Learning Unit 1 - Legal Personality, Types of Company and Company Formation

Learning Unit 1 - Legal
personality, types of company

and company formation
Themes for the learning Unit
Learning Unit 1 Legal personality, types of company and company formation
Theme 1: Sole trader and partnership
Theme 2: Legal personality
Theme 3: Types of Companies
Theme 4: Company formation
Theme 5: Capacity and representation

Learning outcomes
What are the learning outcomes for theme 1?
LO1: Discuss the relevant considerations to be considered when deciding on which

business entity is the most appropriate for a given business purpose;
LO2: Explain what is meant by ‘sole trader’ and the disadvantages of sole
proprietorship;
LO3: Apply the law as it relates to all aspects of a partnership;
LO4: Discuss the authority of partners in terms of contracts with third parties; binding
and personal liability;
LO5 : Discuss the dissolution of a partnership;
LO6: Explain the consequences of a partnership dissolving;
LO7: Explain liquidation in relation to partnerships;
LO8: Discuss the effect of sequestration on the partnership.
Where will you find the answers for these outcome?
PM1: Chapter 21 para 21.1 to 21.3 Chapter 28.4

21.1 INTRODUCTION
Many factors will influence the entrepreneur's decision as to the form of enterprise he or she wishes to use as
vehicle for the business.
What is an entrepreneur?
It is a person who sets up a business or businesses, taking on financial risks in the hope of profit.
What is meant by the phrase ‘form of business enterprise’?

The phrase refers to the chosen legal structure or vehicles within which one chooses to conduct his business
and realize their entrepreneurial goals.
List the recognized forms of business enterprise?

When choosing a trading or business form, any of the following can be used:
1. Sole proprietor
2. Partnership
3. company;
4. close corporation;
5. business trust;
6. partnership;
7. or any combination.
21.1 INTRODUCTION
What are the general factors to consider when deciding what from of business enterprise to choose?
A person does not have to form a company in order to trade or open a business
There are a number of matters that require careful consideration prior to deciding which business entity will be the most
appropriate for a particular business.
Some considerations are of a non-legal and practical nature. These include:
1. the number of persons who will be involved in the business,

2. the extent of their involvement,
3. the capital required to commence business,
4. the sources of that capital,
5. the requirements of customers and clients,
6. the strategic objectives of those involved.
Others factors concern legal matters. These include:
7. the number of and liability of participants in the venture,

8. tax implications and
9. the possible separate legal personality of the business entity (which is discussed below).
21.2 THE SOLE PROPRIETORSHIP (SINGLE-OWNER ENTERPRISE)
What is the most basic form of business enterprise?

It is the sole proprietorship, or enterprise with a single owner.
What are the legal characteristics of a sole proprietorship

1. The single owner acquires all the profits and bears all the risks of the enterprise.
2. Its success depends on one person, the owner, and on that owner's
creditworthiness and ability to run the business.
3. The assets of the owner and those of the business and not separated.
4. The owner is fully liable for the debts and liabilities of the business.
5. This type of business venture does not have the same favorable tax implications
as some other forms of enterprise.
The above legal characteristics of a sole proprietorship can also be seen as the
disadvantages
21.3 THE PARTNERSHIP

21.3.1 Introduction
Explain the rational that supports the partnership as a form of business enterprise
It is the notion that if two or more sole owners joined forces a stronger unit would develop because they would
then have at their disposal their combined resources, financial and otherwise.
What law governs partnership in South Africa?
1. The South African law of partnership is largely governed by common-law principles.
2. The work of the French writer Pothier and the English law of partnership are regarded as strong persuasive
authorities.
List some pieces of legislation that prescribe rules for partnerships?
3. Attorneys Act 53 of 1979 provides that only practicing attorneys may draw up, for reward, an agreement
establishing or dissolving a partnership
4. The Consumer Protection Act 68 of 2008 places a number of restrictions on the name a partnership may
have.
5. Other Acts contain provisions which apply to enterprises generally and therefore also to partnerships (for
example, the Businesses Act 71 of 1991).

