NAME: REATLEGILE TSEKE

DATE: 31 JULY 2024

MODULE CODE: LWCLA22-33
WEEK 1: FORMS OF BUSINESS UNDERTAKING AND TYPES OF
COMPANIES

1. What are the advantages of incorporating a business?

• Limited liability for shareholders: Shareholders are generally not personally liable
for the debts and obligations of the corporation beyond their investment in shares.
• Ownership and Transferability: Shareholders own shares of the company, which
represent their stake in the company. These shares can be bought, sold, and
transferred independently of the company’s activities.
• Rights and Duties: Shareholders have specific rights, such as voting on important
company matters, receiving dividends, and accessing certain information about the
company. They also have duties, such as the duty to act in the company’s best
interests when making decisions that affect it.
• Separate Legal Entity: The company, as a separate legal entity, can enter into
contracts, own property, and sue or be sued independently of its shareholders. This
separation ensures that the personal affairs of shareholders do not directly impact
the company’s legal standing and vice versa.
• Perpetual Existence: The company’s existence is independent of the changes in its
shareholders. This means the company continues to exist even if shareholders
change, providing stability and continuity for the business operations. This means
their personal assets are protected if the company faces financial difficulties or
legal actions.

2. What is legal personality? What is its implication for shareholders?

Section 19 (1) reinforces common-law position from the date and time that the incorporation
of the company is registered, … the company – is a juristic person. Subsection also states that
the company will continue to exist until its name is removed from the companies register in
accordance with the Companies Act. Legal personality refers to the recognition by law that an
entity, such as a corporation, has rights and responsibilities separate from those of its members
or shareholders. This means the entity can enter into contracts, sue and be sued, own property,
and incur liabilities in its own name.
Legal personality entails:
- Limited Liabilities: shareholders are generally not liable for the debts and obligations
of the company meaning their personal assets are protected if the company faces
financial difficulties (Salomon v A Salomon & Co Ltd, 1897).
- Perpetual Existence: the company continues to exist even if its shareholders change.
The death, bankruptcy, or exit of a shareholder does not affect the corporation’s
existence.
 - Transferability of Shares: Shares in a corporation can typically be bought and sold
without affecting the corporation’s continued existence or operations.
- Separate Legal Entity: The company itself is responsible for its actions and can be held
accountable separately from its shareholders (Salomon v A Salomon & Co Ltd, 1897).
-
3. What does lifting the corporate veil entail? What is its purpose and under what
circumstances can it occur?

Lifting the corporate veil refers to the judicial act of holding the shareholders or directors
personally liable for the company’s actions or debts. This legal concept typically happens in
situations where the company is being used for fraudulent, unjust, or illegal purposes
Companies Act 71 of 2008 (South Africa): Section 20(9).

Instances when courts may lift the corporate veil include:

a) Fraud or Misrepresentation: When the company is used to commit fraud or evade legal
obligations.
b) Failure to Observe Corporate Formalities: When corporate formalities, such as
maintaining separate accounts and holding regular meetings, are not observed.
c) Alter Ego Doctrine: When the corporation is merely a façade for the personal dealings of its
shareholders.

4. Do branches, divisions and units of a company have their own separate legal
personality?

No, they do not have their own separate legal personality.

5. List and briefly discuss the three advantages of incorporating a business.

1. Limited liability for shareholders: Shareholders are generally not personally liable for
the debts and obligations of the corporation beyond their investment in shares.

2. Separate Legal Entity: The company, as a separate legal entity, can enter into
contracts, own property, and sue or be sued independently of its shareholders. This
separation ensures that the personal affairs of shareholders do not directly impact the
company’s legal standing and vice versa.

3. Perpetual Existence: The company’s existence is independent of the changes in its

shareholders. This means the company continues to exist even if shareholders change,
providing stability and continuity for the business operations. This means their personal
assets are protected if the company faces financial difficulties or legal actions.
ACTIVITY:
In 2005, Pat and Tracy Morgan established NetMedia (Pty) Ltd which oTered internet-based
news, until it went into liquidation when the company could no longer pay its creditors. During
the winding-up of the company, the liquidator discovered that Mr. and Mrs. Morgan, the only
shareholders and directors of NetMedia (Pty) Ltd had made a loan of R10 million to the
company as a start-up cash injection. This loan was secured by a mortgage bond over
immovable property by NetMedia.
The liquidator argued that there was no real distinction in law between the Morgans and
NetMedia, and the proceeds of the sale of the company’s assets, therefore had to be utilised
to settle all debts owed by the company to its other ordinary creditors. Mr. and Mrs. Morgan
believed that NetMedia’s separate legal identity entitled them to have their secured claim
against the company settled first and vowed to take their fight to the highest court in the land.

