# Regulatory Compliance Category > General Regulatory Compliance Forum >  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.
> ...


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...

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## 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.

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## 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.

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## 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.

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## Dave A

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

It definitely needs help  :Wink:

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## 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  :Smile:

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## 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.

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## 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?

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## 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).

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## 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.

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## Marq

My advise to you Vern would be to get some legal advise. (and for Sieg's piece of mind please pay for it and don't begrudge the fees :Wink: )

If you have sureties in place you can be held personally liable. If they can show negligent trading and breach of company law then it is also a case for personal liability. But if everything was above board and there are no ties to the shareholders then the cc's are separate entities and they will have to go the route of looking for their money there first in any case.

In the meantime good luck with all of this.

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Dave A (04-Dec-09), vern (04-Dec-09)

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## sterne.law@gmail.com

As a rule the creditor needs to claim against the cc. Where there are personal sureties it is a different story.
There are a few options -

Reach agreement on payment terms. Best done via letter (We have no money and if you continue the matter the costs etc you will get nothing. We propose R123 as settlement which can be paid as follows....
You could have the house sale as a suspense condition for payment terms.
If they reach agreement then that takes care of that.
If you are really pressurized, you can serve a notice to defend the action which will give you time to come to an agreement. This is a simple document and is actually normally attached to the summons.  
Sorry - I see that there is no summons or writ yet, presumably a letter of demand. If you have no personal sureties you should be okay. Of course the option of persuing a settlement agreement has value in avoiding a judgement, so you need to weigh up those costs from a future perspective.

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Dave A (09-Dec-09)

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## sterne.law@gmail.com

Pty vs cc.
In PTY your liability to debt is limited to size of shareholding where as cc who ever has money pays. A cc generally offers no protection against debt as everyone makes you sign personal surety.
As per other posts - if you contravene certain sections of company law you forfeit your protection. Negligience is the obvious fault and as an important reminder - negligience includes appointing an incompetent person. An example - the accountant makes a blunder, turns out you appointed your aunt as accountant and she only has a 1 year diploma and 3 years experience, yet you are a company employing 300 people and turning over R30 million a month. Chances are you will be found negligient for employing a person not capable of performing the job.
The idea behind the cc was to offer some form of protection without the onerous obligations and costs of a pty. Obviously this is failing duee to personal sureties. There has been talk for some time about doing away with the cc as an entity.

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## Rootz

My wife and myself own a construction business in the leasure market, and due to the economic climate we have not had any contracts for months. We have been forced to look at liquidating the cc inorder to protect our house.

The CC is in my wife's name and have had to apply to put her under debt review to protect the house as this is our only asset, and currently still have a bond over the property.

Anybody know if this will be suficient protection.

When does it become recless trading

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## Dave A

The page on reckless trading may be brief, but describes what it is technically.

In practice, once the members discover that the cc is technically insolvent, you're expected to do something about it - either ensure that the situation doesn't get worse by voluntary liquidation, or making efforts to reduce or remove the problem.

It's when you continue to trade (after discovery) in a manner that will clearly make the situation worse that you run a serious risk of being held personally responsible.

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## Rootz

Our closed corporation is going into liquidation, all current sumonses are issued in my personal name.

My suppliers now claim that they were not aware that we were trading as a closed corporation and they were under the empression that they were trading with me as a sole prop.

I have been dealing with these suppliers for the past 9 years and have paid them by cheques which clearly states the cc's ck number and trading names.

I also have copies of fax comunications with them on our official letter head showing the ck number and trading names.

Their supplier tax invoices also reflect the closed corporation's vat number.

Will this be sufficient to rpoof in court that they were aware that they were trading with a closed corporation and not a sole prop, I amnot a member of the closed corporation.

Please help not sure which way to turn at the moment

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## Dave A

> Our closed corporation is going into liquidation, all current sumonses are issued in my personal name.


Just making sure - *you've* applied for the liquidation of the cc, or have the creditors issued summons against you personally as the defendant?

