FBE2604/102/3/2020

Tutorial Letter 102/3/2020

Forms of Business Enterprises

FBE2604

Semesters 1 and 2

Department of Mercantile Law

This tutorial letter contains important information

about your module.

BARCODE
 CONTENTS

Page

1 INTRODUCTION TO LECTURERS .............................................................................................. 3

2 FORMAT OF THE EXAMINATION PAPER.................................................................................. 3
3 GENERAL COMMENTS REGARDING THE EXAMINATION ...................................................... 4
4 CONCEPT EXAMINATION PAPER FOR PURPOSES OF REVISION......................................... 5

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 FBE2604/102/3/2020

Dear Student,

You should have received:

 Tutorial Letter FBE2604/101/3/2020 which contains among other things details concerning
the assignments for this module.

1 INTRODUCTION TO LECTURERS

The module coordinator for FBE2604 for 2020 is:

Prof A Saurombe
Tel. (012) 429 8956
e-mail: [email protected]

The other lecturers involved in this module are:

Ms Barbara Masuku
Tel. 012 429 8956
e-mail: [email protected]

Prof Judith Geldenhuys

Tel. 012 429 8472
e-mail: [email protected]

2 FORMAT OF THE EXAMINATION PAPER

The examination is a closed-book examination. You will not be permitted to take any source
material or notes into the examination venue.
Please note that it is a two-hour examination. The examination paper counts out of 100 marks.
The examination mark out of 100 will be adapted to a mark out of 80. If you obtain a mark equal
to or exceeding the subminimum of 40% in the exam, your year mark (for assignments 1 and 2)
will be taken into account. Your year mark will contribute 20% to your final mark if you meet the
subminimum in the exam. Remember, the exam only deals with aspects of the law relating to
companies and close corporations. The law relating to partnerships and business trusts are
not included.

PLEASE NOTE THAT THIS MODULE IS ONLY OFFERED IN ENGLISH IN ACCORDANCE

WITH THE NEW LANGUAGE POLICY WHICH IS APPLIED. UNFORTUNATELY, THIS MEANS
THAT THE EXAM PAPER IS SET IN ENGLISH ONLY AND ALL STUDENTS WILL BE
REQUIRED TO ANSWER THE QUESTIONS IN ENGLISH.
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Section A of the examination paper consists of 3 (three) questions that are divided into sub-
sections. These questions must be answered in the space provided on the examination script. In
this section, you will be required to identify problems, discuss and explain the legal principles and
come to a conclusion relating to the facts provided. You can also expect some direct questions
(“list” or “name”). Please note that in this section you may be required to refer to authority. In other
words, you will need to refer to relevant sections of legislation and relevant case law. You would
have noticed that there is no prescribed case book for this module. You are only required to know
the cases that are discussed in the prescribed segments of the text book and/or the study guide
to the extent that they are discussed therein. Although it is usually possible to get full marks for
your answers if the correct legal principles are mentioned, if you are able to refer to the name of
a relevant case in a question dealing with it, you will receive a bonus mark in the assignment or
exam.
Section B of the exam paper consists of ten (10) multiple choice questions, counting two (2) marks
each. Please ensure that you properly fill in the mark-reading sheet that will be provided to you.
Failure to follow the instructions on the mark-reading sheet will lead to forfeiture of marks.

3 GENERAL COMMENTS REGARDING THE EXAMINATION

The Companies Act 71 of 2008 came into force on 1 May 2011. For the most part it repealed
and replaced the Companies Act 61 of 1973. Questions in the examination will only deal with
the provisions of the Companies Act 71 of 2008 and not those contained in its predecessor.
Students often forfeit marks as a result of the fact that questions are not properly read and/or
are misinterpreted. Please note that the abbreviation of the name of an enterprise (for example:
ZET (Pty) Ltd for a private company and ZET CC for a close corporation) provides an indication
of the type of business in question. The same applies where terms like “shares” “member’s
interest” and “directors” are used. If you use the term “shares” instead of “member’s interest” in a
question dealing with close corporations, it would be incorrect and you will forfeit the marks.
Read all the tutorial letters. These are part of your prescribed study material. Please also
consult myUnisa where discussion notes, previous exam papers and a copy of the updated
Companies Act 71 of 2008 can be accessed under Additional Material.
No question in the exam will count more than 6 marks. There are no essay-type questions and
you will not be required to discuss a single case for 6 marks. Please ensure that you prepare for
shorter type questions and that your answers are short and to the point. In this regard, kindly
consult the guidelines to answering the assignment questions and the concept exam in the
Tutorial Letter 201 that you will receive in due course.
You are not expected to memorise the section numbers from legislation that is mentioned in
passing or between brackets. However, you should remember the numbers of sections of
legislation that are individually discussed, for example sections 19, 20 and 161 of the
Companies Act 71 of 2008. We have included a summary of the important sections of the
legislation with a brief description in Annexure A.

