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The authors in this article examine the legislation that is applicable to the governance of small businesses in South Africa and New Zealand. In this regard the South African Close Corporation Act 69 of 1984 and the New Zealand Companies Act of 1993 are considered. The major characteristics and features in each Act are identified and discussed from a practical point of view. The two legal systems are seen to be vastly different with respect to the legislation that is applicable to small businesses. Whilst the Close Corporation Act contains only 83 sections and four short schedules, the New Zealand Act is more burdensome with some 397 sections and nine rather long schedules. The authors suggest that law reformers in New Zealand take cognisance of the South African Close Corporation Act as a way forward to encourage small business development.
This article is largely styled in a survey format, which serves to highlight and analyse the advantages of adopting a Close Corporation system for New Zealand. There are other articles in existence that explore and academically debate in detail the advantages and disadvantages of having Close Corporations. However, this article was written with the intention to provide readers with a very clear and focused description and analysis of the similarities and differences in the New Zealand and South African legislation in so far as the treatment of small businesses in these countries are concerned. We believe that the South African model of Close Corporations should be considered more closely in New Zealand because:
New Zealand...has too much company law ... (and since) the foundation of company law is contractual ... (it is necessary) to pare away the unduly complex and verbose overlay to recover the underlying contractual principles. This would produce simpler, shorter company law which would generate significant economic gains, especially for small and medium sized enterprises ...[1]
Additionally, whereas the 1993 New Zealand Companies Act had regard to the Canadian Corporations Acts in its formulation,[2] South Africa was the one country that decided to follow Gower’s proposals of a new legal form for small businesses. Hence, the South African Close Corporations Act 69 of 1984 was created and, in this way, provided a new legal form, which many would argue has had a great success story. Furthermore, between 1985 and 1993 alone, 288,020 Close Corporations were registered in South Africa as compared with only 61,559 private companies.[3]
We believe that, by focusing clearly on the above issues, this article will enhance greater understanding and acceptability by readers in New Zealand and elsewhere in so far as the advantages pertaining to the South African Close Corporation model are concerned. We hope that this will encourage and invite further “critical thought on legal developments relating to New Zealand”.[4]
Judith Freedman notes that
There is a strong intuitive case for the creation of a new legal form through which small businesses in the United Kingdom could operate. The view is widely held that our companies legislation, fashioned with the public, quoted company in mind, is of a length and complexity which is wholly inappropriate to the small private company.[5]
S J Naude notes further that
The aim is to provide a simpler and less expensive legal form for the single entrepreneur or few participants, designed with a view to his or their needs and without burdening him or them with legal requirements that are not meaningful in his or their circumstances. This accords with the new awareness of the socio-economic and political importance of small business.[6]
With regard to South African corporate law, a major advancement took place with the enactment of the Close Corporations Act 69 of 1984 that came into effect on 1 January 1985. On this date South African corporate law took a very large leap forward in providing for the needs of small entrepreneurs. This is because, in South Africa, it had been recognised for some time that small businesses form the major part of the South African business communities and thus the “very backbone of the free market system”.[7]
The objectives of the Close Corporations Act were to provide a much simpler and less expensive legal form for the small business which consisted of a single member or a small number of members, but at the same time afford the members the advantages of separate legal personality, which is not found in other small business forms such as partnerships or sole proprietorships. The Close Corporations Act also came into its own by allowing small entrepreneurs the opportunity to dispense with the need for them having to follow the Companies Act 61 of 1973, which had become increasingly complex and burdensome and, for the most part, was not relevant to small businesses. This was largely due to the fact that the said Companies Act had been developed to deal with the needs and problems encountered by the much larger public or private corporations. The alternative possibility of adding further rules into the said Companies Act to regulate the running of small businesses was considered unacceptable.[8] This was because it would only exacerbate the problem by increasing the overall complexity of the said Companies Act. Thus, it is submitted that HS Cilliers et al are correct when they say that the “Companies Act had in effect become inappropriate for the needs of the bona fide small undertaking” and therefore “that the legal formalities have become too onerous” for them.[9]
However, it was recognized that the development of small businesses needed to be enhanced. This is said to be something which
is highly desirable in a country with growing numbers of unemployed. The close corporation is a very suitable vehicle for this purpose as it can cater for the unsophisticated and also the highly sophisticated businessman alike.[10]
It is significant to note that the introduction of the said Close Corporations Act has not, in any way whatsoever, affected the said Companies Act in its application to public and private companies or to any other legal form. The said Close Corporations Act applies only to close corporations and to no other form of legal entity.
Thus, it is important to emphasise that, although companies and close corporations are similar in so far as they both have separate legal personality distinct from the members with their own rights and obligations,
[close] corporations are much less rigidly controlled and the rules are much simpler. The complexities of company law are not easily understood by the layman and they seem unnecessarily involved for suitability to enterprises carried on by one member or relatively few members.[11]
Due to the ever-increasing awareness of the socio-economic and political significance of small businesses, as explained above, the legal forms and requirements found under the Close Corporations Act are very much simpler and less burdensome than under the Companies Act. This has been widely appreciated and accepted in the South African corporate environment, as there are, at present, a huge number of legal entities, which have been created as close corporations. It is fairly obvious that this form of incorporation has arguably succeeded in being considered as nothing less than a South African breakthrough in the corporate and legal environment.
The close corporation is a juristic person and has a legal personality distinct from its members. This means that the close corporation has itself the right to sue, but can also be sued. Thus, in terms of the Act, it is accorded the capacity and powers of that of a natural person.[12] It enjoys perpetual succession and therefore its legal existence is not affected by any changes in its membership. The member or members, minimum of one and maximum of ten,[13] have limited liability with regard to the debts of the close corporation. This is contrary to the situation in private or public companies where the numbers are limited to fifty members or unlimited respectively. Furthermore, juristic persons may generally not be members of a close corporation and a close corporation may not be a subsidiary of a company. However, close corporations can hold shares in a company.
The formation, administration and operation of a close corporation are subject to a minimum number of formalities and the members are subject to a minimum number of duties.[14] Every member of a close corporation may participate equally in the management of the business and represent it. Because no provision is made for the appointment of directors, there is no division, as with companies, between the providers of capital and management. Thus, there is no prescribed annual general meeting and, for the most part, decisions can be made and agreements reached between the members simply on the basis of informal consultation. It is important to note that a close corporation can be identified very easily due to the fact that it has, as part of its name, the abbreviation of “CC” in English (or “BK” in Afrikaans for “beslote korporasie”).
