External relations / Eksterne verhoudings : caput 5

• Date: 01 January 2010
• Pages: 107-146
• DOI: 10.10520/EJC74115
• Published date: 01 January 2010

107

CAPUT 5

EXTERNAL RELATIONS / EKSTERNE VERHOUDINGS

5.1 Representation: initial arrangement and origin1

5.1.1 Introduction

A close corporation is a legal person created under an general ena-

bling Act by registration in compliance with statutory requirements.

There has been a complete break with the traditional principles de-

termining the validity of contracts with corporations created under

a general enabling Act. A close corporation has the capacity and

powers of a natural person of full capacity. Consequently its found-

ing statement does not contain an objects clause. In addition there is

no constructive notice of the particulars of either the founding state-

ment or an association agreement (if any). Hence the traditional ul-

tra vires doctrine and doctrine of constructive notice are irrelevant to

the question of whether a close corporation is bound by a particular

contract. The answer depends on the authority of the person acting

for the close corporation in the particular transaction.

In contradistinction to company law, but as in partnership law, the

position in principle is that each member virtute off‌icii possesses an

equal right to represent the corporation. As expressed in section 54

the general rule is that, in relation to outsiders dealing with a close

corporation, any member is an agent of the corporation for the pur-

poses of its business stated in its founding statement or actually car-

ried on. As in partnership law, an internal restriction placed on the

power of a member to bind the corporation does in principle not affect

a bona f‌ide outsider having no knowledge thereof. It would seem that

this power of a member may also be restricted by “any other agree-

ment between all the members” and that, if so, a contract entered

into in contravention of such restriction will not be binding on the cor-

poration with respect to outsiders having knowledge thereof. Due to

the contradictory provisions of sections 46(b) proviso and 54(5), the

latter’s possible scope of application, if any, is severely curtailed and

a suitable amendment is recommended.

On account of signif‌icant differences between the Close Corporations

Bill2 (hereafter called the “Bill”) and the Draft Bill on Close Corpora-

tions that that was distributed for comment during 19833 (hereafter

1 See also Henning “Die bevoegdheid van ’n lid om ’n beslote korporasie

te bind en enkele ander aspekte van eksterne verhoudings” 1984 JJS

155-174, referred to with approval in Northview Shopping Centre v

Revelas Properties (275/09) [2010] ZASCA (18 March 2010). Original

reference system retained.

2 W77-84 (as read for the f‌irst time).

3 Registrar of Companies, letter M1/4/4/1, 1983 05 17.

108

called the “Draft”), as well as amendments accepted during the com-

mittee stage of the Draft,4 the regulation of external relations in the

Act is not identical to the Draft. As much has been written about the

Draft,5 it is necessary to point out the relevant differences.

5.1.2 General background

One to ten persons qualifying for membership6 may establish a close

corporation and obtain its incorporation by fulf‌illing the requirements of

the Act7 with regard to the registration of its founding statement.8 Upon

registration of its founding statement, a close corporation becomes a

juristic person.9 Subject to the exceptions stipulated in the Act10 it conti-

nues to exist as a juristic person, in spite of changes to its membership,

until it is deregistered and dissolved.11 Its members are not liable for its

debts or obligations merely on account of their membership.12

4 Amendments to Close Corporations Bill, W77 A-84. See: Republic of

South Africa, Parliamentary debates, 1984, vol. 17, col. 7858-7902.

5 Naudé, (Speech) Die voorgestelde nuwe ondememingsvorm vir kleinsake

[The proposed new form of enterprise for small business], National Small

Business Symposium, Johannesburg, 1983 05 09, of which copies were

distributed with the Draft; Naudé, “Beslote korporasie: Die voorgestelde

ondernemingsvorm vir kleinsake” [“Close corporation: The proposed form

of enterprise for small business], MB, vol. 5, no. 2,1983, pp. 62-67 (here-

after the “Explanatory memorandum”) (also published in De Rebus, no.

