ODR 320
Theme 4: Companies
Marissa Badenhorst 2019
, ODR 320 Theme 4: Companies
STUDY UNIT 1: LEGAL CONCEPT OF
A COMPANY, LEGAL PERSONALITY
AND PIERCING THE CORPORATE
VEIL
CHAPTER 4: THE LAW OF BUSINESS STRUCTURE S PAGES 61 – 74
Prescribed Sources of reference:
✓ Section 20(9).
✓ Salmon Salomon v Salomon & Co Ltd [1897] AC 22 (HC)
✓ Dadoo Ltd v Krugersdorp Municipal Council 1920 AD 530
✓ Daimler Co Ltd v Continental Tyre and Rubber Co [1916] 2 AC 307
✓ Gumede v Bandla Vukani Bakithi Limited 1950 (4) SA 560 (N)
✓ Atlas Maritime Co SA v Avalon Maritime Ltd [1991] 4 All ER 769
✓ Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd 1995 (4) SA 790 (A)
✓ Amlin (SA) Pty Ltd v Kooij 2008 (2) SA 558 (C)
✓ Botha v Van Niekerk en ‘n Ander 1983 (3) SA 513 (W)
✓ Le ꞌBergo Fashions CC v Lee 1998 (2) SA 608 (C)
✓ Airport Cold Storage (Pty) Ltd v Ebrahim 2008 (2) SA 303 (C)
✓ Ebrahim v Airport Cold Storage (Pty) Ltd [2009] 1 All SA 330 (SCA)
✓ Hülse-Reutter v Gödde 2001 (4) SA 1336 (SCA)
✓ Ex Parte Gore and Others NNO 2013 (3) SA 328 (WCC)
✓ City Capital SA Property Holdings Ltd v Chavonnes Badenhorst St Clair Cooper NO (85/2017) [2017]
ZASCA 177 (1 December 2017)
** only have to know these cases with reference to the slides and what is said about them in the textbook – not
necessary to read all the cases
WHAT IS A COMPANY?
• A company is generally understood to refer to a structure that is endorsed by law with
the capacity to acquire legal rights and be subject to legal duties
o The distinctive features of a company is that a company has a separate legal
personality distinct from the shareholders or members who compose it
▪ As a separate legal person, the company itself, and not its
shareholders, is the legal owner of the business that it carries on and of
any property/asset purchased by it
• Property owned by the company belongs exclusively to the
company itself and not to its shareholders, not even to its sole
shareholder in the case of a one-man company (Dadoo Ltd v
Krugersdorp Municipal Council)
• Property owned by the company is registered in the name of
the company + profits belong to the company
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, ODR 320 Theme 4: Companies
• The debts + liabilities of the company are the debts and
liabilities of the company itself which gives rise to the concept
of ‘limited liability’ of the shareholders
o Limited liability → the shareholders or members of a
company are not personally liable for the debts and
liabilities of the company
o Thus, if a company cannot pay its creditors, the
creditors cannot claim payment from the shareholders
• SEPARATE JURISTIC PERSON – LEGAL PERSONALITY
o Section 1:
• “ ‘company’ means a juristic person incorporated in terms of this Act, a domesticated
company, or a juristic person that, immediately before the effective date
o (a) was registered in terms of the
▪ (i) Companies Act, 1973 (Act 61 of 1973), other than as an external company
as defined in that Act; or
▪ (ii) Close Corporations Act, 1984 (Act 69 of 1984), if it has subsequently been
converted in terms of Schedule 2;
o (b) was in existence and recognised as an 'existing company' in terms of the
Companies Act, 1973 (Act 61 of 1973); or
• (c) was deregistered in terms of the Companies Act, 1973 (Act 61 of 1973), and has
subsequently been reregistered in terms of this Act…”
• Section 19 – legal status of companies
• (1) From the date and time that the incorporation of a company is registered, as stated in its
registration certificate, the company
o (a) is a juristic person, which exists continuously until its name is removed from the
companies register in accordance with this Act;
o (b) has all of the legal powers and capacity of an individual, except to the extent
that
▪ (i) a juristic person is incapable of exercising any such power, or having any
such capacity; or
▪ (ii) the company's Memorandum of Incorporation provides otherwise;
o (c) is constituted in accordance with
▪ (i) the unalterable provisions of this Act;
▪ (ii) the alterable provisions of this Act, subject to any negation, restriction,
limitation, qualification, extension or other alteration that is contemplated in
an alterable provision, and has been noted in the company's
Memorandum of Incorporation; and (iii) any further provisions of the
company's Memorandum of Incorporation.
