MRL2601
Company Law
Summary Notes. This is an all-inclusive guide to MRL2601 Company Law Summary Notes. A state-owned company (‘SOC Ltd’)
Ø Registered in terms of the Companies Act
Ø Listed as a public entity in Schedule 2 or 3 of the Public Finance Management Act, or
owned by a mu...
Ø It is not a legal requirement that everyone wishing to conduct business must form or
incorporate a company or close corporation but most business people prefer to
operate in a formalised business environment.
Ø Prior to incorporating a business there are a number of issues that require careful
consideration.
Ø These include the number of persons who will be involved in the business and the
extent of their involvement, the capital required to commence the business, the
sources of capital, customer and client requirements, tax issues and the strategic
objectives of those involved
Ø Once a company is incorporated
Ø Registration Certificate issued by CIPC
Ø Company acquires legal personality
Ø Can sue and be sued
Ø Members are not liable for company debts
Ø Members enjoy limited liability
Ø In certain cases the courts have disregarded the separate legal personality of a
company in order to recognize the substance or practical realities of a situation
rather than the form.
Ø Before the codification of the principle of disregard of a company’s separate
existence by the Companies Act of 2008, this matter was regulated by the common
law and referred to as “lifting” or “piercing” the corporate veil.
Ø The courts used it to place limitations on the principle of separate legal personality in
order to avoid abuse
Ø Courts have made it clear that they will not allow the use of any legal entity to justify
wrong, to protect fraud or to defend or hide crime
Ø ‘Piercing the corporate veil’ refers to those exceptional circumstances where the
court ignores the separate legal existence of the company and treats the
shareholders as if they were the owners of the assets and had conducted the
business of the company in their personal capacities OR attributes certain rights or
obligations of the shareholders to the company.
Ø Companies Act like the Close Corporations Act codifies the general principle of
piercing the corporate veil.
Ø 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.
Ø Wording of the section is a combination of section 65 of the Close Corporations Act
and the judgment in Botha v Van Niekerk.
Ø It ignores the view expressed in Cape Pacific Ltd v Lubner Controlling Investments
(Pty) Ltd that described the test in Botha v van Niekerk as too rigid.
Ø It remains to be seen how the courts will decide what would constitute an
unconscionable abuse and to what extent they will use the existing case law dealing
with the common-law rule of piercing the corporate veil.
Ø There are still no hard and fast rules
Ø No general discretion of the courts
Ø Each case will still have to be taken into consideration when deciding whether to
pierce the corporate veil.
Ø Companies Act provides for two types of companies ie. profit and non-profit
company
Profit Companies:
Ø Public Company
Ø Private Company
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Ø Personal Liability Company
Ø State-owned company
Public Company (‘Ltd’)
Ø Shares may be offered to the public and are freely transferable;
Ø Company can be listed on the JSE Limited;
Ø Can be formed by 1 person
Ø Must have at least 3 directors
Ø Obliged to hold annual general meetings
Ø Obliged to appoint an auditor
Ø Obliged to appoint a company secretary
Ø Obliged to appoint an audit committee
A state-owned company (‘SOC Ltd’)
Ø Registered in terms of the Companies Act
Ø Listed as a public entity in Schedule 2 or 3 of the Public Finance Management Act, or
owned by a municipality;
Ø Examples of state-owned companies: ACSA, Denel and South African Airways.
Ø The majority of the provisions applicable to public companies apply to state-owned
companies except if an exemption has been granted by the Minister
Ø Obliged to appoint a company secretary
Ø Obliged to appoint an audit committee
A personal liability company (‘Inc’/ ‘Incorporated’)
Ø Must meet the criteria for a private company,
Ø Mainly used by professional associations (such as attorneys);
Ø Memorandum of Incorporation must state that it is a personal liability company
Ø Directors are jointly and severally liable along with the company for debts and
liabilities contracted during their term of office.
Ø Section 19(3) uses the word “contracted” and not “incurred” to limit directors’ liability
to contractual debts, and to exclude delictual and statutory liabilities.
Ø A provision that the directors and past directors will be liable jointly and severally,
together with the company, for debts and liabilities of the company that were
contracted during their periods of office must be included in the Memorandum of
Incorporation of a personal liability company.
Ø The effect of the inclusion of such a clause is that creditors would be able to hold the
directors jointly and severally liable for the company’s contractual debts and
liabilities.
Ø A director who had paid the debts will have a right of recourse against his or her
fellow-directors for their proportionate share.
Ø Can be formed by 1 person
Ø Must have at least 1 director
Ø The doctrine of constructive notice applies in terms of section 19(5) of the Companies
Act.
Non-profit companies (‘NPC’)
Ø Not formed with the aim of making a profit for its members
Ø A non-profit company has members and not shareholders like profit companies.
Ø Objects must relate to social activities, public benefits, cultural activities or group
interests.
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Ø Must be formed by at least 3 persons who will be the company’s first directors.
Ø Must have at least 3 directors
Ø Directors are not allowed to obtain any financial gain from the company other than
remuneration for the work they performed.
Ø If these companies have members, some members may enjoy voting rights while
others may not.
Ø The income and property of non-profit companies are not distributable to its
incorporators, members, directors, officers or persons related to any of them.
Ø Upon liquidation, income and assets must be paid over to another non-profit
company, voluntary association or trust with a similar purpose.
Ø Objectives of the Companies Act include
v the promotion of the development of the South African economy
v creation of flexibility in the formation and maintenance of companies
v simplicity in the formation and maintenance of companies
v the encouragement of corporate efficiency
v the encouragement of transparency
v the provision of a predictable regulation of companies
Ø The Act makes it possible to incorporate both simple and extremely complex business
structures
Ø When incorporating a company, the Notice of Incorporation plus a copy of the
Memorandum of Incorporation must be filed with the Commission.
Ø Old Act – Articles of Association and Memorandum of Association required to be filed
Ø In addition, the prescribed registration fee must be paid.
Ø Memorandum of Incorporation (founding document of the company) is defined, as
``the document, as amended from time to time that sets out rights, duties and
responsibilities of shareholders, directors and others within and in relation to a
company and other matters.
Ø Memorandum of Incorporation contains details of Incorporators, number of directors
and alternate directors, share capital (maximum issued)
Ø Companies Act imposes certain specific requirements on the content of a
Memorandum of Incorporation, to protect the interests of shareholders in the
company.
Ø A number of default company rules or alterable provisions are provided for.
Ø Companies may accept or alter the alterable provisions as long as the alteration
remains consistent with the Companies Act.
Ø In case of an inconsistency between the Memorandum of Incorporation and the
Companies Act, the Memorandum of Incorporation will be invalid to the extent of its
inconsistency.
Ø Once the Notice of Incorporation and the Memorandum of Incorporation have been
filed with the Commission and the prescribed fee paid, the Commission may either
accept or reject the Notice of Incorporation.
Ø The Notice of Incorporation may be rejected under the following circumstances:
v if it has not been completed in full
v if it has not been properly completed
Ø The Commission must reject the Notice of Incorporation if:
v if the initial number of directors is fewer than the prescribed minimum number
v where as a result of a director's disqualification, the initial number of directors
becomes fewer than the prescribed minimum number
Ø A profit company must have at least one director and a non-profit company a
minimum of three directors.
Ø If one of the directors does not qualify to be a director, this will reduce the number of
directors.
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