Relationship between members and the close corporation

relationship between members and the close corporation

Shareholders-Fiduciary Relationship Among by-laws by shareholders of close corporation to reduce number of directors invalid when . shareholder, but the court treated him as a member of a controlling group of shareholders for. A close corporation must keep the association agreement at its registered office where any member may inspect and make copies of it.[23] Additionally, other. Members of a close corporation will generally draw up an association agreement. This agreement will cover the relationship between the members themselves.

Thus, there is no prescribed annual general meeting and, for the most part, decisions can be made and agreements reached between the members simply on the basis of informal consultation. With regard to the registration of close corporations which is a far simpler process than when registering companiesanyone intending to form the same must compile a founding statement in the prescribed form and lodge it in triplicate with the Registrar of Close Corporations in Pretoria.

No further documents are required, including the memorandum and articles. Thus, no shares are issued, and consequently, every person who is to become a member upon incorporation must make some contribution to the corporation as noted above.

relationship between members and the close corporation

Every member will then be issued with a certificate signed by or on behalf of every member confirming the said interest. Internal Relations Members may agree, at any time, to enter into a written association agreement that governs the internal relationships between all the members inter se and the corporation.

Thus, the doctrine of constructive notice does not apply in the case of close corporations. The same principle applies to the founding statement or other documents registered by or lodged with the Registrar and governed by sections 16 and 17 of the Close Corporation Act.

relationship between members and the close corporation

In this case, however, third parties would be privy to rights of inspection. Disqualifications The following persons are disqualified from taking part in the management of the close corporation: I a married woman, whether subject to the marital power of her husband or not; II a minor who has attained the age of 18 and whose guardian has lodged a written consent for the minor to participate; b save under authority of the court: I an unrehabilitated insolvent; II a person removed from an office of trust as a result of misconduct; III a person who at any time has been convicted of theft, fraud, forgery, or uttering a forged document, perjury, an offence under the Corruption Act 94 of or any offence involving dishonesty or in connection with the formation or management of a company or close corporation and has a result been sentenced to imprisonment for at least 6 months without the option of a fine; c a person subject to an order of court under the Companies Act and disqualified from being a director of a company.

Fiduciary Duties Members owe their fiduciary duties to the close corporation as a separate legal person and not inter se. To that end, section 42 of the act governs the fiduciary position of its members. Thus, a member must: There would not be a breach of fiduciary duty where details have been furnished to all the members regarding a potential conflict of interests, but where they nevertheless allow a breach to result by all of them approving it in writing.

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The members may also ratify a breach once it has occurred, provided that ratification thereof is accompanied once again by the written approval of all the members in the close corporation. However, breaches thereof may also be ratified by the written approval of all the members. Instead, a very simple type of derivative action is provided by section 50 of the Close Corporation Act in terms whereof a member or former member would be liable to a close corporation for any contribution or for any breach of a fiduciary duty or for negligence where any other member has instituted proceedings on behalf of the close corporation having notified all the other members of the intention to do so.

ACCA F6ZAF - 12. Companies, close corporations etc.

Meetings of Members Any member of a close corporation may call meetings of members but, unlike companies, there are no compulsory meetings which have to be called. Proxies are not permitted and thus only persons present in person may vote at a meeting.

Accounting and Disclosure Accounting records are required to be kept at the place or places of business in one of the official languages of South Africa. These must fairly present the state of affairs and business of the close corporation and thereby explain the transactions and financial position of the business.

Every close corporation must appoint an accounting officer in accordance with the provisions of the Act.

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Piercing the Veil of the Close Corporation It has been noted above that members have limited liability in respect of the debts of the close corporation. In the case of companies, the Companies Act [50] is silent as to when the corporate veil should be lifted.

  • Difference between Member and Shareholder

Lifting the corporate veil with companies has largely been developed in court where case decisions have, through time, increased the number of categories that could be used to hold directors liable for debts incurred by their companies. This, of course, is inadequate and what the Companies Act really needs here is a provision which sets out the circumstances under which a court would be allowed to pierce the veil.

The Close Corporation Act has achieved this admirably and has thus codified the piercing of the veil where there has been a gross abuse of juristic personality. That is, whenever a court, on application by an interested person or in any proceedings in which a close corporation is involved, finds that the incorporation of the close corporation or any act done by or on behalf of it, constitutes a gross abuse of the juristic personality of the close corporation as a separate legal entity, the court may declare that the close corporation is not deemed to be a juristic person in respect of specified rights, obligations or liabilities of itself or of specified members or other persons, and may consequently give such further orders as it deems fit so as to give effect to the said declaration.

