Close Corp. (TB)

Question 1

Which statute regulates CCs?

Answer 1

The Close Corporations Act 69/1984

Question 2

Name 4 simple benefits of a CC

Answer 2

Simple, deregulated, flexible, with limited liability

Question 3

Do CCs have legal personality?

Answer 3

Yes, and they have perpetual succession

Question 4

Which document establishes a CC?

Answer 4

The founding statement (CK1).
It sets out certain details about the corp., including the name of the corp., its financial year, details of members, details of the accounting officer, and the principal business of the corp.

Question 5

Which additional document can be used in a CC?

Answer 5

The members may voluntarily draw up an association agreement, which is a contract that principally sets out the rights and duties of, and relationship between, members.

Question 6

Describe the facts that a CC is a juristic person

Answer 6

Even though a CC is a juristic person, it has the capacity and all the powers of a natural person in so far as a juristic person is capable of having such capacity or exercising such powers.
As such, the ultra vires doctrine has no application iro CCs, and
the statement of the principal business of the corp. in the founding statement does not affect the corporation’s capacity and powers. As such any contract entered into by a CC with outsiders will be valid, even if the transaction goes beyond the stated business of the corporation.

Question 7

Does a CC have shareholders?

Answer 7

No, it has members.

Question 8

Describe the legal liability of a CC

Answer 8

A CC is a separate legal person and is distinct and apart from its members. Notwithstanding, the principle that a CC is a separate legal entity, members can be liable for its debts in certain circumstances.

Question 9

How many members can a CC have?

Answer 9

1 - 10

Question 10

Is there a distinction between ownership and control in a CC?

Answer 10

No, members have both ownership and control.

The Act allows every member to participate in the business and to make legally binding decisions obo of the corp.

Question 11

Who may be members of a CC

Answer 11

With a few exceptions, only natural persons (not juristic persons) may hold a member's interest. 
A trustee (of both inter vivos and testamentary trusts) can be a member of a CC in the capacity of trustee. But then no juristic person may be a beneficiary of that trust.

Question 12

Can a CC be shareholder of a company?

Answer 12

Yes, it may even become the controlling shareholder of a company.

Question 13

Are there limits to the number of employees or the value of assets in a CC?

Answer 13

No, only on the number of members.

Question 14

From when may no new CCs be incorporated?

Answer 14

From 1 May 2011 - the commencement of the Companies Act of 2008

Question 15

What is the alternative no that CCs can no longer be incorporated?

Answer 15

Small business can now incorporate as private companies under the Companies Act.

Question 16

Which test is applicable under both the CCA and the CA?

Answer 16

The solvency and liquidity test has to be applied before certain transactions can take place

Question 17

Which special provisions from the Companies Act relates to CCs?

Answer 17

1. All CCs that existed when the Act became effective can continue indefinitely; but no new CCs may be formed;
2. Sched2 of the ct provides for the steps to be taken when CCs are converted to companies;
3. Sched3 makes certain amendments to the CCA:
   a. Annual financial statements of a CC must comply with IFRS
   b. The members of a CC can voluntarily decide that the corp. must comply with the extended accountability provisions of the Act
   c. The business rescue provisions of the Act will apply to CCs

Question 18

How can a CC be converted to a company?

Answer 18

A notice of conversion must be made and accompanied by:

• A written statement of consent approving the conversion of the CC, signed by members of the corp. with at least 75% aggregate members’ interest
• A MOI consistent with the requirements of the Companies Act
• The prescribed filing fee

Question 19

What happens after conversion?

Answer 19

Every member of the CC that has been converted is entitled to (but not obliged) become a shareholder of the company resulting from that conversion; the shares to be held in the company need not necessarily be proportional to the members’ interest stated in the founding statement of the CC.
On registration, the juristic person that existed as a CC continues to exist as a juristic person, but in the form of a company, and all the assets, liabilities, rights and obligations of the CC vest in the company.
- Any legal proceedings instituted by or against the corp. may be continued by or against the newly formed company;
- Any liability of a member of the corp. for the corps.’ debts that had arisen ito the CCA survives the conversion and continues as a liability of that person, as if the conversion had not occurred.

