Part 02 Unincorporated Firms

Company Law
Unincorporated Firms
Company Law (CML2001F) Part 2: Unincorporated Firms
Overview
• Unincorporated firms (covered in this part)
v The sole proprietor
v The partnership
v The trust
• Incorporated firms (later in course)

v Companies
- governed by the Companies Act 71 of 2008
v Close corporations
- governed by the Close Corporations Act 69 of 1984
Company Law (CML2001F) Part 2: Unincorporated Firms / Sole Proprietor
The Sole Proprietor

• A sole proprietorship, also known as the sole trader or simply a
proprietorship, is a type of business entity that is owned and run
by one natural person and in which there is no legal distinction
between the owner and the business.
• There is only one estate, the sole proprietor owns all assets in his
personal capacity
• If the sole proprietor dies the ‘business’ ends as well
Company Law
Partnerships
Company Law (CML2001F) Part 2: Unincorporated Firms / Partnerships
Learning outcomes: Partnerships

By the end of this module, you should appreciate:
• the legal nature of a partnership;
• the effect of a partnership agreement on the rights, duties and
liabilities (civil and criminal) of partners, and special contractual
remedies that arise in this the context of a partnership;
• when a partnership will incur liability to a third party;
• the distinction between joint and several liability, and how the
instance of such may differ depending on the circumstances;
• the concepts of the ‘partnership fund’ and ‘mutual mandate’;
• the formation and dissolution of a partnership, and ways in
which partners may guard against inherent risks; and
• Certain procedural aspects of litigation against a partnership.
Nature of a Partnership
• The legal relationship arising from an agreement between at
least two person in terms of which each contributes towards a
business carried on in common with the object of obtaining
mutual material benefit.
• Essentialia of partnership contract thus:

- Agreement/contract
- At least 2 persons
- Contribution
- Mutual benefit
Requirements For a Valid Partnership Agreement

• Each partner must make a contribution;
• Business must be carried on for the joint benefit of the partners;
• Object must be to make a profit;
• Contract between the parties should be a legitimate contract;
• (Other general legal requirements for a valid contract).
Definition of a Partnership: Elements

1. Legal relationship
2. arising from an agreement
3. between two or more persons (former limit of 20)
- Poppe, Rousseau & Co v Kitching & Others
4. each to contribute to an enterprise
5. with the object of making a profit
i. Co-ownership
ii. Joint transactions
iii. Voluntary association
iv. Concurrence of creditors in an assignment
Elrich v Rand Cold Storage & Supply Company Ltd 1911 TPD 190
6. and to divide such profits…
Definition of a Partnership
• Although the object of dividing profits is the ‘main test’ of
partnership, it is not decisive.
• Compare partnership to other legal relationships:
1) Agency
2) Loans
3) Employment
4) Lease
5) Joint ventures and syndicates
Definition of a Partnership:
Re: Formation of a Partnership
• Where all of the essentials are present there is prima facie a
partnership, unless there is an element showing that the contract
is not an agreement of partnership.
• Court will look at substance, having regard to all circumstances in
which the agreement was made and to the subsequent conduct
of the parties.
• It is the ‘real intention of the parties as deduced from the whole
agreement which must be looked to’ – Deary v Deputy Commissioner
of Inland Revenue 1920 CPD CPD 541 at 547.
Legal Nature of a Partnership

• Aggregate theory vs entity theory?
• South African law does not consider a partnership a separate
entity, but there are a few exceptions for practical purposes.
• Exceptions to the aggregate theory:

- Insolvency
- Litigation * Rule 14 (URC)…
- VAT
The Partnership Fund

• Personality?
• The Partnership Fund
- If the partnership is not a juristic person, who owns the
partnership assets?
- This is reflected by means of a so-called ‘partnership fund’
Rights and Duties of Partners

• Rights of the partners
- Right to share in the profits of the partnership
- Right to participate in the management of the business
- Right to inspect the partnership books
- Right to the distribution of assets upon dissolution

• Duties of the partners
1. Contribution
2. Sharing of management
3. Use of partnership property
4. Reasonable care
5. Good faith…
6. Access to books
7. Account
8. Sharing of profits…
9. Rendering of accounts
> The Duty of Good Faith…