With regard to the registration of close corporations (which is a far simpler process than when registering companies), anyone intending to form the same must compile a founding statement in the prescribed form and lodge it in triplicate with the Registrar of Close Corporations in Pretoria.[15] The Registrar is then required, on payment of the prescribed fee, to register the founding statement in the register, assign a registration number to the close corporation, and certify that it has been incorporated. No further documents are required, including the memorandum and articles.[16]
The following particulars are required to be noted in the founding statement that has to be set out in one of the official languages and signed by or on behalf of every person who is to become a member of the close corporation upon its registration:
(a) the full name;
(b) the principal business to be carried on;
(c) the postal address and the address of any office to which communications may be sent;
(d) the full name and identity number of each member;
(e) the size, expressed as a percentage, of each member’s interest in the corporation;
(f) particulars of the contribution of each member to the corporation whether it be money, property (corporeal or incorporeal) or services rendered;
(g) the name and postal address of a qualified person or firm who has consented in writing to be appointed as accounting officer for the close corporation; and
(h) the date of the end of the financial year of the corporation.[17]
With regard to members’ interests, it is important to note that these interests are not shares, as in the case of a company, because close corporations do not have share capitals. Thus, no shares are issued, and consequently, every person who is to become a member upon incorporation must make some contribution to the corporation as noted above. Every member will then be issued with a certificate signed by or on behalf of every member confirming the said interest.[18] More than one member cannot hold such member’s interest jointly.[19]
Any member may apply to court for an order that any member shall cease to be a member on any of the following grounds where there is:
(a) permanent incapacity as a result of unsound mind or for any other reason in the carrying on of the affairs of the business;
(b) conduct which may have a prejudicial effect on the business;
(c) conduct affecting the relationship with other members so as to render it impossible for other members to carry on that business;
(d) a just and equitable ground to remove the member.[20]
Members may agree, at any time, to enter into a written association agreement that governs the internal relationships between all the members inter se and the corporation.[21] The association agreement must be signed by or on behalf of each member. In addition, a 75% majority vote (that is, 75% of members’ interests), is required where there is either:
(a) a change in the principal business;
(b) a disposal of the whole, or of substantially the whole, undertaking;
(c) a disposal of all (or the greater portion of) the assets;
(d) an acquisition or disposal of immovable property.[22]
A close corporation must keep the association agreement at its registered office where any member may inspect and make copies of it.[23] Additionally, other persons have generally no rights of inspection. Thus, the doctrine of constructive notice does not apply in the case of close corporations.[24] Furthermore, unlike in the case of companies, no person dealing with a close corporation is deemed to have knowledge of any particulars simply by virtue of the fact that it has been stated in the association agreement. The same principle applies to the founding statement or other documents registered by or lodged with the Registrar and governed by sections 16 and 17 of the Close Corporation Act. In this case, however, third parties would be privy to rights of inspection.
The following persons are disqualified from taking part in the management of the close corporation:
(a) any person under legal disability, except:
(I) a married woman, whether subject to the marital power of her husband or not;
(II) a minor who has attained the age of 18 and whose guardian has lodged a written consent for the minor to participate;
(b) save under authority of the court:
(I) an unrehabilitated insolvent;
(II) a person removed from an office of trust as a result of misconduct;
(III) a person who at any time has been convicted of theft, fraud, forgery, or uttering a forged document, perjury, an offence under the Corruption Act 94 of 1992 or any offence involving dishonesty or in connection with the formation or management of a company or close corporation and has a result been sentenced to imprisonment for at least 6 months without the option of a fine;
(c) a person subject to an order of court under the Companies Act and disqualified from being a director of a company.[25]
8. Fiduciary Duties
Members owe their fiduciary duties to the close corporation as a separate legal person and not inter se.[26] However, the association agreement can be a useful device to record the fiduciary duties that shall exist between the members themselves. Unlike in the case of a partnership and a company, where the scope of the statutory duties is not clearly settled and stated, the Close Corporation Act was devised so as to be as simple and clear as possible on many aspects of corporate governance, including the issues relating to the fiduciary duties of members vis-à-vis the close corporation. To that end, section 42 of the act governs the fiduciary position of its members. Thus, a member must:
(a) act honestly and in good faith and in the best interests of the close corporation and avoid any material conflict of interests with those of the close corporation: this means that the member must neither derive any personal benefit from the close corporation nor compete in any way with the corporation in its business activities. There would not be a breach of fiduciary duty where details have been furnished to all the members regarding a potential conflict of interests, but where they nevertheless allow a breach to result by all of them approving it in writing. The members may also ratify a breach once it has occurred, provided that ratification thereof is accompanied once again by the written approval of all the members in the close corporation.[27] A member who has breached a fiduciary duty would be liable to the close corporation for any loss suffered as a result thereof or for any economic benefit derived by the member as a result of the breach.[28]
(b) act with the degree of care and skill that may be reasonably expected from a person with that knowledge and experience, failing which the member shall be liable to the close corporation for any loss caused as a result of the said negligence. However, breaches thereof may also be ratified by the written approval of all the members.[29]
The complex system of derivative actions found in company law is not applicable to close corporations. Instead, a very simple type of derivative action is provided by section 50 of the Close Corporation Act in terms whereof a member or former member would be liable to a close corporation for any contribution or for any breach of a fiduciary duty or for negligence where any other member has instituted proceedings on behalf of the close corporation having notified all the other members of the intention to do so.
Any member of a close corporation may call meetings of members but, unlike companies, there are no compulsory meetings which have to be called. Proxies are not permitted and thus only persons present in person may vote at a meeting.[30] Three-fourths of the members present in person at a meeting shall constitute a quorum.
Whereas in the case of a company, which may not give financial assistance to any person for the acquisition of shares in itself,[31] a close corporation may acquire members’ interests from other members and may certainly give financial assistance to members for them to acquire interests therein.[32]
11. Accounting and Disclosure
Accounting records are required to be kept at the place or places of business in one of the official languages of South Africa. These must fairly present the state of affairs and business of the close corporation and thereby explain the transactions and financial position of the business.[33] In terms of this section of the Act, the record must include the following details:
(a) records showing the assets and liabilities of the close corporation, the contributions from the members, undrawn profits, revaluations of fixed assets and the amounts of loans to and from members;
(b) a register of fixed assets which indicate the respective dates of any acquisitions or disposals and the cost or consideration thereof respectively, depreciation (if any), and, where any assets have been revalued, the date of the revaluation and the revalued amounts thereof;
(c) records containing entries from day to day of all cash received and paid out in detail which is sufficient to enable the nature of the transactions and names of the parties, except with cash sales, to be identified;
(d) records of all goods purchased and sold on credit, including services received and rendered, in detail which is sufficient to enable the nature of those goods and services and the parties to the transactions to be identified;
(e) statements of the annual stocktakings and records to enable the value of stock at the end of the financial year to be determined; and
(f) vouchers supporting entries in the accounting records.[34]
Furthermore, these accounting records have to be kept in such a manner so as to provide adequate precautions against falsification and to facilitate the discovery of any falsification.[35] The accounting records have to be open at all reasonable times for inspection by any member of the close corporation.[36]
A close corporation must also fix a date in each year as to when its financial year (annual accounting period) will end.[37] Furthermore, the duration of each financial year of a close corporation shall be twelve months as set in section 57(1)(a), except within the first financial year of the close corporation, where the financial year commences on the date of registration and ends on the date fixed which must not be less than three and not more than fifteen months after the date of registration.[38]
