TOPIC 2.4: CLOSELY HELD UNDERTAKINGS:
CLOSE CORPORATION
8. Introduction
Reasons for the existence of close corporations
• CCs were created in terms of Act 69 of 1984
• The CC Act was enacted to create a simpler business form than companies. The
unincorporated business forms such as the trust and the partnership, which are easily
created but when creating an incorporated business form like a company, there is a
comprehensive incorporation process, and the rules are extensive.
o In the case of CCs, the aim was to simply this and as entities CCs were highly
successful and many were created.
• The drafters of the new Companies Act decided that the Act is so simply formulated
that they would no longer be a need for CCs.
o Therefore, the 2008 Act drastically amended the CC Act and made it
impossible to incorporated CCs. Those already incorporated continued but
new ones could no longer be incorporated.
Rationale behind CCs
• Was that they should be simple business entities and that they should be easily
incorporated. The incorporation was simple in terms of section 2 and 13 if the
requirements of the Act were met.
o The founding statement (which was a short document) could be registered and
that then brought the new juristic person in the form of CC into being.
• However, both sections 2(1) and 13 of the CC Act as been amended and they
determine that:
o From the coming into effect of the 2008 Companies Act and the section 13 of
the CA which allows for the incorporation of companies in terms of the new
CA Act, it would no longer be possible to create new CCs.
o Side notes: oddly by share coincidence, the incorporation of companies in
terms of the new CAs Act takes place in terms of section 13 and this was also
the position under the CC Act that is, CCs were incorporated in terms of
section 13 of the CC Act. It is important to remember that the incorporation
of CCs in no longer possible after section 13 of the CA came into effect.
o Nonetheless, if you want to conduct a CC there are shelf companies which you
can buy that is, ones that were previously incorporated.
Name of the CC
• Definition:
o The name is defined in section 1 of the CC Act. This provision states that a
name in relation to a corporation means the full registered name of that
corporation or a registered literal translation of that name into any one other
official language of the Republic or a registered shortened form of that name
or any such translation thereof referred to in section 12(a).
§ Side note: it talks about the name of the corporation. It also allows for
a registered literal translation of that name, it allows for shortened
forms of both the name itself and the shortened form of the name.
• Rules regarding registration and reservation of names
o These rules are taken over on the CCs Act and it is dealt with in terms of
section 19 of the Act.
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o Section 19 says that “part A of chapter 2 (those are the rules in the CA
regarding names) read with the changes required by the context required (that
is, to make it applicable to CCs) applies to a corporation and to an applicant
for names and name reservations”.
o Section 19 also determines that the application also of section 11(3) of the CA
to a corporation is subject to the provisions of section 22.
§ Side notes: section 11(3) of the CA deals with the abbreviation or the
word that should be at the end of the name of a company.
§ It seems that there could be some problems with applying the
companies rules to CCs for instance, in CCs it appears that the name
must be a word in that section 1 and other provisions regarding the
name creates the impression that it must be a word (although it can be
a word in various languages). Whereas in company law it does not
have to be a word therefore, it came sometimes be in symbols or
numbers. It is not clear how the overlap between these provisions will
apply in practice.
o The name of a CC has to be set out in its founding statement (the
Constitutional document). Therefore, section 12(a) determines that one of the
issues that has to be in its founding statement is the full name of the
corporation, provided that the literal translation of that name into any one
other official language of the Republic or shortened form of that name or such
translation thereof may in addition be given.
§ Side notes: if you want to use a translation or a shortened form of the
name, it must be in the founding statement of the CC.
o Section 22(A) states that:
§ “any person carrying on under a name or a title to which an
abbreviation contemplated in section 22(1) is sub-joined, of which the
word CC or its equivalent in any other official language or any other
abbreviation thereof form part in a way which indicates incorporation
as a CC in terms of the Act shall unless duly incorporated as a CC in
terms of the Act be guilty of an offence”.
• Side Notes: this means that you cannot use any of the
abbreviations in any of the official languages or the word CC
to indicate that your entity is a CC if it is not incorporated as a
CC in terms of the CC Act.
• One of the difficulties is that in SA there are many translations,
these translations may overlap with the name for companies in
other jurisdictions. For instance, the term for a CC in Siswati
the abbreviation there is BV. BV is also an abbreviation for a
private company in the Netherlands.
o Question: if a private company in the Netherlands does
business in SA and uses an abbreviation BV in its
names, would that then mean that section 22(A) of the
CA is contravened? Possibly not because in that case
the abbreviation is not used to indicate that it is a CC
though there is no clarity on this issue.
• The use of names
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o Section 23 makes section 22 of the CA applicable. It states that section 22 of
the CA read with the changes required by this context applies to a corporation.
• Contravention of the provision:
o Question: what happens if the name of the CC is not properly used (apart
from those instances which we have already discussed)?
§ In the CC Act, there is often a provision for personal liability where the
rules of a CC Act are not complied with and this is such a case. So,
Section 63(a) would apply in this context. This section states that
where the name of a incorporation is in anyway used without the
abbreviation as required by section 22 (that is, not using the
abbreviation in any of the official languages after the name) then, any
member of the incorporation who is responsible for it or authorised or
knowingly permitted the omission of such an abbreviation shall be
liable to any person who enters into a transaction with the corporation
from which a debt accrues for the corporation while that person in
consequence of that omission is not aware that he or she is dealing
with the corporation.
• Side note: what this provision says is that if any member uses
the name of the CC without the abbreviation at the end that
indicates that it is a CC or if any member authorises or
knowingly permit the omission of the abbreviation then that
person will be liable to any person who enters into a
transaction with the CC were the CC became liable and that
person did not know that he or she was contracting the a CC.
• The idea here is that the CC has limited liability which protects
the members against the liabilities of a CC but the idea is that
that liability should be lost where the 3rd party contracts with
the CC without knowing that it is a CC because the
abbreviation CC was not used or the abbreviation in other
languages was not used.
Few members and only natural persons may be between 1-10 (CC s 28 & 29,
63(d))
• We said that the idea behind a CC was to create a simple form of business enterprise
therefore, the legislature decided that CCs should be limited in their number and types
of members.
Membership: Section 28 of the CC Act
• This section is of significance here and it determines that a corporation may not have
more than 10 members.
o Therefore, it can have anything between 1-10 members.
Who may be members: Section 29 of the CC Act
• The Act further determines that only NPs may be members of a CC. For the most part,
companies, testamentary and inter-vivos trust cannot be members of CCs.
• Section 29 allows for the trustees of the inter-vivos trusts and of testamentary trusts to
sometimes be members, but the requirements are strict. Particularity in respect of
inter-vivos trusts. In this instance where trusts can be members, it may include both
juristic members and NPs as trustees.
• Contravention of the provision:
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