I've got a restaurant that's playing games at the moment where they gave no indication they were a cc until they sent a letter advising me they'd sold the cc and the new owner would be responsible for the outstanding bills, so I have a sense of where those creditors may be coming from.

Now bear in mind I (and your creditors) need to prove my argument to the satisfaction of a court of law to support my action against the individuals rather than the cc. So let's look at what I'd present in my instance to give some clues as to where you might stand:

In my case I have the signed service contract - with no indication I'm contracting with a cc. There's a trading name and it's signed by (let's call him) Joe Soap who also confirms by his signature he is duly authorised to enter into the contract on behalf of the [trading name] but does not provide his designation.Payments were cash, but even if they were by cheque, who deposited the cheque? Do you send the cheque to them or do you deposit it into their bank account yourself?There was no sign at the main entrance to their premises indicating the restaurant was trading as a cc. We happen to have a photo of the main entrance as part of our preliminary documentation of the site when we commenced servicing.I'm under no obligation to check who the VAT number you provided is registered to. It appears on my invoice because *you* require it for invoices over R3000.00 to claim the input VAT.Their website only lists the 4 partners, and talks of them as partners - no mention of incorporation of any form.The name of the cc is nothing like the trading name.
I'd present points 1, 3, 5 and 6 in making my case, and be ready with points 2 & 4 if required to counter a defence if they, like you suggest here, raised them as part of their defence.

Does that help any?

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## BusFact

> My suppliers now claim that they were not aware that we were trading as a closed corporation and they were under the empression that they were trading with me as a sole prop.
> 
> I have been dealing with these suppliers for the past 9 years and have paid them by cheques which clearly states the cc's ck number and trading names.
> 
> I also have copies of fax comunications with them on our official letter head showing the ck number and trading names.
> 
> Their supplier tax invoices also reflect the closed corporation's vat number.
> 
> Will this be sufficient to rpoof in court that they were aware that they were trading with a closed corporation and not a sole prop, I amnot a member of the closed corporation.


Were any account applications signed when you started buying from them? If so those details would be crucial.

Next step. What name appears on the invoices, yours or the cc? How did you place orders with them? Verbally / fax /email?

I agree with Dave in that the VAT number and the name on the cheques are irrelevant. A third party could pay the account and they have no reason to research the VAT number.

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## sterne.law@gmail.com

There is no clear position on how the courts decide how far a company or person should go to determine the status of a trading aprtner. They have on occassions used a subjective and on otehrs an onjective approach.
As an example - in a case with Distell liquors the defendent had signed a contract saying he was duly authorized to sign. Because he was married in community of prop he needed his wifes consent. on this occassion the court ruled that Distell should have done more to find out the status, and not relied on the clause alone(Dave you may face a similiar situation - the "he had no authority to act" is a common defence, restaurants in particular)  and consequently the husband had no authority to sign the papers and it was void. 

I think the nature of your invoice trail and paperwork could be the key element. It would all seem to indicate that you have not misrepresented yourself and that a reasonable person would have "presumed" you were a cc and not a sole prop. when they extended credit the onus was on them to protect themselves with the neccessary paperwork.


The chances are they are taking a chance with the personal summons, which would obviously be easier than the cc route.

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## Dave A

> Dave you may face a similiar situation - the "he had no authority to act" is a common defence


My counter to that argument is he also has no right to misrepresent...

 :Hmmm:  Sometimes the contract is signed by a manager - Would a history of the restaurant making payments on the contract up to default shore up the _authority to enter into contract_ issue?

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## sterne.law@gmail.com

There will always be a remedy.

if there is misrepresentation by the individual then he can be sued for performance.

Alternatively if the company knew of it then they can be sued under estoppel.
the payment of the contract, especially if by debit order, now supports that the company knew about and allowed it to continue to run and have tacitly accepted.

There is also the agency issue. A manger is essentially an agent acting for and on behalf the priciple. Thus a valid contract is concluded.

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Dave A (11-Dec-10)

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