• Fiduciary standard: uberrimae fides
- How is this different to usual standard of good faith?
• Four important consequences
- Will render unenforceable a contract entered into by partner
with a third party in breach of it.
- Duty of non-preference arises
- Partner may not buy partnership property without the
consent of his/her co-partners
- Breach of duty of good faith will normally entitle a co-partner
to claim a dissolution of the partnership.
> Sharing of Profits…

• Remuneration for services
- An active partner (eg managing partner) is not entitled to any
remuneration above his/her share of the profits, except:
o If agreed,
o Where he/she has rendered extraordinary services,
beyond the usual scope of the partnership business,
whereby assets are preserved or benefited, or
o Where he/she conducts the business mainly or entirely
him/herself and does more than is obligatory.
• Losses and expenses
• Interest on capital

• Remedies between partners
- Specific performance
- Damages
- Interdicts
- Attachment
- Declaration of rights
• Arbitration
Extraordinary Partnerships
• Universal partnerships
• Anonymous and commanditarian partnerships
- Partner is undisclosed
- Partner liable only to co-partners; not creditors of the
partnership, BUT
o Limitation of commanditarian partner’s liability to co-partners
o Indirect liability to creditors for both in context of insolvency
- On insolvency of known partner, partner cannot claim
concurrently with creditors against the partnership.
- A partner may not participate actively in the business of the
partnership.
Incorporated Partnerships
• Partnerships incorporated under Companies Act 2008.
• May be used for professional firms such as lawyers / accountants.
• Personal liability of directors.
• Not included in discussion of unincorporated firms.
Liability to Third Parties

• Incidence
a) Membership of the partnership / valid agreement
b) Authority to bind the partnership
c) In the name or on behalf of the partnership
• Limitations:
- anonymous and commanditarian partnerships
• (Second contract with third party must also be valid.)

Liability to Third Parties: Authority

• Onus on third party to show that the contracting party had
authority to bind the partnership.
• Authority may arise in a number of ways
- Express provision of partnership agreement
- Implied from
o partnership agreement, or
o customary dealing of the partnership…
• Alternatively, the third party may raise estoppel against the
partnership, estopping the co-partners from denying liability
(even in absence of authority)
> Implied Authority

• Terms implied by specific facts
- Usual rules relating to implied terms
- Cannot override express terms
• Authorisation implied by law (naturalia)
- This is referred to as ‘mutual mandate’
- ‘each partner has authority to do all acts incidental to the
proper conduct of the partnership’ – Braker & Co v Deiner 1934
TPD 281 at 284.
Liability to Third Parties

• Whatever the authority of the partner who has contracted an
obligation, it is necessary, to render his/her co-partners (the
partnership) liable, that the obligation should have been
contracted in the name or on behalf of the partnership.
• Both the representative and the third party must intend for the
contract to be with the partnership.
- ‘If third persons dealing with the manager chose to make him their sole
debtor, with the full knowledge that he is acting for his co-partners as
well as himself, I know of no principle in our law which would justify
them in afterwards treating any other member of the partnership as
their debtors’ – Guardian Insurance & Trust Co v Lovemore’s Executors
(1887) 5 SC 205 at 210.
Criminal Liability
• Offences by a partner against the partnership
• Liability of partners
- Since a partnership has no identity distinct from its
members, it cannot, as such, commit an offence, and it
cannot therefore be prosecuted.
- General rule: a partner is not liable for the criminal conduct
of a co-partner
o Constitutionality of vicarious criminal liability
Civil Proceedings
• Rule 14 (proceedings by and against partnerships)…
• Citation – individual partners or name of partnership
• Service – place of business of partnership / on a partner
• Evidence – admission of debt of partnership by partner…
• Set-off
• In claim by partnership, a 3P defendant cannot normally set off a debt
owing to him by one of the partners individually. Likewise with a claim by
a partner against debt owing to the defendant by the partnership.
• Defendant partnership cannot set off debts owing by the plaintiff to
individual partners.
• Partner sues as a partner, but not when sued personally, may set off a
debt owing to the partnership.
• Judgment against partnership, not individual partners
Dissolution of the Partnership

• Causes
1. Agreement
2. Operation of law
• Frustration
• Death of partner
• Insolvency
• Partner becoming an alien enemy
• Mental disorder or defectiveness
3. Renunciation
a) In certain causes, by due notice of dissolution
b) Lawful cause…
Dissolution of the Partnership

