Close Corporations

1. Close Corporations ONR314

2. Background • Close Corporations Act 69 of 1984 • CC came into operation on op 1 Jan 1985 • Known as “small business corporation” • CC’s provide for the reasonable needs of the typical small businessman

3. Objectives with close corporations • Simple, less expensive and more flexible business form • With separate legal personality • Very popular • Large numbers registered

5. Reasons for a ‘new’ legal form • Company law became more complex • Companies Act became inappropriate for the needs of the bona fide small business • Need for a legal form with advantages of legal personality without subjecting them to strict company law • Aim= simpler, less expensive legal form • Additional form

6. Distinctive characteristics • Members must be natural persons • Legal requirements and environment simpler than Companies Act • CC-Act = 83 sections v Comp-Act = 225 sections and 5 Schedules • CC = juristic person distinct from its members, enjoys perpetual succession • Members = limited liability for CC’s debt

7. … Distinctive characteristics • Capacity and powers of a natural person (limited) • Minimum Formalities • Single person can form a CC, doest have to be for gain • No shares/ no share capital

8. … Distinctive characteristics • No strict rules on capital maintenance = must maintain solvency and liquidity • May provide fin assistance for purchase of a members interest • Flexibility in internal relationships and management • Members have equal say in management

9. … Distinctive characteristics • Act decriminalized = members may be held liable for contraventions of the Act or putting creditors at risk word • Common law fiduciary duties partially codified • Less extensive accounting and disclosure provisions

10. CC v Partnership • CC • 1 -10 members • Only natural persons = members • Juristic person • Perpetual succession • Fiduciary relationship between members and the CC • Entity taxed • Partnership • 2- 20 members • Juristic and natural persons • Change in membership = dissolution • Fiduciary relationship between partners inter se • Partners taxed individually

11. CC v Business Trust • Self study

12. Advantages of a CC • Simplicity of management • Simplicity of decision-making structure • Few formalities • Only annual return • CC may hold shares in a company, company may not hold members interest in CC

13. Disadvantages of a CC • Every member is a agent of the CC and can bind its credit without knowledge or consent of other members • Only 10 members allowed

14. CC’s and the Companies Act 2008 • No new CC’s after commencement of the 2008 Act • Existing CC’s may continue indefinitely • Converted to private companies under the 2008 Act • Act contains provisions affecting the CC’s-Act: business rescue, annual fin statements and audit.

15. Registration Requirements • Not applicable

16. Constitutive documents • Founding statement • Association agreement (optional)

17. Founding Statement • Records information regarding the CC • Changes or additions must be recorded with the Registrar by lodging an amended founding statement (CK2)

18. Assosiation Agreement • Regulates the internal matters • Must be consistent with provisions of the Act • Similar to shareholders agreement • Must be signed by each member and kept at registered office • Inspect = only members

19. CK 1 or Founding dokument • Constitutive document • Sets out the corporate structure • Must be signed by all members upon registration • Inspection = any person

20. Contents of CK1 • Full name • Principle business to be carried on by the CC • Date of the end of the financial year • Postal address • Name and postal address of the accounting officer + written consent • Full names, ID numbers, residential and postal address for each member • Size in % of each members interest • Particulars of each contribution

21. Name of CC • Name: • Starting point of registration • Must not be “in the opinion of the Registrar undesirable” • Not closely resemble another CC or company • Change of name: Self study – How to change CC’s name? Consequences? Par. 26.14-17

22. Additional requirements as to name • Abbreviation CC must be added to the name (or equivalent in official language) • Full registered name + registration number (legible) must: • Be displayed on the outside of registered office and every other office • Mentioned in all notices and official publications

23. If not, member or person acting on behalf of CC: • Guilty of an offence • Liable to the holder of the bill of exchange, promissory note, cheque – unless the amount is paid by the CC

24. Amendments to CK1 • S 15: an amended founding (CK2) statement must be lodged with the Registrar if any change of any particulars stated in the founding statement has taken place • Read

25. Conversions • No new conversions from companies to CC’s • Conversion from CC to company NB!

26. CC to Company • Leave par.26.25 • Notice of conversion must be accompanied by: • Written statement of consent (signed by 75% of the members’ interest in the corporation) • A MOI consistent with the Companies Act 2008 requirements • Prescribed filing fee.

27. CC to Company(…continued) • Every member = shareholder • Shares need not be in proportion to the members’ interests as stated in the founding statement • Juristic person that existed before the conversion continues to exist but in form of company • All assets, liabilities, rights and obligations vest in the company • Legal proceedings continue against the newly formed company • Member’s liability for CC debt survives

28. Dros v Telefon