MRL2601/201/1/2024

Tutorial Letter 201/1/2024

ENTREPRENEURIAL LAW
MRL2601

Semester 1

Department of Mercantile Law

This tutorial letter contains important information

about your module.

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 CONTENTS

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

2 FEEDBACK ON ASSIGNMENT 2 ........................................................................................ 5
3 CONCEPT EXAM PAPER .................................................................................................... 7
4 GENERAL COMMENTS REGARDING THE EXAMINATION ............................................ 11

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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

A partnership is a legal relationship created by means of a contract concluded between two

or more persons. Each partner agrees to make some kind of contribution to the partnership
business. The business is carried for a joint benefit of the parties with the object of making
a profit. Each partner must contribute or promise to contribute something that has economic
value such as money, property, knowledge, skill, contacts or experience. The contribution
must be exposed to risk. A contribution made on condition that it will be returned to the
partner even if the partnership fails does not meet the requirement of the essentialia.
However, partners may agree that a partner will retain ownership of goods and only
contribute the use of goods.

In the facts, Thabelo’s contribution will meet the requirement of the essentalia as he intends
to contribute his skill as an electrician. David’s contribution will also meet the requirement of
the essentalia as he intends to contribute the use of his goods (his Hilux). Sello’s contribution
of money will not meet the requirements of the essentalia because of the condition that
Thabelo and David will reimburse him. Thus, Sello’s invalid contribution will render the
partnership invalid.

(Refer to study unit 15 sub-unit 6 in the study guide)

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Question 2

2.1.1 Although a trustee is usually not allowed to expose trust assets to risks, a trustee in a
business trust is empowered to carry on a business or to trade. This implies authority to
expose the trust to risks inherent in the type of business concerned. In Sackville West v
Nourse and Another 1925 AD 516, it was held that part of this duty entails not exposing trust
assets to undue risk. An unsecured loan or a loan of which the repayment is under the
ordinary market rate will not be considered a sound investment. In Doyle v Board of
Executors 1999 (2) SA 805 (C), it was held that a trustee has to show the utmost good faith
in his or her dealings on behalf of or with the beneficiaries of the trust. This includes the duty
to account sufficiently to the beneficiaries. By appointing Paul as a trustee of the trust, he
was empowered to carry out activities that are inherent in the type of business carried on by
the trust. Even though the trust deed made no provision for buying a delivery vehicle, the
nature of the business carried on by the particular trust is such that transporting computer
equipment is necessary. In the circumstances, therefore, Paul’s conduct is lawful.

(Study unit 15 sub-unit 10 of the study guide)

2.1.2 The duties of a trustee include the following:

• a duty of care, skill and diligence;

• to open a separate trust account at a banking institution;

• to indicate, in his or her bookkeeping, the property held as trustee;

• to register trust property as such;

• to make the trust and trust investment accounts identifiable as such;

• to keep all documents as proof of investments for five (5) years;

• to protect and conserve trust property and collect debts in favour of the trust diligently;

• to observe good faith in dealing with trust property; and

• to give effect to the terms of the trust deed.

(Study unit 15 sub-unit 10 of the study guide) TOTAL: 20

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

QUESTION 1

1.1 Estoppel applies only when the agent did not have actual authority to bind the
company. The misrepresentation (i.e. that the agent had the necessary authority when, in
fact, he or she did not) must have been made by the company as principal. In Freeman and
Lockyer v Buckhurst Part Properties (Mangal) Ltd [1964] 2 QB 480, the court decided that
estoppel could not only arise from the Articles (note that this would be the Memorandum of
Incorporation in terms of the current Companies Act), but also because the company with
full knowledge and approval allowed an ordinary director to act as the managing director
and, in this manner, culpably represented that he was entitled to act. Based on such
misrepresentation, the company will be prevented (estopped) from denying liability if the
third party can prove that
• the company misrepresented, intentionally or negligently, that the agent concerned
had the necessary authority to represent the company
• the misrepresentation was made by the company
• the third party was induced to deal with the agent because of the misrepresentation.

(Study unit 7 sub-unit 7 in the study guide)

1.2 Section 21 of the Companies Act 71 of 2008 regulates preincorporation contracts. The
definition of ‘preincorporation contract’ in section 1 of the Companies Act 71 of 2008
describes it as a written agreement, concluded in the name of the company / on behalf
of the company to be incorporated. The requirements in section 21 are that within a
period of three (3) months after incorporation, the board must ratify or reject the
preincorporation contract. If no action (ratification/rejection) is taken within a period of
three (3) months, it is regarded that the company ratified the contract. On the facts,
more than three months have lapsed. Therefore, the contract between the company
and Joe Foster is binding.

