When the close corporation structure fails to protect the members.

[Dave A]

I was reading the following article this morning, and thought it might be useful to build a list of things that affect the seperation of close corporation members from the liabilities of the CC.

The Cape high court has established new law for the circumstances in which members and officers of a close corporation can be held personally liable for the corporation's debts.

Adam Harris, an insolvency law specialist attorney with law firm Bowman Gilfillan, said that generally, close corporations could be set up to ensure that members were not liable for its debts. "But this judgment is significant in that the court has confirmed that the corporate veil may be pierced where there are special circumstances, such as fraud. Members of a close corporation should not think of themselves as invulnerable to attack from creditors."

Brian Aronoff, a senior associate in litigation at law firm Mallinicks, who was the instructing attorney, said in Dialogue, the firm's quarterly publication, that his client, Airport Cold Storage, had sold and delivered imported meat products and frozen vegetables to Global Foods on credit.

The close corporation failed to pay for the goods and Airport Cold Storage successfully applied for its winding up for failing to pay a debt of R278 377. But it received no dividends because Global Foods had no assets.

Aronoff said that in the light of evidence obtained at an insolvency inquiry, Airport Cold Storage had instituted high court action to hold the close corporation member, Nizaar Ebrahim, and his father, manager Abbas Ebrahim, personally liable for the debt.

The company claimed that father and son had contravened the Close Corporation Act because they had carried on the business for reckless and fraudulent purposes or with the intention to defraud creditors.
full story from Business Report here

Now I might be wrong, but if memory serves me correctly, there is nothing new about the corporate veil being pierced under these circumstances.

I think it is something that CC members should be aware of. Perhaps the best way is to build a TFSA wiki page on do's and don'ts...

[duncan drennan]

I think it is something that CC members should be aware of. Perhaps the best way is to build a TFSA wiki page on do's and don'ts...

DO pay what you owe.

DON'T lie, cheat, steal, defraud.

[Vincent]

Perhaps the best way is to build a TFSA wiki page on do's and don'ts...

I would support a do and don't list.

[Dave A]

Thanks Vincent.

Once I've set up the stubs, I'll post links to the pages here.

I think it is pretty important because people do things by accident, not realising the consequences. The folks who intend to defraud etc. deserve what they get.

[Dave A]

OK. I've got a page in the wiki started here - close corporation.

It definitely needs help

[AgentM]

Hi All

This is quite an interesting topic... My understanding has always been that a CC doesn't offer supreme protection for its members, but that a pty (Ltd) was in fact the best way to provide complete isolation. ie: The company is regarded as a completely seperate legal entity.

However having said that, I also recall reading somewhere that in order to establish a pty (Ltd) company there are a lot more rules and regualtions which need to be followed. One of which may include personal sureties from the shareholders of the company, thus as a shareholder you may still be held liable for the companies debt until such time as its large enough to stand on "its own two feet" ie: Company accounts and assests are large enough to provide surety for its own debts.

Any comments or clarity on this would be appreciated

[Dave A]

Personal sureties are a "problem" in both CC and company structures. A personal surety means that you have given permission for the "corporate veil" to be breached, at least for that particular debt or client. (Surety conditions are actually a very big subject in their own right).

Probably the biggest difference between CC's and Pty Ltd companies when it comes to the issue of personal responsibility is who may be accountable if the corporate veil is pierced.

With CCs, it is the members who may be held accountable.
In Pty Ltd companies it is the directors who are in the firing line, not necessarily the shareholders.

[duncan drennan]

With CCs, it is the members who may be held accountable.
In Pty Ltd companies it is the directors who are in the firing line, not necessarily the shareholders.

Yes! And slowly directors are becoming personally liable for more and more. I'm not even sure what all it opens you up to, but basically, as a director, you are personally liable for the company to operate within the framework of the law (e.g. directors are personally liable for VAT....)

This whole issue of what a director can be help liable for, as well as what shareholders can be held liable for is quite a big question in my mind.

For example, I've heard (possibly misinterpretation?) of cases where shareholders could be expected to pay money for company debts, or is this just in the case of fraudulent actions? Anyone know about the remote dangers for being a shareholder?

[Dave A]

If we look at the case where Ovation investors have to foot the bill of the curator, I think we get a sense of the potential for shareholders' potential liability.

There is no question of the investors being liable for the debts of Ovation other than the curators bill. From this it would seem that shareholders might be tapped for winding up costs, but not for other creditors (unless they had signed a surety along the way).

[vern]

Both our supermarkets in the "platteland" had to be closed, as a result of the recession. We have a cc in place. Have lost everything and had no choice but to place our house on the market (not sold yet).

As we still owe an outstanding amount to our largest creditor we now have received threathing letters for the full outstanding amount to be paid in 10 working days.

Are we liable in our personal capacity as members of the cc to re-pay the debt? We do not at this point have any form of income.

Your input will be appreciated.