MRL2601/201/2/2023

Tutorial Letter 201/2/2023

ENTREPRENEURIAL LAW
MRL2601

Semester 2

Department of Mercantile Law

This tutorial letter contains important information

about your module.

BARCODE
 CONTENTS

1 FEEDBACK ON ASSIGNMENT 01 ...................................................................................... 3

2 FEEDBACK ON ASSIGNMENT 2 ........................................................................................ 5
3 CONCEPT EXAM PAPER .................................................................................................... 7
4 GENERAL COMMENTS REGARDING THE EXAMINATION ............................................ 15

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Dear Student,

By now you should have received Tutorial Letter 101 and Tutorial Letter 102. Tutorial Letter
101 contains information about the format of the examination paper. Tutorial Letter 102
contains the names and contact details of your lecturers and a concept examination.

The aim of this tutorial letter is to provide you with guidelines on answering the compulsory
assignments, Assignments 01 and 02 and the concept examination paper. Please consult
the relevant sections of the study guide referred to in the guidelines for further details.

Please note that the concept examination paper merely serves as an example of how
questions will be asked in the actual examination.

1 FEEDBACK ON ASSIGNMENT 01
General comment regarding answers received from students:
In general students did well in the assignment. This assignment was supposed to be a bit
trickier as you ‘wrote off’ the components of the work dealing with partnerships and trusts in
this assignment. You will not be examined on these enterprises at all.

A startling number of students submitted the incorrect document (either the questions to the
assignment or answers to the assignments for another module). Please be very careful not
to make this mistake in the exam. There is no possibility to resubmit your answers or to
replace the incorrect document on myExams.

QUESTION 1
Two partners who are practicing as dentists, Susan and Jane, decide to dissolve their
partnership by agreement. The partnership agreement is silent regarding the goodwill of the
partnership. Jane continues practicing as a dentist and de facto takes the partnership’s
clients (valued at R1 million) over for her own benefit. Susan feels it is unfair that Jane has
taken over all of the clients and wishes to institute a legal action to claim her part of the
goodwill. Explain whether there is a remedy to Susan’s disposal in these circumstances.
(5)

There are two specific actions with which a partner can enforce his or her rights as a partner
against any of his or her co-partners: the actio pro socio and the actio communi dividundo:
The actio pro socio is a general multipurpose partnership action with which partners can
enforce their mutual rights. It can be used, for example, to enforce compliance with the
partnership agreement, to request an interdict against a partner, to obtain the return of a
partnership asset, etc.

The actio communi dividundo is an action with which co-owners effect physical division of
tangible things which they hold in joint ownership. After dissolution of the partnership, a

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partner can bring this action to obtain physical division of jointly owned partnership assets.
In this scenario, Susan can use the actio communi dividundo.

Refer to study unit 15 sub-unit 8 in the study guide.

QUESTION 2
Name (do not discuss) five (5) different reasons for which a partnership can be terminated.
(5)
Maximum 5 marks
• effluxion of the term of the partnership
• the end of the undertaking (completion of the partnership business)
• mutual agreement
• a change in membership (which can occur because of the death or retirement of a
partner or the admission of a new partner)
• the death of a partner
• insolvency and sequestration of the partnership estate or the estate of any partner
• a bona fide notice of dissolution by any partner
• the situation where partners become alien enemies on or after the outbreak of war
• an order of court
Refer to study unit 15 sub-unit 10 in the study guide.

QUESTION 3
Explain the difference between the two types of trusts are envisaged in the Trust Property
Control Act 57 of 1988. (5)

The definition in the Trust Property Control Act envisages two types of trust, ordinary trusts
and bewind trusts.
An ordinary trust is a trust in terms of which the ownership and control of the trust property
vests in the trustee.
In a bewind trust, the beneficiaries have ownership of the trust assets, but they are under
the control of the trustee.
An example of a bewind trust is that where someone bequeaths assets to a minor child.
Upon the death of the testator (who is the founder of the trust), ownership of the trust assets
vest in the child, but, until the child attains majority, the trustee controls the trust assets.
Refer to study unit 14 sub-unit 2.
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QUESTION 4
Briefly explain what the purpose of the establishment of a trust is and what parties are
involved in a trust. (5)

A trust is an adaptable concept with various uses, including carrying on a business.

