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Advantages of incorporation:

Limited liability therefore limits risk.

Board of directors are the main agents of a company.

Fiduciary law - when the principal is vulnerable to exploitation. The agent (fiduciary) is held to a
higher standard.
Know the distinction/transition between a right granted by the government to something
separate and independent from the government and generally enabled e.g Eskom (option 1)
Common law juristic person (option 2)- habitually behaving the same way as a juristic person.
As soon as profit is made and paid to members, you have to incorporate a company.
Explain companies act in your own words. Bill of rights apply as well, to the extent appropriate.
Know key features of juristic personality
Limited liability is included in the Act, section 20. The shareholders are liable to
the extent of their contribution.

Could contract in different capacities.

If the directors were negligent, the shareholders cannot take legal action against
the directors because the directors owe their duties to the company, not the
shareholders. Only the company can take legal action. If directors act negligent, the
shareholders does not directly suffer. The company may take action towards the
directors if the directors caused loss for the company. Shareholders can ensure that the
company (proper plaintiff) can take legal action against directors.

Shareholders have no automatic right to manage, as opposed to a partnership.

Profits belong to the company, until dividends are declared to the shareholders.

Know basic facts of salomon case and court firmly confirmed that he still had separate
protection as an entity. He was a one man company.
Dadoo: Indian person. He acquired land as a company (he wasn't allowed to as an Indian).
Court again confirmed. This is the authority used.

Principles of Agency
The principal is heavily reliant on the agent. There are two contracts. One is a silent one
between the agent and principal (this is known as a fiduciary contract i.e. a contract of trust) .
The other is between the principal and 3rd party.
What must be in place for the agent to succeed in binding the agent? When are you authorised
to act on someone's behalf?
The agency of agreement is known as the mandate
Empowered agent - can incur rights and responsibilities on your behalf
Unempowered agent - can't incur without authority
Authority is important. Agent could be personally liable for exceeding authority via the implied
warranty of authority.
How to give authority to the agent?
Express authority - can be either written or verbal. The scope of the authority
should be specifically mentioned (specific power of attorney, could be general power) .
Better to do it in writing.
Implied authority - This is derived from the facts. Never actually said or written.
The conduct of the party must be such to the rules of common sense. This is when it will
allow us to come to no other conclusion. The bystander test is used. When managing
someone's business, there is implied authority to do transactions which are reasonably
incidental.
Ratification - Happens after the facts. Can be done tacitly i.e. by doing nothing.
With the first 3, there is essentially authority.
Ostensible authority - when there is no authority given. No ratification is given.
Creates a reasonable impression that authority was given. The principal must create this
impression.
1.
2.
3.
4.

There must be false representation/omission


It must be made by the principal
The 3rd partys reliance must be reasonable and mislead
The 3rd party must have suffered a loss

Similarities between implied and ostensible authority.

Operation of law - Implied authority by law

*estoppel - another term for ostensible

Fiduciary law
The fiduciary often has more knowledge than the 3rd party (beneficiary). Must act in the best
interest of the person's assets they are managing. Must avoid conflicts of interest. Must be
unscrupulously honest.
Directors and partnership are common examples of fiduciary relationships. Certain duties of an
employee may make such a relationship as well.
How to determine if it is a fiduciary relationship?
1. Scope or discretion of power. If the relationship is such that you really just
following instructions, it is unlikely.
2. If the discretion can be exercised under supervision, it is unlikely. If it affects legal
or practical interests of beneficiary then it is likely.
3. If the discretion really impacts the beneficiary
A discretion which can be exercised unilaterally which will legally or practically negatively impact
the beneficiary.
There are duties associated with a fiduciary relationship. See slides. The court enforces these
very strictly. Keep personal accounts separate (State vs De Jager)
It is important to remember who is the fiduciary and the beneficiary.
Trustee - beneficiary
Director - company (not to shareholders)
Partner - fellow partners (not to partnership)
Members of cc - to the cc as well as fellow members
There are two sets/categories of duties:
1. Fiduciary duties (act in good faith etc)
2. A duty to act with care and skill
Causes of action:
1. The cause of action is a breach of fiduciary duties (much more robust)

2. The cause of action is delict.


Cannot make it too onerous for directors.
Sole proprietor

Owned by one natural person, no legal distinction between owner and business
A trademark etc would form part of his personal state
There is only one estate. Everything belongs to him.

The unincorporated partnership

It's a contract between two people at least.


