Part A: Section 21 Companies

Nature requirements for formation, and formalities to be observed

• A company is a juristic (i.e. artificial) person. This means that it exists in law as a separate entity, distinct from its members or officers or any third party. It means also that its assets and liabilities (and its profits and losses) are its own and do not belong to, say, its members; that it can sue and be sued in its own name; and that it has perpetual succession, ie: changes in its membership or in its board of directors do not affect its continuing existence.  

• The formation and activities of companies in South Africa are regulated by the Companies Act No 61 of 1973 ("the Companies Act").

• A company is a two-tier structure, the lower tier comprising one or more natural or juristic persons called members or shareholders;  and the other comprising one or more directors.  In theory at least a company is controlled by its members or shareholders, who have the right, by resolutions adopted at General Meetings of the company, to exercise all the powers of the company. In practice, however, the day to day running of a company is in the hands of its directors, who are elected by, answerable to and are often drawn from the ranks of the members.  If the members are unhappy with the conduct or policies of the directors, their remedy is to dismiss and replace them.

• Section 21 of the Companies Act provides for the incorporation of "Associations not for Gain", commonly reffered to as Section 21 companies. These companies do not have a share capital. In other words, a Section 21 Company cannot issue shares and cannot pay dicidends to its members; instead it is "limited by guarantee", which means that its members undertake to pay a purely nominal amount (usually only a few rand) in the event of the Company failing or being placed in liquidation.

Requirements for registration

• Like all other types of company provided for in the Companies Act, a Section 21 company must be registered with, and obtain a certificate of incorporation from, the Registrar of Companies in Pretoria.  In this regard, a Section 21 company must comply with a number of prerequisites, which include the following:  

  • Because a Section 21 company is deemed to be a public company in terms of the Section 19 of the Companies Act, it must have at least 7 members.

  • The liability of its members in the event of the company failing financially is "limited by guarantee" (see above).

  • The company must be formed for a "lawful purpose".

  • The main object (as set out in the company's founding documents, called Memorandum and Articles of Association) must involve:

"promoting religion, arts, sciences, education, charity, recreation, or any other cultural or social activity or communal or group interests".

• The company's memorandum of association must contain provisions to the following effect:

• All income and property of the company must be applied solely towards the promotion of its main object, and no amount or asset may be awarded or distributed to its members or directors in the form of profits or dividends or in any other way.

• If any surplus (or "profit") remains on the winding up of the company, this surplus must be transferred to another institution having similar purposes, or otherwise in accordance with the instructions of the High Court.

These are the so-called non-profit provisions. However these provisions do not prohibit a Section 21 company from making a profit, nor do they prohibit all and any payments to the company's members or directors;  a Section 21 company may pay its members "reasonable remuneration" for services actually rendered to the company, e.g: if the members or directors are employees of the company, or render professional services to it.

Powers of a Section 21 Company

With certain exceptions (the principal one being the prohibition against distribution of profits), a Section 21 company has the same wide powers to carry out its main object and purposes as any other company.  These powers include the power to purchase movable and immovable property, to invest company funds in any way, to borrow money, to open and operate banking accounts, to employ staff, etc.

Requirements for incorporation

In order to be incorporated, and once incorporated, a Section 21 company is obliged to comply with the extensive provisions of and formalities provided for in the Companies Act. These include the following:

• The phrase "Association incorporated under Section 21" must be included in or subjoined to the company's name. The approval of the Registrar must by given for the desired name of the company; this is obtained by "reserving" a name in advance of incorporation.

• In order to be registered a company must provide the Registrar with, inter alia, the original and two notarially certified copies of its memorandum and articles of association in the prescribed form. The memorandum sets out the name of the company, the names and addresses of its founding members, its purpose and main object, and its powers. The articles of association deal with such matters as the appointment of members and directors, the conduct of meetings and annual general meetings, the powers of the directors, etc. The records filed with the Registrar are public documents and may be read by any person on payment of the prescribed fee.

• The company must appoint auditors. The Registrar must be informed of such appointment and the auditor's address on the prescribed form, and must be informed promptly of a change of auditor.

• The company must appoint a registered address (at which all correspondence and court process, if any, may be delivered), inform the Registrar thereof, and keep the Registrar informed of any change in this address.

• A register of members of the company must be kept in the prescribed form. The register must contain the addresses of the members and the date they became members. The register must be kept at the Company's registered address (or at its place of business or that of its agent, in which case the Registrar must be informed) and must be available for inspection by any member of the public for at least two hours each day during ordinary business hours.

• The Company must keep a register of directors, which register must reflect certain prescribed information about each director. The rules which apply to this register are much the same as apply to the register of members.

• The company must keep the Registrar informed in the prescribed manner of the names of the directors and certain other information about them, and of any changes of director or changes in this information.

• The directors' names (and the name and registration number of the company) must appear on every letter, catalogue or circular sent, distributed or published by the Company.  If a director is not a South African citizen, his/her nationality must appear in brackets after his/her name.

