The members of the Close Corporation are not liable for the debt of the Close Corporation unless the members have signed surety for the debt of the Close Corporation. However, there are times when the members can be held liable for the debt of the Close Corporation in their personal capacity, even if they did not sign surety for the Close Corporation. These “times” are determined by the Close Corporations Act 69 of 1984 and is discussed below. Under thesecircumstances the fact that a Close Corporation was registered can be ignored as if it was not registered and the members be held personally liable as if the Close Corporation did not exist. This is referred to as “lifting the corporate veil” and means that members who are “hiding” behind “veil” of the Close Corporation, will be taken out from their hiding place (the Close Corporation) and be held liable for the debts and liabilities of the Close Corporation.
The circumstances that members can be held liable in their personal capacity even if they did not sign surety, are the following sections of the Close Corporations Act (hereinafter referred to as “the Act”):
SECTIONS 22 AND 23: CLOSE CORPORATION NAME NOT DISPLAYED CORRECTLY
In terms of Section 22 of the Act the abbreviation “CC” – in capital letters –must appear behind the name of the Close Corporation in any sign on any of the premises of the Close Corporation. It must also be clearly visible in any documentation that the Close Corporation uses or signs.
In terms of Section 23 of the Act the full name and registration number of the Close Corporation must be clearly visible at its place of business as well as on any documentation that the Close Corporation uses or signs. This name and registration number must also be visible in at least one other official language
If the Close Corporation does not display its name as aforementioned, the Close Corporation and, any member who signs documentation without the information of the Close Corporation set out as such, will be guilty of an offence. A member who signs or uses documentation and the details of the Close Corporation is not as set out, will be personally liable for any debt of the Close Corporation or damages caused by the Close Corporation in his/her personal capacity as well.
Every member must contribute to the Close Corporation and such contribution, whether it is money or goods or property, must transfer such property or money to the Close Corporation within 90 days after the registration of the Close Corporation. If a member fails to do so, that member shall be liable for every debt of the Close Corporation from the date of registration of the founding statement in which of the contribution concerned are stated tot the date of the actual payment, delivery or transfer of such money or property.
If the members deregister the Close Corporation while there are outstanding debts in the Close Corporation, they can be held personally liable for the debts of the Close Corporation.
If a member obtains a gain that should have accrued to the Close Corporation, then the member can be forced to repay the benefit he/she so obtained. All the members of the Close Corporation have a fiduciary duty towards the Close Corporation. This means that the member must act in the financial interest of the Close Corporation always and not for his/her own gain or take profits that could/should have accrued to the Close Corporation.
If a member acts negligently and causes damage to the Close Corporation, the member can be held liable by the Close Corporation for any damages that the Close Corporation has suffered because of such negligence. The member will act negligently if he/she does not act with the degree of care and skill that may be reasonably expected from a person with his/her knowledge and experience.
There are other circumstances under which members can be help personally liable in terms of Section 63, which will not be discussed here. What can be said is that where it is found that a member hides behind the “veil” of the Close Corporation, this veil can be lifted if the member abuses the Close Corporation. Abusing the Close Corporation can mean that the member is not truthful to third parties that he is a member of a Close Corporation, causing damages to third parties. In such an instance the member can be held liable for the payment of such debt in his/her personal capacity.
The fiduciary duties of directors are derived from our common law, which is created through the precedents set by our courts. While the Act attempts to codify many of these common law duties, it is a partial codification of the common law.
In the circumstances, to the extent that the Act does not deal with a specific duty, or the consequence thereof, the common law will apply or will supplement such duty. Section 76 addresses, to a very large extent, the standard of conduct expected from directors.
Section 76(3) states that a director of a company, when acting in that capacity, must exercise the powers and perform the functions of a director – in good faith and for a proper purpose; in the best interests of the company; and with the degree of care, skill and diligence that may reasonably be expected of a person – carrying out the same functions in relation to the company as those carried out by that director; and having the general knowledge, skill and experience of that director.
Section 76(4) states that, in respect of any matter arising in the exercise of the powers or the performance of the functions of a director, a company director will have satisfied the obligations set out in section 76(3), if that director has taken reasonably diligent steps to become informed about the matter. This goes to the degree of knowledge that a director would have as to the financial status of the company.
A director would therefore be entitled to rely on the performance and information provided by persons who have received delegated powers or authority to perform one or more of the board’s
functions. This includes the ability to rely on the veracity of the information provided, including financial statements and other financial data prepared by the employees of the company, accountants or any other professional person retained by the company, the board, or any committee constituted by the company.
Also included would be matters involving skills or expertise that the director could reasonably believe a person to have or to be within that person’s professional competence. For instance, if a director receives financial information from departmental managers, he or she would be entitled to rely on the veracity of such information provided such reliance is reasonable in the circumstances and when one considers the specific expertise of that manager. For example, the marketing director would not have the same level of insight into a set of management accounts as would the financial director.
Furthermore, in terms of section 76(4) of the Act, a director would have satisfied the obligations of section 76(3), if the director decided, or supported the decision of a committee or the board, regarding that matter, and the director had a rational basis for believing, and did believe, that the decision was in the best interests of the company.
However, section 77(9) states that in any proceedings against a director, other than for wilful misconduct or wilful breach of trust, the court may relieve the director, either wholly or in part, from any liability set out in this section, or on any terms the court considers just, if it appears to the court that the director has acted honestly and reasonably, or having regard to all the circumstances of the case, including those connected with the appointment of the director, it would be fair to excuse the director.