Personal Liability The Close Corporation Act contains almost no criminal sanctions and seeks to be self-regulatory. Persons may be jointly and severally liable for the debts of the close corporation as follows: The cardinal difference in practice between this provision and section of the Companies Act is that the members themselves in a close corporation are subjected to personal liability, whilst, in a company, the directors and not the shareholders would be at risk.

The rationale for this is that, whilst the members of the close corporation are responsible for the carrying on of the business in it, the directors would have that responsibility in a company. If a close corporation were deregistered while having outstanding liabilities, all members at the time of deregistration would be jointly and severally liable for such liabilities.

Furthermore, members and employees of the close corporation or any other person acting on behalf of it, can be personally liable for the debts of the close corporation where, for example, cheques, notices, invoices, receipts or any other documents issued by the close corporation do not state both the full name and registration number of the close corporation.

Payments to Members A close corporation may distribute net income to its members only if it is solvent and sufficiently liquid. Any distribution in breach of these requirements may be claimed by the close corporation from its members. Thus, in terms of the Act: Criminal Liability Although there has been heavy emphasis on decriminalising corporate wrongdoing with the introduction of the Close Corporation Act, there are still eleven sections that create criminal offences.

In addition to the penalties that the court may impose as noted above, the court may order the close corporation, its members, officers or any other persons to perform an act within such period that the court may deem fit. Comparison with Partnerships and Business Trusts Partnerships in South Africa comprise a minimum of two members, but no more than twenty members.

A partnership does not exist as a separate legal person and therefore the partners are liable for the debts of the partnership and consequently own the partnership estate. This is not the case in a close corporation. While a fiduciary relationship exists between the partners inter se, members in a close corporation owe their fiduciary duties to the close corporation itself. In addition, although a partnership must submit a joint tax return, the individual partners will be taxed individually.

The close corporation, however, is taxed as a separate entity on the same scale applying to companies [64] and thus certain tax benefits would apply. As a result of the unsuitability of the company form for smaller businesses, business trusts have become popular.

This is something that needs to be considered when deciding which business form is the appropriate one in the circumstances. Conversion of Companies into CloseCcorporations and visa versa It is possible to convert a company into a close corporation [66] and a close corporation into a company [67] provided that the requisite procedures are followed as set out in each section. The details governing each provision extend further than the purview of this article. Suffice to say that the stated intention of the legislature was to provide a simple, less expensive and more flexible legal form for small businesses, and, at the same time, afford them the advantages of separate legal personality.

The acceptance of this concept is evident by virtue of the large number of close corporations, both new and converted from a company, which have been formed to date. The numerous textbooks and loose-leaf binders which interpret Acts of Parliament affecting business bear testament to the reality that this is not in fact the case.

The most significant differences between the new Companies Act of and the Companies Act of can be stated as follows: Under special rules, a company is allowed to repurchase its own shares, provided that the company is allowed to do so by its own constitution.

Difference between Member and Shareholder - Michalsons

A solvency test was introduced to maintain sufficient assets for the company to pay its debts as they fall due. Thus, the legal concept of capital was removed. These are the abolition of par value, the implementation of the solvency test and the ability to buy back shares previously issued by the company itself. The abolition of par value considerably reduced the accountability required when dealing with transactions in shares. The extensive body of law both taxation and company law that had been enacted over the years, with respect to the recording and application of the share premium reserves and discounts on the issues of shares, was almost overnight made redundant.

The ease of recording seemed almost unbelievable since shares were issued and recorded as paid up for the amounts so paid. The solvency test was seen by some as a radical move by the New Zealand law reformers. The Act brought about great changes to the New Zealand business scene. It was expected that it would become easier to form and manage a company. Moreover, directors would be made more responsible and accountable for the activities of a company. Simplification was the order of the day.

An example, which has a direct bearing on this article, is the removal of the distinction between public and private companies. Thus, the provisions governing small, medium and large businesses alike would be legislated for under just one Act. The legislature in New Zealand did consider whether special legislation should be enacted to cover the circumstances of closely held companies. However, this is one significant example whereby each country has chosen to take a different path.

Australia has retained the distinction between private and public companies. In Australia, a private company is a company which is owned by two to fifty people or entities, and the company name ends with Proprietary Limited in its abbreviated form, cited as Pty Ltd. A public company in Australia is owned by five or more persons or entities, and the company name ends with Limited in its abbreviated form, cited as Ltd.

Share transfers are usually restricted for a proprietary company, whereas the shares of a public company are usually readily transferable. Despite the decision to keep the distinctions between the public companies and the proprietary companies in Australia, the New Zealand legislature concluded that: We have considered also the benefits of harmonisation with Australian law, Hence, the legislature decided to enact only one Act to cover all classes or types of companies.