A trust is an arrangement through which ownership of a person’s property is, by virtue of a
trust instrument, made over or bequeathed to a trustee under the trust instrument in order
to be administered for the benefit of beneficiaries.
Trusts were designed to protect the weak and to safeguard the interests of those who are
absent or dead.
(Land and Agricultural Bank of South Africa v Parker and others).
The founder creates the trust, the trustee manages and controls the trust property, and the
beneficiary is the party on whose behalf the trust is created and managed.
All or any of the parties to a trust may be legal (juristic) persons.

Refer to study unit 14 sub-units 1 and 2.

TOTAL: 20 marks

2 FEEDBACK ON ASSIGNMENT 2
General comment regarding answers received from students:

Many students used the internet to try and find answers to the questions. When you write
the Entrepreneurial Law exam, please use the prescribed work, i.e., the study guide, the
prescribed textbook and the Tutorial Letters.

The assignment questions were straight forward, and students who used the study guide
got good results as the answers were all available straight from the study guide.

QUESTION 1
Nandi and Patricia want to start a catering business together called It-out (Pty) Ltd. Briefly
explain the steps which they would need to take in order to incorporate a company.
(5)

To register a company, a Notice of Incorporation and a copy of the Memorandum of

Incorporation must be lodged with the Commission and the prescribed registration fee must
be paid.
Section 1 of the Companies Act determines that to “lodge” the documents means to deliver
them to the Commission (CIPC), which is responsible for registration.
It-out (Pty) Ltd is a private company and the company can be formed by one (1) person.

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 Refer to study unit 4 sub-unit 2 in the study guide.

QUESTION 2

The board of directors of Mongalo Estates (Pty) Ltd is contemplating selling 80 per cent of
the company’s assets to Hinrich Schupple, a German businessman. Indicate what right the
shareholders have who do not agree with the proposed sale, and what process they must
follow. (5)

In this instance, a private company is contemplating disposing the greater part of the
company’s assets. This is one of the triggers for the dissenting securities holders’ appraisal
rights/ the appraisal remedy. Section 164 of the Companies Act 71 of 2008 applies.

The dissenting shareholders may send a written objection to the resolution. Within ten (10)
business days after adoption of the resolution, the company must send a notice that the
resolution has been adopted to each security holder who filed an objection and has not
withdrawn the objection or voted in favour of the resolution.

The shareholder may then demand payment of a fair value for the shares held by him or
her. The company must then make a written offer to pay an amount considered by the
company’s directors to be a fair value. If the company fails to make an offer of the offer is
considered to be inadequate the shareholder may apply to court to determine a fair value
and for an order requiring the company to pay that fair value.

Refer to study unit 13 sub-unit 3.2 in the study guide.

QUESTION 3
Briefly explain how the court assessed what the respective remedies aim to achieve, and
which remedy would be more appropriate to apply when both sections 36 and 49 of the
Close Corporations Act 69 of 1984 could be used in the decision of Feni v Gxothiwe and
Another 2014 (1) SA 5 (ECG). (5)

Section 36 of the Close Corporations Act is used to terminate a member’s membership in the
close corporation.
The focus of section 36 is on the member’s capability or on the effect of his/her conduct on the
business of the close corporation.
Section 49 is applied to remedy unfairly prejudicial conduct.
The focus of section 49 is on the effect of the member’s conduct on either the close corporation
or on a particular member or members.

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QUESTION 4

Good Food CC’s main business is catering. The corporation has five members: Anthea,
Bert-Filandro, Carol, Daniel and Elvis. Each member holds a 20 percent member’s interest.
The association agreement determines that only Daniel is authorised to represent the close
corporation. Anthea enters into a contract for the purchase of a racehorse on behalf of the
close corporation with Bert-Filandro. Explain whether the close corporation is bound to the
transaction. (5)