• The directors of the company must ensure that proper minutes in the prescribed form are kept of all directors' meetings. Likewise, an attendance register in respect of all directors' meetings must be kept.

• The company must keep financial and accounting records in the prescribed form, and must prepare annual financial statements and lay these before the annual general meeting of the members. The annual financial statements must be lodged with the Registrar.

• Every company must lay a directors' report before the annual general meeting. Generally speaking this report deals with the state of health of the company, and more specifically must comply with the provisions of Section 299 of the Companies Act.

The above list is merely a sample of the formalities that must be complied with and the obligations placed on the company and its officers in terms of the Companies Act. In many cases the failure to comply with the provisions of the Companies Act may render the directors or the company liable to criminal prosecution.

Members of companies

• The members of a Section 21 company may be natural or juristic persons (or representatives or nominees of other institutions, such as government departments), and may be foreign citizens.

• As indicated above, one of the principal rights of members is to appoint and dismiss directors.

Directors of companies and their duties

• The Companies Act absolutely disqualifies certain persons from being appointed as director of a company, and permits others to be directors only with the authority of the High Court. Examples of persons subject to absolute disqualification are:

  • A body corporate or other juristic person, e.g: a company or close corporation.

  • A minor.

  • A person of unsound mind.

  • An unrehabilitated insolvent.

  • Any person who has ever been convicted of an offence involving dishonesty, e.g: theft, fraud, etc.

• Directors may not act beyond the objects of the company (as set out in the memorandum of association), or beyond the limitations placed on their powers by the Companies Act or by the common law, or, without the approval of the members in general meeting, beyond the powers conferred on them by the memorandum and articles of association.  It is possible to incorporate in the memorandum and articles of association of a company restrictions on the powers of directors, for example prohibiting them from selling or encumbering the company's immovable property without the authorisation of the members, or without the authorisation of some third party.

• A director stands in what is called a "fiduciary" relationship to the company. This means that the director :

  • Must use his/her position and exercise his/her powers in a bona fide manner in the interests of the company.

  • Must not place him- or herself in a position in which his/her personal interests conflict with his/her duties to the company.

• A director may not act arbitrarily, capriciously or for an improper purpose.  A director must exercise an independent discretion and may not fetter his/her discretion or blindly follow the instructions of another.

• If a director fails to exhibit in the performance of his/her duties that degree of skill which may reasonably be expected from a person of his/her knowledge and experience, the director may be liable to the company for any loss it may suffer as a result.

• However, a director is not liable for mere errors of judgment and is not required to have special business acumen or expertise, or singular ability or intelligence. But a director may not shelter behind culpable ignorance or failure to understand the company's affairs, or be indifferent or a mere dummy.

• Unless required to do so in terms of his/her contract with the company, a director is not bound to give continuous attention to the affairs of the company. A director's duties are of an intermittent nature to be performed at periodical board meetings. A director is not bound to attend all such meetings, though he/she ought to attend whenever reasonably able to do so.

• A director, in consenting to take office as such, assumes a position involving duties which cannot be shirked by leaving everything to others. Except in so far as they are allowed to do so under the articles of association, directors cannot delegate their duties or simply leave a task, which they are all under a duty to do, to one of their number, however reasonable and safe it may seem to the directors to do so.

Personal liability of directors and members

• The general rule is that the members, directors and officers of a company are not liable for the company's debts.

• There are certain exceptions to this rule in the Companies Act in relation to directors, two of which are:

  • If a director signs or authorises to be signed on behalf of the company any one of a specified category of documents containing an undertaking to pay money, for example a cheque or an order for goods, and the full name of the company is not recorded clearly on such document, the director will be personally liable unless the amount reflected in the document is paid by the company.

  • Where it appears that the business of the company was or is being carried on recklessly or with the intention of defrauding creditors, a Court may declare that a person who was knowingly a party to such conduct is personally liable for the debts of the company.

• A director or officer may become liable to a third party (e.g: a firm with which the company does business) in a number of circumstances, such as when a director acts beyond his/her authority in contracting with the third party, or when the director informs the third party that the company can pay for goods bought when the director knows that this is not the case.

• In terms of Section 66 of the Companies Act :

“If any public company (which includes a Section 21 company) … carries on business for more than 6 months while it has less than 7 members, every person who is a member of the company during the time that it so carries on business after those 6 months and is cognisant of the fact that it is so carrying on business, shall be liable for the payment of the whole of the debts of the company contracted during that time and may be sued for (such debts) without any other member being joined in the action” (my emphasis).

It is therefore imperative that the members of a Section 21 company ensure that there are at all times at least 7 members.

Winding-up of a company

A company may be wound-up voluntarily (by resolution of its members), or by application to the High Court by (for example) a creditor or a member.  Winding-up requires the appointment of a liquidator, who is responsible for collecting and selling the assets of the company, paying its debts (if possible) and distributing any surplus.

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