21.3.2 Definition and legal nature of a partnership
What is the legal definition of a partnership?
A partnership may be described as a legal relationship which arises contractually between two or more persons, in terms of which
they agree to each contribute to a common business, with the object of making a profit for division between them.
What are the legal characteristics of a partnership?
1. In general a partnership is not a separate legal entity with separate legal personality. It therefore does not attract rights
duties and obligations separate from the partners themselves.
2. But in certain circumstances, a partnership is indeed treated by law as if it were a separate entity.
Discuss 2 circumstances, where a partnership is indeed treated by law as if it were a separate entity?
3. In terms of the Rules of Court a partnership may sue or be sued in its partnership name. Litigation need therefore not
being the names of all the individual partners.
4. And for purposes of sequestration a partnership is treated as an estate which is separate from those of its members.
Creditors of the partnership must, in principle, claim against the partnership estate, and private creditors have a claim
against the individual estate of the particular partner.
What is the purpose of having the exceptions as discussed above?

These exceptions have been developed to avoid practical problems and injustices, and do not detract from the general principle
that the partnership is not a separate legal entity.
21.3.3 The basic requirements (essentialia) of a partnership
How do you form a partnership?
1. The partners need to agree into and consent to the terms and conditions of the partnership by
way of a partnership agreement
2. The partnership agreement will be distinguished from other types of contract by its essentialia
3. Since a partnership agreement is a specific type of contract, it clearly must comply with all the
general requirements for a valid contract. These requirements include:
a. The partners must consensus

b. The partners contractual capacity;
c. The contract must be lawful;
d. It must be possible to render performance in terms of the contract, and,
e. If any formalities are prescribed for the contract, they must be adhered to.
21.3.3 The basic requirements (essentialia) of a partnership
Ate there any formal requirements needed to be complied with in order to enter into a valid partnership?
1. No. No formal requirements need be complied with.

2. A valid partnership may therefore be concluded orally, in writing, or tacitly, that is, through conduct. But a written contract is
preferable as it creates more certainty about the parties' rights and duties.
3. There are three key elements or essentialia of a partnership agreement:
a. each partner must contribute towards the partnership;

b. the partnership must have as its object the making of profit to be divided among the partners, and
c. the partnership business must be carried on for the joint benefit of all the partners.
SO: If the essentialia are present, and the parties intended to form a partnership, the agreement between them constitutes a
partnership.
Can other legal entities enter into partnership?
1. Yes. Legal entities may be parties to a partnership agreement.

2. For example, a close corporation may enter into a partnership agreement with a company, another close corporation, or a
natural person. A partnership agreement may, like any other agreement, not conflict with legislation, public policy, or good
morals.
3. The Companies Act 71 of 2008 (discussed in paragraph 21.4) does not provide for any limitation on the number of partners in

21.3.3 The basic requirements (essentiallia) of a partnership
21.3.3.1 A contribution by each partner
What is meant that each partner must contribute something to the partnership for t to be valid partnership?
1. Each partner must contribute something or undertake to contribute something to the partnership.
2. This contribution may be capital (any property, for example, money, movable or immovable property), services,
knowledge or skill.
3. The contribution may also consist of corporeal or incorporeal (for example, copyright) things, and may also comprise a
combination of various types of contributions, for example, labour and money.
4. There is, generally, no restriction on the type of contribution that can be delivered, provided that it has commercial
value.
5. The contribution must be made unconditionally. It must therefore be subjected to the risk of the partnership business.
6. A person who makes a contribution to the partnership on condition that it must be repaid to him or her irrespective of
the success of the enterprise is a creditor of the partnership and not a partner.

