MRL2601/201/1/2023

Tutorial Letter 201/1/2023

ENTREPRENEURIAL LAW
MRL2601

Semester 1

Department of Mercantile Law

This tutorial letter contains important information

about your module.

BARCODE
 CONTENTS

1 FEEDBACK ON ASSIGNMENT 01 ........................................................................................ 3

2 FEEDBACK ON ASSIGNMENT 2 .......................................................................................... 7
3 CONCEPT EXAM PAPER ..................................................................................................... 10
4 GENERAL COMMENTS REGARDING THE EXAMINATION ............................................. 19

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Dear Student,

By now you should have received Tutorial Letter 101 and Tutorial Letter 102. Tutorial Letter
101 contains information about the format of the examination paper. Tutorial Letter 102
contains the names and contact details of your lecturers and a concept examination.

The aim of this tutorial letter is to provide you with guidelines on answering the compulsory
assignments, Assignments 01 and 02, and the concept examination paper. Please consult
the relevant sections of the study guide referred to in the guidelines for further details.

Please note that the concept examination paper merely serves as an example of how
questions will be asked in the actual examination.

1 FEEDBACK ON ASSIGNMENT 01
General comment regarding answers received from students:
In general students did well in the assignment. This assignment was supposed to be a bit
trickier as you ‘wrote off’ the components of the work dealing with partnerships and trusts in
this assignment. You will not be examined on these enterprises at all.

A startling number of students submitted the incorrect document (either the questions to the
assignment or answers to the assignments for another module). Please be very careful
not to make this mistake in the exam. There is no possibility to resubmit your answers or
to replace the incorrect document on myExams.

QUESTION 1

Identify the different types of partnership that are recognised in South African law. (5)

Maximum 5 marks

The following types of partnerships are recognised in South African law:

Universal partnerships: Two types of universal partnerships can be distinguished: the

societas universorum bonorum and the societas universorum quae ex quastu veniunt.
A particular partnership.
Extraordinary partnerships: anonymous or silent partnership or a partnership en
commandite.
Special partnerships which were registered under the now repealed Special Partnerships
Limited Liabilities Act of the Cape Province and Natal.

Refer to study unit 15 sub-unit 3 in the study guide.

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QUESTION 2

Petrus in his will bequeaths his farm to his two sons on condition that they farm in
partnership. Lenta, an 82-year-old unmarried woman and Maxfed (Pty) Ltd conclude a
partnership agreement. A few pharmacists conclude a partnership agreement with the aim
of repackaging and selling stolen medication. Dobby, an eleven-year-old with assistance
from his guardian concludes a partnership agreement with Playco CC with the aim of
marketing and distributing toys.

With reference to the facts provided above and the requirements for the conclusion of a
partnership agreement, explain whether a valid partnership can come into existence in the
respective scenarios. (5)

Maximum 5 marks

Petrus cannot create a valid partnership by including the stipulation in his will. A partnership
is created by agreement. There must be consensus between his two sons to create a
partnership before a valid partnership would come into operation.

A married woman and a juristic person may conclude a valid partnership agreement.
Therefore, a partnership can come into existence between Lenta and Maxfed (Pty) Ltd.
The pharmacists may not conclude a valid partnership agreement as the object, i.e. selling
stolen medication is not lawful.

Dobby is eleven and a minor with limited contractual capacity, but he is assisted by his
guardian. He can conclude a valid partnership agreement with Playco CC, a close
corporation.

Refer to study unit 15 sub-unit 6 in the study guide.

QUESTION 3

With reference to relevant authority, indicate whether a partnership is recognised as a

separate entity apart from the partners in terms of South African law. (5)

Maximum 5 marks

Partnerships do not have to be registered with the Registrar, but they also do not acquire
their own separate legal personality. Partnerships do not enjoy all the rights and benefits
attached to legal personality. A partnership does not exist independently from the partners.