Question 20

Discuss the contributions made by members

Answer 20

On the formation of a CC, each person (member) on its incorporation was required to make a contribution (money, assets, or services)
Particulars of these contributions have to be included in the founding statement.
The size of the member’s interest need not necessarily be in proportion to this contribution.

Question 21

What does each member of a CC have?

Answer 21

A member’s interest in the corporation.

Question 22

What is a member’s interest?

Answer 22

A single interest expressed as a percentage. (The total of all members’ interests must = 100%)
A member may not hold more than one interest.
A member’s interest may not be held jointly

Question 23

When does a person become a member?

Answer 23

When the founding statement reflecting that person’s membership was registered.

Question 24

What is the dual-function of a certificate of member’s interest?

Answer 24

1. Reflects membership

2. Reflects member’s interest

Question 25

Is there a securities register for CCs?

Answer 25

No, because the necessary detail is reflected on the founding statement (or amended founding statement)

Question 26

When does membership for a person cease?

Answer 26

After disposing of his or her member’s interest and after registration of an amended founding statement reflecting the same.

Question 27

What is the legal nature of a member’s interest?

Answer 27

The Act states that it is movable property transferable in the manner provided in the Act.
It is incorporeal.

Question 28

Define a member’s interest

Answer 28

A personal right against the corporation, entitling the member to a proportionate share in the aggregate members’ interests, to participate in a distribution of profits, and to share in a distribution of the assets on liquidation once all the creditors have been paid.

Question 29

How are members’ voting rights determined?

Answer 29

Unless provided in an association agreement, it will be in proportion to their members’ interests.

Question 30

How can new members acquire a member’s interest?

Answer 30

1. From an existing member

2. By making a contribution in the form of money or assets to the corporation

Question 31

How is a member’s interest disposed?

Answer 31

1. Act makes provision for the disposal of a member’s interest in the event of death or insolvency, and where a member’s interest is attached and sold by way of sale in execution.
2. Pursuant to a court order (which must direct the disposal of the member’s interest)

Question 32

What must happen before a member’s interest can be disposed?

Answer 32

1. Must be made in accordance with association agreement (if any)
2. With the consent of every other member

Question 33

What is required for a legatee or heir to receive a member’s interest?

Answer 33

Requires the consent of the other members.
If consent not forthcoming within prescribed period, the executor may sell the member’s interest, subject to the same restrictions that apply in the case of an insolvent member.

Question 34

What are the statutory duties imposed on members?

Answer 34

1. A fiduciary duty

2. A duty of care and skill

Question 35

Discuss a member’s fiduciary duty

Answer 35

A member has a fiduciary duty to do -

1. Act honestly and in good faith
2. Exercise his powers in the interests of the corporation
3. Not exceed his powers
4. Avoid a material conflict of interest
5. Not compete in any way with the corporation in its business activities
6. Notify the other members as soon as practicable of the nature and extent of any material interest that he has in any contract of the corporation (where he fails to do so, the contract is voidable)

Question 36

How is a member, that has breach a fiduciary duty, liable?

Answer 36

Personally liable to the corp. for any loss suffered by the corp., or for any economic benefit derived by the member.
He must also repay any benefit obtained as a result of the breach.

Question 37

Discuss the duty of care and skill

Answer 37

A member will be liable for a breach of this duty in carrying on the business of the CC, if this has resutled in a loss for the corporation.
The standard of care is that which reasonably be expected from a person with that member’s knowledge and experience.
This is a subjective element.
Liability will not be incurred if the conduct has the written approval of all the members and they were aware of all material facts.

Question 38

What is required for a member to institute court proceedings in the name of the CC?

Answer 38

The authorisation of a members’ resolution, passed by members holding at least 51% of the members’ interest.