• (2) A person is not, solely by reason of being an incorporator, shareholder or director of a
company, liable for any liabilities or obligations of the company, except to the extent that
this Act or the company's Memorandum of Incorporation provides otherwise.
• (3) If a company is a personal liability company the directors and past directors are jointly
and severally liable, together with the company, for any debts and liabilities of the company
as are or were contracted during their respective periods of office.
• Legal status ito section 19 is thus acquired from the date and time the corporation is
registered:
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, ODR 320 Theme 4: Companies
All powers and
Constituted in
capacity of Juristic Person
accordance with
natural person
•Except insofar JP •Exists •Unalterable
is incapable continuously provisions
•As per MOI •Until name •Alterable
removed provisions +
•No liability of noted in MOI
other person •Other provisions
except Act + of MOI
MOI
THE DISADVANTAGES OF A COMPANY
The formation of a company requires compliance with a number of legal formalities
The company must be registered with the Companies Commission
The formation of a company requires a constitution (MOI) which must be lodged or
filed with the Companies Commission
After its formation, the company is subject to regulation throughout its existence
There are many other administrative burdens, and transparency and accountability
requirements that companies must comply with, the financial cost of which is borne
by the company
Public companies and certain private companies must have their annual financial
statements audited
EXPLAIN THE CONCEPT OF THE SEPARATE LEGAL PERSONALITY OF COMPANIES
AND ITS LEGAL CONSEQUENCES.
• Concept of a company as a separate legal person → a legal person is merely a legal
concept and has no physical existence
o A legal/JP cannot perform acts, but does possess its own legal personality to
acquire rights and incur obligations that are distinct from those of the directors
and shareholders of the company
• The Companies Act 71 of 2008 → provides for the concept of the separate legal
personality of a company and states that from the date and time that the
incorporation of a company is registered, the company is a JP and has all the legal
powers and capacity of an individual, except to the extent that a JP is incapable of
exercising such powers or having such capacity OR to the extent that the company’s
MOI provides otherwise
o A registration certificate issued by the Companies and Intellectual Property
Commission (CIPC) is conclusive evidence that all the requirements for
incorporation have been complied with
▪ When is the company deemed as having been incorporated? As from
the date and time, if any, stated in the registration certificate
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, ODR 320 Theme 4: Companies
▪ When does a company acquire its own separate legal personality?
Once the certificate has been issued → the company acquires its own
separate legal personality and it exists continuously until its name is
removed from the companies register
• The Act applies both to JPs formed under the 2008 Companies Act and the 1973
Companies Act
o For the purposes of the Act, a JP includes a foreign company and a trust
(contrary to common law)
o The Act also applies to CCs that have been converted to companies
• Salomon v Salomon & Co Ltd = authority for separate legal personality of a company
• Legal personality is also acquired by way of:
o A specific Act (e.g. the University of Pretoria Act)
o Common law = conduct
▪ Separate property of association and members
▪ Association = standing + capacity
▪ Association = have rights + obligations
▪ Usually = expressly or tacitly from an agreement between legal
subjects
▪ Acts can exclude
SALOMON V SALOMON & CO LTD
FACTS
• Mr Aron Salomon was a sole trader for may
years and had carried on business as a leather
merchant and wholesale boot manufacturer
• He wished to expand his business and wanted
to enjoy the benefits of limited liability and
perpetual succession
• He sold his business to another company
• Salomon, his wife, daughter and two sons were
shareholders in the company
• Salomon and his 2 sons were directors of the
Company
• Salomon held 20 001 out of 20 007 shares issued by the company and was a secured
creditor, controlling shareholder, director and employee of the company
• The company’s business failed and a year later it went into liquidation
• The liquidator objected obo the trade creditors and contended that the company
was a sham and a scheme designed to enable Salomon to conduct his business in
the name of the company and thereby to limit his liability for the debts of the
company
o It was also contended that since Salomon owned all but 6 of the shares issued
by the company, he and the company were one and the same person and
that consequently the company’s debts were his debts
LEGAL QUESTION
• Is a company a separate legal person quite distinct from its shareholders and
directors?
JUDGMENT
• The House of Lords unanimously found in favour of Salomon
• It was held that the company had been validly formed and registered and was
therefore a legal person
• The court stated that once the company was legally incorporated, it was a
completely different person with its own rights and liabilities
• The motives of those who took part in the formation of the company = irrelevant
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, ODR 320 Theme 4: Companies
• The court held further that there was no requirement in the Companies Act that
required the subscribers to the memorandum to be independent or unconnected
• The court concluded that the business belonged to the company and not to
Salomon, who was not liable for the debts of the company
• There was no fraud on the part of Salomon, nor any fraud on the creditors of the
company
o “It seems to me impossible to dispute that once the company is legally incorporated
it must be treated like any other independent person with its rights and liabilities
appropriate to itself, and that the motives of those who took part in the promotion of
the company are absolutely irrelevant in discussing what those rights and liabilities
are.”