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Section 8(3) of the Companies Act 71 of 2008 determines that no association formed for the
purpose of acquisition of gain by the association or its members will be a legal person unless
it is registered. Partnership agreements are not registered with the Companies and
Intellectual Property Commission under any law.

The rights and obligations of the partnership are those of the partners and the assets belong
to the partners.

In Sacks v Commissioner for Inland Revenue 1946 AD 31, the court held that, unless a
partnership agreement provided otherwise, receipts of income of a partnership were so
received by the partners in common, and only when the time arose at the end of an
accounting period would a partner become entitled to claim a separate determinable share
of the partnership profits. However, this position has been altered by section 24H of the
Income Tax Act 58 of 1962, which ensures that each partner is regarded as carrying on the
business of the partnership.

The general rule is that a partnership does not exist independently of the partners. There
are only two instances (exceptions) in which a partnership will be deemed separate from its
members:

Sequestration

Section 13(1) of the Insolvency Act 24 of 1936 provides that sequestration of a partnership
estate is to be treated as distinct from the estates of the individual members. If the estate of
an insolvent partnership is sequestrated, the partnership estate (which comprises the
contributions of partners and further assets acquired by the partnership), the estates of the
partners must be sequestrated simultaneously. The debts of the partnership are first paid
from the partnership estate before the private estates of the partners will be looked at to pay
the partnership debt.

Michalow NO v Premier Milling Co Ltd 1960 (2) SA 59 (W): the court held that the Insolvency
Act 24 of 1936 departed from the common law by retaining the partnership estate as a
separate estate from the estates of the partners.

Litigation

In terms of Rule 14 of the Uniform Rules of the High Court a partnership may be sued and
may sue in its business name. A similar provision is to be found in Rule 54 of the Magistrates’
Courts Act 32 of 1944. When judgment is levied against a partnership, the partnership assets
must first be exhausted before execution can be levied on the separate property of the
partners.

Refer to study unit 15 sub-unit 7 of the study guide.

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QUESTION 4

Briefly explain what the requirements are for the formation of a valid trust. (10)

Maximum 10 marks

The founder must intend to create a trust. The founder must express his intention in such a
way that a legally binding trust obligation is created. This obligation either consists of a duty
on the trustee to administer the trust property in terms of the trust document or, in the case
where a trustee has not yet been appointed, of a duty on the founder to ensure that the trust
assets are administered by a trustee. In order to create a legally binding obligation, the will
or agreement which gives rise to the obligation must be legally valid. The trust property must
be defined with sufficient certainty. It must be possible to ascertain which property is subject
to the trust. The object of the trust must be certain.

The object can either be –

• to benefit named or ascertainable persons or a class of persons; or

• to further one or more impersonal objects, for instance sports or culture.

The trust object must be lawful. Legally, no general formalities are attached to the creation
of a trust. Certain formalities must, however, be complied with before a person may act as
a trustee. One of these requirements is the lodging of the trust instrument or a copy thereof
with the Master of the High Court.

Refer to study unit 14 sub-unit 8 of the study guide.

QUESTION 5

Set out five (5) duties of a trustee in relation to a business trust. (5)

Maximum 5 marks

• He or she must observe his duties in terms of the trust document.

• He or she must transfer the trust benefits to the trust beneficiaries in terms of the trust
document.
• He or she must fulfil his duties impartially and in good faith.
• In the performance of his or her duties and the exercise of his powers he must act with
the care, diligence and skill that can reasonably be expected of a person who manages
the affairs of another.