You must know the cases as they are discussed and explained in the text book and the study
guide. It is not necessary to memorise the entire reference to the cases for purposes of the
examination. You may refer to a case by using an abbreviation of the name (one of the parties)
that you can remember easily, for instance “the Robinson-case.”

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Please note that although it will definitely provide a good indication of the types of questions
that you can expect in the examination, it will not suffice to prepare for the examination by just
working out the answers to the activities in the study guide.
Previous exam papers are available on myUnisa. Please note that lecturers are not allowed to
publish the memoranda for the questions.
Please note that no dissemination of notes in aide of preparation for the examination has been
authorised by UNISA save for the questions and activities that have been placed on myUnisa
under Additional Resources for the module. Kindly refrain from using notes that are not
disseminated by or copyrighted to UNISA to avoid possible disappointment.
Be warned that previously there have been scams where falsified examination scripts have
been offered for sale to students. Please do not be fooled. Strict controls have been implemented
in order to ensure the integrity of this module’s exam.

4 CONCEPT EXAMINATION PAPER FOR PURPOSES OF REVISION

PLEASE NOTE THAT YOU DO NOT HAVE TO STUDY THE WORK PRESCRIBED FOR
PARTNERSHIPS AND TRUSTS IN YOUR STUDYGUIDE FOR PURPOSES OF THE EXAMINATION.

We have included a concept examination paper for purposes of revision. This should
provide you with an indication of the way in which the longer (written) questions are asked
in this module. We shall provide you with guidelines for answering these questions in
Tutorial Letter 201.
However, please note that you will not pass if you merely work out the questions to this
concept paper and memorise it. The prescribed work for this module must be thoroughly
studied to master the work.

SECTION A

QUESTION 1

1.1 What type of company is Cantabile (Pty) Ltd? Indicate what the main features of this type
of companies are. (3)

1.2 If there is a contradiction between a stipulation contained in the Companies Act 71 of 2008
and a stipulation in the Memorandum of Incorporation, or between a stipulation in the
Memorandum of Incorporation and one in the rules, which stipulation would enjoy
preference? (3)

1.3 Annastacia, a director of a company named Intercrush (Pty) Ltd comes to you for advice.
During 2016, Intercrush (Pty) Ltd had entered into an agreement with Kobert (Pty) Ltd in
terms of which Intercrush (Pty) Ltd was awarded certain contracts. Initially, and in
accordance with the agreement, certain payments were made by Stanford Bank on behalf
of Kobert (Pty) Ltd to Intercrush (Pty) Ltd. However, four payments for work performed in
terms of the agreement were not paid into Intercrush’s nominated account, but were paid
into the personal account of Willem, Annastacia’s co-director at Intercrush (Pty) Ltd instead.
Willem and Annastacia are the sole directors and shareholders of Intercrush (Pty) Ltd.
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 When Annastacia discovered that the payments were erroneously made into Willem’s
account, she confronted him. However, Willem denied having ever received any payments.
Annastacia immediately went to the police station, and instituted fraud charges against
Willem. After the confrontation regarding the misappropriated funds, Willem became
completely passive and refused to be involved in the running of the company’s affairs. He
also made it very clear to Annastacia that he is unwilling to attend any board or shareholders’
meetings. Recently, Annastacia has been informed that Willem is in the process of selling
all of his immovable property in the Republic of South Africa, and that he has opened several
off-shore bank accounts. Annastacia wants to institute action to reclaim the misappropriated
money without delay against Willem, Kobert (Pty) Ltd and Stanford Bank. She fears that
Willem will leave the country in order to avoid liability, or that his many contacts could assist
him in avoiding liability. Moreover, she is also concerned that she will not be able to afford
the legal costs.

Explain which of the two remedies provided in sections 163 or 165 would better serve
Intercrush (Pty) Ltd if Annastacia wishes to institute legal proceedings to reclaim the money
on behalf of Intercrush (Pty) Ltd. (4)

1.4 The main object of ABC (Pty) Ltd is manufacturing furniture. The Memorandum of
Incorporation provides that the board of directors may appoint a managing director who
will be authorised to enter into contracts on behalf of the company. Should the contract,
however, exceed the amount of R150 000, prior consent of the general meeting is required.
Godfried, one of the directors, buys a beach house for R350 000 from Nomagugu on behalf
of ABC (Pty) Ltd.