PRINCIPLES ESTABLISHED
• A company is a separate legal person quite distinct from its shareholders and
directors, and shareholders are in principle not liable for the debts and liabilities of
the company
• Motives of the promoters = irrelevant in discussing rights and liabilities
THE LEGAL CONSEQUENCES OF SEPARATE LEGAL PERSONALITY
limited
company liability
may contract
with its perpetual
shareholders succession
company Legal
can sue consequences property and
and be of separate assets of the
sued in its legal company
own name personality belong to the
company
shareholder
has no right to
manage the profits of the
company's debts and company
business or liabilities of belong to
enter into the company the
transactions belong to the company
on its behalf company
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, ODR 320 Theme 4: Companies
The legal consequences of separate legal personality
Limited liability • The liability of shareholders for the
company’s debts = limited to the amount
they have paid to the company for its
shares
• General principle: shareholders ≠ liable
for the debts of the company and are
Through the concept of under no obligation to the company/its
limited liability, business creditors beyond their obligations based
people are able to limit the on the value of their shares (the claims of
risk of investing funds into a creditors = confined to the assets of the
business → this encourages company and cannot obtain satisfaction
growth and expansion of of their debts from the personal assets of
companies which is NB to the shareholders)
the economy • A person ≠ by reason of being a
shareholder/director/incorporator liable
for any liabilities/obligations of the
company, except if the Act or MOI
provides otherwise
Perpetual succession • Notwithstanding changes in its
shareholding through a transfer of shares,
by death or any other cause → the
company retains its legal identity and
continues to survive, i.e. the existence of
the company ≠ affected by changes in
shareholders
Property and assets of the company belong • Assets do not belong to the shareholders,
to the company as shareholders do not have a
proprietary interest in the company’s
assets
• Only once the company = liquidated do
the shareholders have a right to share in
a division of the company’s assets
• Principle that property purchased by a
company belongs to the company itself
and not to the shareholders is illustrated in
Dadoo Ltd v Krugersdorp Municipal
Council
Profits of the company belong to the • The profits do not belong to the
company shareholders
• The shareholders have a right to profits
only when the company declares a
dividend
• Not even a sole shareholder of a
company may help himself to the profits
of the company, and should he do so →
will be guilty of the criminal offence of
theft
Debts and liabilities of the company belong • Except in certain exceptional
to the company circumstances, the shareholders of a
company cannot be compelled to pay
the debts of the company
• If the company is liquidated, this will not
generally result in the shareholders’
estates being sequestrated
• Should the estates of the shareholders be
sequestrated → will generally not result in
the liquidation of the company
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, ODR 320 Theme 4: Companies
• A person ≠ by reason of being an
incorporator/director/shareholder of a
company liable for any
liabilities/obligations of the company,
except to the extent that the Act or the
MOI provides otherwise
A shareholder has no right to manage the • Membership ≠ qualify a shareholder to
company’s business or to enter into manage the company’s business/to bind
transactions on its behalf the company to a contract
• Only those persons who are authorised as
representatives to bind the company
may do so
• Contracts entered into by a company
are the company’s contracts and not the
contracts of its shareholders
Company can sue/be sued in its own name • If a company sustains a loss for which it
has a legal right of action → a
shareholder of the company ≠ have a
direct right of action for the loss
• The company itself must institute the
action, as it is capable of suing and being
sued in its own name
Company may contract with its • A company may enter into transactions
shareholders with its shareholders because it is a
person separate from its shareholders
• A company may also employ one of its
shareholders as an employee under a
contract of service
• Even if an indiv owns all the shares in a
company and is the sole director of the
company and thus has total control over
the company → he may also be
employed by that company under a
contract of service
DADOO LTD V KRUGERSDORP MUNICIPAL COUNCIL
FACTS
• Under certain legislation enacted in the then
Transvaal province, Indians were prohibited
from owning immovable property in the
Transvaal
• In 1915 a company called “Dadoo Ltd” was
formed with two Indian shareholders: Dadoo,
who owned all the shares in the company
save for one share, and Dindar, who owned
the other share in the company
• The company purchased property in Krugersdorp and subsequently let the property
out to Dadoo in his personal capacity, where he carried on a general dealer’s
business
• The Krugersdorp Municipal Council contended that the company had contravened
the statute prohibiting Indian people from owning immovable property in the
Transvaal
JUDGMENT
• The Appellate Division rejected this argument on the ground that the statute did not
apply to companies, even if all the shares of the company were held by South
Africans of Indian origin
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