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• He or she must take possession of the trust assets and keep these clearly separate from
his personal property, for example, by opening a separate trust account at a bank for the
money of the trust.
• He or she must preserve the trust property and keep it free from burdens such as liens.
• He or she must manage those trust assets which are capable of producing an income in
such a way that a reasonable return is obtained.
• He or she must maintain a proper account of trust funds and trust business, retain
documents relating to the administration of the trust and render account of his
administration of the trust when the Master requests him or her to do so.
• A trustee whose appointment has been effected after 31 March 1989, the date of
commencement of the Trust Property Control Act, is obliged to furnish the Master with an
address where notices and processes can be delivered and must, in case of a change of
address, notify the Master of his new address within 14 days by registered post.
• In practice, a trustee of a business trust possesses only the management powers which
are conferred on him in the trust document. Since extensive management powers are
indispensable for conducting a business, it is essential that the trust document of a
business trust should explicitly confer wide powers on the trustee to enter into business
transactions on behalf of the trust, to acquire new assets, to employ staff and to provide
security.

Refer to study unit 14 sub-unit 10 in the study guide.

TOTAL: 30

2 FEEDBACK ON ASSIGNMENT 2
General comment regarding answers received from students:

Many students misinterpreted question 1 or were confused because the matter was decided
in the Labour Court. Please note that matters involving different types of enterprises can be
heard in any court. When you write Entrepreneurial Law, you must restrict your answers to
the prescribed work, ie the principles applicable to the business enterprises.

The rest of the assignment questions were straight forward, and most students managed to
find the answers in the study material. However, there were a number of students who tried
to find the answers on Google. Please use the prescribed study material, ie your study guide
and the prescribed textbook in order to answer the questions in the exam.

QUESTION 1

Themba, who was a manager of the Men’s Club, approached the Commission for
Conciliation, Mediation and Arbitration (the CCMA) seeking severance pay after he was
retrenched. The trade union that he belongs to was informed that he was not employed by
the Men’s Club, but that he was in fact employed by a company named Bad Boys (Pty) Ltd.
The trade union duly cited Bad Boys (Pty) Ltd as the respondent in a referral to the CCMA.
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The sole director and shareholder of Bad Boys (Pty) Ltd, Tendai Munyai, during conciliation
indicated that the Men’s Club was insolvent and that Themba had been dismissed for
operational reasons. The commissioner advised Themba to refer an unfair dismissal
dispute. When the matter was referred for arbitration, both the Men’s Club and Bad Boys
(Pty) Ltd were cited as respondents. After hearing the matter, the commissioner ordered
Bad Boys (Pty) Ltd to pay Themba an amount of R250 000 for his unfair dismissal. However,
it was discovered that Bad Boys (Pty) Ltd had no assets. In fact, Tendai Munyai who also
participated in the running of the business had provided financial assistance to Bad Boys
(Pty) Ltd and he had secured claims against the company for repayment of the loan
amounts.

Themba intends to seek an order from the Labour Court to the effect that Tendai Munyai
was his true employer and that he must pay him the amount of R250 000. With reference to
the relevant legislation and case law, indicate what Themba would have to prove in order to
hold Tendai Munyai liable. (20)

Maximum 20 marks

The separate juristic/legal personality of a company can be ignored in certain circumstances.

It is referred to as the lifting or piercing the corporate veil. The common-law principle of the
lifting or piercing of the corporate veil developed in case law. There are no strict rules when
a court will lift the corporate veil. However, the following principles have developed in case
law:

• Botha v Van Niekerk and Another 1983 (3) SA 513 (T): A party must have suffered an
‘unconscionable injustice’ before the court could lift the veil.

• Cape Pacific v Lubner Controlling Investments (Pty) Ltd and Others 1995 (4) SA 790 (A):
The court confirmed that it has no general discretion simply to disregard a company’s
separate legal personality. The court held that the separate legal personality of a company
should not be easily ignored. However, circumstances do exist for example fraud,
dishonesty or other improper conduct where it would be justifiable to pierce the corporate
veil. The court held further that Botha v Van Niekerk was too rigid. The court indicated that
it would adopt a more flexible approach namely of taking all the facts of each case into
consideration when determining if the veil should be pierced. A balance must be struck
between the need to preserve the separate legal identity of the company against policy
considerations in favour of piercing the corporate veil. The veil could also be pierced in
relation to a specific transaction.

