CLOSE CORPORATIONS

CHAPTER 16
CLOSE CORPORATIONS
 What is a close corporation?: A close corporation is a juristic person distinct from its
members, it enjoys perpetual succession, and its members have limited liability.
 The Incorporation of a CC is initiated with the founding statement of the members. It contains
the basic layout for the CC and can be amended later amongst the members by concluding an
association agreement that is not accessible for any non-member.
 Background:
 Closed Corporations were subject to Close Corporations Act 69 of 1984. On 1 May 2011, the
Companies Act 71 of 2008 came into effect, replacing the Companies Act 1973 and amending
the Close Corporations Act of 1984.
 The Companies Act, 2008 changed the regulatory framework applicable to close corporations.
 In terms of the new Companies Act 2008, no new close corporations can be registered and
no company conversions to close corporations will be registered after 1 May 2011.
 Close corporations that were in existence at the time that the 2008 Act came into effect may
continue to exist indefinitely.
 The 2008 Act has not repealed the Close Corporation Act No 69 of 1984, nor has it done away
with close corporations.
 The two Acts will exist concurrently, and CCs will be required to comply with the provisions of
the new Companies Act only in so far as it amends the Close Corporation Act.
NATURE OF CLOSE CORPORATION AND ITS MEMBERS

 CC were established by way of a founding statement containing details of

members, proposed name, interests of members and the name of the business
must end with letters “cc.”
 CC is a legal person so members are not liable in their personal capacity.
 The general rule: Members are held jointly and severally liable in specific
instances
 Exceptions to the general rule: members can incur personal liability if there
is abuse of powers, fraud, etc
 Profit is taxed as company tax and not in the hands of the members.
 Fiduciary duties (in good faith), Each member has authority to bind
corporation to transactions.
 Transfer of Ownership / Lifespan and continuity: there is perpetual
succession in a CC, it is not influenced by the withdrawal or addition of
members.
NATURE OF CLOSE CORPORATION AND ITS MEMBERS
 A CC has no share capital and therefore no shareholders. The owners of a CC are called
members of the CC.
 Members have a membership interest in the CC and members’ interest is expressed as a
percentage.
 Membership, generally speaking, is restricted to natural persons. Only natural persons can be
members of a CC, a legal entity, no matter where incorporated, cannot be member of a CC.
 A CC may not have an interest in another CC.
 The minimum number of members is one and the maximum number of members is 10.
 Association Agreement is the single most important document of any Close Corporation if
there is more than one member. 
 Definition of an association agreement: A written agreement between members regulating
internal relationships and other lawful matters such as members voting rights and their right to
participate in distributions of profits and other payments by the corporation to its members
will be in proportion to their member’s interest.
CLOSE CORPORATIONS & THE COMPANIES ACT 2008
 In terms of the new Companies Act 2008, no new close corporations can be registered
and no company conversions to close corporations will be registered after 1 May
2011.
 Requirements to Convert the close corporation into a private company.
1. There must be a notice of conversion and this notice must be accompanied by:
2. A written statement of consent approving the conversion of the cc, signed by members
of the cc holding in aggregate at least 75 percent of member’s interest.
3. A memorandum of incorporation (MOI) consistent with the requirements of the
Companies Act.
4. The prescribed fee.
DUTIES MEMBERS OWE TO THE CC
 The Close corporations Act imposes two specific duties on members towards
the CC:
1. A fiduciary duty- page 382 of P.Book
 All the members of the Close Corporation have a fiduciary duty towards the Close
Corporation. This means that the member must do the following:
 Act honestly and in good faith
 Exercise his/her powers in the interests of and for the benefit of the corporation
 Not exceed his/her powers
 Avoid a conflict of interests
 Not compete in any way with the corporation in its business activities (for example
not to do business in competition with the Close Corporation).
 In the event that the fiduciary duties are breached, a member may be held
personally liable for any loss suffered by the corporation or debts incurred as a
result of such a transaction (s 42(3)). The member would in such an event have to
repay any profit made by him or her.
DUTIES MEMBERS OWE TO THE CC
2. A duty of care and skill
 A member will be liable only if the close corporation suffers a loss as a result
of the breach of this duty (s 43(1)).
 The member's conduct is measured against the conduct which could
reasonably have been expected from a person with the same skill and
knowledge as the member (to establish negligence).
 In case of a breach, another member may institute action against the close
corporation or its members in his or her personal capacity
CIRCUMSTANCES UNDER WHICH MEMBERS OF A CLOSE CORPORATION MAY BE HELD PERSONALLY LIABLE FOR THE
DEBTS OF THE CC
 circumstances under which members of a close corporation may be held personally liable
for the debts of the CC
 In terms of section 65: abuse of separate juristic personality of corporation
 S 65 provides that a court has extensive powers to ignore the existence of a cc in case where
there’s an abuse of a corporation as a juristic person.
 Similar to lifting of corporate veil, in terms of S 20 of Companies Act the court may:
 Declare that the company is to be deemed not to be a juristic person, and
 Make any further order the court considers appropriate.
 In terms of section 23 which requires the name and registration number of a corporation
to appear on certain documents, cheques and orders issued by the corporation.
 In terms of section 52 which prohibits the making of certain loans, and
 In terms of section 64 which imposes personal liability on those who have acted recklessly
or fraudulently.
Remedies for breach of duties by members
 One of the most important remedies provided for in the Close Corporations
Act for disputes between members is that contained in section 36 which
empowers the court, on the application of a member of a corporation, to order
that a particular person is to cease to be a member of the close corporation.
 Termination of another members’ interest: Section 36 of the Close
Corporations Act 69 of 1984
 In a cessation of membership by order of court, the Close Corporations Act
provides two main remedies against each other.
 The termination of the offending member’s membership by an order of court
in terms of s 36
 Assistance from the court where a member or members have been guilty of
unfairly prejudicial conduct in terms of s 49
 there are many CCs that have remained in existence that still require
regulation.