Close Corporation – Personal Liability and Member’s Authority | Legal Articles

 

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Close Corporation – Personal Liability and Member’s Authority

Since the change of company laws in South Africa, owning a new close corporation is no longer possible.

However, these changes did not affect any close corporations which were already in existence and such CC’s still require regulation as before.

close corporation in South Africa

Close Corporation Ownership in South Africa

One of the many benefits of a close corporation is that it’s typically easier to regulate and administer than a company.

In addition, a CC is deemed a juristic person distinct from its members who have limited liability.

Close corporation members’ interests in the CC are determined according to their percentage of ownership. This is different to a company where shareholders acquire shares in the company.

Right of Members of a Close Corporation

The Close Corporation Act 69 of 1984 governs the regulations of a CC as well as the terms stipulated in the agreement between the CC and its members.

In the event where no such agreement has been entered into, the Act provides a default position for regulating the CC and the rights and obligations of its members.

Conduct of Members of a CC

Members of a CC have the right to act on their own and this has a binding effect on the on CC.

This is applicable unless the authority of the member in question has been restricted in some way and the other party to the transaction is aware of the restriction in place.

Section 54 of the Company’s Act says the following: “Subject to the provisions of this section, any member of a corporation shall in relation to a person who is not a member and is dealing with the corporation, be an agent of the corporation”.

This means that every member of the CC is able to bind the CC in their individual capacity unless there is an agreement which specifically states otherwise, or it’s dealt with according to the internal relations rules stipulated in section 46 of the act.

Section 46 states that members are to have equal rights with regard to managing the affairs of the CC and the power to represent the CC in carrying out its business-related tasks.

This is provided that the consent of a member holding member’s interest of a minimum 75% will be required for the following decisions:

  • a change in the principal business carried on by the CC;
  • a disposal of the whole, or substantially the whole, undertaking of the CC;
  • a disposal of all, or the greater portion of, the assets of the CC; and
  • any acquisition or disposal of immovable property by the CC.

Personal Liability of Close Corporation Members

According to the act, members are not by default held personally liable for the liabilities and obligations of the CC merely because they are members.

This is because the CC is typically treated independently from its members. Members are only held liable in cases where the member has signed as surety, indemnitor or guarantor for the CC’s debts and obligations.

However, according to section 63, 64 and 65 of the act, members may be held personally liable if the member:

  • disregards his or her duties
  • commits acts of gross negligence
  • abuses the separate juristic personality of the CC

Members may agree to be held personally liable for the debts and obligations of the CC which will require the members to enter into a separate agreement for these specific purposes.

Van Deventer & Van Deventer Incorporated – Attorneys in Johannesburg

If you have any further questions related to the regulations of an existing close corporation in South Africa, please feel free to contact us.

Comments are closed for this post, but if you have spotted an error or have additional info that you think should be in this post, feel free to contact us.


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