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• Hülse-Reutter v Gödde 2001 (4) SA 1336 (SCA): The court agreed that it has no general
discretion simply to disregard a company’s separate legal personality. The corporate veil
would only be lifted if there was evidence of misuse or abuse of the distinction between the
company and those who control it and this has enabled those who control the company to
gain an unfair advantage. Therefore, a dual test was introduced: by adding the element of
unfair advantage. The court further confirmed that much depended on a close analysis of
the facts of each case and considerations of policy.

Section 20(9) of the Companies Act 71 of 2008 regulates disregarding the separate legal
existence of a company (statutory lifting of the veil).

The scope and application of section 20(9) was considered in Ex Parte Gore NO [2013] 2
All SA 437 (WCC). The court held that the test of an unconscionable abuse is not as onerous
to prove as a gross abuse. The remedy in section 20(9) is available if a corporation is used
as a sham or device. Section 20(9) of the Companies Act 71 of 2008 is not available as a
remedy of last resort only.

Please ensure that you always reach a conclusion if the question requires you to do so. In
this case, in order to succeed Temba would have to prove that Tendai had abused the
separate legal personality of the company in order to avoid personal liability.

Refer to study unit 2 sub-unit 4 in the study guide.

QUESTION 2

The members of Gangnam’s Tile CC discover that Puseletso has been concluding several
contracts on behalf of the close corporation that benefit her family members, but which is
detrimental to the business. They are of the opinion that Puseletso’s actions amount to a
breach of her fiduciary duties. Advise the members regarding the following:
2.1 The scope of the fiduciary duties that are owed by a member of a close corporation.
(5)
Maximum 5 marks

Section 42 of the Close Corporations Act 69 of 1984 regulates this duty.

Members owe this duty to the close corporation. A member of a close corporation must
comply with the following:
• Must act honestly and in good faith;
• Exercise the powers to manage or represent the corporation in the best interest of the
corporation;
• Not act without or exceed such powers;
• Avoid a conflict of interests with those of the close corporation;
• Not derive a personal financial gain to which he or she is not entitled by virtue of being
a member of the close corporation;
• Disclose any material interest in a transaction to the other members as soon as
possible;
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• Not compete with the close corporation’s business activities in any way.

Refer to study unit 16 sub-unit 7.1 in the study guide.

2.2 With reference to the relevant statutory provision, what the other members would have
to prove to successfully apply for a court order remove Puseletso as a member of the
close corporation. (5)

Section 36 of the Close Corporations Act 69 of 1984 is applicable.

In terms of this provision in order to terminate the membership of a member of a close
corporation the following must be proven:
Permanent incapacity to participate in running of business;
Conduct that is reasonably likely to affect the running of the business negatively;
Conduct rendering it impossible for the other members to continue working with that
particular member in the enterprise;
The existence of circumstances rendering it just and equitable to terminate the member’s
membership.

Refer to study unit 16 sub-unit 7.3.2 in the study guide.

TOTAL: 30

3 CONCEPT EXAM PAPER

PLEASE NOTE THAT YOU DO NOT HAVE TO STUDY THE WORK PRESCRIBED FOR
PARTNERSHIPS AND TRUSTS IN YOUR STUDY GUIDE FOR PURPOSES OF THE
EXAMINATION.

We have included a concept examination paper in Tutorial letter 102 for purposes of
revision. This should provide you with an indication of the way in which the longer
(written) questions are asked in this module. What follows are guidelines for
answering these questions.

NB: Please note that you will not pass if you merely work out the questions to this
concept paper and memorise it. The prescribed work for this module must be
thoroughly studied to master the work.