The members of a close corporation shall, within nine months after the end of every financial year of the close corporation, prepare annual financial statements in one of the official languages of South Africa for the year in question.[39] These have to include a balance sheet and an income statement with any notes attached.[40] The annual financial statements of a close corporation must conform to generally accepted accounting practice and also fairly present the state of affairs of the close corporation as at the end of the financial year.[41] It must also disclose separately the aggregate amounts at the end of the financial year of the contributions by members, undrawn profits, revaluations of fixed assets and the amounts of loans to and from members.[42] It must be in agreement with the accounting records so that compliance with section 58 is made possible and that an accounting officer may report to the close corporation without him having to refer to subsidiary accounting records and vouchers, although the accounting officer may still do so.[43] The report of the accounting officer is attached to the annual financial statements.[44]
The close corporation is not required to have an annual audit as with a company unless this is a requirement of any association agreement. Every close corporation must appoint an accounting officer in accordance with the provisions of the Act.[45] With regards to the qualifications of the said accounting officer in a close corporation, no person shall be permitted to hold such office unless that person is a member of a recognised profession which:
(a) requires, as a condition of membership, its members to have passed examinations in accounting and related fields of study, which would be a sufficient qualification, in the opinion of the Minister, for the accounting officer to perform his or her duties; and
(b) has the power to exclude from its membership any persons found to be guilty of negligence in the performance of their duties or of conduct, which is discreditable to their profession; and
(c) has been named by the minister by notice in the Government Gazette in terms of section 60(2) of the Act, which notes that the Minister may, from time to time, publish by notice in the Government Gazette, the names of those professions whose members would be qualified to perform the duties of an accounting officer.[46]
The consent in writing by all of the members is required before any member or employee of the close corporation may be appointed as accounting officer.[47] An accounting officer of a close corporation shall at all times not only have a right of access to the accounting records and to all the books and documents of the close corporation, but also to have a right to require from members such information and explanations as is considered necessary for the performance of duties as accounting officer.[48]
Within three months of the completion of the annual financial statements, the duties of an accounting officer are to:
(a) determine whether the annual financial statements are in agreement with the accounting records of the close corporation;
(b) review the appropriateness of the accounting policies represented to the accounting officer as having been applied in the preparation of the annual financial statements;
(c) report to the close corporation in respect to (a) and (b) above;
(d) describe the nature of any contravention of a provision of the Act that he or she may become aware of;
(e) state that he or she is a member or employee of the close corporation where this is the case, or is a firm of which a partner or employee is a member or employee of the close corporation;
(f) report by certified post to the registrar if, at any time, the officer knows, or has reason to believe, that the close corporation is not carrying on business or is not in operation and has no intention of resuming such operations in the foreseeable future;
(g) report any changes in the founding statement during the financial year, which have not been registered or that the liabilities of the close corporation exceed its assets at the end of the financial year or that the annual financial statements indicate incorrectly (or has reason to believe) that the assets of the close corporation exceed its liabilities at the end of the financial year.[49]
It has been noted above that members have limited liability in respect of the debts of the close corporation. In the case of companies, the Companies Act[50] is silent as to when the corporate veil should be lifted. Lifting the corporate veil with companies has largely been developed in court where case decisions have, through time, increased the number of categories that could be used to hold directors liable for debts incurred by their companies. This, of course, is inadequate and what the Companies Act really needs here is a provision which sets out the circumstances under which a court would be allowed to pierce the veil. The Close Corporation Act has achieved this admirably and has thus codified the piercing of the veil where there has been a gross abuse of juristic personality.[51]
Thus, a court is, in terms of this provision, and unlike in the case of companies, expressly given the power to pierce the veil of corporate capacity in the case of close corporations. That is, whenever a court, on application by an interested person or in any proceedings in which a close corporation is involved, finds that the incorporation of the close corporation or any act done by or on behalf of it, constitutes a gross abuse of the juristic personality of the close corporation as a separate legal entity, the court may declare that the close corporation is not deemed to be a juristic person in respect of specified rights, obligations or liabilities of itself or of specified members or other persons, and may consequently give such further orders as it deems fit so as to give effect to the said declaration.
The Close Corporation Act contains almost no criminal sanctions and seeks to be self-regulatory.[52] This is achieved through various sections of the Act that impose personal liability on members and other persons for the debts of the close corporation when the Act has been contravened.
Persons may be jointly and severally liable for the debts of the close corporation as follows:
(a) where the name of the close corporation is being used without the abbreviations of “CC” or “BK”, any member responsible for or having authorised or knowingly permitted the omission, would be liable to any person who is unaware that the transaction in question involved a close corporation;
(b) where any member fails to make a contribution as required by the Act, that member would be liable for all of those debts incurred from the date of registration to the date of contribution;
(c) where a juristic person or a trustee of an inter vivos trust purports to hold the interests of a member, directly or indirectly, such person or its nominee would be liable for the debts of the close corporation for the period during which such contravention occurs;
(d) where a close corporation effects payment for the acquisition of the interests of a member in circumstances that contravene the Act, every member at the time would be liable for those debts incurred prior to payment; this excludes the member who is aware of the payment but who can prove that he or she took all reasonable steps to prevent the payment;
(e) where a close corporation gives financial assistance for the acquisition of the interests of a member in circumstances which contravene the Act, the rule as noted in (d) above would apply mutatis mutandis;
(f) where a person takes part in the management of the business of the close corporation while disqualified from doing so in terms of section 47(1)(b) or (c), that person would be liable for every debt of the close corporation incurred as a result of the said participation in its management;
(g) where there has been no accounting officer appointed in the close corporation for a period of six months, every person who was a member of the close corporation during this period and aware of the vacancy, and who was still a member after this period had expired, would be liable for every debt of the close corporation incurred during the period of the said vacancy.[53]
With regard to the liability that may exist for reckless or fraudulent carrying-on of business of the close corporation, this is provided for by section 64 of the Act. This states that:
(a) a court may, on the application of the Master, a creditor, a member or a liquidator, declare that any person who was knowingly a party to the carrying on of the business of a close corporation recklessly, with gross negligence or with the intent to defraud or for any fraudulent purpose shall be personally liable for all or any of the debts or other liabilities of the close corporation as the court may deem fit;
(b) a court may give such further orders as it considers proper for the purpose of giving effect to the declaration and enforcing that liability;
(c) every person who is knowingly a party to the carrying on of the business in any such manner would be guilty of an offence.
The cardinal difference in practice between this provision and section 424 of the Companies Act is that the members themselves in a close corporation are subjected to personal liability, whilst, in a company, the directors (and not the shareholders) would be at risk. The rationale for this is that, whilst the members of the close corporation are responsible for the carrying on of the business in it, the directors would have that responsibility in a company.
If a close corporation were deregistered while having outstanding liabilities, all members at the time of deregistration would be jointly and severally liable for such liabilities.
Furthermore, members and employees of the close corporation or any other person acting on behalf of it, can be personally liable for the debts of the close corporation where, for example, cheques, notices, invoices, receipts or any other documents issued by the close corporation do not state both the full name and registration number of the close corporation.[54] Such persons would be liable only if the close corporation fails to pay.
