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Mercantile Law 471 (Topic 3 - Juristic Personality) Summary
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Neat and comprehensive summary of all the coursework prescribed for the final year module, Mercantile Law 471 (Companies).
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TOPIC 3: JURISTIC PERSONALITYIntroduction
- Juristic personality is what distinguishes a company and certain associations from
partnerships, trusts and other common law associations.
- Although the importance of this concept is sometimes exaggerated, it remains
important.
- Juristic personality will be awarded through legislation
o CCs and companies obtain their juristic personality through general legislative
provisions
§ Section 19(1) of the Companies Act: Juristic personality of a company.
• “From the date and time that the incorporation of a company
is registered … the company— (a) is a juristic person”
§ Section 2 of the Close Corporations Act: Juristic personality of a close
corporation.
• “A corporation formed in accordance with the provisions of
this Act is on registration in terms of those provisions a juristic
person”
- Definition of a juristic person
o Section 1 of the CA: Expands the concept of juristic person rather than define
it
§ “includes (a) a foreign company; and (b) a trust, irrespective of
whether or not it was established within or outside the Republic”
o Melville v Busane
§ CA merely extends the application, insofar as it deals with juristic
personality, to trusts but is does not convert trusts into companies
and that trusts, beyond the Act, will not be viewed as juristic persons.
§ Trust cannot be liquidated in terms of the CA 2008.
• Schedule 5 Item 9: Winding-up and liquidation provisions of
old Act will continue to apply to only to Companies and not to
other juristic persons.
• Therefore, trusts (even though they are viewed as a juristic
person under the 2008 Act) are not liquidated in terms of the
winding-up or liquidation provisions of the old Act because it
only applies to Companies as set out in the transitional
arrangements.
Characteristics
a) Brings a separate entity into existence
- Vitamax (Pty) Ltd v Executive Catering Equipment
o Crucial to the essential characteristics of a company is its existence as an
entity distinct from its members.
- Airport Cold Storage (Pty) Ltd v Ebrahim
, o One of the most fundamental consequences of incorporation is that a close
corporation, just like a company, is a juristic entity separate from its
members.
Salomon v Salomon & Co Ltd
(Dealt with in almost every company law course in the world)
Facts
Mr Salomon was the sole proprietor of a boot and shoe manufacturing business. Built up a
thriving business with his wife, 5 sons and a daughter.
His sons were employees, but he wanted to change the nature of the business to involve his
sons. He therefore decided to incorporate the business = company.
He did this in the following way:
1) Incorporated Salomon & Co Ltd
2) Sells the sole proprietorship business to the new company
3) In exchange for the transfer Mr Salomon and his sons received shares in the new
company
4) So called debentures are also issued to Mr Salomon (10 000 pounds worth of
debentures) which is securities in terms of which the company is bound to pay a
particular amount to the holder. Essentially evidence of security held for a loan to
the company.
5) At the end of this transaction, the shareholders are Mr Salomon and his family. Mr
Salomon is also a debenture holder in the new company.
Company got into some financial trouble and borrowed money from a Mr Broderip and as
security for this loan, the debentures are transferred to Broderip. At some stage, the new
company gave up some of its assets as security for the payment of the debentures
(debenture holder can execute against the assets if the company fails to pay the
debentures).
Ultimately, Salomon & Co Ltd fails and is liquidated. However, it is clear that company does
not have enough funds to pay all its creditors and debenture holders (Mr Broderip). Mr
Broderip, however, is a secured creditor and therefore has preference and this can be
exercised against the assets.
Legal question
Should all the assets go to the debenture holder or should the other creditors also get
something?
Court of Appeal
It was found that the incorporation of the company created a juristic person but because it
was simply an internal transfer by which Mr Salomon transferred his business to a company
,of which he and his family were the only shareholders, it meant that Mr Salomon did not
receive the benefit of juristic personality and was not regarded as completely separate from
the juristic person.
On this basis the court found that Mr Salomon had to indemnify the company (pay it) to
make sure the company can pay its creditors and because the debentures were initially
issued to Mr Salomon, the debenture holders were not entitled to any payment unless all
the other creditors have already been paid.
House of Lords
Rejected the approach of the court of appeal and held that through incorporation a
separate juristic person was created and the mere fact that it was Mr Salomon simply
incorporating its business was irrelevant. Mr Salomon was a separate person from the
business and there was thus no duty on him to contribute and, similarly, the debentures had
to be paid as if they were concluded with a complete outside party.
NB: Court found that there was no fraud involved and the company was not a mere agent of
Mr Salomon. If this was the case, the decision might have been different.
Importance
Settled the idea that companies are a separate juristic person that is separate from its
shareholders and should be regarded as such.
b) Perpetual succession
- Section 19(1)(a) of the Companies Act: “juristic person, which exists continuously
until its name is removed from the companies register in accordance with this Act”
- Section 2(2)(a) of the Close Corporations Act: Similar provision to the one above.
- Therefore, a change in shareholders or members does not influence the existence of
the entity (differs from partnerships).
- Gower (English author): “the vicissitudes of the flesh have no direct effect on the
disembodied company”
- Economic importance of this characteristic:
o Makes is possible to house assets in a juristic person and make plans for the
continued maintenance of those assets in the juristic person.
o Allows for changes of interest held in those assets.
c) Makes juristic person owner of its own assets
- Shareholders/members have no direct rights to the assets of the juristic person.
o They merely have personal rights in the company itself.
o No real rights in assets.
o Profits can be distributed to shareholders, but this is subject to transfer. Real
right received after transfer, but before which they only have a personal right
to the transfer process.
, - Hansmann & Kraakman: Calls it “affirmative asset partitioning” = Assets are kept
separate from the estates of the members/shareholders. Partitioned to prevent the
creditors of those members/shareholders to claim the assets of the juristic person.
o Makes it useful for business purposes.
o Means that you do not need to know the shareholders to trust them because
the business will be safe. Especially helpful in large companies.
- Example: Share block company
o Shareholder has a share in a company that holds a piece of property.
o Share gives the shareholder the right to use that property.
o Mostly units that can be used by the shareholders at particular period in
time.
o Merely a personal right against the company to use the property. No real
right against the property.
- Delictual claims
o Because the company is the owner of the assets, it is the company who will
have the claim against someone who have committed a delict against it/its
property.
o An exception is where a derivative action in terms of section 165 is brought
which provides that, for example, a shareholder can bring a claim on behalf
of the company.
§ Foss v Harbottle as referred to in Roestorf NO v Johns
• The mere fact that you are a shareholder (even where you
have suffered secondary loss) it is always the company that
should bring the delictual claim.
• Even if the company was negligently or fraudulently managed.
Still the company’s claim.
§ Itzikowitz v ABSA Bank Ltd
• Rejected the decisions in Kalinko v Nisbet, McLelland v Hulett
and McCrae v ABSA Bank Ltd where the courts held that the
shareholders could bring a delictual claim against persons who
have committed a delict against the company for losses which
they suffered as shareholders if the company was no longer
able to bring the claim itself. For example, where the company
was liquidated after a delict was committed against it.
• The principle behind this was that the shareholder was not
allowed to claim where it had suffered secondary loss because
it could lead to double jeopardy/double benefit. However, this
is quite flawed. Where a delict is committed against a
company, the company itself has lost something (i.e., building)
but also gained a claim in delict = no possibility of double
jeopardy where the company has instituted that delictual
action.
• The court in Itzikowitz held that the real reason why this is not
allowed is because of the separate juristic personality of the
company. Therefore, the important question as to what would
be the basis of the shareholder’s claim was never asked in
these three cases. The company is a separate person so they
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