You and Your Rights

Introduced in 1984 by the Close Corporations Act, a close corporation is defined as a legal person' separate from its members, owning the assets and incurring the liabi-lities and obligations of the business in the same way as a company (see companies). In this way the twin benefits of limited liability and perpetual succession enjoyed by a company are conferred, but they are conferred more simply and inexpensively. The close corporation may have no more than 10 members, who, as a general rule, must be individuals (in legal terms, natural person). The only other person that may be a member of a close corporation is a testamentary trust, acting through its trustee; in that instance, however, a juristic person (such as a company) may not be a beneficiary under the trust. There is thus a general prohibition against a legal' or juristic' person being a member of a close corporation.

A company may therefore not be a member of a close corporation, nor may a close corporation be a member of another close corporation, even though a company may, for example, hold shares in another company and a close corporation may have only one member.

Instead of holding shares each member acquires an interest in the corporation, expressed as a percentage. The founding members of a close corporation will each have to make an initial contribution (which need not be in money) to it. As with the company, there is no minimum contribution laid down, and nothing to prevent members from limiting their contributions and therefore their risk.

Members may elect to put more money into the close corporation by way of loans so as to receive benefits as creditors instead of as members.

To become a member of a close corporation, you can acquire an interest from an existing member or make a contribution to the close corporation itself in return for obtaining an agreed percentage interest in it.

Formalities and formation expenses

State authority is required for the creation of a close corporation. The Close Corporations Act, 1984, lays down the requirements that have to be met in order to achieve incorporation. Essentially, the re-quisite number of persons can form a close corporation simply by registering a founding statement with the Registrar of Close Corporations in Pretoria.

On registration, the registrar is required to issue a certificate of incorporation to serve as evidence that the close corporation has been formed.

Other formalities associated with the registration of companies are also drastically reduced or eliminated. For instance, the address of the registered office of the close corporation (which must be a street address) as well as its postal address are mentioned in the founding statement itself; the need for any further documen tation in this regard, which is always required in the case of a company, is therefore eliminated.

This brevity and simplicity is made possible largely because the Close Corporations Act provides for the way in which a close corporation is to be run internally. This eliminates the need for any prior agreement on the matter. Furthermore, the internal structure of a close corporation is a lot simpler than that of a company, as there are no directors.

Flexibility is, however, provided, as the statutory rules apply only in the absence of contrary agreement - an association agreement can therefore be entered into by the members, providing for matters to be done differently.

Naming the close corporation

Close corporations must have a name and be allocated a registration number by the Registrar of Close Corporations.

This name and the registration number of a close corporation must be displayed conspicuously in easily legible characters outside the registered office and every place in which the business is conducted. Furthermore, as in the case of companies, the registration number and the name must be used, in legible characters, in documents such as official publications, letters, invoices, receipts, delivery notes, and all bills of exchange, promissory notes, endorsements, cheques, and orders for money or goods'. The Close Corporations Act specifies that official publications' include advertisements, and that an order' includes an order for services'.

It is possible for a close corporation to register a literal translation of its name into another official language, and shortened forms of its name in an official language. Use of either full version is permitted, but not the use of the shortened form on its own. Names can be changed at any time.

A number of statutes prohibit the use of certain words in business names. For example, no one may use a name implying that he or she is an attorney, notary or conveyancer if this is not true; a business name may not include the words government', state', or United Nations'; and the use of the word bank' is prohibited unless the person using that term is registered as a deposit-taking institution.

The name of a close corporation must have the abbreviation 'CC' or 'BK' (the abbreviation for 'beslote korporasie') in capital letters subjoined to it.

The name must not, in the opinion of the registrar, be undesirable'. (The Close Corporations Act, however, expressly provides that there is no duty on the registrar to consider the question.) Examples of what are considered undesirable are:

• Names identical to or nearly resembling names already registered;
• Names containing descriptive words conveying an impression of a corporation's business that differs materially from the corporation's main business;
• Words in a name suggesting vast resources, such as International' and National', in a close corporation which only has a small capital;
• Words in a name suggesting blasphemy or indecency or causing annoyance or offence to any person or class of persons;
• Names suggesting government patronage, whether by the South African government or a foreign state;
• A name consisting of fewer than three letters of the alphabet.