A close corporation may distribute net income to its members only if it is solvent and sufficiently liquid. Any distribution in breach of these requirements may be claimed by the close corporation from its members. Thus, in terms of the Act:
(a) any payment to a member by the close corporation, arising out of his or her membership, may only be made if, after such payment is made, the assets of the close corporation, fairly valued, exceed all of its liabilities and if the close corporation is able to pay its debts as they become due in the ordinary course of business and if such payment will in the particular circumstances not in fact render the close corporation unable to pay its debts as they become due in the ordinary course of business;
(b) any payment to a member in his or her capacity as a creditor of the close corporation or for remuneration for services rendered as an employee or officer of the said close corporation or for repayment of a loan or of interest thereon or payment of rental is not included within these restrictions;
(c) the term “payment” includes the delivery or transfer of property.[55]
It is important to note that the interests of the members can comprise the following:
(a) contributions by members as noted above;
(b) surplus on the revaluation of fixed assets; it is sound practice to distribute the available net proceeds out of a realised capital profit;[56]
(c) undistributed (retained) income or undrawn profits.[57]
The shareholder’s equity in a limited company is, however, more formally structured as follows:
(a) the issued share capital comprising shares at nominal value and the share premium account;
(b) the non-distributable reserves comprising the capital redemption reserve fund;
(c) the distributable reserves comprising the general reserve, the reserve for increased replacement costs of the plant and the unappropriated (retained) income.[58]
Thus, the basic approach followed by the courts is that the issued share capital of a limited liability company constitutes the capital fund on which creditors of the company can rely for the satisfaction of their claims. Thus, the capital fund consists of contributed or paid-in shareholders’ equity as contrasted with accumulated shareholders’ equity comprising both non-distributable and distributable reserves.[59] On the other hand, the part of the members’ contributions, which form part of the members’ interests in a close corporation, is almost equivalent to the contributed or paid-in shareholders’ equity with regard to a company.[60]
Although there has been heavy emphasis on decriminalising corporate wrongdoing with the introduction of the Close Corporation Act, there are still eleven sections that create criminal offences.[61]
In terms of section 82(1) of the Act, penalties can be imposed on a close corporation or a member or officer of the close corporation for the following offences:
(a) a contravention of section 52 (prohibitions of loans and furnishing of security to members and others by the close corporation), or section 56 (accounting records), or section 64 (liability for reckless or fraudulent carrying-on of business of the close corporation), a fine not exceeding R2000.00 or imprisonment for a period not exceeding two years, or to both such fine and such imprisonment;
(b) a contravention of section 58 (annual financial statements), a fine not exceeding R1000.00 or imprisonment for a period not exceeding one year, or to both such fine and such imprisonment;
(c) a contravention of section 20 (order to change name), or section 22 (formal requirements as to names and registration numbers), or section 22A (improper references to incorporation in terms of the Act), or section 23 (use and publication of names), or section 47 (disqualified persons regarding management of the close corporation), a fine not exceeding R500.00 or imprisonment for a period not exceeding six months, or to both such fine and such imprisonment; and
(d) a contravention of section 16 (keeping of copies of founding statements by close corporations), or section 41 (publication of names of members), or section 49 (unfairly prejudicial conduct), a fine not exceeding R100.00 or imprisonment for a period not exceeding three months, or to both such fine and such imprisonment.
In addition to the penalties that the court may impose as noted above, the court may order the close corporation, its members, officers or any other persons to perform an act within such period that the court may deem fit.[62]
Partnerships in South Africa comprise a minimum of two members, but no more than twenty members. A partnership does not exist as a separate legal person and therefore the partners are liable for the debts of the partnership and consequently own the partnership estate.[63]
Any change in the membership of the partnership will result in its dissolution. This is not the case in a close corporation. While a fiduciary relationship exists between the partners inter se, members in a close corporation owe their fiduciary duties to the close corporation itself. In addition, although a partnership must submit a joint tax return, the individual partners will be taxed individually. The close corporation, however, is taxed as a separate entity on the same scale applying to companies[64] and thus certain tax benefits would apply.
As a result of the unsuitability of the company form for smaller businesses, business trusts have become popular.[65] The business trust does not have separate legal personality, but the number of beneficiaries is not limited to ten or to natural persons as with a close corporation. This is something that needs to be considered when deciding which business form is the appropriate one in the circumstances.
It is possible to convert a company into a close corporation[66] and a close corporation into a company[67] provided that the requisite procedures are followed as set out in each section. The details governing each provision extend further than the purview of this article. Suffice to say that the stated intention of the legislature was to provide a simple, less expensive and more flexible legal form for small businesses, and, at the same time, afford them the advantages of separate legal personality.[68] Thus, in order to promote the formation of close corporations, one of the provisions of the Close Corporation Act was to permit the conversion of existing companies into close corporations.
The acceptance of this concept is evident by virtue of the large number of close corporations, both new and converted from a company, which have been formed to date.
It would be expected that one of the aims of any piece of commercial legislation is that it be ‘user friendly’; that is, easily understood and easily applied by those who operate their businesses based on its provisions. The numerous textbooks and loose-leaf binders which interpret Acts of Parliament affecting business bear testament to the reality that this is not in fact the case.[69]
The main objective underpinning company law must be to facilitate legitimate business activity.[70]
Company laws are in large part enabling in that they provide the process for the creation of companies, their operation and termination.[71]
One of the assumptions underlying the work of the Law Commission, in preparing the Companies Act of 1993, was that company law should be simple and cheap yet “flexible enough to meet the needs of diverse organisations”.[72] To this end company law was designed to cover all company forms, and the distinction between private and public companies was abandoned.
The most significant differences between the new Companies Act of 1993 and the Companies Act of 1955 can be stated as follows:
(a) the abolition of the concepts of par value and the nominal value of shares;
(b) the expression in the statute of a standard form of a company constitution;
(c) the provision of more detailed statements regarding the duties and powers of directors;
(d) the reform of the rules about share capital and the abolition of the doctrine of the maintenance of capital; and
(e) the provision of greatly simplified liquidation rules.[73]
Trading in its own shares by a company was allowed for the first time in New Zealand. Under special rules, a company is allowed to repurchase its own shares, provided that the company is allowed to do so by its own constitution. A solvency test was introduced to maintain sufficient assets for the company to pay its debts as they fall due. Thus, the legal concept of capital was removed.
From an accountant’s perspective, three major changes were implemented. These are the abolition of par value, the implementation of the solvency test and the ability to buy back shares previously issued by the company itself. The abolition of par value considerably reduced the accountability required when dealing with transactions in shares. The extensive body of law (both taxation and company law) that had been enacted over the years, with respect to the recording and application of the share premium reserves and discounts on the issues of shares, was almost overnight made redundant. The ease of recording seemed almost unbelievable since shares were issued and recorded as paid up for the amounts so paid.
The solvency test was seen by some as a radical move by the New Zealand law reformers. However, many supported the move because it was perceived to reflect commercial reality in that nothing should be distributed to shareholders unless “those who have priority (creditors) are protected”.[74] Whilst many Commonwealth jurisdictions reformed their corporate laws many times over the past 50 years, New Zealand had its one major reform in 1993. The Companies Act of 1993 has been described as “a momentous event”.[75]
The Companies Act of 1993 came about as a result of extensive research and consultation on company law. “A once-in-a-generation overhaul”[76] of the legal environment in which companies operate took effect on 1 July 1994. The Law Commission was charged with advising the Minister of Justice “on ways in which the law of New Zealand can be made as understandable and accessible as is practicable”.[77] One of the major themes of the reform was to make company law clearer and more intelligible for present and potential users.
