LU 2 - Legal Personality & Lifting of the Corporate Veil

Question 1

What does ‘legal person’ mean?

Answer 1

AN entity separate from its members.

Question 2

What are the 3 ways of acquisition of legal personality?

Answer 2

1. Conduct
2. Separate act (eg. SABC, Eskom, Telkom, etc.)
3. Generaling enabling act (eg. CC Act, Co Act)

Question 3

How does an SA company get legal personality?

Answer 3

Through incorporation ito the Co Act (s1)

Question 4

What did the court hold in Solomon v Solomon?

Answer 4

A company legally incorporated must be treated as independent with own rights and liabilities

Question 5

What did the court decide in Airport Cold Storage?

Answer 5

A fundamental result of incorporation is that the company is separate from its members
and its assets are not the property of the members

Question 6

What did the court decide in Dadoo v Krugersdorp Munic. Council?

Answer 6

The company property vests in the company not the members

Question 7

What are the implications of this separateness?

Answer 7

1. Limited liability for the members
2. Assets belong to the Co not members
3. Profit belongs to Co; not members
4. Any wrong done against the Co, the Co must seek redress
5. The Co can sue and be sued in its own name
6. The Co can participate in business and law in its own name
7. A Co is managed by directors (unless the MOI provides otherwise)
8. The Co has control over finances, policies and practices (the Co has separate mind, will and existence)
9. Limitation of powers of shareholders
10. Members do not have a right to act obo Co
11. If the members’ estates are sequestrated, it will not lead to liquidation of the Co’s estate.

Question 8

What are the 2 ways in which the corporate veil can be lifted?

Answer 8

1. Legislation

2. By the courts

Question 9

Generally, when will legislation/court ignore the separate legal existence

Answer 9

Only in exceptional circumstances.

Question 10

Name 3 cases applicable to courts lifting the corporate veil

Answer 10

1. Botha v Van Niekerk: Will not lift veil if there is a legitimate alternative remedy;
2. Hulse Reutter: Only if there is no other remedy available
3. Ex Parte Gore

Question 11

In which cases will the court lift the veil?

Answer 11

1. If the members have complete or near complete control of the company;
2. If members have control over finances, policies and practices
   - Thus, where the company has no separate mind, will or existence
   - Where evidence reveals that Co is merely a facade that conceals reality of the situation

Question 12

Discuss Ex Parte Gore and Others NNO (WCC)

Answer 12

1. Legal personality = separate identity
2. Sec 20(O) = statutory basis for disregarding corp. personality
3. The common law doctrine of ‘piercing the corp. veil’ was considered and restated
4. It is SUPPLEMENTING (not substituting) the common-law doctrine
5. It is a remedy available whenever there is illegitimate use of concept of juristic personality adversely affecting 3rd party unreasonably
6. ‘Any interested party’ defined as ‘any person having direct and sufficient interest in relief sought’

Question 13

What are the types of companies? (9)

Answer 13

1. Profit Companies: Public company (Ltd), SOW (SOC Ltd), Personal liability co (Inc), Private Co, External Co.
2. Non-profit Companies: NPC, External Co.

Question 14

What is the difference between public and private companies iro the old and new acts?

Answer 14

Mostly the same, except that the maximum of 50 members for a private co is repealed.
- The limitation on transfer of shares in Pvt Co kept

Question 15

How many shareholders are needed for a company?

Answer 15

Only one for all Co types, except for NPC where no shareholder is required.

Question 16

How many directors must a Public Co have?

Answer 16

Three

Question 17

When is a SOC governed by the Co Act?

Answer 17

Unless where the Minister of DTI excludes it and where it is difficult to apply due to conflicting legislation

Question 18

Discuss ‘company with personal liability’

Answer 18

• Inc
• For professions and their specific needs
• A private co, but directors are jointly and severally liable for debts and liabilities (sec 19(3))
• It is possible to convert to another type of Co without court approval

Question 19

Discuss ‘NPCs’

Answer 19

• Now an independent type of Co
• Schedule 1 sets out specific rules/requirements
• The largest change being that an NPC can now be formed without members
• Thus 2 types: with members, or without
• If there are no members, the MOI must state how the directors are appointed

Question 20

Discuss ‘external companies’

Answer 20

• Foreign company doing business in SA
• Must register within 20 business days from starting activities in SA
• Must have an office in SA
• Ito s23 must register and have office, but most of the Co Act requirements are not applicable

Question 21

Discuss the ‘name’ of a company (as part of formation)

Answer 21

1. Section 11
2. A name may be reserved for 6 months for later use, but may be extended for a longer period
3. The reservation may be transferred, but no longer allowed to trade in names
4. The CIPC may go to court to prohibit
5. You may reserve a name as a defensive name for 2 years - but only if there is a DIRECT and MATERIAL interests
6. Ito s11(1) may use any word and it need not make sense
7. If using registration number as name, it must be followed by ‘(South Africa) Ltd’
8. May use symbols
9. May register swear words, but names may not be disagreeable

Question 22

Ito sec11(2) what may names not do?

