MRL2601 SUMMARY STUDY NOTES. This is an all-inclusive guide to MRL2601 - ENTREPRENEURIAL LAW
Forms of enterprises –
1. Sole proprietorship – capital on one person invested
2. partnership – 2 or more pool capital and abilities
3. CC – legal personality
4. Company – Legal personality
...
Forms of enterprises –
1. Sole proprietorship – capital on one person invested
2. partnership – 2 or more pool capital and abilities
3. CC – legal personality
4. Company – Legal personality
5. business trust
The registration of a company or CC allows the body with separate legal personality with its own
rights and liabilities
The risk extends only to the loss of amount they contributed as capital
CC and company enjoys the benefit of perpetual succession – change in membership does not stop
their legal existence)
Shareholders of the company do no usually participate directly in management of the enterprise
Each member in CC is entitled to participate in the management and no provision is made for a
board of directors.
Benefit of incorporation – Public Company with Share Capital is the most efficient of mobilizing
capital from the investing public.
Private companies are aimed at smaller enterprises which do not rely on public funds.
The company as a legal person
A Company is described as an association of persons with the common objective of
acquiring gain. As an association of persons, it exists as a separate entity with a legal
personality from registration. Therefore it can acquire rights and duties in its own name
assets, employ, sure or be sued. It also acquires rights from the BoR, i.e. nature of
company and nature of rights, but the company is not equated to a natural person i.e.
right to life.
A company is a business entity and can acquire rights and duties and perform acts
required for economic activities. It cannot participate in legal transactions itself; it must
act through an organ/agent.
Acquisition of a legal personality
There are 3 ways an associations of persons or organized body can acquire a legal
personality.
1. separate act – own separate act of Parliament i.e. legislation relating to Eskom
2. General Enabling Act – the company’s act, CC act.
3. by conduct – by conducting itself as a legal person in compliance with certain
requirements e.g. company consists of less than 20 people, acquisition for gain
must pursue the acquisition for gain
Legal personality may appear from the contents of association’s
constitution, dealings, nature and activities of association.
An association that conducts business without the objective of making a profit
may obtain a legal personality by their conduct e.g. charities.
Liability of members – they only loose the money they invested. They are not
liable for debts of the company.
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,Company as a separate legal entity
SALOMON v SALOMON – S (sole Proprietor) then expanded business to include his
family (Company). Business went bad and debtors wanted to claim from him personally.
He could not be personally liable.
On formation a company, a separate legal entity acquires the capacity to have its own
rights and duties. Legal personality exists apart from its members.
Consequences of Separateness:
- Company estate is assessed apart from the estates of individual members. The
debts of the company are Company’s debts and not that of its members. The
sequestration of a member ≠ the liquidation of the company.
- Profits of the company belong to the company and not the members.
- Assets of the company belong to the company and not to its members. Members
do not have proprietary rights. On liquidation members may share in the division
of the assets of the company.
- No one is qualified by virtue of membership to act on behalf of the company.
Only those who are appointed as representatives, i.t.o the Articles, may bind the
Company.
Disregard of the separate existence of the corporate entity
SALOMON and DADOO case
SALOMON - a company has its own legal personality, one which is distinct from its
members. It allows a company to perform juristic acts in its own name, as well as to sue
and to be sued. Further, members and directors enjoy protection against personal
liability. However, the court made it clear that in the event of fraud or
dishonesty being proven, the separate corporate personality must be discarded
In Foss v Harbottel, the court confirmed the idea that when a wrong is committed
against a company, the company itself would be the plaintiff in the proceedings and not
the members. This principle was later reinforced in the Salomon case, where it was held
that the company is a separate legal person, this being the first time the court asserted
the separate legal existence of the company.
Due consideration to the actual state of affairs pertaining within the company ‘behind’
the corporate entity.
Emphasis is placed on inviolability of the entity instead of regarding it as a whole.
Disregard by the Courts – Piercing the veil/lifting of the corporate veil
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, Because veil piercing is an exception to the rule of separate legal personality and not
the rule itself, courts must be careful to permit veil piercing. In exceptional
circumstances the veil is said to be “pierced.” When the court ignores the existence of a
company, it treats the members as though they are the owners of the corporate assets
and that they are conducting the business in their personal capacities. Another form of
piercing the corporate veil is where the courts impute the rights and/or obligations of the
members on the company. Accordingly veil piercing is where the veil of incorporation is
ignored in order to determine the individuals upon whom liability should be imposed. It is
important to note than when the courts pierce the corporate veil, they would be doing so
only to determine the rights, liabilities and obligations of the parties in the instance
before it and, for all other purposes, the company’s separate existence and personality
remains unaffected.
The courts will take the interest of justice into account.
Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd and Others, “It is
undoubtedly a beneficial principle that our courts should not lightly disregard a
companies separate personality, but should strive to give effect to and uphold it”. To do
so would undermine the policy and principle that underpin the concept of separate
corporate personality.
Daimler case – during WW1 in Britain, the court looked at the nationality of the members
and directors in the company to determine whether the Company was an enemy or not.
Robinson case – the court refused to look at the subsidiary as a separate entity, where it
was sought to use the subsidiary as a device to evade the director’s fiduciary duty to the
holding company.
The court would consider piercing the veil in cases of dishonestly, fraud or improper
conduct. The court will not allow the true state of affairs to be concealed by provisions in
the company’s documents – for tax liability.
The balance between policy consideration and the need to preserve the separate
corporate-ness needs to be identified.
Hulse case the court said that one should look at the facts of each case. If there was
evidence of misuse/abuse and if members gained an unfair advantage.
Botha case – the court said that the seller must have suffered an “unconscionable
injustice” before it will lift the veil.
Disregard by legislature
Legislature renders persons other than a company liable for the debts of the company
as a SANCTION for non-compliance with a statutory obligation.
When a person is personally liable for the debts of the company:
o When a person signs on behalf of the company and the company name is
incorrect, unless honoured by the company, he will be personally liable.
o Public company members will be personally liable where the company’s
membership is less than 7 for a period of 6 months – S 66
o A company with share capital must not commence business before the registrar
issues the Company with the certificate to commence business. Before that
members and Directors are jointly and severally liable.
o If the business was carried out recklessly/intent to defraud, any person who was
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