21.3.3.2 The object of making a profit to be divided among the partners
Explain the requirement that the object of the partnership must be to make a profit which is to be divided among the partners
?
1. The main object of the partnership must be to make a net profit in which each of the partners may expect to have a share.
2. The net profit is the amount by which the gross income exceeds the expenses and losses.
3. If the parties to the agreement have another objective, such as the advancement of sport or culture, and are not
interested in making a profit, no partnership is formed. If a charitable organization makes a profit to use for a charitable
purpose, this also does not constitute a partnership, because the aim is not to distribute the profit amongst the members.
4. No partnership can exist without community of profit. Should the parties agree that one or more of them will not be
entitled to a share of the profits, no partnership comes into being. The requirement is met if a partner has only a hope or
an expectation of sharing in the profit: for example, where the particular partner will share in the profit only when it
exceeds a specific amount.
5. The partners are free to regulate the proportions in which they share profits, with one proviso only: that no one may be
entirely excluded from the division. Partners may validly agree that only one or some of them will bear a net loss.
'
;

21.3.3.3 Partnership business to be carried out for the joint benefit of the parties
Explain the requirement that the Partnership business must be carried out for the joint benefit of
the parties?
1. The partnership should be formed in the common interest of the parties: in the sense that the
intention should be that each partner will derive a profit from it.
2.
Although a partnership is usually formed for the purpose of the continuous running of a business,
it may also be formed in order to accomplish a specific project, such as the construction of a
building.
3. This requirement therefore implies that the partners should be jointly entitled to the common
fund formed by their contributions.
;
21.3.4 The natural consequences (naturalia) of a partnership agreement
What is a naturalia of a contract?
1. The natural consequences of a contract are those consequences which apply to the particular type of
contract by operation of law.
2. The specific contract may, however, determine that one or more of these consequences will not apply,
without affecting the validity of the contract as a contract of that particular type.
3. A provision in a contract of partnership which excludes certain natural consequences has no effect as far as
other persons (often referred to as 'third parties ') who have no knowledge of it are concerned, but is
effective between the partners.
4. The most common natural consequences (naturalia) of a partnership agreement are the following:
a. Mutual mandate
b. The proportion in which the net profit is shared
c. The obligation to share in the net loss
d. The proportion in which the net loss is shared