The Act brought about great changes to the New Zealand business scene. It was expected that it would become easier to form and manage a company. Moreover, directors would be made more responsible and accountable for the activities of a company. Simplification was the order of the day. An example, which has a direct bearing on this article, is the removal of the distinction between public and private companies. Thus, the provisions governing small, medium and large businesses alike would be legislated for under just one Act.
The legislature in New Zealand did consider whether special legislation should be enacted to cover the circumstances of closely held companies. They noted that “closely held companies are expressly provided for in the United States of America”, and that Australia in 1988 had introduced the Close Corporations Bill.[78]
Under the CER (Closer Economic Relations) agreement with Australia, New Zealand and Australia agreed to move towards harmonisation of their laws. However, this is one significant example whereby each country has chosen to take a different path. Australia has retained the distinction between private and public companies. In Australia, a private company is a company which is owned by two to fifty people or entities, and the company name ends with Proprietary Limited (in its abbreviated form, cited as Pty Ltd). A public company in Australia is owned by five or more persons or entities, and the company name ends with Limited (in its abbreviated form, cited as Ltd). Share transfers are usually restricted for a proprietary company, whereas the shares of a public company are usually readily transferable.
Despite the decision to keep the distinctions between the public companies and the proprietary companies in Australia, the New Zealand legislature concluded that:
We have considered also the benefits of harmonisation with Australian law, ... there is little benefit to be obtained from harmonisation because the nature of closely-held corporations is such that they are less likely to have trans-Tasman trade or securities concerns.[79]
With the advent of the internet, e-commerce, global trading and the increasing access to international markets via the worldwide web, the aforementioned conclusion may no longer be valid or applicable.
With regard to the appropriateness of the provisions relating to private and public companies in New Zealand and other close corporation legislation, the Law Commission in New Zealand surmised that “the main objectives of any close corporation law are to provide flexibility”.[80] It would appear that the Law Commission believed that the Companies Act of 1993 (in draft at that stage) would be sufficiently flexible and that the requirement for a company to have at least one director (in terms of section 150) would not be sufficiently onerous to justify a separate Bill to cater for closely held corporations. It appears that the Commission further believed that a small company could tailor its individual constitution to specify the terms necessary to reflect the company’s special needs or preferences within the broad framework of the legislation being developed. Hence, the legislature decided to enact only one Act to cover all classes or types of companies.
Small and medium sized enterprises (SMEs) play a key part in the increase in commercial activities in New Zealand. SMEs are more predominant in New Zealand than in many other countries. They account for a high proportion of employment in New Zealand relative to other countries. They dominate the business scene in terms of numbers and contribute significantly to employment and the economy of the nation.
SMEs constitute the majority of all enterprises in New Zealand: 85% of New Zealand enterprises employ five or less full-time equivalent staff whilst 96% of enterprises employ 19 or fewer staff.[81] Thus, New Zealand is predominantly a nation of small enterprises, and more small enterprises are emerging annually. The number of SMEs (0-19 staff) increased 30.9% between 1994 and 1998. However, small firms (0-5 staff) have shown the greatest growth, with the number of enterprises increasing 35% between 1994 and 1998.
Statistics reveal that:
(a) SMEs account for 42% of all employees, and small firms account for 24%; and
(b) SMEs contribute 33% of the economy in terms of sales and other income, and small firms contribute 17%.
(c) births and deaths among small firms have increased 142% and 126% respectively over the last decade; these increases account for 95% of the total increase in enterprise dynamics in the economy.
Many of the small businesses use the company structure. The total number of registered companies in New Zealand in 1999 was 222,655 (206,775 in 1998). During 1999 new company registrations were 29,179 (up 22%). During the same period 942 companies went into liquidation and 264 into receivership. Clearly company formation was popular and the number of companies being formed has increased. The number of companies listed on the New Zealand Stock Exchange has remained fairly static at around 220 companies for many years. Only approximately 0.1% of New Zealand companies are listed on the nation’s stock exchange. Therefore, the majority of companies in New Zealand are SMEs and predominantly private in nature.
Even by international comparison, SMEs form a significant component of the New Zealand economy. SMEs are not wealthy. They cannot afford expensive litigation or registration costs. In 1997 the average profit for small firms was only $57,000 compared to an average of $6.7 million for enterprises employing 100 or more full-time employees.[82] The owners are also constrained by the amount of time and money that they can invest in searching for information and assistance. It is important to the economy and the owners of these small businesses that their structure is appropriate for their needs.
The Act in its introduction states as one of its main purposes:
To reaffirm the value of the company as a means of achieving economic and social benefits through the aggregation of capital for productive purposes, the spreading of economic risk, and the taking of business risks; ...[83]
Many sections of the Act are arguably not relevant to the needs of small businesses. Furthermore, it could be argued that the Act is still too cumbersome and complicated. As a result, this provides much work for accountants and lawyers (and others) at a relatively high expense to clients who own small businesses and who have neither the time nor the ability to comprehend the legalities and formalities contained in the 397 sections comprising the Act.
The company formation is often recommended by accountants as the best structure for a business in New Zealand where there is more than one owner. Upon the incorporation of the SME, each owner usually contributes capital into the business in return for being allocated a number of shares. However, there is now no statutory minimum capital required under the Act. Thus, in reality, the owners do not have to inject any capital (cash or assets) into the business, but can provide funds by way of a loan to the business. This practice is recommended because, as profits accumulate, the business is able to pay off the loan(s) without bringing about any taxation implications for the owners. The formation of companies is further enhanced in the case of SMEs, with five or fewer shareholders, as a result of their ability to register themselves under the Income Tax Act of 1994 as a Loss Attributing Qualifying Company.[84] The qualifying company is able to transfer losses for tax purposes to the shareholders of the company so as to offset any individual income in much the same way as is allowed in a partnership. It is not the purpose of this article to examine the taxation implications of the company structure.
“A company is born as a hollow legal shell”[85] but is a legal personality separate from its owners. Directors are appointed to manage the resources that are drawn from creditors and shareholders for trading purposes.
At least one shareholder and one director are required.[86] This enables a true one-person company to be formed. No upper limit is placed on the number of shares that can be issued. Prior to current legislation, many small companies were formed with just two shareholders in terms of a system where one shareholder would generally hold 99% of the requisite shares.
4. Formalities, Registration and Incorporation
The essential requirements to form a company are simple. That is to say, a name, a share, a shareholder and a director are all that is required.[87] The shareholders may or may not have limited liability. No constitution is required for a company.[88] If a company does not have a constitution, then the provisions of the Act will prevail.[89] Ross argues that the constitution provided by the Act would not be suitable for most companies.[90]
If a company at any time wishes to have its own constitution, then this is a relatively simple matter of passing a special resolution (without having to argue this change in court), provided that a 75% majority vote can be attained.[91] The constitution, once formulated and agreed upon, has to be delivered to the Office of the Registrar of Companies in Wellington for registration.