(Study unit 5 sub-unit 3 in the study guide)

QUESTION 2

Question 2.1

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

statement.
Member’s interest may not be held jointly.
The aggregate members’ interests must at all times be 100 per cent.
A member’s interest in a close corporation is like a share in a company.
Member’s interest is an incorporeal, moveable thing.
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Member’s interest is a personal right to share in the close corporation’s profits after its
creditors have been paid.

(Study unit 16 sub-unit 5.1 in the study guide)

Question 2.2

2.2 Puseletso’s sequestration will not affect the continuation of the business as a close
corporation has separate legal personality.
Section 34(1) of the Close Corporations Act 69 of 1984 prescribes a mandatory procedure
for disposal of an insolvent member’s interest. The purpose is to balance the rights of the
other members with the rights of creditors of the insolvent member’s estate.
If the estate of a member is sequestrated, the trustee of the insolvent estate may realise the
member’s interest, and
o sell the member’s interest to the close corporation
o sell the member’s interest to the other members
o sell the member’s interest to a third party, subject to the other members’ pre-emptive
right to purchase the member’s interest.
The money value will thereafter be paid over to the creditors.
(Study unit 16 sub-unit 6.2 in the study guide) TOTAL: 20

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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.

NB: Please note that you will not pass the module MRL2601 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 Section 21 of the Companies Act 71 of 2008 is applicable. Pre-incorporation contract
must be concluded in writing by someone who professes to act on behalf of a company
which is yet to be formed. The company must ratify the contract within three (3) months. If
the contract is not rejected within three (3) months, it will be presumed or deemed to be
ratified.
(Study unit 5 sub-unit 3 in the study guide)

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

Incorporation must be lodged with the Companies and Intellectual Property Commission and
the prescribed registration fee must be paid. One (1) or more persons may incorporate a
private company.
Study unit 4 sub-unit 2 in the study guide)

1.3 Section 46 of the Companies Act 71 of 2008 applies. 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.
(Study unit 8 sub-unit 7 of the study guide)

1.4 Section 61(8) of the Companies Act 71 of 2008 determines which matters must be
transacted at the annual general meeting. They are:
• Election of directors
• Election of the auditor
• Election of the audit committee
• The directors’ report

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• The audited financial statements of the preceding financial year
• The audit committee’s report
• Any matters raised by the shareholders
(Study unit 9 sub-unit 7 of the study guide)

1.5 No, Amos cannot immediately be appointed as the auditor.

The following persons are disqualified from being an auditor:
a director or prescribed officer of the company; an employee or consultant of the company
who was or has been engaged for more than one year in the maintenance of any of the
company’s financial records or the preparation of any of its financial statements; a director,
officer or employee of a person appointed as company secretary; a person who, alone or
with a partner or employees, habitually or regularly performs the duties of accountant or
bookkeeper, or performs related secretarial work, for the company; a person who, at any
time during the five financial years immediately preceding the date of appointment, was a
person contemplated above or is a person related to a person contemplated above.
(Study unit 11 sub-unit 4 of the study guide)

QUESTION 2
2.1.1 Clause 1 is a pre-emptive right clause/ right of pre-emption. In terms of section 39 of
the Companies Act 71 of 2008 every shareholder in a private company (and a personal
liability company) has the right, before any other person who is not a shareholder of the
company, to be offered and to subscribe (within a reasonable time) for a percentage of any
shares issued or proposed to be issued equal to the voting power of that shareholder’s
general voting rights immediately before the offer was made. However, a company’s
Memorandum of Incorporation may limit, negate or restrict this right with respect to any or
all classes of shares of that company. The pre-emptive right clause in a Memorandum of
Incorporation is an alterable provision. Rights of pre-emption prevent the dilution of
shareholding interests held by existing shareholders of the company and are, therefore,
aimed at protecting such shareholders.
(Study unit 8 sub-unit 5 in the study guide)

2.1.2 A director can be removed by the shareholders and in some instances by the board
of directors. Section 71 of the Companies Act 71 of 2008 regulates the removal of directors.
It determines that a removal can be affected despite any provision in the Memorandum of
Incorporation or any other agreement. A director who has been removed may apply to the

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court to review the removal. A removal in terms of section 71 does not detract from the right
of the director to claim compensation/damages for early removal. Anthea cannot prevent
her removal. Anthea may claim compensation for her premature removal.
(Study unit 10 sub-unit 9 in the study guide)

2.2 A non-profit company (a company that is not formed with the aim of making a profit
for its members) is the most appropriate type of company. At least one of its objects must
relate to social activities, public benefits, cultural activities or group interests. It must be
formed by at least three persons, who will be the company's first directors. It must have at
least three directors, but they are not allowed to obtain any financial gain from the company
other than remuneration for the work they have performed. A non-profit company does not
have to have members. If it has members, some members may enjoy voting rights while
others may not. The income and property of non-profit companies are not distributable to its
incorporators, members, directors, officers or persons related to any of them. All assets and
income must be used to further the company's stated objective. An incorporator, director
etc. may not receive any financial benefit or gain from the company other than reasonable
remuneration for work done/ compensation for expenses/ to advance the objects.
Upon liquidation, income and assets must be paid over to another non-profit company,
voluntary association or trust with a similar purpose.
(Study unit 3 sub-unit 3 in the study guide)