21.3.4.1 Mutual mandate
Explain ‘Mutual mandate’ as a the natural consequence (naturalia) of a partnership agreement
1. Unless there is an agreement to the contrary, the general rule is that each partner, individually and without the
collaboration of the other partners, has the capacity to perform any legal act concerning the administration of the
partnership.
2. Therefore, each partner can bind his or her co-partners as principals by performing any legal act which falls within the
business sphere of the partnership. For example, if a partnership has been established to operate a restaurant, an
application by one of the partners for a liquor license for the restaurant would fall within the business of the partnership.
The purchase of a sports car, however, would fall outside the business of the partnership.
3. Unless a third party is aware of the partner's lack of authority, the partnership will be bound by a contract concluded
between the third party and the partner which falls within the scope of the partnership business, despite the fact that
the specific partner's capacity as representative has been excluded or restricted in the partnership contract.
21.3.4.2 The proportion in which the net profit is shared
Explain ‘The proportion in which the net profit is shared’ as a the natural consequence (naturalia) of a partnership
agreement?
1. Although it is an essential element of a partnership agreement that each partner must be entitled to share in the
net profits of the partnership, the partners may freely arrange the proportion in which those profits are shared.
2. In the absence of any provisions in a contract, the net profit is divided in the same ratio as the partners'
respective contributions. Should it be impossible to value the respective contributions properly, the profit will be
divided equally among all the partners.
21.3.4.3 The obligation to share in the net loss
Explain ‘The obligation to share in the net loss ’ as a the natural consequence (naturalia) of a partnership agreement?
1. If the trading result of the partnership is a net profit, it follows from the basic requirement that net profit must be divided
between the partners, and that they must also share the losses (because losses and expenses are brought into account with
the gross income of the partnership in order to calculate the net profit).
2. If the trading result is a net loss, the general rule is that all partners also share in the losses.
3. A partner can, however, be excluded from the obligation to share in the net loss by agreement. But there must be at least
one partner who will carry the losses of the partnership.
21.3.4.4 The proportion in which the net loss is shared
Explain ‘The proportion in which the net loss is shared ’ as a the natural consequence (naturalia) of a partnership agreement?
1. In the absence of a provision to the contrary, net losses are shared in the same proportion as net profits. This means that
the partner who receives the greatest portion of the profit must also absorb the largest proportion of the net losses.
2. This situation can sometimes be unjust if the proportion in which the profit is shared is not in accordance with the
respective contributions by the partners.
3. It is therefore desirable that the partnership agreement should contain an express arrangement in this regard.
21.3.4.5 The proportion in which the assets are divided upon dissolution
Explain ‘The proportion in which the assets are divided upon dissolution’ as a the natural consequence (naturalia) of a
partnership agreement?
1. If the partnership contract does not determine the ratio in which assets will be divided on dissolution of the
partnership, the partnership assets are divided in the same ratio as the profits.
2. If the partners have not come to an agreement regarding the manner in which the profits are to be divided, a pro rata
division of the assets is made upon dissolution, in proportion to the partners' respective contributions to the
enterprise.
3. Should it be impossible to value the respective contributions, on dissolution the assets will be divided equally between
the partners.
21.3.4.6 The proportion in which the partners are Co-owners of the assets of the partnership
Explain ‘The proportion in which the partners are Co-owners of the assets of the partnership ’ as a the natural consequence (naturalia) of a
partnership agreement?
1. It was mentioned above that a partnership is not a separate legal entity.
2. Therefore the assets of the partnership do not belong to the partnership, but to the partners jointly.
3. The partners hold the assets as co-owners, in other words, they jointly hold the assets in undivided shares. Unless otherwise provided for,
the partners are co¬owners of the partnership assets in the same proportion as that in which the assets are divided upon dissolution.
4. If this ratio is unknown, the partners are co-owners in the same ratio as that in which the profits are to be shared.
21.3.5 The rights and duties of partners
Fully explain the duties of partners in a partnership?
1. The duties to the partnership include:
a. the duty to make a contribution towards the partnership,

b. a duty to share in the losses,
c. a duty of care and skill,
d. and a duty of full disclosure or
e. a duty to account
The value of utmost good faith can be employed to give content to four separate duties:
1. Duty to accept and fulfil the obligations of the partnership agreement
2. Duty to acquire benefits for partnership
3. Duty to guard against a conflict of interest
4. Duty of disclosure
21.3.5 The rights and duties of partners
Fully explain the duties of partners in a partnership?
The rights are:
1. At common law, a partnership is considered to be a contract uberrimae fidei - that is, a contract of the utmost
good faith
2. The relationship between the partners must be based on mutual trust and the utmost confidence
Each partner is in a fiduciary relationship to the others
3. Relationship between partners is governed in essence by way of the partnership agreement
4. The rights of partners between themselves have been summarized as:
a. constituting a right to share in the profits of the partnership,

b. a right to participate in the management of the business,
c. the right to compensation,
d. the right to inspect the partnership books and
e. the right to distribution of assets on dissolution
21.3.6 The termination or dissolution of a partnership

21.3.6.1 Grounds for dissolution
How can a partnership come to terminate?
A partnership may be dissolved or terminated in a number of different ways:
1. Effluxion of a period of time