Explain whether or not ABC (Pty) Ltd can raise the restrictions to its capacity as contained
in its Memorandum of Incorporation as grounds to avoid being bound to the contract.
(5)

1.5 With reference to relevant case law set out four benefits associated with acquiring of legal
personality. (5)

QUESTION 2

2.1 Pro-shift (Pty) Ltd, a black economic empowerment company, wishes to acquire shares in
Cashflex Ltd. Unfortunately, Pro-shift (Pty) Ltd is not in a position financially to purchase
the shares without first acquiring a loan. Cashflex Ltd wants Pro-shift (Pty) Ltd to become
a shareholder in it as it would be in compliance with the company’s corporate social
responsibility goals. Cashflex Ltd intends to offer the shares to Pro-shift (Pty) Ltd at a lower
price and better interest rate than it would be possible to acquire a loan for at any financial
institution.

2.1.1 Discuss the relevant requirements for this transaction as contained in the Companies Act
71 of 2008. (5)

2.1.2 Besides corporate social responsibility, mention other constitutional principles that are
important for purposes of South African business. (5)

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2.2 Indicate whether the following statements are true or false. Please provide a reason for
your answer.

2.2.1 Hamid is the auditor of Moonblue Ltd. Hamid requests certain company documents from
Barney Moonblue Ltd’s financial director. Barney can legally refuse to furnish Hamid with
the documents. (2)

2.2.2 Once a domesticated company is registered in South Africa, it no longer enjoys registered
status in the foreign jurisdiction. (2)

2.2.3 A proxy may delegate authority to act on behalf of the shareholder to another person.
(2)
2.2.4 Not all payments made by a close corporation to its members are subject to compliance
with the solvency and liquidity criteria. (2)

2.2.5 A company is the only business form that offers South African entrepreneurs the benefits
attached to juristic personality. (2)

QUESTION 3

3.1 Griff and Percy met each other during 2014. At the time, Percy was operating a business,
Climatic Air CC, which supplies and installs air conditioning and refrigeration systems.
Percy was the sole member of the corporation. Percy invited Griff to join Climatic Air CC
as an employee. In 2016, Percy offered to sell to Griff 20 per cent of the membership
interest in Climatic Air CC. Griff bought into the business and signed a written association
agreement. Griff worked very hard in the business and built up a substantial new client
base while maintaining the existing client base. The business grew and strengthened
financially. Despite Griff’s interest in the business, Percy dominated him, and made
business decisions without consulting Griff at all. The good business relationship that
existed between Percy and Griff started declining. Percy had committed the resources of
the close corporation to a huge building project which made it impossible for the close
corporation to properly service its existing clients, resulting in a decline in customer
satisfaction and orders. Percy did shoddy work on the big projects, and much of the
contracted money had to be offset to rectify the poor quality workmanship. As Percy had
largely excluded him from the management of the business, it became virtually impossible
for Griff to monitor his investments, the financial position of the business and its exposure
to risk. Percy concedes that the personal and business relationship between himself and
Griff has irretrievably broken down with no prospect of reconciliation. Indicate whether Griff
who seeks an order for the cessation of his membership and payment of a fair value for
his members’ interest has prospects of success. (5)

3.3 Joseph, Aubrey and Barbara are the members of Pantex CC. The main business of the
corporation is manufacturing and selling of underwear. Barbara becomes aware of a
special elastic that is stronger and much cheaper than the elastic that the close corporation
is currently using. She tells Joseph and Aubrey about the elastic, but she does not tell them
how cheap it is. Joseph and Aubrey are very interested and instruct her to import the elastic
from China. Barbara proceeds to buy the elastic in her personal capacity for R200 000 after
which the close corporation buys it from her for R350 000. (5)

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3.3.1 What duty could Barbara have breached under the circumstances and what does this duty
entail? (Indicate to whom the duty is owed and the scope of this duty) (5)

3.3.2 What possible legal action/s can possibly be instituted against Barbara and who should
institute the action/s? (2)

3.4 In terms of the Companies Act 71 of 2008 it is possible to apply for an order to court to
declare a director of a company or a member of a close corporation delinquent, or to place
him or her under probation. Briefly explain the consequences of a delinquency order.
(3)

TOTAL FOR SECTION A: 60

SECTION B

QUESTION 1

Jo is a member of Best Bikes CC. The business of the close corporation is to manufacture
motorcycles. The association agreement provides that Jo may not enter into contracts on behalf
of the close corporation where the value of the contract exceeds R10 000. Jo, a keen sportsman,
concludes a contract on behalf of the close corporation with Dina for the purchase of soccer balls
to the value of R12 000.