Section 54 of the Close Corporations Act 69 of 1984 states that every member has the
authority to conclude contracts on behalf of the close corporation in relation to a person who
is not a member (an outsider or third party).
The doctrine of constructive notice does not apply to close corporations. This means that,
even if the association agreement (which is in any event not a public document) states
otherwise, every member can conclude contracts on behalf of the corporation. It does not
matter whether or not the transaction falls within the scope of the main business of the
corporation.
In J&K Timbers (Pty) Ltd v GL&S Furniture Enterprises CC, the court confirmed that a
member of a close corporation is an agent, even though no authority, express or implied,
has been conferred upon him or her by the corporation. The corporation is bound by an act
performed on its behalf by a member, unless the third party knew, or reasonably ought to
have known of the absence of the required power.
In this scenario, Bert-Filandro is a member of the close corporation, and not an outsider or
a third party.
Therefore, section 54 of the Close Corporations Act is not applicable/ the contract will not
be binding.
Refer to study unit 16 sub-unit 10 in the study guide.

TOTAL: 20 marks

3 CONCEPT EXAM PAPER

PLEASE NOTE THAT YOU DO NOT HAVE TO STUDY THE WORK PRESCRIBED FOR
PARTNERSHIPS AND TRUSTS IN YOUR STUDY GUIDE FOR PURPOSES OF THE
EXAMINATION.

We have included a concept examination paper in Tutorial letter 102 for purposes of
revision. This should provide you with an indication of the way in which the longer
(written) questions are asked in this module. What follows are guidelines for
answering these questions.

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NB: Please note that you will not pass if you merely work out the questions to this
concept paper and memorise it. The prescribed work for this module must be
thoroughly studied to master the work.

QUESTION 1
1.1 Briefly explain to two prospective entrepreneurs, Thandeka and Mike, whether or not
the requirements for the piercing of the corporate veil in terms of the Companies Act
71 of 2008 and the Close Corporations Act 69 of 1984 are identical. Refer to case law
in your answer. (5)
The requirements of company law and close corporations’ law for the piercing of the
corporate veil are similar but are not identical.

Section 20(9) of the Companies Act 71 of 2008 follows the example of the Close
Corporations Act 69 of 1984 by codifying the general principle of piercing the corporate veil.

Section 20(9) of the Companies Act 71 of 2008 provides that if a court finds that the
incorporation of a company or any act by or use of a company constitutes an unconscionable
abuse of its juristic personality, the court may declare that the company will be deemed not
to be a juristic person in respect of rights, liabilities and obligations relating to the abuse.

Section 65 of the Close Corporations Act 69 of 1984 refers to a ‘gross abuse’ but section
20(9) of the Companies Act 71 of 2008 refers to an ‘unconscionable abuse’.

The wording of section 20(9) of the Companies Act 71 of 2008 is a combination of section
65 of the Close Corporations Act 69 of 1984 and the judgment in Botha v Van Niekerk 1983
(3) SA 513 (T). It ignores the view expressed in Cape Pacific Ltd v Lubner Controlling
Investments (Pty) Ltd 1995 (4) SA 790 (A), which described the test in Botha v Van Niekerk
as being too rigid.

Refer to study unit 2 sub-unit 4 in the study guide.

1.2 Frank is an Information Technology (IT) specialist. He wishes to incorporate a company

for his business. He does not want to offer any securities to the public.

1.2.1 Advise Frank on the type of company that would be the most suitable for his needs
and briefly explain to him what the characteristics of such a company are. (5)
The best type of company is a private company.

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Its Memorandum of Incorporation prohibits the offering of any securities to the public and
restricts the transferability of its securities.

Private companies are no longer limited to 50 shareholders, as was the case under the
Companies Act 61 of 1973.

In terms of section 8(2)(b) of the Companies Act 71 of 2008, a private company’s

Memorandum of Incorporation must contain a prohibition against the offering of its securities
to the public (1) and restrict the transferability of its securities.

It can be formed by one person.

It must have at least one director.

Refer to study unit 3 sub-unit 2 in the study guide.

1.2.2 List the information that must be contained in Frank’s prospective company’s
Notice of Incorporation. (6)

The Notice of Incorporation must contain the following information:

Type of company;
The incorporation date;
The financial year end;
The registered address (main office);
The number of directors;
The company name.

Refer to study unit 4 sub-unit 2 in the study guide.