2. The end of an undertaking
3. Change in the membership of a partnership
4. Insolvency of the partnership
5. Notice of dissolution is given by one of the members
6. Where the partners become alien enemies on or after the outbreak of war
7. Order of court granted on application of one or more of the partners for good cause
8. On the occurrence of an event specified in the partnership agreement
What are the legal consequences when a partnership terminates?
9. When the partnership dissolves, the legal relationship which was created by the partnership agreement changes.
10. The partnership estate is liquidated, creditors of the partnership are paid and any surplus is divided amongst the partners.
11. No formalities are required for dissolution of a partnership. Wide publicity should, however, be given to the dissolution, in order to avoid liability to
parties acting on the erroneous impression that the partnership is still in existence.
21.3.6 The termination or dissolution of a partnership
21.3.6.2 Consequences of dissolution
What are the consequences of dissolution of partnership?
1. While the partnership is being liquidated (after dissolution), the partners still owe fiduciary duties to one another.
2. The partnership agreement, and the mutual mandate of partners, is terminated.
3. The rights and duties of the partnership towards third parties remain valid and binding. But the partners generally become jointly and
severally liable for the partnership's obligations.
21.3.7 Liquidation of the partnership
What is meant ‘Liquidation of the partnership’?
1. Liquidation entails the realisation of the assets of the partnership, the payment of the partnership debts, and the
distribution of the remaining assets or liabilities among the partners.
2. The partnership agreement may contain provisions regarding the liquidation procedure.
3. Partners may conduct the liquidation themselves, or they may appoint a liquidator to do so
28.4 THE CONSEQUENCES OF SEQUESTRATION
What are the consequences of sequestration of a partnership?
1. As soon as a person's estate is sequestrated, various consequences follow for the insolvent.
2. It affects the insolvent's personal status, property, as well as civil legal proceedings instituted by or against him or
her. It could also have an impact on certain contracts concluded before the sequestration.
3. When a partnership estate is sequestrated, the court simultaneously sequestrates the estates of all the partners,
except if there is a legal bar to the sequestration of a particular partner's estate.
4. The sequestration of a partner's personal estate can be avoided by giving security for the payment of all the
partnership debts within a period fixed by the court.
5. The sequestration of a partnership estate or of the private estate of any of the partners results in the dissolution
of the partnership.
LO9: Apply the law as it relates business entities;

LO10: Explain what is meant by the incorporation and registration of a company;
LO11: Apply the concept of the “piercing/lifting of the corporate veil” to a set of
facts;
LO12: Discuss the key features of a company’s juristic personality
PM: Chapter 2 Paras 2.1.2.1 (a) and (b)and Chapter 21 para 21.4.1
2.1.2.1 Legal subjects
What is a legal subject?
1. A legal subject is a human being or entity subject to the law: a member of the legal
community to whom the law applies and for whose benefit the law exists.
2. Every legal subject has legal capacity, that is, the capacity to be the bearer of rights and
duties.
3. First, it should be noted that in law all legal subjects are called 'persons'.
What two categories of persons does the law recognize a legal subjects?
4. Today, the law recognizes two categories of persons, namely natural persons and juristic
persons.
5. It should also be noted that in law the concepts 'human being' and 'person' are not
synonymous.
6. 'Person' and 'legal subject' are, however, synonymous.

(a) Natural persons
Explain the concept of a natural person?
1. The concept of a natural person refers to a human being. Every human being,
from a new-born baby to an adult, is a legal subject, and every human being can
have rights and duties.
2. For instance, the law protects the physical integrity and honour of a new-born
child, and also determines that he or she can inherit property.
(b) Juristic persons
Explain the concept of a Juristic persons ?
1. As a result of the requirements of legal and commercial intercourse, the law is obliged to recognise as legal subjects entities other
than human beings.
2. This does not mean that these entities acquire the natural personality of human beings or that they have a physical existence, but
merely that these entities are recognised as holders of rights and powers and are subject to duties. These entities are elevated by
the law to the status of juristic or artificial persons, but not to that of natural persons.
Provide examples of Juristic persons?
A company, university, municipality, and the state are all examples of juristic persons. One of the features of a juristic person is that it has
rights and is subject to duties; another feature is that it has perpetual succession. This means that although the individuals who comprise
the juristic person may die, the juristic person continues to exist.
Explain further the concept of a company as juristic person?
3. The company is one of the most important kinds of juristic person.