QUESTION 1
1.1 Briefly explain to two prospective entrepreneurs, Thandeka and Mike, whether or not
the requirements for the piercing of the corporate veil in terms of the Companies Act 71 of
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2008 and the Close Corporations Act 69 of 1984 are identical. Refer to case law in your
answer. (5)

Maximum 5 marks
The requirements of company law and close corporations’ law for the piercing of the
corporate veil are similar but are not identical.

Section 20(9) of the Companies Act 71 of 2008 follows the example of the Close
Corporations Act 69 of 1984 by codifying the general principle of piercing the corporate veil.

Section 20(9) of the Companies Act 71 of 2008 provides that if a court finds that the
incorporation of a company or any act by or use of a company constitutes an unconscionable
abuse of its juristic personality, the court may declare that the company will be deemed not
to be a juristic person in respect of rights, liabilities and obligations relating to the abuse.

Section 65 of the Close Corporations Act 69 of 1984 refers to a ‘gross abuse’ but section
20(9) of the Companies Act 71 of 2008 refers to an ‘unconscionable abuse’.

The wording of section 20(9) of the Companies Act 71 of 2008 is a combination of section
65 of the Close Corporations Act 69 of 1984 and the judgment in Botha v Van Niekerk 1983
(3) SA 513 (T). It ignores the view expressed in Cape Pacific Ltd v Lubner Controlling
Investments (Pty) Ltd 1995 (4) SA 790 (A), which described the test in Botha v Van Niekerk
as being too rigid.

Refer to study unit 2 sub-unit 4 in the study guide.

1.2 Frank is an Information Technology (IT) specialist. He wishes to incorporate a company

for his business. He does not want to offer any securities to the public.

1.2.1 Advise Frank on the type of company that would be the most suitable for his needs
and briefly explain to him what the characteristics of such a company are. (5)

The best type of company is a private company.

Its Memorandum of Incorporation prohibits the offering of any securities to the public and
restricts the transferability of its securities.

Private companies are no longer limited to 50 shareholders, as was the case under the
Companies Act 61 of 1973.

In terms of section 8(2)(b) of the Companies Act 71 of 2008, a private company’s

Memorandum of Incorporation must contain a prohibition against the offering of its securities
to the public (1) and restrict the transferability of its securities.

It can be formed by one person.

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It must have at least one director.

Refer to study unit 3 sub-unit 2 in the study guide.

1.2.2 List the information that must be contained in Frank’s prospective company’s
Notice of Incorporation. (6)

The Notice of Incorporation must contain the following information:

Type of company;
The incorporation date;
The financial year end;
The registered address (main office);
The number of directors;
The company name.

Refer to study unit 4 sub-unit 2 in the study guide.

1.2.3 Briefly explain the procedure that Frank must follow in order to register the company.
(4)

A Notice of Incorporation and Memorandum of Incorporation must be lodged at the

Companies and Intellectual Property Commission and the prescribed registration fee must
be paid. One or more persons may incorporate a profit company.
Refer to study unit 4 sub-unit 2 in the study guide.

SUBTOTAL: [20 marks]

QUESTION 2

2.1 Agnes, Phineas and Sam are three friends who wish to start their own publishing
company. While driving one Sunday afternoon, Sam comes across the perfect office
building. He wishes to purchase this building on behalf of the proposed company.
Advise Sam what the requirements are that will need to be adhered to in terms of the
Companies Act 71 of 2008 in order to conclude a valid and binding contract on the
company’s behalf before its incorporation. (5)

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Maximum 5 marks

In terms of section 21 of the Companies Act 71 of 2008, a pre-incorporation contract will be

binding on a company if it is concluded by a person in the name of, or purporting to act in
the name of or on behalf of a company yet to be incorporated in terms of the Companies Act
71 of 2008; the contract was concluded in writing; and the board of directors of the company
ratifies the transaction or does not reject the contract within the stipulated three-month
period after its incorporation.

Refer to study unit 5 sub-unit 3 in the study guide.