Legal relationship from an agreement, not a separate entity.
Each must contribute
There must be benefit for all

Also have the essential terms (which decides the type of contract), implied terms (after essential
are met) and incidental terms (which can change implied terms)
Essentialia
1. Each party makes a contribution
Any asset which has some monetary or commercial or appreciable value, even
skills or intellectual property. Value does not need to be exactly determined. A loan
cannot be considered as such, as you are acting in a different capacity as a creditor.
Perhaps an interest free loan could be.
Could also be the use of an asset
Could also be a future contribution
2. Business must be carried on for joint benefit of all partners
Business - anything which occupies time, attention and labour with the eye of
making a profit
SA law does not recognize the partnership where there is one or more of the
partners sharing in losses only, they must all share in profits.
3. Objective to make it a profit
Just aim to make one, could possibly not actually make one.
Profit can also mean saving money/any financial benefit ie not limited to only
making money
4. Contract should be legitimate/valid
For us to identify contract, should have been valid when looking at the essentialia
The court will also always look at the ( intention) of the partnership, perhaps it was an
employee relationship or they don't wanna share profits.

Other legal requirements


Valid contract, meet all requirements for validity
Legality? Cannot have a partnership by aiming to make profits by doing
something illegal.
No agreement between actual partnership and 3rd party.
They are also jointly liable.
After whatever is contributed, they own in joint and undivided shares. As well as any other
profits after. Hence, there is a change in ownership. Not the same as the partnership owns the
assets, but the partners.
This is reflected in the partnership fund, which is owned jointly by all partners.
Two viewpoints regarding partnership as separate legal entities
1. Entity theory: when you treat the partnership as a separate legal entity
2. Aggregate theory: when you do not treat the partnership as a separate legal
entity. Exceptions to the rule:
How we treat partnerships when they're insolvent
When there is litigation (either for or against)
In terms of VAT
When we sequestrate a partner, the Insolvency Act tells us that when any one (individual) of
these estates becomes insolvent, we sequestrate (because they are natural persons,
company=liquidate) them all separately but simultaneously. The partnership fund is not
sequestrated.
Personal creditors of the partner who is sequestrated must be paid first after his assets are
realised. Then the partnership creditors are paid off by selling off all assets in the partnership
fund. If there is no money left, then the other partners estates (who were not insolvent) will be
sequestrated.
Someone might stand surety/security to be sequestrated first.
Litigation - A partnership can see and be sued in its own name.
VAT- A partnership is allowed to register as a VAT vendor.
Two juristic entities can form a partnership
Types of partnerships

1. Extraordinary partnerships
Universal partnership - A partnership of all property - the partners agree to pool
together in partnership all of their assets, past present and future. More in the context of
private relationships etc.
Silent partnership - One of the partners stand in the background and is not
actively involved in the management and does not want to be exposed to the risks as a
member. He is not liable to 3rd parties. However, his fellow partners can still hold him
liable for his share of the debt.
Partnership en commandite - commandatarian partnership. Same as silent partner, but he is
only liable to his fellow partners to the extent of a pre-agreed amount. Hence, share less
aggressively in profits.
Rights and duties of the partners
Rights
1. Share profits
Firstly, as the agreement, usually aligns with contributions or skill set, or
bargaining power.
Secondly, is the agreement is silent, then it's according to each partner's
contribution.
Thirdly, divide profits equally if cannot determine contribution.
2. Participate in a management
Not the case with a company, as it is not separate entities. Ownership and
control vest in the same people. Can exclude partners to the extent that they can still
oversee their own assets.
The silent partners and commandatarian partners cannot manage at all. Must not
manage to the extent that a 3rd party will be mislead.
3. Inspect partnership books

4. Right to distribution of assets upon dissolution


As you own the assets jointly.
Duties
1. Make contributions
2. Share in losses
Same as profits

3. Care and skill


Separate from fiduciary duties. The degree of care and skill is fairly low under
delict. The test for care and skill is subjective. A partner must look after the partnership's
affairs and assets with the same degree of care and skill that he displays when
managing his own affairs.
4. Accept and fulfillment obligations of partnership agreement
5. Acquire benefits for partnership
6. Guard against conflict of interest
7. Duty of disclosure
The last 3 should be done in good faith, as they are fiduciary duties as they apply to
partnerships.

The partnership
Technically can't contract on behalf of the partnership as it is not separate legal entity. Principal
as yourself and agent on behalf of your partners
Contracting on behalf of your fellow partners. They will be joints creditors etc.
Requirements
1. Valid agreement between the representing partner and the 3rd party +
partnership. Assume this is valid.
2. Authority. Express, implied, ratification,ostensible or by law etc
See authority discussion. Forms of authority etc.
Authority implied by law - mutual mandate is when partner binds others if
contract is in scope of the business. This is known as authority implied by law. Look at
the facts, how business behaved in the past and then other partners in same
market/industry. If outside of scope, doesn't mean other partners might not be bound, as
their might be other forms of authority.
Implied authority is when the circumstances say so. Implied by law is a legal rule.
3. Contract intention must be concluded in the name of the partnership.

