Close Corporations: a member’s authority to bind it and personal liability for its debts

Close Corporations: a member’s authority to bind it and personal liability for its debts

As a result of changes to South Africa’s company laws, effective as from 1 May 2011, it is no longer possible to register a new close corporation (“CC“) in South Africa.  However, there are many CCs that have remained in existence that still require regulation.  In this article, we have considered a few of the most common CC-related questions our clients have been faced with.

One of the main benefits of a CC is that it is often administratively easier to regulate than a company, while also being a juristic person distinct from its members who have limited liability.  The individual members’ interests in the CC are determined according to their percentage of ownership, as opposed to a company where shareholders acquire shares in the company.

The regulation of CCs is governed by the Close Corporations Act, 69 of 1984 (as amended) (“the Act“) and the terms set out in the association agreement that has been concluded between the CC and its members (if any).  If no such agreement has been entered into, the Act must be relied on as the default position regulating the CC and its members’ rights and obligations.

Can the conduct of a member of a CC bind the CC?

Members have the authority to act on their own and this can have the effect of binding the CC, unless the authority of the member in question has been restricted and the other party to the transaction knows or ought to have known of that restriction.  Section 54(1) of the Act states “Subject to the provisions of this section, any member of a corporation shall in relation to a person who is not a member and is dealing with the corporation, be an agent of the corporation…”.

The effect of this section is that each member of the CC has the ability to bind the CC in their individual capacity, except where there is an association agreement which states otherwise or it is expressly dealt with in terms of the default internal relations rules set out in section 46 of the Act.  Section 46(b) provides that members shall have equal rights with regard to the management of the business of the CC and with regard to the power to represent the CC in the carrying on of its business, provided that the consent of a member (or members) holding a member’s interest of at least 75%, shall be required for the following fundamental decisions:

  • a change in the principal business carried on by the CC;
  • a disposal of the whole, or substantially the whole, undertaking of the CC;
  • a disposal of all, or the greater portion of, the assets of the CC; and
  • any acquisition or disposal of immovable property by the CC.

Section 46(b) protects individual members to a degree, in that 75% or more of the members’ interests acting together are required to successfully bind the CC if they wish to give effect to any of the material changes or substantial transactions recorded in that section.

Can members be held personally liable for the debts of the CC?

The default position for personal liability in terms of the Act is that the members of a CC shall not merely by reason of their membership be liable for the liabilities or obligations of the CC (section 2(3) of the Act).  As such, members are not ordinarily held liable for the liabilities and obligations of the CC as the CC is treated as being independent of its members. As with a company, the members would not be liable for the liabilities and/or other obligations of the CC unless a member has signed as surety, guarantor or indemnitor for such debts and/or obligations of the CC.

However, in certain circumstances members are deemed to be personally liable for the liabilities and obligations of the CC, as set out in sections 63, 64 and 65 of the Act.  In summary, these sections provide for a member’s personal liability if a member disregards their duties, commits acts of gross negligence in the carrying on of the business of the CC and/or abuses the separate juristic personality of the CC.

In addition, members can agree to be held personally liable for debts of the CC but this will require the members to enter into a separate agreement for these purposes.  For example, in the case of a sale of a members’ interest or the business of a CC, one or more members may decide to agree to be held personally liable to the buyers for any liabilities of the CC that arose prior to the sale.

How to deal with oppressive conduct by members

The fact that members can act on their own and bind the CC in certain situations, regardless of the other members’ wishes, can lead to unfair and/or prejudicial situations.  If a member of a CC feels that his/her fellow members have unfairly prejudiced him/her in any way or that their acts have been oppressive, in terms of section 49 of the Act, that member can apply to the court for the granting of a remedial order in respect of such conduct.

Section 49 gives the court wide discretionary powers to make orders “with a view to settling the dispute” between the members of a CC, if it is just and equitable to do so.  Such an order could include ordering the offending member to purchase the member’s interest of the affected member (or members) at a fair price, whether he/she wants to or not, in order to compensate an affected member for the binding of the CC in a transaction or other arrangement that is deemed by the court to be unjust and/or inequitable.

This short outline provides some general advice relating to CCs, but there may be unusual situations where it is advisable to obtain specific advice from your attorney.

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