Close CorporationsONR 314

Chapter 28: Internal Relations

•Duties of care and skill•Owe duties to corporation

Fiduciary position of members•Members in close relationship towards each other

•CC-Act sets out guidelines

•Provisions largely based on principles enunciated by the courts over the years

•S 42(2)- Each member, act honestly and in good faith, and exercise powers to manage or represent the CC, in its interest and for its benefit

•Not exceed powers•Avoid conflict of interest•Not derive benefit from the CC

•May not compete with CC•Failure to disclose a material interest in a contract of the CC =……

•Breach•Ratification possible•Except unratifiable wrong – S42(2)(a)(i)

Duties of Care and Skill•S 43- member act with due care and skill

•Breach = liable to CC for loss•Care and skill reasonably expected from person of same knowledge and experience

•2 aspects of importance:

•1-Proven loss for the CC•2-Only liable if did not act with degree of care and skill reasonably expected of from a person of his knowledge and experience

•Ratification possible

Association Agreement•AA – written agreement between members

•Regulate internal relations•Optional•Informal and flexible•Absent – Act regulates internal relations

•In terms of s46 the following apply unless AA states otherwise:

Every member entitled to participate in carrying on of the business

Equal rights in management and representation

Differences decided by majority voteNumber of votes = % interestIndemnified of expenditure incurred in

conducting the business and preserving the assets of the CC

Payments to members in proportion to their respective % interest

Entering into an AA•CC with 2 or more members•Signed by or on behalf of each member

•Any matter regarding internal relationships

•Must be consistent with the Act•Copy kept at registered office•Only members may inspect

Contractual relationship constituted by AA•Contractual rights and duties•Binds members while members•And when they stop being members

•Amendments or cancellation must be in writing

Matters regulated by AA:•Participation in management•Settling of disputes•Voting and proxy votes•Repayment of contributions•Procedure at meetings•Sale or transfer of a member’s interest

•Financing •Any other matter that would ordinarily be dealt with in a shareholders’ agreement

Matters NOT regulated by AA:•Matter in which an insolvent member’s interest may be disposed of

•Disqualified persons•Power to call a meeting of members

•Blanket approval of breach of duties in terms of s42 &43

Matters that require written consent•Acquisition of a member’s interest

•Fin assistance•Loans and security•Ratification of pre-incorp contracts

•Ratification of breach of fiduciary duties or duty of care and skill

Management•In terms of AA and Act•Unless varied or altered by AA, the following

rules apply:Every member entitled to participate in

carrying on the business – equal rights – unless under legal disability or disqualified by court

Matters are decided by majority vote at meetings.

Every member entitled to call a meetingNotice of meetingsQworum

Remedies•Distinguish between: •Section 49 – member’s rights•Section 50 – CC’s rights

Payments to members•Rules set out in s 51 govern payments to maintain solvency.

•Payment only made if:After payment assets>liabilitiesAfter payment CC able to pay debts as they become due in ordinary course of business

Prohibition on loans and security•Without the prior express consent in writing of all members, no loan:

To any memberTo any CC where a member holds an interest of more than 50%

To any company or other juristic person controlled by one or more members