A trust

A legal relationship, created in a trust deed by a founder whereby certain assets are handed
over to be controlled and managed by a trustee to the benefit of a beneficiary.
Parties to the trust:
1.

Founder
Sets up the trust
Donates the assets that form the trust property (ordinary trust)
His role terminates here, but he can remain involved. Can make trust irrevocable.
He can also be appointed as a trustee.

2.

Trustee
Often appointed by the founder
Stated in the trust deeds
Charged with managing the assets

Duties: only what's on slides


They own the assets in their capacity as trustee
They have all real rights to the assets as capacity as trustee
He contracts on behalf of the trust as capacity as trustee
He is also held liable in his official capacity (Mr. Y in his capacity as trustee) to
the 3rd party under delict and to the trust (if there is a loss) ie the beneficiaries. They
have personal rights to get the duties from the trustee, if the trustee acted negligently
(not enough care and skill) and there was a loss to the trust,then they have a claim in his
personal capacity.
Execute against him as trustee
Good to appoint an independent trustee.
For the protection of the trust, get authorisation the master of the high court to
transact on behalf of the trust. Each trustee gets it once at the beginning.
If he does not get authorisation, the contract is void. It can't be ratified.
The Trust Property Control Act regulates trusts broadly and administratively.
Regulated far less aggressively than companies.
Keep assets separate and account.
Much higher, objectively determined reasonable level of care and skill
3. Beneficiaries
Entitled to benefit under trust deed
Personal right to the benefits conveyed by the trust deed
The right is either vested (precise, immediate) or discretionary (the trustees may
from time to time depending on financial situation to give gracious amount)

Types of trusts

Not a separate legal entity, but have many features of it because of its flexibility.

Takes care of the interests of those who absent, vulnerable or dead. Mechanism
where control of assets is given to a caretaker.
Two main types of trust:
1. A living trust (inter-vivos) an ordinary trust
2. A trust because of death (mortus causa) a testamentary trust.
Ownership of the assets vest in the trustees as his capacity as such.
3. A bewind trust. A beneficiary-who-own trust. When you want the beneficiary to
own the asset, but it is managed by the trustee.

Could be used to make business as well

The law sees the trustee as two separate owners of two separate legal estates.
He can be sued if something is wrong, in his official capacity as trustee. If he refuses to
comply, go to sheriff who can only attach assets that the trustee owns in his official
capacity.

Requirements of a trust
1. Founder must intend to create a trust. Either done by a will and testament or by a
trust deed.
2. The trust property must be clearly defined.
3. The beneficiaries must be either ascertained or ascertainable. Can be
impersonal objects.
4. Your trust object must be lawful.

The Business Trust


You can mimic the structures of a company using a trust
The powers of the trustee are different. They're given powers to carry on
business and trade.
The beneficiaries are able to sell their interests
The clear exception is the way the trust is taxed. The rate is 40%. Not regulated
as much.
Application question:
1. Answer actual question and identify problem
2. What is the legal principle or rule, mention requirements etc

1. Although is not considered a separate legal entity, the rules of court make a
practical exception when litigating against a partnership therefore can sue partnership,
who will be sued as the defendants. Who is liable? While the partnership exists, we say
that the partners are jointly liable. This means that the creditor must sue G & B together
for each part of his debt. After the partnership terminates, the alternative to this is joint
and several liability. This means that the creditor can choose to do the above, or sue G
or B for the full amount (most efficient way to go for the wealthiest person). G can then
go to B for his share of the losses. This is the right of recourse.
2. Although is not considered a separate legal entity, the rules of court make a
practical exception when upon sequestration (according to the Insolvency Act) we
sequestrate all the estates separately and simultaneously. They must first deplete the
partnership fund. After that, they can look to the estates of the each partner.
3. The effect will be that the original partnership will terminate and a new one will
form, as partnership has no perpetual succession
4. This is a silent/commanditarian partnership
5. Contributions, if cannot be monetary ascertainable then equally.
6. The one partner acted as an agent on behalf of the others, hence did it have
legal consequences for the other 3? There are three requirements to do so: valid
contract (assumed valid), agent has authority (list the sources of authority - no express
and ratification - start with implied by the law ie mutual mandate ie each partner has the
inherent authority to bind the others as long as it's in the scope of the business. Here it is
comfortably outside the scope. If unsure, look at history and other businesses in
industry. Could be authority implied by the circumstances. Could be ostensible authority
if mutual mandate fails. This is harder to prove. Know what estoppel is and know the the
principal creates the false impression), contract concluded in name of partnership.