2.2 Woodco (Pty) Ltd has two shareholders, Thabang and Precious, who each hold 50%
of the issued share capital of the company. Thabang, Precious and Jackson are
appointed as the company’s directors. Thabang buys a load of timber to the value of
R2 million from Xander. Thabang does not seek permission from the board of
directors as required. Xander does not take the trouble to find out what the company’s
Memorandum of Incorporation determines but does not suspect any irregularity in the
agreement. Explain whether the company is bound to the contract. (9)

Maximum 9 marks
Section 20(7) of the Companies Act 71 of 2008 determines that an outsider who contracted
with the company in good faith can assume that the internal requirements and formalities
have been complied with.

The exceptions are: if third party (outsider) knew or reasonably ought to have known that
the internal requirements were not complied with.

In terms of the common-law Turquand rule, if the person acting on behalf of the company
has the authority to do so, but there is subject to an internal formality, such as approval by
the board, an outsider contracting with the company in good faith is entitled to assume that
this internal requirement has been complied with. The company will be bound by the contract
even if the internal formality has not been complied with. The exceptions under the common-
law rule are: if the outsider was aware of the fact that the internal formality had not been
complied with; or if the circumstances in which the contract were concluded were suspicious.

In this case, there is no indication that Xander knew or should have known or that the
circumstances were suspicious. The company is bound in terms of section 20(7) and the
common-law Turquand rule.

Study unit 7 sub-unit 6 in the study guide.

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2.3 Figozo Ltd showed an increase in profits for the 2022 financial year. At a board meeting,
the directors decide that dividends should be paid out to the company’s shareholders.
Indicate what the requirements are in terms of the Companies Act 71 of 2008 that must
be adhered to before the dividends may be declared and paid. (6)

Section 46 of the Companies Act 71 of 2008 is applicable.

The payment of dividends qualifies as a distribution.
The board of directors must authorise the distribution.
The company must comply with the solvency and liquidity test in terms of section 4 of the
Companies Act 71 of 2008.
If the dividend is not paid within 120 business days after the board applied the solvency and
liquidity test the board must reconsider the solvency and liquidity test and cannot pay the
dividend unless the board adopts another solvency and liquidity test resolution.

Refer to Study unit 8 sub-unit 7 in the study guide.

SUBTOTAL: [20 marks]

QUESTION 3

3.1. Mr Schmitds (a German citizen), Mr Ells (an English citizen) and Mr Dube (a South
African citizen) are the only shareholders of West Meets South (Pty) Ltd, a company
registered in South Africa with its head office located in Sandton. Due to the time and
financial costs involved in travelling from Europe to South Africa each time there is a
meeting, especially less important meetings, Mr Schmitds and Mr Ells ask you for
advice whether it is possible for resolutions of shareholders to be passed without
holding any shareholders’ meetings. Advise them whether this is possible under the
common law and under the Companies Act 71 of 2008. (10)

Maximum 10 marks

Yes, it is possible.

In English and South African case law, the common law rule of unanimous assent has been
accepted. In terms of this rule, certain decisions may be valid without a meeting being held,
provided that all the members are fully aware of the facts and all of them have assented
thereto, although this need not be in writing.

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In Gohlke and Schneider v Westies Minerals (Pty) Ltd 1970 (2) SA 685 (A), the court held that
members may validly appoint a director to the board without any formal meeting being held,
because there was evidence of their unanimous consent.

The court, in In re Duomatic Ltd [1969] 1 ALL ER 161 (Ch) held that the unanimous approval
of directors’ remuneration by the two directors holding all the voting shares in a company
could be regarded as a resolution of a general meeting approving the payment.

Although it is still possible to apply the common law principle of unanimous assent, the
Companies Act 71 of 2008 now provides another option. In terms of section 60 of the
Companies Act 71 of 2008, a resolution may be submitted to shareholders and, if adopted
in writing by the required majority, will have the same effect as if it had been adopted at a
meeting without actually holding a general meeting of shareholders. This means that the
unanimous assent (where it is required that each and every shareholder agrees) is not
required under section 60. So long as the required majority agrees in writing, a decision may
be validly passed without convening a shareholders’ meeting. However, any business of a
company that must be conducted at an annual general meeting may not be conducted by
using the section 60 procedure.

