Close CorporationsONR314

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

Objectives with close corporations

•Simple, less expensive and more flexible business form•With separate legal personality•Very popular•Large numbers registered

YearClose

CorporationsPublic

CompaniesPrivate

CompaniesNon Profit

(Section 21)Limited by Guarantee

External

Companies

2000 77000 304 29595 987 2 127

2001 86396 269 27572 1353 3 132

2002 107307 252 29580 1652 0 139

2003 110721 252 29330 1931 0 141

2004 128750 211 33754 1760 0 144

2005 186078 333 41213 2214 1 144

2006 228304 270 36152 2113 0 149

2007 225065 281 32745 2214 0 174

2008 264571 190 26562 2098 2 154

2009 231146 136 21935 2166 0 131

2010 177085 98 22571 1901 0 142

2011 11407 2 2167 200 0 12

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

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

… 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

… 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

… 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

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

CC v Business Trust•Self study

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

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

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.

Registration Requirements

•Not applicable

Constitutive documents

Founding statementAssociation agreement(optional)

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

•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

CK 1 or Founding dokument

•Constitutive document•Sets out the corporate structure•Must be signed by all members upon registration•Inspection = any person

Contents of CK1Full namePrinciple business to be carried on by the

CCDate of the end of the financial yearPostal addressName and postal address of the

accounting officer + written consentFull names, ID numbers, residential and

postal address for each memberSize in % of each members interestParticulars of each contribution

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

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

•If not, member or person acting on behalf of CC:

Guilty of an offenceLiable to the holder of the bill of exchange, promissory note, cheque – unless the amount is paid by the CC

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

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

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.

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

Dros v Telefon