1.2.3 Briefly explain the procedure that Frank must follow in order to register the company.
(4)

A Notice of Incorporation and Memorandum of Incorporation must be lodged at the

Companies ad Intellectual Property Commission (Commission) and the prescribed
registration fee must be paid. One or more persons may incorporate a profit company.
Refer to study unit 4 sub-unit 2 in the study guide.

SUBTOTAL: [20 marks]

QUESTION 2

2.1 Agnes, Phineas and Sam are three friends who wish to start their own publishing
company. While driving one Sunday afternoon, Sam comes across the perfect office
building. He wishes to purchase this building on behalf of the proposed company.
Advise Sam what the requirements are that will need to be adhered to in terms of the
Companies Act 71 of 2008 in order to conclude a valid and binding contract on the
company’s behalf before its incorporation. (5)

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In terms of section 21 of the Companies Act 71 of 2008, a pre-incorporation contract will be
binding on a company if it is concluded by a person in the name of, or purporting to act in
the name of or on behalf of a company yet to be incorporated in terms of the Companies Act
71 of 2008; the contract was concluded in writing; and the board of directors of the company
ratifies the transaction or does not reject the contract within the stipulated three-month
period after its incorporation.

Refer to study unit 5 sub-unit 3 in the study guide.

2.2 Woodco (Pty) Ltd has two shareholders, Thabang and Precious, who each hold 50%
of the issued share capital of the company. Thabang, Precious and Jackson are
appointed as the company’s directors. Thabang buys a load of timber to the value of
R2 million from Xander. Thabang does not seek permission from the board of directors
as required. Xander does not take the trouble to find out what the company’s
Memorandum of Incorporation determines but does not suspect any irregularity in the
agreement. Explain whether the company is bound to the contract. (9)

Section 20(7) of the Companies Act 71 of 2008 determines that an outsider who contracted
with the company in good faith can assume that internal requirements and formalities have
been complied with.

The exceptions are: if third party (outsider) knew or reasonably ought to have known that
the internal requirements were not complied with.

In terms of the common-law Turquand rule, if the person acting on behalf of the company
has the authority to do so, but there is subject to an internal formality, such as approval by
the board, an outsider contracting with the company in good faith is entitled to assume that
this internal requirement has been complied with. The company will be bound by the contract
even if the internal formality has not been complied with. The exceptions under the common-
law rule are: if the outsider was aware of the fact that the internal formality had not been
complied with; or if the circumstances in which the contract was concluded were suspicious.

In this case, there is no indication that Xander knew or should have known or that the
circumstances were suspicious. The company is bound in terms of section 20(7) and the
common-law Turquand rule.

Refer to study unit 7 sub-unit 6 in the study guide.

2.3 Figozo Ltd showed an increase in profits for the 2022 financial year. At a board meeting,
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the directors decide that dividends should be paid out to the company’s shareholders.
Indicate what the requirements are in terms of the Companies Act 71 of 2008 that must
be adhered to before the dividends may be declared and paid. (6)

Section 46 of the Companies Act 71 of 2008 is applicable.

The payment of dividends qualifies as a distribution.
The board of directors must authorise the distribution.
The company must comply with the solvency and liquidity test in terms of section 4 of the
Companies Act 71 of 2008.
If the dividend is not paid within 120 business days after the board applied the solvency and
liquidity test the board must reconsider the solvency and liquidity test and cannot pay the
dividend unless the board adopts another solvency and liquidity test resolution.

Refer to Study unit 8 sub-unit 7 in the study guide.

SUBTOTAL: [20 marks]

QUESTION 3

3.1. Mr Schmitds (a German citizen), Mr Ells (an English citizen) and Mr Dube (a South
African citizen) are the only shareholders of West Meets South (Pty) Ltd, a company
registered in South Africa with its head office located in Sandton. Due to the time and
financial costs involved in travelling from Europe to South Africa each time there is a
meeting, especially less important meetings, Mr Schmitds and Mr Ells ask you for
advice whether it is possible for resolutions of shareholders to be passed without
holding any shareholders’ meetings. Advise them whether this is possible under the
common law and under the Companies Act 71 of 2008. (10)

Yes, it is possible.