• Lawful cause for renunciation
- Fulfilment of a condition allowing partner to give notice of
dissolution
- Breach of an essential term of the partnership agreement
- Conduct causing loss of confidence
• Consequences of dissolution
- Duties of partners
- Insolvency proceedings
- Accrued rights
- Incurred obligations
Company Law
The Business Trust
Company Law (CML2001F) Part 2: Unincorporated Firms / The Business Trust
Learning outcomes: The Business Trust

By the end of this module, you should appreciate:
• the legal nature of a trust;
• The liability of a trustee;
• the role, rights and duties of various parties to a trust;
• the necessary requirements for the creation of a valid trust;
• the way in which a beneficiary can protect his/her interests;
• the difference between various types of trusts dealt with;
• how a business trust differs from other types of trusts, and how
such a trust can be structured to mimic a company;
• The advantages of using a trust as a business vehicle.
Legal Nature of a Trust

• A trust is a legal relationship that has been created by/in a trust
deed and it has the following key characteristics:
- The relationship created by persons known as founder/donor
- The founder places assets under the control of another
person/s known as the trustee/s
- This is either done during the founder’s lifetime or after
his death (inter vivos / mortis causa).
- The purpose of the exercise is to benefit third persons known
as the beneficiaries
Parties to a Trust
• Founder/settlor
• Trustee
• Beneficiary
Types of Trusts
• Inter vivos
• Mortis causa (testamentary trusts)
• Bewind trusts
Creation of a trust
Requirements for creation of valid trust (will/contract):
1. Intention by founder…
2. expressed in way that is legally binding…
3. Trust property…
4. Object of trust must be certain…
5. Lawful object.
• Section 4 of the Trust Property Control Act 57 of 1988

requires the lodging of the trust instrument with the Master
of the High court… practical effect?
Duties of the trustee

• Must act with care, diligence and skill
• Must open separate trust account
• Must act with good faith
• Must exercise an independent discretion at all time
• May not expose assets to undue risk
• Must invest trust property productively
• Must act within the powers granted in the trust deed
• Powers of the trustee to deal with trust assets are limited at

common law: traditionally, the trustee preserved and protected
these, as far as possible, free from risk.
Legal position of the beneficiary, generally:

• The trust document determines the nature and extent of the
rights of a trust beneficiary
• Beneficiary acquires right to benefit from the trust once s/he
accepts the benefit offered in the trust document.
- Before acceptance, the founder can revoke/vary the benefit.
• Right/s of beneficiary remains subject to
- Terms of the trust document, and
- Exercise of a discretion (if any) by the trustee.
• Vested rights are assets in beneficiary’s estate.
• Remedies include:
- Enforcement of rights in trust document (after acceptance)
- Damages action for breach of trust where fin. loss suffered
The Business Trust

• A business trust is no more than an ordinary trust in which the
trustees have been given power to carry on business and to trade.
• Beneficiaries are usually able to sell, cede or otherwise deal with
their interests in the trust the way that a shareholder is able to
deal with his shares.
• It is thus possible to structure a trust in a way that resembles a
company or a close corporation.
• Powers otherwise excluded at common law:
o to sell trust assets;
o to enter into a loan agreement and to mortgage trust assets;
o to expose trust assets to business risks by conducting a business.

Part 02 Unincorporated Firms

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Part 02 Unincorporated Firms

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Company Law

• Incorporated firms (later in course)

The Sole Proprietor

Learning outcomes: Partnerships

• Essentialia of partnership contract thus:

Requirements For a Valid Partnership Agreement

Definition of a Partnership: Elements

Legal Nature of a Partnership

• Exceptions to the aggregate theory:

The Partnership Fund

Rights and Duties of Partners

Rights and Duties of Partners

> The Duty of Good Faith…

> Sharing of Profits…

Rights and Duties of Partners

Liability to Third Parties

• (Second contract with third party must also be valid.)

Liability to Third Parties: Authority

> Implied Authority

Liability to Third Parties

Dissolution of the Partnership

Dissolution of the Partnership

Learning outcomes: The Business Trust

Legal Nature of a Trust

• Section 4 of the Trust Property Control Act 57 of 1988

Duties of the trustee

• Powers of the trustee to deal with trust assets are limited at

Legal position of the beneficiary, generally:

The Business Trust

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