The Companies Act 71 of 2008 also provides for the possibility of holding electronic
meetings.

Refer to study unit 9 sub-unit 6 in the study guide.

3.2 The Memorandum of Incorporation of ABC (Pty) Ltd contains the following provision:
‘Directors hold their office for life’. Azaria is a director of ABC (Pty) Ltd. The board of
directors removes Azaria as director. Indicate whether or not she can invoke the
provisions in the Memorandum of Incorporation to prevent her removal. Also indicate
whether she could claim damages for her premature removal based solely on the
provisions as contained in the Memorandum of Incorporation. (7)

Maximum 7 marks

A director can be removed by shareholders and, in some circumstances, by the board of

directors. Despite any provision contained in the company’s Memorandum of Incorporation
or any agreement between the company and the director, removal may be affected by an
ordinary resolution of the shareholders. A director who has been removed from office by the
board may apply to a court to review the determination of the board. This application must
be brought within twenty (20) business days from the date of a decision taken by the board.
The court has a discretion whether to confirm the determination of the board. A removal in
terms of section 71 of the Companies Act 71 of 2008 does not detract from any right that
the director so removed has to claim compensation or damages resulting from the loss of
his/her office.

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Azaria cannot prevent her removal. She can apply though to court to review the board’s
decision to remove her. However, she can claim damages in terms of the provision in the
Memorandum of Incorporation.

Refer to study unit 10 sub-unit 9 in the study guide.

3.2 Instead of applying for relief to a court, a person entitled to relief or to file a complaint
may refer it to various other forums in terms of the Companies Act 71 of 2008. Name
three (3) alternatives provided for in the Companies Act 71 of 2008.
(3)
Maximum 3 marks

Any three (3) of the following:

• Companies and Intellectual Property Commission
• Companies Tribunal
• Take-Over Regulation Panel

• Other accredited entity

• Conciliation and arbitration
Refer to study unit 13 sub-unit 5 in the study guide.

SUBTOTAL: [20 marks]

QUESTION 4

4.1 List five (5) characteristics of a member’s interest in a close corporation.

(5)
Maximum 5 marks

A member’s interest is expressed as a percentage (out of a total of 100%) in the founding

statement. A member’s interest may not be jointly held. The aggregate (total) of members'
interests must always be 100%. A member’s interest in a close corporation is similar to a
share in a company. A member’s interest is an incorporeal, movable thing. A member’s
interest is a personal right to share in the close corporation’s profits after payment to its
creditors.

Refer to study unit 16 sub-unit 5.1 in the study guide.

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4.2 Good Food CC’s main business is catering. The close corporation has five (5) members:
Annastacia, Beauty, Carol, Daniel and Elvis. Each member holds a 20% members’
interest. The association agreement determines that only Daniel is authorised to
represent the close corporation. Annastacia enters into a contract for the purchase of a
racehorse on behalf of the close corporation with Beauty. Explain whether the close
corporation is bound to the transaction. (5)

Section 54 of the Close Corporations Act 69 of 1984 states that every member has the
authority to conclude contracts on behalf of the close corporation in relation to a person who
is not a member (an outsider or third party). The doctrine of constructive notice does not
apply to close corporations. This means that even if the association agreement (which is, in
any event, not a public document) states otherwise, every member can conclude contracts
on behalf of the corporation. It does not matter whether or not the transaction falls within the
scope of the main business of the corporation. A close corporation will therefore be bound
by most agreements concluded on its behalf by its members. Close corporations will,
however, not be held liable if the outsider or third party knew or reasonably should have
known that the member who concluded the contract on behalf of the close corporation
lacked authority.

