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Close Corporations

Close Corporations. ONR 314. Chapter 29: External relations. Members as agents: Section 54 Every member is an agent of the CC Any act of a member binds the CC If member had no power – still binding on CC and third party UNLESS….

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Close Corporations

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  1. Close Corporations ONR 314

  2. Chapter 29: External relations • Members as agents: • Section 54 • Every member is an agent of the CC • Any act of a member binds the CC • If member had no power – still binding on CC and third party UNLESS…

  3. A bona fide outsider is not affected by the internal restrictions of power if they have no knowledge of it • BUT may be bound by contract that falls outside the scope of business • EVEN if the contract was not authorized or ratified • Eg. If 3rd party did not have or should not reasonably have know of the lack of authority

  4. 3rd party’s are entitled to assume that each member has the necessary authority to act on behalf of the CC

  5. Non-members as agents • S54 deals with power of members to bind the CC • CC may authorize non-member to act as agent • Express or implied authority • CC can ratify the agreement

  6. Regulation of loans and provision of security • Par 29.23 – 29.33 Self study for short questions

  7. Chapter 30 : Personal liability • Personal liability as sanction: • CC-Act creates few criminal sanctions • Act = self-regulating • Nb sanction = personal liability

  8. Main provisions giving rise to personal liability: • Section 63 - for specific contraventions • Section 64 - for reckless and fraudulent trading • Section 65 - for abuse of corporate juristic personality

  9. Section 63 • Contravention = automatic liability • CC not relieved of primary liability • Creditor may sue CC or offender for debt

  10. Joint and several liability: • Use of the identifying abbreviation • Delivery of contribution • Membership • Payment in respect of acquisition of member’s interest • Financial assistance • Management by disqualified person • Accounting officer vacancy for morethan 6

  11. Section 64 • If any business was carried out recklessly, with gross negligence or fraudulently, • court may declare person personally liable for debts/liabilities • Could be criminal offence

  12. Test for recklessness • is objective • is subjective (Philotex v Snyman) • Other factors: • Scope of operations • Role, function & powers of members • Fin position of the CC

  13. What is reckless trading? • Debt incurred dishonestly = fraudulent trading

  14. Section 65 • Incorporation or any act of the CC a gross abuse of its juristic personality • Rights, obligations or liabilities of CC or any of its members • If distinction between CC and its controllers being fraudulently, dishonestly or improperly abused • To the unfair advantage of the controllers

  15. Other Instances of Personal liability • Correct use of name on cheques and documents –person who issues or authorizes • Deregistration – If CC deregistered while outstanding debts, all debt must be payed

  16. Members liable to compensate CC if: • Breach of fiduciary duty or duty of care and skill towards the CC • Granting of loans in contravention of section 52 • Distribution to members that will result in CC not being solvent and liquid.

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