4. The member of a company, or shareholder, has no ownership or other real right in the property of the company.
5. A member or shareholder merely has a personal right to claim a share of the profits of the company if a dividend is declared, or to
claim a share of the surplus assets of the company if it is liquidated.
6. Moreover, if a company is caused loss unlawfully, the company, but not individual shareholders, has an action for redress against
the person who caused the loss.
7. Conversely, the company is liable for the company's debts and the shareholders cannot be sued for them.
21.4 COMPANY LAW
21.4.1 Introduction
What are some of the main advantages of a Company as a form of business enterprise?
1. Separate legal personality
2. Unlimited shareholders
3. Limited liability of shareholders
4. Perpetual succession.
What are some of the main disadvantages of a Company as a form of business enterprise?
5. A company cannot be equated with a natural person for all purposes.
6. It cannot perform inherently human acts, such as the drafting of a will. Since it is primarily a business entity, it
can generally only incur those rights and duties that are required for economic activity.
7. It must necessarily act through its organs or agents.

21.4 COMPANY LAW
21.4.1 Introduction
Explain some of the important consequences in the fact that a company is a separate entity existing
apart from its members?
1. The company can acquire rights and duties in its own name. For example, it can acquire assets,
conclude contracts, and sue and be sued in its own name in court.
2. The company estate is also assessed separately from the estates of individual members.
3. The members' liability is limited to the amount that each of them has invested in the company.
4. Also, the sequestration of members' estates will not lead to liquidation of the company and the
liquidation of the company does not necessarily result in the sequestration of members' estates.
5. The perpetual succession or continuity of the company means that changes in its membership do
not affect its continued existence. Also , investments in the company are transferable, so that each
member can dispose of his or her investment without this affecting the company's continued
existence.
21.4 COMPANY LAW
21.4.1 Introduction
Explain the concept of piercing the corporate veil?
1. In some instances the corporate entity is disregarded. This means that at certain times the advantage of
limited liability will be ignored.
2. Legislation provides for specific instances: for example, where the business of the company is being
carried: on recklessly or with intent to defraud.
3. Our courts have in the past been prepared to disregard the corporate entity, or 'pierce the corporate veil',
in instances where they considered that it is being abused.
4. The general policy, however, was not lightly to disregard a company's separate corporate personality, but
rather to give effect to and uphold it.
5. The Companies Act 71 of 2008 (see paragraph 21.4.2) confirms that a court may, in any instance where the
incorporation, act or use of a company constitutes an unconscionable abuse of the juristic personality of
the company, declare that the company is deemed not to be a juristic person in respect of certain rights,
obligations, liabilities or parties, as the court decides.
LO13: Discuss the various types of companies that may be registered in terms of the
Companies Act;
LO14: Differentiate between the various companies created by the Companies Act
and between an ‘external’ and a ‘domesticated’ company.
PM1: Chapter 21 Paras 21.4.3 & 2.6 – 2.9

What is a profit company?
1. The Act provides for the incorporation of profit and non-profit companies.
2. A profit company has the object of financial gain for its shareholders. It may be
incorporated by one or more persons.
3. There is no limit to the number of shareholders that it may have.
4. Four types of entity may qualify as profit companies, namely:
a. public companies,
b. state-owned companies,
c. personal liability companies and
d. private companies.
Differentiate between public and private companies?
Public:
1. A public company is identified by its name, which ends with the word 'Limited',
or its abbreviation (for example, Eatwell Limited or Eatwell Ltd).
2. All profit companies that are not state-owned companies, private companies or
personal liability companies are public companies.
3. Their shares are freely transferable and may be offered to the public. This
feature enhances the marketability of the shares, which may be listed on a stock
exchange (the shares do not, however, necessarily have to be listed on a stock
exchange). At present there is only one stock exchange in South Africa, namely
the JSE Limited.
Differentiate between public and private companies?
Private:
1. The name of a private company ends with the words '(Proprietary) Limited', or
its abbreviation (for example, Andrews Transport (Proprietary) Limited or
Andrews Transport (Pty) Ltd).
2. The Memorandum of Incorporation of this type of company prohibits it from

