equivalent of a special resolution in terms of this Act;
and
• the whole or greater part of its assets and undertaking are within the
Republic, other than the assets and undertaking of any subsidiary that is
incorporated outside the Republic; and
• the majority of its shareholders are resident in the Republic; and
• the majority of its directors are or will be South African citizens; and
• immediately following the transfer of registration, the company -
- will satisfy the solvency and liquidity test; and
- will no longer be registered in another jurisdiction.
 3 Registration
• Registration is effected by the completion and the signing of the MOI by
the requisite number of persons or an organ of state and by filing the
prescribed Notice of Incorporation (NOI).
• A company is deemed to be a juristic person from the date and time that
its incorporation is registered.
• Company name reservation is done in terms of s 12 (for six months) and
may be transferred and the criteria in s 11(2)(b) or (c) for acceptability
of names for registration are, with the exception of s 11(2)(a) (if the
name is the 'same' as an existing company name or already reserved)
the same as for the name chosen, without reservation, and listing
thereof in the NOl.
• If there are reasonable grounds for considering that the proposed name
for reservation may be inconsistent with s 11(2)(b) or (c), the CIPC must
reserve the name but can require the applicant to serve a copy of the
application on the person/s on the grounds that that person/s may have
an interest in the use of the name that has been reserved 90 and such
person/s may apply to the Companies Tribunal within three months from
receipt of the notice for a determination: section 160.
• If reserved, the name will be indicated on the NOI and the company will
be registered with that name.
 Section 11(2)(a) provides, the name must not be the same as an existing
name, trademark or well-known trademark in terms of the Trade Marks Act
194 of 1993. If the name in the NOI is the same as that of a registered
company (also of a domestic or external company), or a reserved name, or a
registered trademark, or the names in particular categories, the CIPC may use
the registration number as name in the interim.
 If the CIPC has reasonable grounds to believe that the proposed name is
inconsistent with section 11(2)(b) or (c) the company may be required to
serve a copy of the application on the relevant person. If the name is
deemed to be 'offensive', the company may be required to serve the notice
on the Human Rights Commission.
 Section 11(2)(b) requires that the name must not be confusingly similar to an
existing name, trademark or well- known trademark in terms of the Trade
Marks Act 194 of 1993. 'Similar’ requires it to have a marked resemblance or
likeness and that the offending mark (or name) should immediately bring to
mind the well-known trademark (or other name) and cause confusion in the
mind of the ordinary person.
 Section 11(2)(c), requires a name not to falsely imply or suggest, or be such
as would reasonably mislead a person to believe that the company is part of
or associated with, any other person or entity.
 The meaning of 'reasonably mislead a person to believe', which addresses the
effect rather than the act itself, should be the same as in Adidas AG and
Another v Pepkor Retail Limited102 In Lucky Star Ltd v Lucky Brands (Pty) Ltd
and Others, it was accepted there is clearly a possibility of an overlap between
section 11(2)(b) and the alternative effect of section 11(2)(c).
 If the CIPC does not require the person applying for reservation of a
name or the company which chooses a name in the NOI that does not
comply with section 11(2)(b) and/or (c) to serve a copy of the application
on the relevant person, any interested person can apply to the Companies
Tribunal for a determination in terms of section 160.
 In such a case it can be done on good cause shown at any time after the date
of the reservation or registration of the name that is the subject of the
application. 'Good cause’ was defined in the Highly Nutritious Food Company
(Pty) Ltd v The Companies Tribunal and Others case as not only referring to
an explanation for the delay in bringing the application, but also as to why the
application must be entertained, being the merits of the application.

 Please complete the rest of the chapter