In English and South African case law, the common law rule of unanimous assent has been
accepted. In terms of this rule, certain decisions may be valid without a meeting being held,
provided that all the members are fully aware of the facts and all of them have assented
thereto, although this need not be in writing.
In Gohlke and Schneider v Westies Minerals (Pty) Ltd 1970 (2) SA 685 (A), the court held that
members may validly appoint a director to the board without any formal meeting being held,
because there was evidence of their unanimous consent.

The court, in In re Duomatic Ltd [1969] 1 ALL ER 161 (Ch) held that the unanimous approval
of directors’ remuneration by the two directors holding all the voting shares in a company
could be regarded as a resolution of a general meeting approving the payment.

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Although it is still possible to apply the common law principle of unanimous assent, the
Companies Act now provides another option. In terms of section 60 of the Companies Act
71 of 2008, a resolution may be submitted to shareholders and, if adopted in writing by the
required majority, will have the same effect as if it had been adopted at a meeting without
actually holding a general meeting of shareholders. This means that the unanimous assent
(where it is required that each and every shareholder agrees) is not required under section
60. So long as the required majority agrees in writing, a decision may be validly passed
without convening a shareholders’ meeting. However, any business of a company that must
be conducted at an annual general meeting may not be conducted by using the section 60
procedure.

The Companies Act 71 of 2008 also provides for the possibility of holding electronic
meetings.

Refer to study unit 9 sub-unit 6 in the study guide.

3.2 The Memorandum of Incorporation of ABC (Pty) Ltd contains the following provision:
‘Directors hold their office for life’. Azaria is a director of ABC (Pty) Ltd. The board of
directors removes Azaria as director. Indicate whether or not she can invoke the
provisions in the Memorandum of Incorporation to prevent her removal. Also indicate
whether she could claim damages for her premature removal based solely on the
provisions as contained in the Memorandum of Incorporation. (7)

A director can be removed by shareholders and, in some circumstances, by the board of

directors. Despite any provision contained in the company’s Memorandum of Incorporation
or any agreement between the company and the director, removal may be affected by an
ordinary resolution of the shareholders. A director who has been removed from office by the
board may apply to a court to review the determination of the board. This application must
be brought within twenty (20) business days from the date of a decision taken by the board.
The court has a discretion whether to confirm the determination of the board. A removal in
terms of section 71 of the Companies Act 71 of 2008 does not detract from any right that
the director so removed has to claim compensation or damages resulting from the loss of
his/her office.
Azaria cannot prevent her removal. She can apply though to court to review the board’s
decision to remove her. However, she can claim damages in terms of the provision in the
Memorandum of Incorporation.
Refer to study unit 10 sub-unit 9 in the study guide.
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3.2 Instead of applying for relief to a court, a person entitled to relief or to file a complaint
may refer it to various other forums in terms of the Companies Act 71 of 2008. Name
three (3) alternatives provided for in the Companies Act 71 of 2008.
(3)
Any three (3) of the following:
• Companies and Intellectual Property Commission
• Companies Tribunal
• Take-Over Regulation Panel
• Other accredited entity
• Conciliation and arbitration
Refer to study unit 13 sub-unit 5 in the study guide.

SUBTOTAL: [20 marks]

QUESTION 4

4.1 List five (5) characteristics of a member’s interest in a close corporation.

(5)

A member’s interest is expressed as a percentage (out of a total of 100%) in the founding

statement. A member’s interest may not be jointly held. The aggregate (total) of members'
interests must always be 100%. A member’s interest in a close corporation is similar to a
share in a company. A member’s interest is an incorporeal, movable thing. A member’s
interest is a personal right to share in the close corporation’s profits after payment to its
creditors.

Refer to study unit 16 sub-unit 5.1 in the study guide.

4.2 Good Food CC’s main business is catering. The close corporation has five (5) members:
Annastacia, Beauty, Carol, Daniel and Elvis. Each member holds a 20% members’
interest. The association agreement determines that only Daniel is authorised to
represent the close corporation. Annastacia enters into a contract for the purchase of a
racehorse on behalf of the close corporation with Beauty. Explain whether the close
corporation is bound to the transaction. (5)

Section 54 of the Close Corporations Act 69 of 1984 states that every member has the
authority to conclude contracts on behalf of the close corporation in relation to a person who
is not a member (an outsider or third party). The doctrine of constructive notice does not
apply to close corporations. This means that even if the association agreement (which is, in
any event, not a public document) states otherwise, every member can conclude contracts
on behalf of the corporation. It does not matter whether or not the transaction falls within the
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 scope of the main business of the corporation. A close corporation will therefore be bound
by most agreements concluded on its behalf by its members. Close corporations will,
however, not be held liable if the outsider or third party knew or reasonably should have
known that the member who concluded the contract on behalf of the close corporation
lacked authority.

