Converting a Close Corporation (CC) Business into a Proprietary Limited (Pty) Ltd

Converting a Close Corporation Business into a Pty Ltd

What Is A Close Corporation?

A Close Corporation (“CC”) is a simple form of a Company. Further to this it is also more flexible than a Company. This was originally created for the small business. The term simplicity was defined in the case of J&K Timbers (Pty) Ltd v GL & S Furniture Enterprises CC t/a Tegs Timbers which in essence incorporated the same term with the Close Corporations Act. The rest of the case determined whether or not a member of the CC may conduct business with a third party without the consent of the other members which the Court held that a member can.

The new Companies Act came into force in or around May 2011 and did away with the registration of new CC’s. However, existing CC’s may continue indefinitely according to the Companies Act. It also allows them to convert from a CC to a Propriety Limited Companies ‘(Pty)Ltd’.

What Is A Proprietary Limited Company?

There are essentially different types of Companies: a Private and a Public. A Private Company is the most common company which people enter into to conduct their own private business, as it allows an individual (albeit natural or juristic) to register a Company with a profit generating intention.

A Private Company needs a document called a Memorandum of Incorporation (“MOI”) amongst other things. The MOI restricts the transferability of its shares to the Public.

In general terms should more than one shareholder be vested in a Company; a Partnership Agreement would be instituted to define the powers and duties of the Parties involved. This is in accordance with the MOI as well as the Companies Act.

When registering a Company you would need to decide whether or not to impose any restrictions against your Shareholders.

The Old Companies Act of 2008, accepted that only 50 Shareholders/Partners were allowed to enter into a shareholders agreement, however, this has changed and there are no longer any restrictions.

The Accounting Officer has certain duties in relation to the financial statements, as set out in section 62 of the CC Act. This requirement may very well cost money, and in the case of some CC’s this could constitute a significant and unwanted cost to the members. It is a serious offence if the members of the CC allow the office of Accounting Officer to be vacant for six months, the CC could lose the protection of limited liability.

One technical difference that could have a significant impact on the Directors of the entity in question is that the Companies Act in section 76 provides for what is known as the Business Judgment Rule.

Directors of Private Companies will be able to take advantage of this protection which is not provided for members of a CC by the CC Act.

The Business Judgment Rule (as mentioned above) is designed to protect directors who follow certain steps from being liable to the Company.

A Director who wishes to enjoy this protection needs to show that they acted in good faith with proper purpose, and in the best interests of the Company: with the necessary skill and diligence. In addition the Director would need to satisfy some other very specific requirements which relate to being free of personal financial interests in the matter and in taking appropriate steps to become informed about the matter.

While this may seem minor at first, there is a significant difference between the old and new Companies Act and provides protection for diligent Directors which will enable them to operate the business in order to achieve maximum return for the shareholders without undue fear of liability.

In conclusion, a Company does provide more protection to Directors, provided certain conditions are met; same of which have been included above. There are a number of simple instances where a CC could lose its protection of limited liability.

There is no reason as to why a Close Corporation is better than a Private Company apart from the protection which the Directors will have.

 

Bradley Cullingworth

Candidate Attorney