Owners of a company hold shares that represent their interest. Under the Act, shares are viewed as entitlement to benefits, such as dividends and voting rights. These entitlements are set out in section 36, but may be altered either in accordance with the provisions set out in the Act or by way of the company’s constitution.[92]
Since shareholders have no direct roles in the management of the company, there are no provisions for their removal.
6. Internal Relations
Internal relations are governed by a company’s constitution that was previously provided for in the Memorandum of Association and Articles of Association under the 1955 Companies Act. The constitution can at any time be altered, adopted or revoked by special resolution that requires a 75% majority vote. Furthermore, the directors must not enter a major transaction unless it is first approved by at least 75% of the company’s shareholders.[93]
7. Disqualifications
Any person can be a shareholder of a company, but certain persons are disqualified from becoming directors of a company. Directors can be disqualified under section 151 of the Act or removed in accordance with the provisions of its constitution.[94]
The following persons are disqualified from becoming directors:
(a) those under 18 years of age;
(b) undischarged bankrupts;
(c) those prohibited under sections 382 (persons prohibited from managing companies), 383 (court may disqualify directors) or 385 (registrar may prohibit persons from managing companies) of the same Act; and
(d) those who do not have the qualifications required under a company’s own constitution.[95]
8. Fiduciary Duties
Directors’ responsibilities are set out in detail in the Act (unlike in the 1955 Act where the duties of directors were not codified). The duties in the current Act explicitly include a number of duties such as:
(a) to exercise care, diligence and skill, which a reasonable director would exercise;
(b) to act in good faith and for the benefit of the company;
(c) to exercise powers for a proper purpose;
(d) not to use confidential information for private benefit; and
(e) not to allow the company to continue trading while the company is insolvent.[96]
For a small business the increased responsibilities of directors may therefore deter potential directors from using the company business form. Thus, although directors are given full power to manage companies, any breach of these duties could expose them to personal liability.
Annual meetings must be held each year unless 75% of the voting shareholders agree, by resolution, that an annual meeting is not necessary. However, special meetings must be held upon the request of not less than 5% of the voting shareholders.[97] A quorum for any meeting is achieved when those persons present and proxies held represent the majority of the voting power of the company.[98]
10. Loans to Members (Shareholders)
Companies are permitted to provide financial assistance to shareholders to purchase shares from the company or from other shareholders.[99] These provisions could be quite helpful for a small business when one shareholder wishes to be released from his or her shareholding.
11. Accounting and Disclosure
Part XI of the Act refers to accounting records and their audit. Only two sections (194-195) refer to the accounting records, whilst twelve sections (196-207) relate to the auditor and the auditing process. The lack of specific directions on accounting records can be explained because the Act relies on the provisions of the Financial Reporting Act of 1993, which covers all reporting requirements for entities reporting to its members. In section 194 (c), of the Companies Act, the directors are given the responsibility to see that the financial statements “comply with section 10 of the Financial Reporting Act”.[100] The Financial Reporting Act in turn provides detailed guidance on the preparation of financial statements and on the content on the auditor’s report.
The Financial Reporting Act of 1993 required, from 1 July 1994, issuers of securities, companies and some public sector entities to report on financial matters. Company financial reporting requirements are found in the Companies Act of 1993, the Financial Reporting Act of 1993 and the Securities Act of 1978. It has been noted:
Corporate reporting obligations in New Zealand are extensive and complex. They recognise the rights and needs of legitimate external users seeking information that helped them understand how a company has performed and is positioned.[101]
Good corporate governance is linked intimately to a good financial reporting system.[102] Thus, entities covered by the Financial Reporting Act are required by the same to comply with “approved reporting standards” (currently named the Financial Reporting Standards or FRS) as issued by the Accounting Standards Review Board (ARSB). The Financial Reporting Act provides strong incentives for complying with the FRS by allowing a court to impose fines to a maximum of $100,000 per director for non-compliance.
In order to reduce the requirements on some small companies two concessions are available:
(a) where shareholders unanimously agree, the exempt company has nine months from balance date in which to prepare its financial statements. Normally, companies have to prepare their statements within five months of the end of the financial year and an audit of those statements is mandatory.
(b) these companies need not appoint an auditor where all shareholders unanimously pass a resolution that one should not be appointed. This resolution will remain binding until the next annual meeting takes place.
Certain companies are exempt from the provisions of the Financial Reporting Act of 1993 in terms of section 2(1). Exempt companies currently are those that:
(a) have total assets not over $450,000; and
(b) have turnover not over $1,000,000; and
(c) are not a subsidiary of another company; and
(d) do not have subsidiaries of their own.[103]
Most SMEs will be exempt companies and the reporting requirements for them are much less onerous than for those companies that do not qualify for the exemptions. Exempt companies are required to prepare three statements. These are a position statement, a statement of performance and a statement of other information. Furthermore, the directions for the preparation of the same are contained in the Financial Reporting Order of 1994. Somewhat surprisingly, the financial statements of exempt companies do not have to comply with generally accepted accounting practice (commonly referred to by accountants as GAAP)[104] or give a true and fair view.
The veil of the company upon incorporation is designed to protect shareholders and directors from responsibility for acts done in the name of the company. The view is that a properly incorporated company should be able to rely on limited liability that comes with incorporation. However, if the company is found to be merely a sham or providing a facade to cover its true purpose, and this is proven in court, then the principle of limited liability can be set aside. Thus, in New Zealand, the courts are prepared to reveal the substance of underlying transactions that may not otherwise be transparent without lifting the corporate veil. It has been noted:
It is dangerous to interpret even recent pieces of legislation literally, especially if that interpretation will causes injustice, since New Zealand Courts are willing to do judicial gymnastics to ensure their interpretation of statutes will achieve justice in the individual case.[105]
13. Personal Liability
The company is a separate legal entity and therefore any liability is limited to company assets and any unpaid portion of the agreed share price. The shareholders are not liable for any company debts beyond the amount that they agreed to pay for the shares. However, directors may find that external investors, before any loans are made to the Company, frequently require personal guarantees to be undertaken by them.
However, should directors breach their fiduciary duties, the courts may pierce the corporate veil and hold them personally liable for any debts incurred as a result of this breach.
14. Payments to Members
Profits can be distributed to the shareholders as salaries or dividends from tax paid profits, or left in the company as retained earnings. A company may distribute its surplus (net income) to its members only if it is solvent. Any distributions to shareholders are subject to the solvency test.[106]
The solvency test was introduced to maintain sufficient assets for the company to pay its debts as they fall due. The legislation set out in section 4(1) of the Act comprises two tests that are required to be passed before a distribution to shareholders can be made. The two tests are:
(a) the company is able to pay its debts as they become due in the normal course of business; and
(b) the value of the company’s assets is greater than the value of its liabilities, including contingent liabilities.
Thus, the legal emphasis is on what remains in the company rather than what is removed.
More flexibility has been provided in that companies can reduce capital and make distributions provided that the solvency test is applied (and passed) so that creditors interests are protected. However, directors can arguably see the solvency test as an onerous requirement.