187, Jul. 1983, pp. 332-336); Henning, “Handelinge van ’n lid en die be-

oogde aanspreeklikheid van ’n beslote korporasie”, TRW, vol. 8, no. 2,

Nov. 1983, pp. 230-233. ’n Verduidelikende memorandum oor die wet-

sontwerp op beslote korporasies, 1984, was compiled by the Department

of Trade, Industry and Tourism. Cf. Republic of South Africa, Parliamentary

debates, 1984, vol. 15, col. 7729. The Draft and Explanatory Memo randum

were preceded by a memorandum called The need for a new legal form

for small business, that was published and distributed for comment. See

Re gistrar of Companies, letter M11I3/7/1I2. 1981 1203. See further: Nau-

dé, “The need for a new legal form for small business”, MB, vol. 4, no. 1,

1982, pp. 5-13 (hereafter the “Original memorandum”). See in this regard

also: Naudé, “A new form of enterprise for small business?”, Entrepre-

neur, vol. 1. no. 6, Nov. 1982, pp. 7-9; Van Wyk, “’n Nuwe belastingbe-

deling vir die kleinsake-korporasie?”, MB, vol. 5, no. 1, pp. 7-11; Ribbens

“Quo vadis corporate personality and partnership: Why not the incorpo-

rated partnership proper?”, TSAR, 1983, pp. 118-136 en 201-215.

6 See section 29 on requirements for membership.

7 See sections 12 and 13.

8 Section 2(1).

9 Section 2(2)

10 Section 63, 64 and 65.

11 Section 2(2).

12 Section 2(3).

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In contradistinction to a partnership,13 a close corporation is a fully-

f‌ledged legal person offering its members all of the privileges of incorpo-

ration, in particular perpetual succession and limited liability in respect

of the corporation’s debts and liabilities.14 As in the case of an incor-

porated company,15 the close corporation is an independent juristic

person distinct from its members and is the bearer of its own rights and

duties.16 As in the case of an incorporated company, co-operative, mu-

tual benef‌it society, building society, pension fund organisation, subject

association and employers’ organisation, legal personality is obtained

by means of a general enabling Act. As the Companies Act,17 Act on

Co-operatives,18 Mutual Benef‌it Societies Act,19 Building Societies Act20

Pension Funds Act21 and the Labour Relations Act,22 the Act prescribes

the general ways and means for incorporation as a legal person.23

Since a legal person is only a reality in the legal sense and does not

have a physical existence, it must of necessity act through the natural

persons as its organs24 or representatives.25 The basic principle is that

13 E.g. Muller v. Pienaar, 1968 3 S.A. 195 (A), on pp. 202-203; Ex Parte

Cohen, 1974 4 S.A. 674 (W), on p. 675; Str ydom v. Protea Eiendom-

sagente [Strydom v. Protea Property Agents], 1979 2 S.A. 206 (T), on

p. 209; Standard Bank of S.A. Ltd. v. Lombard, 1977 2 S.A. 808 (W),

on p. 813; Lombard v. Standard Bank of S.A. Ltd. 1977 2 S.A. 806 (T),

on p. 807. For a discussion of the general rule and its exceptions, see

Henning and Delport, “Partnership”, in Joubert (ed.), The law of South

Africa, vol. 19, Butterworths, Durban, Pretoria, 1983, pp. 281-287.

14 Naudé, Explanatory memorandum, op. cit., p. 63; Republic of South

Africa, Parliamentary debates, 1984, vol. 15, col. 6653.

15 I.e. a company incorporated in terms of the Companies Act 61 of 1973.

For a general discussion of the meaning of the word “company”, see

Cilliers and Benadé, Maatskappyereg [Company Law], 4th ed., Butter-

worths, Durban, 1982, p. 4; Meskin (ed), “Companies”, Joubert (ed),

The law of South Africa, vol. 4, Butterworths, Durban, 1982, pp. 7-10;

Hahlo, South African company law through the cases, 4th ed., Juta,

Cape Town, 1984, p. 5.

16 See from 15; Cilliers and Benadé, op. cit., pp. 4,10-11,71; Hahlo, op .

cit., p. 38; Milne (ed), Henochsberg on the Companies Act, 3rd ed.,

Butterworths, Durban, 1975, p. 109; Oosthuizen, “Aanpassing van die

verteenwoordigingsreg in maatskappyverband”, TSAR, 1979, p. 1.

17 Act no. 61 of 1973, Sections 32, 63 and 64.

18 Act no. 91 of 1981, Sections 27 and 28.

19 Act no. 25 of 1965, Sections 5 and 7.

20 Act no. 24 of 1965, Sections 4, 5 and 6.

21 Act no. 24 of 1956, Sections 4 and 5.

22 Act no. 28 of 1956, Sections 4 and 5.

23 See Cilliers and Benadé, op. cit., p. 6; Hahlo, op. cit., p. 38.

24 On the term “organ”, see Naudé, Die regsposisie van die maatskap-

pydirekteur met besondere verwysing na die interne maatskappyver-

band, Butterworths, Durban, 1970, pp. 41-42.

25 Webb and Co. Ltd. v. Northern Rif‌les, 1908 T.S. 462, on p. 465: Rob-