Commercial Law

What changed under the 2008 Act

The 1973 Act's memorandum and articles of association were replaced by a single Memorandum of Incorporation ("MOI"). No new close corporations may be registered since 1 May 2011, although existing close corporations may continue indefinitely and are still governed by the Close Corporations Act 69 of 1984. The doctrine of constructive notice was largely abolished, the capital maintenance rules were replaced by the solvency and liquidity test in section 4, and business rescue replaced judicial management.

Which vehicle: private company, personal liability company, partnership or trust

There is no universally correct answer. The four common vehicles carry different consequences for liability, tax and succession, and the right one depends on who must own the business, who must run it, and what must happen to it when a founder dies or leaves.

• Private company ((Pty) Ltd) — a separate legal person; shareholders are not liable for its debts save in the exceptional cases below. Taxed at the company rate, with dividends tax on distributions. Ownership passes by transfer of shares, which makes succession clean if there is a shareholders' agreement.
• Personal liability company (Inc.) — used mainly by professional practices. Directors and past directors are jointly and severally liable, together with the company, for debts contracted during their terms of office (section 19(3)).
• Partnership — not a separate legal person. Each partner is liable in solidum for partnership debts, the partnership dissolves on the death or withdrawal of a partner unless the agreement provides otherwise, and profits are taxed in the partners' hands.
• Trust — useful for holding growth assets outside a founder's estate, but only if it is genuinely administered as a trust with independent decision-making. A trust is not a suitable trading vehicle for most operating businesses.

The Memorandum of Incorporation

The MOI is the company's constitution and it binds the company, its shareholders and its directors. It sets the share structure, the appointment and removal of directors, quorum and voting requirements, and any restrictions on the company's powers. It may increase, but generally not weaken, the Act's protections. Critically, section 15(7) provides that a shareholders' agreement must be consistent with the Act and with the MOI — any provision that is inconsistent is void to the extent of the inconsistency. Owners are regularly surprised by this: the carefully negotiated shareholders' agreement loses to the standard-form MOI that was filed without being read.

Leading cases you should know

• Cape Pacific v Lubner Controlling Investments

  Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd [1995] ZASCA 53; 1995 (4) SA 790 (A)

  The court may disregard a company's separate legal personality where it is used as a device to evade an existing obligation. Incorporation protects you — it does not licence you.

• Ex parte Gore NO and Others

  Ex parte Gore NO and Others (18127/2012) [2013] ZAWCHC 21; [2013] 2 All SA 437 (WCC)

  Section 20(9) of the Companies Act gives the court a wide statutory power to declare that a company is not a separate person where there has been an unconscionable abuse of its juristic personality — wider and easier to invoke than the common law.

• Ebrahim v Airports Cold Storage

  Ebrahim and Another v Airports Cold Storage (Pty) Ltd [2008] ZASCA 113; 2008 (6) SA 585 (SCA)

  Those who run a close corporation recklessly, or with no regard to its separate existence, can be held personally liable for its debts. The same reasoning informs reckless-trading liability under section 22 of the Companies Act.

• Land and Agricultural Development Bank of SA v Parker

  Land and Agricultural Development Bank of SA v Parker and Others [2004] ZASCA 56; 2005 (2) SA 77 (SCA)

  A trust that is run as the founder's alter ego, with no genuine separation between control and enjoyment, invites the court to go behind it. If you use a trust, appoint an independent trustee and keep proper minutes.

• SA Renewable Green Energy v Coria (PKF) Investments 28

  South African Renewable Green Energy (Pty) Ltd and Others v Coria (PKF) Investments 28 (RF) (Pty) Ltd and Others [2025] ZAWCHC 458

  A recent application of section 15(7): where a shareholders' agreement conflicts with the MOI, the MOI prevails and the conflicting provision is void. Draft the two documents together.

Practical warnings

• Do not accept the registration agent's standard MOI without reading it. It is the document that decides your disputes.
• Sign the shareholders' agreement and the MOI at the same time, and check them against each other.
• Signing personal suretyships for the company's debts undoes much of the protection of incorporation — negotiate limits and a release on exit.
• Keep company money separate from personal money. Commingled accounts are the fact pattern in almost every personal-liability judgment.
• Record what happens when a shareholder dies, is disabled, divorces or wants out — before it happens.
• Trading while the company cannot pay its debts exposes directors personally; take advice as soon as solvency is in doubt.