15. Criminal Liability
The Act incorporates reference to other Acts dealing with crimes, as in the section relating to qualifications of directors. In addition, throughout the Act and in sections 373 to 386 in particular, offences and penalties with respect to the dealings of a company are outlined. The intention appears to be that directors, and sometimes their delegated persons, should not be able to use the limited liability provisions to avoid responsibility.
The increased accountability and responsibilities of directors under this Act have been extensively argued elsewhere[107] and have been “blamed” as being responsible for the large increase in insurance protection costs for directors to cover activities that the directors may have undertaken in the course of their duties for a company.[108]
The main business forms available to small business owners in New Zealand are: sole trader, partnership, trust and company.
A sole trader is an unincorporated business form owned by a single person who receives all the profit and incurs all the liabilities. A problem with this business form is that the business does not have a separate legal form from the owner and thus the owner rather than the business is subject to taxation. Furthermore, the owner is liable for all business debts.
A partnership in New Zealand is formed by private agreement by two or more persons as co-owners of a business. In the absence of any agreement between the partners on how to run the business, the partners will be bound by the provisions as stated in the Partnership Act of 1908.
The partnership is not a separate entity. Thus, its profits are taxable in the hands of the individual partners and this is so whether those profits are distributed or not. Furthermore, the partnership property is owned in common by the individual partners. Since it is not a separate legal entity, the death or withdrawal of one partner will terminate the partnership, unless there are special conditions contained in the partnership agreement to ensure continuity of the business. Similarly, if a new partner is to be admitted to the partnership, the old partnership is to be dissolved and a new one begins.
A further problem with this business form is that a partner is responsible for and liable to pay the entire debts of the partnership, including other partners’ shares of the debt, if the other partners are insolvent. Additionally, each partner acts as an agent of the firm. Therefore, if one partner has implied or express authority to act for the partnership, then all the partners would be bound by any contract that is entered into.
A trust is an arrangement giving legal title to property to another as a trustee. The trustee controls and maintains the property for designated parties (beneficiaries). Family trusts are commonly used in New Zealand to protect the assets of small business owners. However, the restrictions of the assets, and the need to protect those assets, can curtail the activities of the trustees. For the more entrepreneurial and risky types of business, the trust structure would not seem appropriate.
A further problem facing the sole trader, partnership and trust is the need for them to consider under which Act they are to be governed with regard to their financial reporting. For example, the trust and partnership may find that they are bound to comply with the FRS if they prepare general-purpose financial reports, whilst at the same time being exempt from the provisions of the Financial Reporting Act.
A comparison has been made between two different legal systems in so far as corporate law is concerned. The two legal systems, the South African and the New Zealand systems, have been seen to be vastly different in many ways with respect to the legislation that is applicable to small businesses and their development. In this article, the major characteristics and features unique to each system have been discussed and analysed. It is evident from the discussions that neither system is absolutely perfect and that each system has attempted to overcome its own difficulties by enacting legislation, which may be unique to its own country’s principles and values.
However, the authors suggest that the South African Close Corporation Act, although not perfect, is an excellent piece of legislation for governing the development of small businesses. A close corporation is defined by the South African Act as having no more than ten members. The main reason why this Act works so well is because the formation, administration and operation of a close corporation are subject to a minimum number of formalities. This succinct and concise piece of legislation has been widely appreciated and accepted into the South African corporate environment. The proof of this can be easily found in the fact that a huge number of legal entities in the form of a close corporation have been established and registered in South Africa since the Act was enacted in 1985. The aim of the Act was to provide a simple and inexpensive form of business for a single member or for a few members without including the very burdensome and complicated procedures and legal requirements that are present in the South African Companies Act. At the same time, the close corporation is unlike a partnership, sole trader or trust in that it is accorded the full status of a juristic person with a legal personality distinct from its members.
If one now compares this with the status quo in New Zealand with regard to small businesses, it is evident that the New Zealand Companies Act of 1993 contains nearly 400 sections and nine schedules. This is so whether one is dealing with a closely held company with a maximum of generally around 20 members or shareholders, or a publicly listed company with a capacity for an infinite number of members or shareholders. It can therefore be well argued that the many sections in the New Zealand Companies Act are neither relevant nor appropriate to the needs of small businesses, especially if those small businesses comprise only a few members of family or friends. As a result, in order to comply with all the regulations and procedures, small businesses become easy prey to accountants and lawyers who can charge exorbitant rates. Thus, the real question that needs to be asked is whether it is really necessary to have burdensome and complicated legislation of this nature to regulate small businesses, especially for those companies that comprise only a few members. Is it not unnecessary to expect that a small business in New Zealand should have to be subject to the same rules and regulations that a large company is subject to? The South African Close Corporation Act is proof that less legislation for small businesses works well and is the way forward. What then may be the reason or reasons inhibiting the New Zealand legislature from embarking upon this route and thereby easing the corporate protocol procedures for small businesses? Would it be too much of a task for the legislature to overhaul and amend the legislation again when this was done only in 1993? Does the New Zealand Law Commission still believe that the Companies Act of 1993 is sufficiently flexible and that its numerous sections and schedules are not sufficiently onerous to justify a separate Act for small businesses even for those that are made up of a very few members? Does the New Zealand Law Commission further believe that small businesses could still appropriately tailor their individual constitutions so as to specify the terms necessary to reflect the special needs of their company, and to achieve this without being obliged to use the accounting or legal profession at a cost which may be horrendous and unnecessary if the Act was not so detailed and burdensome?
Another point worthy of consideration is that the South African Close Corporation Act does not allow shares to be issued amongst the members, as close corporations do not have share capital. Instead, each member receives an interest and the amount of that interest is determined by the respective contribution that that member makes. This is a much simpler system than issuing shares and receiving a dividend. Simply, the members’ interests are expressed as a percentage and, upon the close corporation making a profit, that member will be entitled to receive that percentage of the profits.
Furthermore, a court in terms of the provisions of the Close Corporation Act, and unlike the case of both South African and New Zealand companies, is expressly given the power to pierce the veil of corporate capacity. Thus, whenever a court finds that there has been a gross abuse of the juristic personality of the close corporation as a separate legal entity, the court may declare that the close corporation is not a juristic person and hold the member or members personally liable for the debt or debts of the close corporation.
Thus, a codification of the rules governing the lifting of the corporate veil has simplified and clarified the position as to when corporate abuse is unacceptable. There are no express provisions in the New Zealand Companies Act which permit a court to pierce the veil. However, the court will use its discretion to set aside the principle of limited liability in cases where there has been a proven abuse of the corporate device.
In summation, the authors highly recommend that the New Zealand law reformers take cognisance of the South African Close Corporation Act. The authors agree with the view that small businesses often have a
complex legal structure imposing unnecessary and unperceived legal costs ... (Furthermore) (t)he only effective means ... for small businesses is the creation of a simple corporate form ... the small business person could then opt to achieve virtually all of the benefits of incorporation but without all of the burdens”.[109]
Consequently, simplification and clarification of legislation is the way forward as it encourages small business development and growth. The South African Close Corporation Act has proven itself as something of a masterpiece. It has encouraged small business development throughout South Africa. It has, on the whole, been very successful in encouraging small business development amongst all of its peoples and has contributed as well to national wealth. Is this not what New Zealand needs as well?