2.3 The company will be liable/ contract will be valid and enforceable. Section 20(7) of
the Companies Act 71 of 2008 determines that when an outsider contracts with the company
in good faith, he or she 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 this case, there is no
indication that the third party knew or should have known.
(Study unit 7 sub-unit 6.2 in the study guide)

2.4 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:
• Companies and Intellectual Property Commission
• Companies Tribunal
• Take-Over Regulation Panel or
• Other accredited entity for resolution by means of conciliation and arbitration.
(Study unit 13 sub-unit 5 in the study guide)

2.5 Ubuntu refers to the saying umuntu ngumuntu ngabantu, which means a person is a
person through others. In the case of S v Makwanyane 1995 (6) BCLR 665 (CC), Madala J
expressed the view that ubuntu advocates social justice and fairness. In the set of facts
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provided, the view of the directors that the company should be managed solely in the
interests of the shareholders is not in line with the principle of ubuntu which advocates for
social justice and fairness. This approach fails to acknowledge the responsibility of the
company towards the community within which it operates. Based on the principle of ubuntu
which promotes social justice and fairness, the company’s payment of bursaries can be
justified.
(Study unit 1 sub-unit 2 in the study guide)

QUESTION 3
3.1 Section 51 of the Close Corporations Act 69 of 1984 regulates payments to members.
No payment may be made to members in their capacities as members unless the solvency
and liquidity test is complied with, and the members all consented in writing. Section 51 only
applies to payments made in the capacity of member, not in the capacity of a creditor.
Therefore, the requirements of section 51 do not apply to the payments in respect of the
lease and the employment contract.
(Study unit 16 sub-unit 11 in the study guide)

3.2 Close corporations are not exempt from financial reporting but in terms of the Close
Corporations Act 69 of 1984 only an accounting officer needs to be appointed. The
Companies Act 71 of 2008 in section 30 requires that certain close corporations have to
audit their financial statements. The annual financial statements must be audited if required
by the regulations made by the Minister in terms of section 30(7), taking into account whether
it is desirable in the public interest, having regard to the economic or social significance of
the company, as indicated by any relevant factors including its annual turnover, the size of
its workforce, or the nature and extent of its activities. In terms of Regulation 28(2) of the
Companies Regulations 2011, if, in the ordinary course of its primary activities, it holds
assets in a fiduciary capacity for persons who are not related to the company and the
aggregate value of such assets held at any time during the financial year exceeds R5 million
a close corporation must audit its financial statement. Moreover, if its public interest score
in that financial year is 350 or more, or is at least 100, if its annual financial statements were
internally compiled an audit is required. The financial statements also need to be audited if
in its Association Agreement or elsewhere the close corporation’s members' resolved that
this is required.
(Study unit 16 sub-unit 13 in the study guide)

3.3 Section 54 of the Close Corporations Act 69 of 1984 regulates representation in close
corporations. Members of close corporations act as agents for the corporation. The doctrine
of constructive notice does not apply to close corporations. Third parties are not deemed

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to be aware of the contents of the close corporation’s public documents. Close corporations
are generally bound to any contract concluded with an outsider by a member, regardless of
whether or not the transaction falls within the scope of the corporation’s principle business.
The close corporation can escape liability if the third party knew or reasonably ought to have
known that the member who concluded the agreement on behalf of the close corporation
lacked the necessary authority. In J&K Timbers (Pty) Ltd v GL&S Furniture Enterprises CC
2005 (3) SA 223 (N) it was held that a member is an agent, even though no authority,
express or implied, has been conferred upon him by the close corporation and the close
corporation is bound by the act, unless one of the exceptions apply.
In this case no facts are presented evidencing that the third party knew or ought to have
known of the lack of authority. Consequently, the close corporation will be bound to the
contract.
(Study unit 16 sub-unit 10 in the study guide)

4 GENERAL COMMENTS REGARDING THE EXAMINATION

The examination paper is a four-hour open-book (you can use all your prescribed study
material) take-home exam out of 80 marks. The exam will comprise 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.

Please note that you are required to use the invigilator app for the duration of the exam.
Further information regarding the use of the invigilator app will be provided in the
announcements on the MRL2601 MyModule site closer to the exam date.

You should practise answering short and medium length questions of this kind by revising
the discussion questions and answers available on the MRL2601 MyModule site. 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.

Do not hesitate to contact us if you experience any uncertainties regarding the contents of
the prescribed study material.

All the best with the examination.

YOUR LECTURERS

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