SMEs are more predominant in New Zealand than in many other countries. They account for a high proportion of employment in New Zealand relative to other countries. They dominate the business scene in terms of numbers and contribute significantly to employment and the economy of the nation. SMEs constitute the majority of all enterprises in New Zealand: The number of SMEs staff increased Many of the small businesses use the company structure.

The total number of registered companies in New Zealand in was, in During the same period companies went into liquidation and into receivership. Clearly company formation was popular and the number of companies being formed has increased. The number of companies listed on the New Zealand Stock Exchange has remained fairly static at around companies for many years.

SMEs are not wealthy. They cannot afford expensive litigation or registration costs. It is important to the economy and the owners of these small businesses that their structure is appropriate for their needs. The Act in its introduction states as one of its main purposes: To reaffirm the value of the company as a means of achieving economic and social benefits through the aggregation of capital for productive purposes, the spreading of economic risk, and the taking of business risks; Furthermore, it could be argued that the Act is still too cumbersome and complicated.

As a result, this provides much work for accountants and lawyers and others at a relatively high expense to clients who own small businesses and who have neither the time nor the ability to comprehend the legalities and formalities contained in the sections comprising the Act. The company formation is often recommended by accountants as the best structure for a business in New Zealand where there is more than one owner.

Upon the incorporation of the SME, each owner usually contributes capital into the business in return for being allocated a number of shares. However, there is now no statutory minimum capital required under the Act.

Thus, in reality, the owners do not have to inject any capital cash or assets into the business, but can provide funds by way of a loan to the business. This practice is recommended because, as profits accumulate, the business is able to pay off the loan s without bringing about any taxation implications for the owners. The formation of companies is further enhanced in the case of SMEs, with five or fewer shareholders, as a result of their ability to register themselves under the Income Tax Act of as a Loss Attributing Qualifying Company.

It is not the purpose of this article to examine the taxation implications of the company structure. Directors are appointed to manage the resources that are drawn from creditors and shareholders for trading purposes. At least one shareholder and one director are required. No upper limit is placed on the number of shares that can be issued.

Formalities, Registration and Incorporation The essential requirements to form a company are simple. That is to say, a name, a share, a shareholder and a director are all that is required. No constitution is required for a company. Interests of Members Owners of a company hold shares that represent their interest.

Under the Act, shares are viewed as entitlement to benefits, such as dividends and voting rights. Disqualifications Any person can be a shareholder of a company, but certain persons are disqualified from becoming directors of a company.

Directors can be disqualified under section of the Act or removed in accordance with the provisions of its constitution.

The duties in the current Act explicitly include a number of duties such as: Thus, although directors are given full power to manage companies, any breach of these duties could expose them to personal liability.

Loans to Members Shareholders Companies are permitted to provide financial assistance to shareholders to purchase shares from the company or from other shareholders. Only two sections refer to the accounting records, whilst twelve sections relate to the auditor and the auditing process. The lack of specific directions on accounting records can be explained because the Act relies on the provisions of the Financial Reporting Act ofwhich covers all reporting requirements for entities reporting to its members.

The Financial Reporting Act of required, from 1 Julyissuers of securities, companies and some public sector entities to report on financial matters. Company financial reporting requirements are found in the Companies Act ofthe Financial Reporting Act of and the Securities Act of It has been noted: Members should fulfil these duties to the best of their abilities. The members are not liable for the debt of the Close Corporation unless the member s has ve signed surety for the debt of the Close Corporation.

If the Close Corporation owes R20 million and not one of the members signed surety, the debt remains that of the Close Corporation and the creditors will only be able to act against the Close Corporation.

This is as long as the Close Corporation pays its debt. If the member s has ve signed surety for the debt of the Close Corporation, then the creditor can act against the member s if the Close Corporation does not pay its debt or in the case where the Close Corporation does not own enough assets to attach to cover the outstanding debt.

The creditor must first act against the principal debtor the Close Corporation in this case and only if the Close Corporation does not have enough assets to sell or does not pay the debt, then the creditor can act against the surety. In practise however Summons is issued against the Close Corporation as First Defendant and against the surety ies as Second and Third and so on Defendants.

Judgment is obtained simultaneously against the Close Corporation and the member s everybody that signed surety. If no surety was signed then only the Close Corporation will be a Defendant.

Once Judgment was obtained, the creditor must act against the Close Corporation first. It cannot skip the Close Corporation and start acting against the member s as surety first. Once the creditor has tried to obtain payment from the Close Corporation and cannnot, the creditor can issue a Warrant for Execution to attach the property of the Close Corporation.