[*] BSC, LLB, LLM (Cape Town), Attorney of the High Court of the Republic of South Africa, Lecturer in Commercial Law, University of Waikato.
[**] BCom (Hons) (Otago) MEc (New England), Chartered Accountant, Senior Lecturer in Accounting, University of Waikato.
[1] Goddard, “Company Law Reform-Lessons from the New Zealand Experience” (1998) 16 Company and Securities Law Journal 235, cited in (1998) 10 Corporate Law Electronic Bulletin 25-26 at http://cclsr.law.unimelb.edu.au/bulletins.
[2] Law Commission, “Company Law Reform and Restatement” Report No 9 (1989) Chapter 1, paragraph 32, 9.
[3] Freedman, “Small Businesses and the Corporate Form: Burden or Privilege?” (1994) 57(4) Modern Law Review 555, 578-579.
[4] Spiller, “Editor’s Introduction” (1999) 7 Waikato Law Review.
[5] Freedman, supra note 3, at 555-584.
[6] (1983) De Rebus 332, 333, as cited by Gibson, JTR et al South African Mercantile & Company Law (7th ed, 1997) 437.
[7] Venter (1984) JJS 110, as cited by Cilliers, HS et al Corporate Law (2nd ed,1992) 568.
[8] Cilliers, supra note 7, at 569.
[9] Ibid.
[10] Ibid, 570.
[11] Gibson, supra note 6, at 457.
[12] Close Corporation Act No 69 of 1984, s 2(4).
[13] Section 2(1).
[14] Cilliers, supra note 7, at 571.
[15] Close Corporation Act No 69 of 1984, s 13.
[16] Section 14.
[17] Section 12.
[18] Section 31.
[19] Section 30(2).
[20] Section 36.
[21] Section 44(1).
[22] Section 46(b).
[23] Section 44(2).
[24] Section 45.
[25] Section 47(1).
[26] Section 42(1).
[27] Section 42(4).
[28] Section 42(3).
[29] Section 43.
[30] Section 48.
[31] Companies Act 61 of 1973, s 38.
[32] Close Corporation Act No 69 of 1984, s 52(2).
[33] Section 56.
[34] Section 56(1).
[35] Section 56(3).
[36] Section 56(4).
[37] Section 57(1)(a).
[38] Section 57(4)(a).
[39] Section 58(1).
[40] Section 58(2)(a).
[41] Section 58(2)(b).
[42] Section 58(2)(c).
[43] Section 58(2)(d).
[44] Section 58(2)(e).
[45] Section 59(1).
[46] Section 60(1).
[47] Section 60(3).
[48] Section 61.
[49] Section 62.
[50] Companies Act 61 of 1973.
[51] Close Corporation Act No 69 of 1984, s 65.
[52] Cilliers, supra note 7, at 626.
[53] Close Corporation Act No 69 of 1984, s 63.
[54] Section 23(2).
[55] Section 51.
[56] Cilliers, supra note 7, at 636. The authors further state that unrealised capital profit which results from a revaluation should be distributed to members only when there is certainty that the solvency and liquidity of the close corporation would not be affected and that therefore the requirements of section 51 of the Act have been met. This is in accordance with the guidelines set out by the South African Institute of Chartered Accountants in the Close Corporations Auditing and Accounting Guide (41.10 fn note 10 on Statements and Guides of the SA Institute of Chartered Accountants).
[57] Close Corporation Act No 69 of 1984, s 58(2)(c).
[58] Cilliers, supra note 7, at 634.
[59] Ibid.
[60] Ibid.
[61] Ibid, 629.
[62] Close Corporation Act No 69 of 1984, s 82(2).
[63] Cilliers, supra note 7, at 572.
[64] Ibid.
[65] Ibid.
[66] Close Corporation Act No 69 of 1984, s 2.
[67] Companies Act 61 of 1973, s 29C.
[68] Cilliers, supra note 7, at 569.
[69] Watson, “Coleman v Myers under the Companies Act 1993” (1995) 1(3) New Zealand Business Law Quarterly 168.
[70] Ellis, “Company Law in the 1990” in Farrar, J H (ed) Contemporary Issues in Company Law 5.
[71] Law Commission, Company law reform and restatement Report No 9 (1989) 2.
[72] Ibid, 4.
[73] Ibid, 1-2.
[74] Comments reported as made by Elizabeth Hickey in Fallow “Companies Act: a radical revamp”, Waikato Times, 18 February 1994, 15.
[75] Grantham, “When does unanimous consent not have to be unanimous?” (1995) 191) New Zealand Business Law Quarterly 42-45.
[76] Fallow, supra note 74, at 15.
[77] Law Commission, supra note 71, at 30.
[78] Ibid, 56-57.
[79] Ibid, 57.
[80] Ibid, 56.
[81] These figures exclude most of agriculture and some industries within business, community, recreational and personal services, which include many SMEs and economically insignificant enterprises.
[82] Statistics from the 1998 Annual Enterprise Survey conducted by Statistics New Zealand.
[83] Introductory statement to the Companies Act 1993.
[84] Income Tax Act of 1994, ss HG 3, HG 4 and TAA s 37, as cited in CCH New Zealand Master Tax Guide 2000, 730.
[85] Ross, M, Corporate Reconstructions: strategies for directors (1999) 65.
[86] Companies Act 1993, s 10.
[87] Section 10.
[88] Section 26.
[89] Section 28.
[90] Ross, “Re-registration - seeking commonality” (1993) Accountants’ Journal 28.
[91] Companies Act 1993, s 32.
[92] Section 36(2).
[93] Section 129.
[94] Section 156.
[95] Section 151(2).
[96] Section ss 131 to 149.
[97] Section ss 120 to 122.
[98] First schedule 4(2).
[99] Sections 76 to 80.
[100] Section 10 of the Financial Reporting Act obliges the directors of every reporting entity to prepare financial statements within five months after the balance date of the entity or within a shorter period after the end of its financial year or balance date.
[101] J Todd and J Harvey in the foreword to Annual Report Presentation: Price Waterhouse Holdings (NZ) Limited (1997).
[102] Lowenstein, “Financial transparency and corporate governance: you manage what you measure” (1996) 96 Columbia Law Review 1335.
[103] The dollar limits are altered from time to time by Order in Council.
[104] GAAP refers to the approved financial reporting standards endorsed by the Financial Reporting Standards Board or, in absence of any standard, those practices having approval of the New Zealand Institute of Chartered Accountants.
[105] Watson, supra note 69, at 168.
[106] Companies Act 1993, s 52.
[107] Dugan, “Variation of Directors’ Duties under ss 131, 133 and 137 of the Companies Act 1993” (1997) Companies and Securities Law Bulletin 96-100; and Crombie and Samujh, “Negative Messages as strategic communication: a case study of a New Zealand company’s annual executive letter” (1999) 36(3) Journal of Business Communication 229-246.
[108] Spisto, “D and O insurance for directors and officers – what is this and is it a viable option in South African law? (1996) 29 CILSA 61 – 70.
[109] Hicks, “Corporate Form: Questioning the Unsung Hero” (1997) Journal of Business Law 329, 306-330.
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