In J&K Timbers (Pty) Ltd v GL & S Furniture Enterprises CC 2005 (3) SA 223 (N), the court
held that a member is an agent of the close corporation, even though express and implied
authority is lacking, and the close corporation is bound by the act of the agent.

The close corporation will not be bound in this instance, as Beauty is a member and knew/
ought to have known that Annastacia lacked the required authority.

Refer to study unit 16 sub-unit 10 in the study guide.

4.3 Saraphina is a member of Mend & Sew CC. The other members, Alphi and Botsego
feel that Saraphina has not been complying with her management duties. Advise them
regarding the grounds upon which the court may, in terms of the Close Corporations Act 69
of 1984 order that a member shall cease to be a member of a close corporation. (5)

Section 36 of the Close Corporations Act 69 of 1984 is applicable. In terms of this

provision, the following must be proven:

Permanent inability to perform her part in carrying on the business;

Conduct which is likely to have a prejudicial effect on the carrying on of the business;

Conduct making it reasonably impossible for the other members to associate with her in
the carrying on of the business;

It is just and equitable in the view of the court that she should cease to be a member.

Refer to study unit 16 sub-unit 7.3.2 in the study guide.

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4.4 Lesedi and Simphiwe are the members of Private Investigators CC. Upon formation
of the close corporation, they agree that their respective membership contributions will
consist of cash only. Each member was required to contribute R100 000 and these amounts
were duly recorded in the founding statement. Apart from the monetary contribution, Lesedi
also entered into a lease agreement in terms of which he rents out a building he privately
owns to the close corporation for use as an office. Simphiwe, who is a part-time student at
UNISA, also enters into an employment contract with the close corporation. In terms of the
contract of service he is required to be in the office to attend to the corporation’s day-to- day
business.

At a meeting of the members, Lesedi and Simphiwe decide that due to a lack of profits
generated from sales, the close corporation will repay each member 2% of their respective
contributions to enable them to provide for personal needs. They further agree that the close
corporation will make some payments to them in respect of their respective rental and
employment agreements.

Advise the members of Private Investigators CC whether these payments meet the
requirements in terms of the Close Corporations Act 69 of 1984. (5)

Maximum 5 marks

Section 51 of the Close Corporations Act 69 of 1984 regulates payments to members. In

terms of section 51, no payment may be made to members in their capacities as such if the
solvency and liquidity criteria are not complied with and the other members have not all
provided their written consent for such a payment.

Section 51 applies only to instances where payments are made to members in their capacity
as members and not if the payment is made to a member in his or her capacity as creditor.
Before any type of distribution can be made to members in their capacity as members, the
requirements set out in section 51 must be adhered to.

If a payment must be made to a member in his or her capacity as a creditor, these principles
will not be applicable. Should a creditor claim payment when it is due and payable, the close
corporation will be liable.
Refer to study unit 16 sub-unit 11 in the study guide.

SUBTOTAL: [20 marks]

TOTAL: [80 marks]

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 MRL2601/201/1/2023

4 GENERAL COMMENTS REGARDING THE EXAMINATION

The examination paper is open-book (you can use all your prescribed study material) and
will count out of 80 marks. The exam will comprise short and medium length questions
(mainly five (5) marks per question). Read the questions carefully before attempting to
answer them. Always identify what has been asked and consider whether the question deals
with either companies or close corporations. Let the mark allocation of each question guide
you regarding the required length of the answer. Always re-read your answer and ensure
that you have answered what was asked.

You should practise answering short and medium length questions of this kind by revising
the discussion questions and answers available on myUnisa. Please take note of our
suggested answers. Please also use the narrated PowerPoint presentations that have been
placed under Additional Resources for you after you have done your revision. We hope that
they will assist in providing clarity on the respective study units.

Do not hesitate to contact us if you experience any problems with the study material.

All the best with the examination.

YOUR LECTURERS

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