making any offer of its securities to the public and restricts their transferability.
What is a State owned Company?
SOC
1. A state-owned company's name ends with the expression 'SOC Ltd'.
2. This type of company falls within the meaning of 'state-owned enterprise' in

terms of the Public Finance Management Act 1 of 1999, or is owned by a
municipality.
3. The South African Bureau of Standards (SABS) is an example of such a company

as well as SABC, SAA, Eskom
Differentiate between external company and a foreign company?
1. In terms of the Companies Act of 2008 (the “Act”), a foreign company is

distinguished from an external company by the nature of its registration
requirements.
2. A foreign company is defined simply as an entity incorporated in some other

jurisdiction outside the Republic of South Africa.
3. In terms of section 23 of the Act, an external company is incorporated outside

the Republic and conducts its activities within the Republic, irrespective of
whether it is a profit-making or non–profit entity.
4. In this case, the company would need to be registered as an external company.

When a foreign company is registered as an external company in South Africa, it
is given legal recognition in South Africa.
Theme 4: Company formation
21.4 COMPANY LAW

21.4.3 Formation, membership and types of company
Explain how a company can be registered?
1. The Companies Act of 2008 requires a notice of Incorporation and Memorandum of

Incorporation to be filed with the Companies and Intellectual Property Commission
before a company can be registered.
What is the MOI?
2. The Memorandum of Incorporation is a founding document that sets out the

relationship between the company and its shareholders; directors; other parties
within the company, and third parties.
When does a company acquire its separate legal personality?
3. A company acquires legal personality from the moment of registration.

LO18: Apply the following concepts: the ultra vires doctrine, the doctrine of
constructive notice and the Turquand rule to a set of facts;
LO19: Explain how the Companies Act has changed the Common Law position
regarding the ultra vires doctrine, the doctrine of constructive notice and the
Turquand rule.
PM:Chapter 21 Para 21.4.6

21.4.6 Representation of a company
How does a company act?
1. A company, as a legal person, cannot itself perform juristic acts but must act
through agents (agency is discussed in chapter 20).
2. When dealing with outsiders, the normal principle of the law of agency that the
company agent must have the necessary authority to bind the company,
applies.
3. But, over the years, the demands of commercial practice have necessitated the
development of specific rules with regard to agency in a company law context.
What does the Companies Act of 2008 state about how a company acts ?
1. The Companies Act of 2008 provides that a company has all the legal capacity and the powers of a natural person except to the
extent that a juristic person is incapable of exercising any such power or the company's Memorandum of Incorporation
provides otherwise.
2. The capacity of a company is not limited by its main or ancillary objects or business as it was under the Companies Act of 1973.
Although the company's Memorandum of Incorporation may limit, restrict or qualify the purposes, powers or activities of the
company, any such restriction would not render invalid any contract that conflicts with it.
What is the effect of this rule?
3. The contract remains valid and binding on the company and the other party to the contract. Each shareholder has a claim for
damages against any person who fraudulently or owing to gross negligence causes the company to do anything inconsistent
with the Act, or a limitation, restriction or qualification on the powers of the company as stated in its Memorandum of
Incorporation, unless ratified by special resolution.
What is the position should the contract not be concluded yet?
4. However, if the company or directors have not as yet performed the planned action (for example, concluded the contract) that
is inconsistent with a limitation or qualification contained in the Memorandum of Incorporation, one or more shareholders,
directors or prescribed officers of the company may obtain a court order preventing the company or directors from doing so.
5. A third party who did not have actual knowledge of this limitation or qualification and acted in good faith will be able to claim
for any damages suffered as a result. Shareholders, directors, prescribed officers and a trade union representing employees of
the company may also institute proceedings to prevent the company from doing anything inconsistent with the Act.
What are the rules as they relate to Directors of the company?
1. Directors may lack the authority to conclude a particular transaction because the
Memorandum of Incorporation of the company specifically limits their authorisation.
2. In such a case the company will still be liable on the transaction if the directors have
exceeded the limits of their authority.
What happens if the MOI stipulates an internal formality?
3. Where the Memorandum of Incorporation provides that a specific director (or the
directors) may be authorised by complying with some internal formality (for
example, by obtaining the prior approval of the general meeting for a specific
contract), an outsider dealing with the company in good faith may assume that this
authorisation has been obtained, unless the person knew or reasonably ought to
have known of any failure by the company to comply with its formal and procedural
requirements.
What are the rules as they relate to pre-incorporation contracts
1. The Act permits the conclusion of pre-incorporation contracts on behalf of a company to be

