ASSIGNMENT 1

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Subject: The Close Corporation Act 2 Assignment Code: D20059981-A Edition: 1
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Gugulethu Xaba Student Number: 419421

Question 1

In terms of section 63 both the corporation and one or more of its members are jointly and severally
liable for the following specified debts to third parties where:

- Liability for Debts- A member does not disclose the full name of the corporation and include the
abbreviation “CC” when making transactions with third parties so the other party is not aware
that they are dealing with a corporation
- where a member fails to pay his or her contribution in money or to deliver or transfer property
within 90 days of the registration of a corporation, or within 90 days of the registration of an
amending Founding Statement (whichever applies) then he or she is personally liable with the
corporation
- where the office of an accounting officer of the corporation is vacant for a period of six months,
any member who was aware of the vacancy and is still a member at the end of the period will be
liable for every debt the corporation incurred during the vacancy and this liability continues so
long as the vacancy exists and the member remains a member.

- Abusing power of personality –what this means is that the Court will ignore the separate legal
personality of the corporation and identify individual persons who will be held liable if it finds
there is a gross abuse of the juristic personality of a corporation. The Companies Act does not
have a corresponding section, but the courts nevertheless will use the same process if it is
shown that corporate personality has been used to mask fraud or other improper conduct.

- Business carried on recklessly or fraudulently (section 64)- under this section if the Court find
out there has been reckless, fraudulent and gross negligence in a way the business is carried out
, the court may declare any person who was knowingly a party to such misconduct to be
personally liable for debts and liabilities as directed by the court, and may lay down other orders
to enforce the liability

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Question 2

The following accounting records must be kept by a close corporation to present the state of affairs of
the corporation. To explain all transactions and the financial position of the Corporation:

- a record of assets and liabilities;

- a register of fixed assets showing date of acquisition, and the cost, depreciation, the date of any
revaluation and the revalued amount, the date of any disposals and the amount realised;
- a daily record of cash received and paid;
- records of goods purchased and services received;
- records of goods sold on credit and services rendered on credit terms;
- an annual stock-taking statement;
- records to enable such stock to be valued;
- vouchers supporting all entries in the accounting records;
- records to show:
o the contributions made by each member;
o profits which have not been withdrawn by members;
o the revaluation of fixed assets (a necessity before any profits can be paid to members);
o the loans made by members to the corporation;
o the loans made by the corporation to members.

Questions 3

a) It is the annual financial statements which must be produced within nine months following the
end of each financial year, this must include the Balance Sheet and the Income Statement and
any notes thereon for both.
b) The financial statements must disclose the following :
o the aggregate amount of contributions by members;
o the amount of undrawn profits;
o the revaluation of fixed assets at fair market value;
o the amount of loans to and from members;
o the movements of the above loans during the year (sections 58 (2) (b) and (c)).

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 c) The financial statements must be in a summarised form to ensure that:
- the agreement of the financial statements with the records is made possible;
- the accounting officer can report to the corporation in terms of sections 62 (1) (c)
without having to refer to subsidiary accounting records and vouchers. However, he or
she may make such investigations if it is desirable.

d) Duties of an accounting officer :

In terms of section 62 the accounting officer is required to do the following not later than three months
after the completion of the annual financial statements:

1) determine whether the annual financial statements agree with the accounting records, and
report to the members on this matter;
2) determine what accounting policies have been followed in the preparation of the financial
statements and whether such policies are appropriate, and report to the members on this
matter;
3) report to the members if he or she becomes aware that the corporation has in any way
contravened the requirements of the Act, no matter how trivial the contravention;
4) report to the Registrar by certified post if he or she knows or has reason to believe that the
corporation is not carrying on business and has no intention of resuming operations in the
immediate future; and
5) report to the Registrar by certified post if he or she discovers that:
– a change to the founding statement has not been made when it should have
been made; or
– the financial statements show the liabilities of the corporation exceed its assets.
If the accounting officer finds that a subsequent financial statement shows that
the assets of the CC exceed its liabilities he or she may lodge a new report to the
Registrar which will cancel his or her original report
–

Question 5

a)

The fixed assets were valued at 97 000

The stock was valued at 40 000
The debtors were valued at 21 500
Cash 8 000
166 500
Deduct the liabilities 47 000
Therefore total contribution of members 119 500
Total undrawn profits of members 0 000 available for distribution
Original equity 119 500
119 500 Total interest of members

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b) No because Income earned by a close corporation and distributed to members is received by them
free of income tax

Question 6

The topics the report must deal with are the following:

 the estimated amount of the corporation's assets and liabilities;

 the reasons for the financial failure of the corporation (if there has been such a failure);
 whether he or she has submitted, or will submit, a report to the Master in terms of section 400
(2) of the Companies Act dealing with contraventions and offences under the Close Corporations
Act;
 whether any member or former member appears to be liable:
- to the corporation on grounds of breach of trust or negligence;
- to make repayments to the corporation in terms of sections 70 and 71;
- to either a creditor of the corporation or the corporation itself by virtue of the
provisions of this Act;
 any legal proceedings by or against the corporation pending at the date on which the winding-
up commenced, or which may have been since instituted, or are to be instituted;
 whether further enquiry is desirable concerning any matter relating to the formation or failure
of the corporation or in the way it was conducted;
 whether the corporation has kept the accounting records required by section 56 and, if not, in
what respects that section of the Act has not been complied with;
 the progress and prospects concerning the winding-up;
 any other matter which he or she considers desirable to report on, or on which he or she
requires instructions

-Ends -

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