Answer 22

Ito s11(2) names may not:

a. Be the same as other Co or trademark
b. May not be confusingly similar
c. May not falsely imply/suggest association
d. Name must not institute propaganda of war, incitement of IMMINENT violence or advocacy of hatred

Question 23

What are the 3 new abbreviations introduced by the Co Act 2008?

Answer 23

• SOC Ltd
• NPC
• RF

Question 24

Briefly discuss the formation (4)

Answer 24

1. It is a simplified process of registration
2. First file a NOI (notice of incorporation) an then an MOI (memorandum of incorporation)
3. Will then receive a registration certificate
4. Rules and shareholders agreements are other documents which will be filed with the CIPC

Question 25

What must a NOI contain?

Answer 25

1. Name 2. Directors 3. Foreign co must have registered office 4. Financial year 5. Date chosen - It must give pertinent emphasis to any clause in the MOI that contains limitation

Question 26

Ito the Co Act what is the relationship between the parties ito the MOI?

Answer 26

The MOI and rules binds- 1. The Co and every shareholder 2. The shareholders inter se 3. The Co and every director, prescribed officer, member of committee of board of directors in the exercise of their functions/duties.

Question 27

Discuss the contents of the MOI

Answer 27

1. 2 types of provisions: Alterable and unalterable 2. Name and signing (or proxy) must be included 3. The type of co 4. Classes of shares, rights attached to classes, and share capital 5. Attach a court order pertaining to compromise with creditors 6. If NPC, appointment of directors (if no members)

Question 28

Define 'alterable provisions' (5)

Answer 28

A provision of the Act which expressly contemplates its effect on a particular company may be negated, restricted, limited, qualified, extended or otherwise altered in substance or effect by that Co's MOI

Question 29

Define 'unalterable provisions'

Answer 29

A provision of the Act that does not expressly contemplate that its effect on any particular company may be negated, restricted, limited, qualified, extended or otherwise altered in substance or effect by a Co's MOI

Question 30

Discuss 'amendments of MOI provisions'

Answer 30

- Limiting of procedural requirements pertaining to alteration of provision of MOI in addition to Co Act - Or prohibition of such changes - Result: a. Notice of Incorporation - prominent statement b. Name "RF" c. Deemed knowledge, thus constructive notice

Question 31

When does constructive knowledge apply?

Answer 31

Only to the RF clauses listed in NOI

Question 32

Discuss the registration certificate

Answer 32

1. It is conclusive evidence that a. Requirements for incorp. have been complied with; and b. The Co is incorporated from date on certificate. 2. Later conclusive evidence of: a. Date of issue of certificate b. Date of NOI (co may choose date)

Question 33

Discuss 'shareholders agreements'

Answer 33

1. Shareholders Agreements are between shareholders and may not be in conflict with the Actor the MOI 2. Co has 2 years to get the SHA in line with the new Act (a transition provision) 3. CIPC: If changes are made to 1 document, must change all (eg. if changes to SHA, must change MOI)

Question 34

What is the purpose of Shareholder Agreements?

Answer 34

To keep certain information private/secret.

Question 35

Discuss 'rules ito section 15(3) to 15(6)'

Answer 35

1. Directors may make, amend or repeal rules without a special resolution, except if MOI provides otherwise 2. Rules deal with matters relating to mgmt of the Co not dealt with in the Act or MOI 3. Must be published and filed at CIPC 4. May not be inconsistent with Act/MOI 5. To be binding it must be ratified by Shareholder meeting 6. It is binding in the same was as the MOI

Question 36

Discuss 'pre-incorporation contracts'

Answer 36

1. Section 21 2. Written agreements entered into before incorp of the Co by a person in the name or obo the Co (that does not yet exist) with the intention that the Co will ratify the contract after incorp 2. Refers to agreements and/or actions 3. This s21 provides no solution to the problems pertaining to pre-incorp contracts 4. Agent is jointly and severally liable if Co is not incorporated or rejects agreement/action after incorp 5. The Co has 3 months after incorp to reject the contrat, otherwise considered ratified (even if Co did not know about the contract) 6. There is an enrichment action available for agent if Co rejects for benefits received