It is possible under the Companies Act, 1973, to take a registrar's decision on a company's name to the Supreme Court, but this seldom happens. The Close Corporations Act does not confer such a right (although there may be other, common-law, remedies), but interested persons can request either the registrar or the court to order a close corporation to change its name within one year after the registration of its founding statement, on the grounds of the undesirability of the name.

Even if the name of a close corporation has been registered, the registrar can, within a period of one year after registration, decide that the name is undesirable and order that it be changed.

On receiving a written objection to a business name to which the Business Names Act, 1960, applies, the registrar can order that the name be changed if it is considered likely to deceive or to mislead the public or to cause annoyance or offence to any person or class of persons or is suggestive of blasphemy or indecency'.

Whatever the registrar's decision, the unsuccessful party (the objector or the business) can apply to the Supreme Court within 60 days to overrule the registrar (see business names).

The use of a name by a close corporation which is similar to that of another business may amount to passing off', that is, a representation by someone that his or her business or merchandise is that of another or is associated with that of another. passing off can be prevented by obtaining a court order (see interdict).

Counting the cost

Though fees are payable upon the formation of a close corporation (around R150 in 1996 for registration), it is still much cheaper to set up a close corporation than a company. Should a close corporation with a highly complicated founding statement or association agreement be desired, however, its creation could become more expensive. On the other hand, an off-the-peg' (already formed but dormant) close corporation may be acquired instead.

Operating requirements

The obligation to keep books of account and to produce financial statements is also imposed on a close corporation, but less rigorously and in less detail than in the case of a company. The requirement that the financial statements of companies be audited on an annual basis is replaced by the requirement that financial statements be checked by an accounting officer' whose duties are less onerous than that of the auditor of a company. The necessary registers and returns are minimal. There is no equivalent of the certificate to commence business issued to a company by the Registrar of Companies, although a certificate of incorporation must still be obtained by a close corporation. Formal controls are avoided whenever possible, the minimum notice period for members' meetings, for example, being simply reasonable notice' unless the association agreement provides otherwise. There is no need for an annual general meeting.

There has also been a move towards decriminalisation - although it has not been possible to scrap all of the provisions imposing criminal liability, there are fewer of them. There is recourse to other techniques, such as the imposition of a penalty, not exceeding a certain sum, on members of a close corporation for failure to lodge documents with the registrar (for example, when an amendment to the founding statement of the corporation is made and has not been lodged timeously with the Registrar of Close Corporations despite written notice by the registrar calling for this to be done). A penalty imposed by the registrar has the effect of a judgment of a civil magistrate's court (subject, however, to the right of the members concerned to approach the court with a view to setting aside or reducing the penalty, or with a view to exempting any one or more of the members from the duty to pay it).

Also, members may face the forfeiture of the protection normally afforded to them by the principle of limited liability in certain cases, for example, when the business of the close corporation was carried on recklessly, with gross negligence or with intent to defraud. The members who were knowingly party to the carrying on of the business in that way may then be held personally liable for the debts incurred by the close corporation.

Furthermore, all notices and other official publications, bills of exchange, promissory notes, endorsements, cheques, orders for money, goods or services, letters, delivery notes, invoices, receipts, or letters of credit emanating from the corporation must bear the corporation's registered name and number.

If for any reason a bill of exchange, promissory note, cheque or order for money, goods or services does not comply with these requirements and it is not met or paid, then the member or person who issued it will be liable for the amount due.

Founding statement

The founding statement of a close corporation must contain:

• The full name of the corporation (as well as any translation and shortened forms of the name); EA description of the main business to be carried on;
• The date on which the corporation's financial year ends;
• The postal address of the corporation;
• The address of the registered office of the corporation, which must be a street address and not a box number;
• The name, address and profession of the accounting officer of the corporation;
• The name, identity number and address of each member;
• The size of each member's interest expressed as a percentage;
• The full particulars of each member's contribution to the corporation.