ANSWER:
For the Liquidator:
The liquidator argues that there is no real distinction between the Morgans and NetMedia,
implying that the corporate veil should be pierced. This would treat the Morgans and their
company as a single entity, prioritizing the settlement of debts owed to ordinary creditors over
the Morgans' secured claim. Companies Act 71 of 2008 (South Africa): Section 20(9) allows
a court to pierce the corporate veil if a company is used as a vehicle for fraudulent or dishonest
purposes. As per case law, Gilford Motor Co Ltd v. Horne (1933) and Jones v. Lipman (1962),
the corporate veil can be pierced to prevent individuals from using a company to shield
themselves from their obligations. The liquidator should show that the Morgans used NetMedia
as an alter ego or for fraudulent purposes.

For Mr. and Mrs. Morgan:

The Morgans argue that NetMedia's separate legal personality entitles them to have their
secured claim settled first. They rely on the principle of limited liability and the distinct legal
identity of the corporation. Companies Act 71 of 2008 (South Africa): Section 20(1) confirms
the separate legal personality of a company. As per case law, Salomon v. A. Salomon & Co.
Ltd (1897), a company is a separate legal entity from its shareholders and directors, entitling
secured creditors to priority in liquidation. The Morgans should emphasize the legality and
proper execution of their loan to NetMedia. They should argue that the mortgage bond over the
immovable property was a legitimate transaction and that there is no evidence that suggests
improper conduct or misuse of the corporate structure. They can also point to the lack of
evidence of fraud or dishonesty in the formation and operation of NetMedia.

The liquidator must be able to prove that NetMedia was a mere façade for the Morgans' personal
dealings or was used for fraudulent purposes. If the liquidator succeeds, the court may pierce
the corporate veil, prioritizing the claims of ordinary creditors. But, if the Morgans can prove the
legitimacy of their loan and the proper conduct of corporate formalities, they may successfully
uphold their secured claim.
ACTIVITY:
Lisa resigned from ABC (Pty) Limited where she was employed for several years. At the time of
her employment with ABC (Pty) Limited she signed a restraint of trade agreement which stated
that she may not compete with the business of ABC (Pty) Limited for a period of 1 year after
resigning. She has subsequent to her resignation registered her own company, Lisa’s Brand (Pty)
Limited, and is using the company, of which she is the sole shareholder and director, as a front
to circumvent the provisions of the restraint of trade agreement. The directors of ABC (Pty)
Limited approach you for advice. They are aware that Lisa’s Brand (Pty) Limited is a separate
legal person to Lisa, they however feel that Lisa’s Brand (Pty) Limited should still be bound by
the restraint of trade agreement.

ANSWER:
Advice for ABC (Pty) Limited:
ABC (Pty) Limited is concerned that Lisa is using her new company, Lisa’s Brand (Pty) Limited,
to circumvent the restraint of trade agreement she signed with ABC. Although Lisa's Brand is a
separate legal entity, there are legal grounds and precedents that can allow ABC to hold Lisa
and her company accountable for breaching the restraint of trade agreement. Courts may
pierce the corporate veil if a company is being used as a mere façade (Alter Ego doctrine) to
avoid legal obligations. Companies Act 71 of 2008: Section 20(9): A court may disregard the
corporate personality if it is used as an alter ego or for dishonest purposes. As per case law,
Gilford Motor Co Ltd v. Horne (1933), the court pierced the corporate veil where a former
employee used a company to circumvent a non-compete agreement.

ABC (Pty) Limited needs to show that Lisa’s Brand (Pty) Limited is conducting business in
direct competition with ABC (Pty) Limited within the stated 1-year period. They need to provide
evidence that Lisa’s Brand (Pty) Limited is a front for Lisa to avoid the restraint of trade
agreement. This can include similarities in how ABC and Lisa’s Brand operate. Lisa’s role and
actions within her new company showing how she was directly involved in competing activities.
ABC can argue that allowing Lisa to use her company to circumvent the agreement would result
in an injustice to ABC, which relied on the restraint of trade to protect its business interests.

ABC can initiate legal proceedings to enforce the restraint of trade agreement against Lisa and
her company. They can also collect and present evidence showing the competitive activities of
Lisa’s Brand and Lisa’s direct involvement. By showing that Lisa’s company is a sham or façade
to avoid her legal obligations, ABC can seek to pierce the corporate veil and hold Lisa
accountable for the breach.
Quiz: True Or False.

1. Amy wishes to conduct a business but does not what to be responsible for the
business’ debts. The best form of business for Amy is the Sole Proprietorship.

False.

2. The shareholders of a company are the beneficial owners of the company.

False.

3. The shareholders of a company own the company’s assets.

True.

4. The separate legal personality of a company may never be disregarded.

False.

5. The legal personality of a company ends at death.

False.

6. When a public company has fewer directors than prescribed, it ceases to exist as
a separate legal personality.

False.

7. A trust is a separate legal person because trustees are not personally liable for
the debts of the trust.

False.

8. A non-profit company does not need to have a specific object.

False.

9. A domesticated company is a foreign company that has transferred its

registration to South Africa

True.