incorporated.
2. This constitutes an exception to the general common-law principle that there cannot be an agent in
respect of a non-existent principal.
3. A major disadvantage of the statutory provision is that a person who enters into such a contract is
held jointly and severally liable for liabilities emanating from the reincorporation contract if
a. incorporation does not take place, or

b. the company does not ratify a part of the contract after incorporation.
NOTE:
Such personal liability does not arise in terms of the common law and much pre-incorporation will
therefore rather be structured under the common-law alternatives (benefit of a third party (stipulatio
alteri), a trust or cession and delegation).

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Learning Unit 1 - Legal

personality, types of company

Learning Unit 1 Legal personality, types of company and company formation

Theme 1: Sole trader and partnership

Theme 2: Legal personality

Theme 3: Types of Companies

Theme 4: Company formation

Theme 5: Capacity and representation

What are the learning outcomes for theme 1?

LO1: Discuss the relevant considerations to be considered when deciding on which

Where will you find the answers for these outcome?

PM1: Chapter 21 para 21.1 to 21.3 Chapter 28.4

What is meant by the phrase ‘form of business enterprise’?

List the recognized forms of business enterprise?

Some considerations are of a non-legal and practical nature. These include:

1. the number of persons who will be involved in the business,

Others factors concern legal matters. These include:

7. the number of and liability of participants in the venture,

21.2 THE SOLE PROPRIETORSHIP (SINGLE-OWNER ENTERPRISE)

What is the most basic form of business enterprise?

What are the legal characteristics of a sole proprietorship

21.3 THE PARTNERSHIP

What law governs partnership in South Africa?

1. The South African law of partnership is largely governed by common-law principles.

List some pieces of legislation that prescribe rules for partnerships?

21.3 THE PARTNERSHIP

What is the legal definition of a partnership?

What are the legal characteristics of a partnership?

What is the purpose of having the exceptions as discussed above?

21.3 THE PARTNERSHIP

21.3.3 The basic requirements (essentialia) of a partnership

How do you form a partnership?

a. The partners must consensus

21.3 THE PARTNERSHIP

21.3.3 The basic requirements (essentialia) of a partnership

1. No. No formal requirements need be complied with.

a. each partner must contribute towards the partnership;

Can other legal entities enter into partnership?

1. Yes. Legal entities may be parties to a partnership agreement.

21.3 THE PARTNERSHIP

21.3 THE PARTNERSHIP

21.3.3 The basic requirements (essentiallia) of a partnership

21.3 THE PARTNERSHIP

21.3.3 The basic requirements (essentiallia) of a partnership

21.3 THE PARTNERSHIP

21.3.4 The natural consequences (naturalia) of a partnership agreement

What is a naturalia of a contract?

21.3 THE PARTNERSHIP

21.3.4 The natural consequences (naturalia) of a partnership agreement

Explain ‘Mutual mandate’ as a the natural consequence (naturalia) of a partnership agreement

21.3 THE PARTNERSHIP

21.3.4 The natural consequences (naturalia) of a partnership agreement

21.3.4.2 The proportion in which the net profit is shared

21.3 THE PARTNERSHIP

21.3.4 The natural consequences (naturalia) of a partnership agreement

21.3.4.3 The obligation to share in the net loss

21.3 THE PARTNERSHIP

21.3.4 The natural consequences (naturalia) of a partnership agreement

21.3.4.4 The proportion in which the net loss is shared