Business decisions

Although it is possible for members of close corporations to make their own arrangements regarding the taking of business decisions and to incorporate the terms upon which they settle into an association agreement, it is not obligatory for them to do so. If there is no association agreement, or one that does not provide to the contrary, then:

• Every member (except those disqualified in terms of the Act) may participate in carrying on the business;
• All members have equal rights in proportion to their interest in managing the corporation's business;
• All are empowered to represent the close corporation in the conduct of business transactions. Disqualified persons include:
• Those under a legal disability, such as lunatics or prodigals (but not a married woman or a minor over the age of 18 whose guardian has lodged with the corporation a written consent to the minor's participation in the management of the business of the corporation).
• Unrehabilitated insolvents, except those under authority of an order of court, persons who have been removed from an office of trust because of misconduct and persons who have at any time been convicted of an offence involving dishonesty, including forgeryI, fraudI, perjuryI and theftI, for which a sentence of imprisonment for at least six months without the option of a fine has been imposed.
• Any person disqualified from being a director of a company by an order of court under the Companies Act.

In certain matters, for example, a change in the principal business carried on by a close corporation, the disposal of the whole or the greater part of the undertaking of the corporation and any acquisition or disposal of immoveable property by the corporation, the written consent of 75 per cent of the members is required unless the association agreement provides otherwise. Differences between members are decided by majority vote, with each member having a number of votes corresponding to his or her interest in the corporation.

Winding-up

The members of a close corporation, like the shareholders in a company, can pass a written resolution to wind up the corporation voluntarily. The corporation may be wound up without intervention by a court if all the members agree to the passing of such a resolution and by a court if members holding more than half the total voting power resolve to have the corporation wound up. In the latter case, a magistrate's court or a provincial or local division of the Supreme Court may grant an order winding up the corporation.

In addition to this, there are various grounds upon which a close corporation can be compulsorily wound up by a court. These include:

• The failure to commence business within a year after incorporation or the suspension of business for a year;
• The inability of the corporation to pay its debts;
• The presence of circumstances rendering it just and equitable' that the corporation be wound up.

The corporation will be deemed to be unable to pay its debts if:

• A creditor to whom the corporation owes R200 or more has delivered to the registered office of the corporation a demand requiring the corporation to pay the sum due and the corporation has for 21 days after that neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor;
• Any process issued to enforce the judgment of a court in favour of a creditor of the corporation is returned by the sheriffI of the court with an endorsement that there is insufficient disposable property to satisfy the judgment, or that the disposable property found did not realise enough on a sale in execution to pay the judgment debt in question;
• It is proved to the satisfaction of the court that the corporation is unable to pay its debts.

It should also be shown that the winding-up order is to the benefit of all the creditors. It is unnecessary to prove that the liabilities of the close corporation exceed its assets in order to have it wound up on the basis of the inability to pay its debts; it is enough for a debtor to prove commercial insolvency' - the mere inability to pay debts as they fall due. When a winding-up order is granted, the master of the supreme court appoints a liquidator to take charge of the close corporation, distribute its assets or, after they have been realised for cash, pay the proceeds to the creditors of the corporation and thereafter to the members in the unlikely event that assets or cash proceeds are left over. After this has been done, the close corporation may be deregistered, at which point it will cease to exist.

Deregistration

The registration of the founding statement of a close corporation may be cancelled if all of the members submit to the registrar a written statement declaring that the corporation has ceased to carry on business and has no assets or liabilities, or if the registrar has reasonable cause to believe that the corporation is not carrying on business or is not in operation. In the latter case the registrar must first serve on the corporation by certified post at its postal address a letter informing the close corporation that unless written notice is received within 60 days of receipt of this letter that the corporation is carrying on business or is in operation, it will be deregistered.

Notice of such deregistration is published in the government gazette. Notwithstanding deregistration, however, all members and former members of the corporation will remain liable for the debts incurred by the close corporation while they were members.

DEREGISTRATION can be reversed and registration restored by the registrar on application by any interested person if the corporation at the time of the deregistration was carrying on business or was in operation, or if it is otherwise just that the registration be restored.