ARE YOU SURE YOU ARE A MEMBER OF YOUR CLOSE CORPORATION?

1. INTRODUCTION

A “member” of a close corporation is defined in section 1 of the Close Corporations Act, 69 of 1984 (the “Act”) as:

(a) a person qualified for membership of a corporation in terms of section 29 of the Act; and
(b) designated as a member in a founding statement of the corporation, including, subject to the provisions of the Act, persons referred to in section 29(2) (c) (i.e. a trustee, administrator, executor or curator, or other legal representative in respect of any such person who is insolvent, deceased, mentally disordered or otherwise incapable or incompetent to manage his or her affairs); but
(c) excluding any such person who has in terms of the Act ceased to be a member.

2. “QUALIFIED FOR MEMBERSHIP IN TERMS OF SECTION 29 OF THE ACT”

Subject to subsections (1A) or (2)(b) and (c) of section 29 of the Act, only natural persons may be members of a corporation and no juristic person or trustee of a trust inter vivos in that capacity shall directly or indirectly hold a member’s interest in a corporation. 

However, for purposes of this newsletter the interpretation of this requirement is not investigated further. This newsletter endeavours to investigate the meaning of the following requirement, namely that a member must be designated as such in a founding statement of the corporation.

3. “DESIGNATED AS A MEMBER IN A FOUNDING STATEMENT OF THE CORPORATION”

The essential effect of the definition, read with the definitions of “founding statement” and “registered”, is that membership of a corporation, unless the context otherwise indicates, is constituted by one’s designation as such in a registered founding statement or amended founding statement (sections 12(d), 13 and 15 (1) of the Act).

The intention of the Legislature is that, unless a particular context were otherwise to indicate, a member of a corporation for purposes of the Act is exclusively either a person who is a registered member thereof or a legal representative of such person.

Section 29(3) (b) of the Act provides that a person becomes an actual member only upon registration of an amended founding statement. 

4. “EXCLUDING ANY SUCH PERSON WHO HAS IN TERMS OF THE ACT CEASED TO BE A MEMBER”

A person who has in terms of the Act ceased to be a member, i.e. through disposition of his interest (section 33(1) (a) read with section 37 of the Act) or through order of Court (section 36 or section 49 of the Act), is intended not to be a member of the corporation for purposes of the Act. 

However, it is submitted that, in fact he will continue to be such a member while the founding statement or, as the case may be, the amended founding statement in which he is designated as a member remains unreplaced by an amended founding statement eliminating such designation (section 15(1) of the Act). 

In Geaney v Portion 117 Kalkheuwel Properties cc and Others 1998 (1) SA 622 (T) at 625 the Court held that “if a member resigns, such resignation will only take place when an amended founding statement is registered”. However, in arriving at this conclusion the Court apparently relied on the provisions of section 15(2) of the Act and it is respectfully submitted that the Court should have relied on section 15(1) of the Act read with section 12 of the Act since these provisions deal with the change of membership.

In a particular case this may have far-reaching consequences for such person, the corporation, its other members and third parties. Thus, e.g. such person may be liable personally for debts of the corporation (section 63 of the Act); or the corporation may be bound by a contract purportedly concluded on its behalf by such person without its authority (section 54(2) of the Act).  It is respectfully submitted that the Act is deficient in catering for this situation.  The provisions of section 15(3) of the Act are inadequate in that their operation depends on knowledge of the cessation of such person’s membership being acquired by the Registrar (section 15(3) (a) of the Act), which in practice may not occur promptly or at all.  Moreover, during the operation of the process envisaged by section 15(3) of the Act, unless the requisite amended founding statement is registered, the situation continues that such person remains designated as a member in the founding statement (or, as the case may be, an existing amended founding statement), and therefore is a member of the corporation for purposes of the Act.

5. CONCLUSION

In terms of sections 1, 2, 12, 13 and 15 of the Act, the registration of a founding statement is fundamental to the existence of a corporation. And so is a member of a corporation a “registered member” and even though such membership may/may not coincide with the de facto membership, de facto membership is in fact not membership for purposes of the Act unless the context specifically otherwise indicates.

In a follow up Newsletter the members’ duties regarding the registration of an amended founding statement will be discussed, as well as the remedies available, should such amended founding statement not be registered.

WRITTEN BY: LORETTE JANSE VAN RENSBURG
PETZER, DU TOIT & RAMULIFHO