Indicate the CORRECT statement:

(1) The contract will bind Best Bikes CC, because Jo is a member of the close corporation and
Dina was unaware of the restriction on his authority.
(2) The contract will not bind Best Bikes CC, because the contract falls outside the close
corporation’s main business.
(3) The contract will bind Best Bikes CC due to the operation of the Turquand rule.
(4) The contract will not bind Best Bikes CC, because Jo’s authority to bind the close
corporation is limited by the association agreement. (2)

QUESTION 2

Choose the INCORRECT statement regarding member’s interests in a close corporation –

(1) Close corporations were intended for small businesses, and the number of members is
limited to ten.
(2) It is not permitted for more than one person to hold a members' interest jointly.
(3) Juristic persons are generally allowed to become members in a close corporation.
(4) A minor, or a person under legal disability may become a member of a close corporation
with the necessary assistance. (2)

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QUESTION 3

Which of the following is NOT a ground for the disqualification of a person from being appointed
as a company secretary?

(1) A court has prohibited the person from being a director.

(2) A court has declared the person a delinquent.
(3) The person has been removed from an office for being dishonest.
(4) The person is a rehabilitated insolvent. (2)

QUESTION 4

Which one of the following persons may be appointed as the external auditor of Mayibule Ltd?

(1) Felicity, the company’s managing director.

(2) Bonke, who resigned as director of Mayibule Ltd at the end of the previous financial year.
(3) Phindi who was previously the auditor of Mayibule Ltd, who wishes to return after five
years.
(4) Herr Grieb, a German citizen. (2)

QUESTION 5

Indicate which one of the following statements concerning pre-incorporation contracts, as

contemplated in the Companies Act 71 of 2008, is INCORRECT

(1) Pre-incorporation contracts must be concluded in writing.

(2) The intention is for the company to be bound by the agreement after its incorporation.
(3) All common-law methods for the conclusion of pre-incorporation contracts are repealed.
(4) Section 21 of the Companies Act 71 of 2008 regulates pre-incorporation contracts. (2)

QUESTION 6

Indicate which one of the following statements concerning directors’ duties is INCORRECT:

(1) The test to determine whether a director breached his duty of care and skill is objective
with subjective elements.
(2) The Companies Act 71 of 2008 completely codifies the duties that directors owe to the
companies that they serve.
(3) The Companies Act 71 of 2008 has adopted the business judgment rule to protect directors
in certain instances.
(4) The Companies Act 71 of 2008 distinguishes between the duty of care, skill and diligence
and the fiduciary duty. (2)

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QUESTION 7

Complete the sentence by choosing the CORRECT statement.

Debenture holders…

(1) are creditors of a company by virtue of having made loans to the company.
(2) are creditors of a company by virtue of holding shares in the company.
(3) can only claim payment from the company if it will remain solvent and liquid.
(4) have an unconditional right to vote at all company meetings. (2)

QUESTION 8

Complete the sentence by choosing the CORRECT statement.

To incorporate a new company in terms of the Companies Act 71 of 2008, the following documents
must be filed: The Memorandum of Incorporation and the…

(1) Association agreement.

(2) Founding statement.
(3) Notice of Incorporation.
(4) Statement of principal business. (2)

QUESTION 9

Choose the INCORRECT statement regarding the conclusion of a pre-incorporation contract on

behalf of a to be formed company

(1) It is possible to conclude a contract obo of a company that is not yet registered in terms of
the Companies Act 71 of 2008.
(2) The intention of the person concluding the contract is to hold company liable once company
comes into existence.
(3) It is possible to conclude this type of contract in different ways.
(4) It is possible to conclude a contract obo the company by means of common law agency.
(2)

QUESTION 10

Choose the INCORRECT statement

Shares are…

(1) transferable from one person to another.

(2) incorporeal, movable property.
(3) corporeal and embodied in a share certificate.
(4) bundles of personal rights. (2)

END OF PAPER
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Please note that the questions in the exam will deal only with the law relating to companies and
close corporations.
For purposes of revision for the exam, we also suggest that you access the activities and
questions for the various study units on myUnisa under Additional Resources.

