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Thread: Member disputes in close corporation

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    Member disputes in close corporation

    We have a close corporation with two members (50:50).Member A and Member B , a year after starting out agree mutually that they cannot work together, so Member A asks Member B to leave the business which he does without negotiating part reimbursement of the monies he (Member B) invested.
    Member B is public officer of the corporation, however it is Member A who handles bank related matters and sars related returns and payments without any reference to Member B.
    Now, for 6 months after leaving the business , Member A has continued to work at the business.As a result of financial contraints, Member A has been unable to pay the latest Vat and Paye returns.
    Sars has threatened legal action toward Member B who has not been any part of the business for 6 months and is totally out of touch with the business.
    What course of action would Member B have in this scenario?

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    The first question that comes to mind is whey the heck would B leave without either getting remuneration, keeping tabs on the company if he is still a member and why did he not do something about removing himself from the cc because he is still totally liable for whatever A does without his knowledge !!

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    Hi, I acknowledge and thank you for your comment. The situation still remains what course of action should be recommended to Member B in the tricky situation in which he finds himself.

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    Diamond Member Justloadit's Avatar
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    This is my opinion, and is not a recommendation!
    You should seek legal council.

    Failing having a one to one with 'A' to clear up the problem, then there is only an expensive and long legal road to follow. This is very costly, and if 'A' has no capital or assets, may just cost you more money and not alleviate the problem. A costly route to follow, and can take years to come to fruition.

    First of all, immediately inform SARs that 'B' is not the "Public Officer", however SARS will require someone to be the company Public Officer - not sure who in this case, maybe 'A'?. This must be minuted in the company file. There is supposed to be a file/Book with all meetings and minutes recorded. This is to safeguard all members.

    Secondly inform the bank to change the signing powers, that both partners must sign, (You can not change to a single signature, as then 'A' could construe this as sabotage, and you will be the one in the hot seat, where all your efforts to clear up the situation will come to naught), that is the only way to curb spending, and try and bring the situation around, in order to pay the debts. Send a letter to each of the suppliers informing them that no orders to be processed unless there is a order issued with both A and B signatures. This is to prevent further expenses.

    Send a letter out to each customer, that the bank details have not changed, this is to ensure 'A' does not tell the clients to pay into another account.

    If 'A" objects to all this, ensure that it is done first, then you have a means to negotiate yourself out of the situation.


    So few people realise the enormous responsibilities a public officer holds. If there has been any abnormalities in the tax, the public officer is personally responsible for the debt, is one of them. Secondly, if you are a Public Officer, then you must be in control of the company finances, any abnormalities in this department also makes the public officer personally responsible.
    Make also sure that you get yourself out of any sureties, as soon as possible.

    If an agreement is reached you then ensure that you remove your name and sureties in your name from the business.
    Last edited by Justloadit; 28-Jan-17 at 06:49 AM. Reason: Shifted a sentence in wrong paragraph
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    Silver Member Greig Whitton's Avatar
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    Quote Originally Posted by Ian37 View Post
    Member A asks Member B to leave the business which he does
    Is Member B still registered as a member of the CC? (i.e. did he leave the business in his capacity as a member, or just in his capacity as an employee?)

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    Member dispute with CC

    Quote Originally Posted by Greig Whitton View Post
    Is Member B still registered as a member of the CC? (i.e. did he leave the business in his capacity as a member, or just in his capacity as an employee?)
    Reply: Member B remains a member of the CC. He is no longer employed or active in the business. He remained a member as he has a loan account and investment in business and felt that he would lose out if he resigned as a member of the CC.

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    Silver Member Greig Whitton's Avatar
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    Quote Originally Posted by Ian37 View Post
    Reply: Member B remains a member of the CC. He is no longer employed or active in the business. He remained a member as he has a loan account and investment in business and felt that he would lose out if he resigned as a member of the CC.
    In that case, SARS is entitled to claim from Member B personally, presumably on the basis that Member B was party to negligent or fraudulent conduct that lead to the current tax liability. Member B is obviously entitled to dispute this, but would need to show that:

    (1) He was not party to any payment / taxation / financial management activities; and
    (2) He was unaware that Member A was not carrying out these responsibilities properly.

    This won't be easy. In my opinion, here are Member B's best courses of action (in order of best to worst):

    (1) Step back into the business temporarily, work with Member A to settle the tax liability, and then resign as a member.

    (2) Convince Member A to take full responsibility for the tax liability and make sure that he actually does so (good luck with that).

    (3) Explain the situation to SARS and convince them to leave Member B out of their claim (good luck with that too).

    (4) Lawyer up and defend SARS' claim. If unsuccessful, consider taking legal action against Member A.

    One other point: assuming Member B was unaware of Member A's negligence, the threat from SARS irrevocably changes that. In other words, Member B can no longer claim that he is unaware of Member A's mismanagement. Therefore, Member B may have a legal responsibility to act on this information (e.g. approach the courts to have Member A declared delinquent).

    All things considered, it would probably be a good idea for Member B to consult with a reputable attorney. The consequences of SARS' threat go beyond being held personally liable for business debt. It could potentially also lead to Member B being declared delinquent by a court, which has far reaching implications.

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    Member B is obviously entitled to dispute this, but would need to show that:

    (1) He was not party to any payment / taxation / financial management activities; and
    (2) He was unaware that Member A was not carrying out these responsibilities properly.

    I have NEVER heard that this will EVER work. The fact remains if a member is part of a cc but is not actively involved and is not aware of bad financial management activities, he is still responsible. It his his fault that he did not make himself aware. You cannot claim you did not know especially with SARS or the banks ! They WILL not accept this. Ignorance of the law and responsibilities is no excuse.

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    Silver Member Greig Whitton's Avatar
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    Quote Originally Posted by HR Solutions View Post
    The fact remains if a member is part of a cc but is not actively involved and is not aware of bad financial management activities, he is still responsible.
    This is not a fact at all. On the contrary, a member can escape personal liability even if they ARE actively involved AND party to questionable financial decisions. For example, see Heneways Freight Services (Pty) Ltd v Grogor.

    Quote Originally Posted by HR Solutions View Post
    You cannot claim you did not know especially with SARS or the banks ! They WILL not accept this.
    They probably won't, but that doesn't mean that members and directors have no recourse should the matter end up in court. The members of a close corporation and directors of a company are, as a general rule, not personally liable for business tax and other debts if the business can't pay them. For example, Section 180 of the Tax Administration Act specifically states that you can only be held liable for the outstanding tax of a taxpayer (such as a company or close corporation) if:

    1. You are regularly involved in the taxpayer's financial affairs; and
    2. You are deemed to have been negligent or fraudulent.

    These provisions clearly strengthen the position of Member B in OP's post since he was not involved in the close corporation's financial affairs. Furthermore, proving negligence (let alone fraud) is far from easy. Members and directors may have acceptable reasons for not paying tax or settling a debt (such as in the Heneways Freight Services case).

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    We are talking about members, not directors ..... Big difference

    And I'm afraid to say it is a fact !

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