In J&K Timbers (Pty) Ltd v GL & S Furniture Enterprises CC 2005 (3) SA 223 (N), the court
held that a member is an agent of the close corporation, even though express and implied
authority is lacking, and the close corporation is bound by the act of the agent.
The close corporation will not be bound in this instance, as Beauty is a member and knew/
ought to have known that Annastacia lacked the required authority.
Refer to study unit 16 sub-unit 10 in the study guide.

4.3 Saraphina is a member of Mend & Sew CC. The other members, Alphi and Botsego feel
that Saraphina has not been complying with her management duties. Advise them
regarding the grounds upon which the court may, in terms of the Close Corporations Act
69 of 1984 order that a member shall cease to be a member of a close corporation.
(5)

Section 36 of the Close Corporations Act 69 of 1984 is applicable. In terms of this

provision, the following must be proven:

Permanent inability to perform her part in carrying on the business;

Conduct which is likely to have a prejudicial effect on the carrying on of the business;

Conduct making it reasonably impossible for the other members to associate with her in
the carrying on of the business;

It is just and equitable in the view of the court that she should cease to be a member.

Refer to study unit 16 sub-unit 7.3.2 in the study guide.

4.4 Lesedi and Simphiwe are the members of Private Investigators CC. Upon formation
of the close corporation, they agree that their respective membership contributions will
consist of cash only. Each member was required to contribute R100 000 and these amounts
were duly recorded in the founding statement. Apart from the monetary contribution, Lesedi
also entered into a lease agreement in terms of which he rents out a building he privately
owns to the close corporation for use as an office. Simphiwe, who is a part-time student at
UNISA, also enters into an employment contract with the close corporation. In terms of the
contract of service he is required to be in the office to attend to the corporation’s day-to- day
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business.

At a meeting of the members, Lesedi and Simphiwe decide that due to a lack of profits
generated from sales, the close corporation will repay each member 2% of their respective
contributions to enable them to provide for personal needs. They further agree that the close
corporation will make some payments to them in respect of their respective rental and
employment agreements.

Advise the members of Private Investigators CC whether these payments meet the
requirements in terms of the Close Corporations Act 69 of 1984. (5)

Section 51 of the Close Corporations Act 69 of 1984 regulates payments to members. In

terms of section 51, no payment may be made to members in their capacities as such if the
solvency and liquidity criteria are not complied with and the other members have not all
provided their written consent for such a payment.

Section 51 applies only to instances where payments are made to members in their capacity
as members and not if the payment is made to a member in his or her capacity as creditor.
Before any type of distribution can be made to members in their capacity as members, the
requirements set out in section 51 must be adhered to.

If a payment must be made to a member in his or her capacity as a creditor, these principles
will not be applicable. Should a creditor claim payment when it is due and payable, the close
corporation will be liable.
Refer to study unit 16 sub-unit 11 in the study guide.

SUBTOTAL: [20 marks] TOTAL: [80 marks]

4 GENERAL COMMENTS REGARDING THE EXAMINATION

The examination paper is open-book (you can use all your prescribed study material) and
will count out of 80 marks. The exam will comprise out of short and medium length questions
(mainly five (5) marks per question. Read the questions carefully before attempting to
answer them. Always identify what has been asked and consider whether the question deals
with either companies or close corporations. Let the mark allocation of each question guide
you regarding the required length of the answer. Always re-read your answer and ensure
that you have answered what was asked.

You should practise answering short and medium length questions of this kind by revising
the discussion questions and answers available on myUnisa. Please take note of our
suggested answers. Please also use the narrated PowerPoint presentations that have been
placed under Additional Resources for you after you have done your revision. We hope that
they will assist in providing clarity on the respective study units.

All the best with the examination.

YOUR LECTURERS

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