Binding Authority and Liability of Members of Close Corporations | Legal Articles

 

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Binding Authority and Liability of Members of Close Corporations

Whilst as from the 1st of May 2011 it is no longer possible to register a close corporation, some of those registered before the date still remain in existence whereas some have converted to companies.

rights of members of a close corporation

Rights of Members of a Close Corporation

Close Corporations in South Africa are governed by the Close Corporations Act 69 of 1984 and should there be any in each case, the association agreement. These normally contain the rights and obligations of the members who own the close corporation, as well as any provisions with regards to its operations and legal implications.

Whereas a close corporation is regarded as a juristic person with separate legal persona to that of its members, the individual members ought to observe such and alleviate the risk of binding the close corporation in instances where it was not intended so.

Section 54 of the Close Corporations Act

Section 54(1) of the Act provides that a member of a close corporation is an agent of the close corporation in dealings with a third party. This then means members have the ability to bind the close corporation.

However, the association agreement may make provisions to limit the binding authority of the members, unless in special circumstances this in all reasonable respects is hidden from the third party.

Section 46 (b) of the Act provides a default position that members have equal authority with regards to management and representation of the business except in instances where a specified threshold of percentage interest is required for sweeping decisions e.g disposal of assets, alteration of principal business, acquisition of immovable property.

Close Corporation Limited Liability

Due to the separate legal persona of a close corporation (just like companies), its liabilities cannot be imputed to its members unless there are grounds to do so.

Whilst in an instance where a member signed as a guarantor/surety of a debt is a voluntary action, the below instances are examples where liability is involuntarily imputed to members:

  • Members disregarded their duties - Section 63
  • Committed acts of recklessness, gross negligence or fraud in their activities on behalf of the close corporation – Section 64
  • Abused the separate personality of the close corporation – Section 65

However, in instances where a member is of the view that their interests have been prejudiced by the conduct of other members, they can apply to Court for remedial action as per Section 49 of the Act.

This is especially so where a transaction which is not just and equitable was entered into. The Court’s powers in this scenario are discretionary and aimed at finding resolution of the dispute.

Van Deventer & Van Deventer Incorporated – Attorneys in Cape Town and Johannesburg

Kindly contact us for comprehensive assistance and guidance with the above and related matters.

 

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