Good luck with your studies!

YOUR LECTURERS

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Annexure A

IMPORTANT SECTIONS OF LEGISLATION FOR PURPOSES OF COMPANIES:

COMPANIES ACT 71 OF 2008:

Section 1 Definitions

Section 4 Solvency and liquidity test (used for purposes of distributions)

Section 7 Purposes of the Companies Act

Section 8 Categories of company

Section 13 Right to incorporate a company

Section 14 Registration of a company

Section 15 Memorandum of Incorporation, shareholder agreements and rules of company

Section 16 Amending the Memorandum of Incorporation

Section 19(1) Legal status of companies same as natural person except in as far as it is
impossible

Section 19(3) Personal liability companies

Section 19(4) Abolishing doctrine of constructive notice and exceptions

Section 20 Validity of company actions

Section 20(7) Statutory presumption of compliance with formal and procedural requirements
(similar to common law Turquand Rule)

Section 20(9) Disregarding of juristic personality (similar to common law piercing corporate
veil)

Section 21 Pre-incorporation contracts

Section 38 Issuing shares

Section 44 Financial assistance for subscription of securities (requirements for validity)

Common law tests laid down in Lipschitz and Gradwell cases to see if
transaction qualifies as financial assistance.

Section
Distributions
46 Must be authorised by board. Requirements for valid distributions (declaration
of dividends, payment in lieu of capitalization shares, share buy-backs,
company incurring a debt, waiver of a debt to the company).

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Section 48 Acquisition of company’s own shares

Section 57 Expanded definition of ‘shareholder’ for purposes of Part F of Chapter 2

Section 58 Shareholder right to be represented by proxy

Section 60 Shareholders acting other than at meeting

Section 61 Shareholders meetings

Section 62 Notice of meetings

Section 64 Meeting quorum and adjournment

Section 65 Shareholder resolutions

Section 66(7) Consent to serve as a director required for appointment

Section 67 First director or directors

Section 69 Ineligibility and disqualification of persons to be director or prescribed officer

Section 71 Removal of directors

Section 76 Standards of directors’ conduct

Section 76(4) Business Judgment Rule

Section 77 Liability of directors and prescribed officers

Section 78 Indemnification and directors’ insurance

Section 90 Appointment of auditor

Section 91 Resignation of auditors and vacancies

Section 92 Rotation of auditors

Section 93 Rights and restricted functions of auditors

Section 94 Audit committees

Section 158 Remedies to promote purpose of Companies Act

Section 160 Disputes concerning reservation or registration of company names

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Section 161 Application to protect rights of securities holders

Section 162 Application to declare director delinquent or under probation

Section 163 Relief from oppressive or prejudicial conduct

Section 164 Dissenting shareholders appraisal rights

Section 165 Derivative actions

Section 166 Alternative dispute resolution

Schedule 1 Non-profit companies

Schedule 2 Conversion of close corporations to companies

Close Corporations Act 69 of 1984

Section 65 Abuse of separate juristic personality of corporation

IMPORTANT SECTIONS FOR PURPOSES OF CLOSE CORPORATIONS:

CLOSE CORPORATIONS ACT 69 OF 1984

Section 34(1) Mandatory procedure for disposal of an insolvent member’s interest

Section 36 Disposal of a member’s interest and cessation by order of court

Sections 38 Acquisition of a member’s interest by the close corporation

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Section 40 Financial assistance by corporation in respect of the acquisition of a member’s
interest

Sections 42 The fiduciary duties of members towards the close corporation

Section 43 Personal liability of member for negligence (not acting with reasonable skill and
care)

Section 44 Association agreements

Section 49 Statutory personal action

Section 50 Statutory derivative action

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Section 51 Payments to members

Section 52 Prohibition for the making of certain loans or provision of security

Section 54 Representation in close corporations

Section 56 Personal liability for not keeping proper accounting records

Section 58(2) Accounting requirements in close corporations

Section 62 Duties of accounting officers

Section 62A Application of accountability provisions of Companies Act

Section 63 Joint liability for failure:

- To use “CC” after corporation’s name (section 22)
- To contribute the agreed contribution (section 24)
- To qualify as a member.
- To comply with the rules relating to giving of financial assistance in
terms of section 39
- To fill a vacancy of auditor for longer than 6 months or for managing
the close corporation when disqualified to do so.

Section 64 Liability for reckless and fraudulent trading

Section 65 Gross abuse of the legal personality of a close corporation

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