Although close corporations exist independently of the individuals behind them, it is not a foregone conclusion that these persons are necessarily absolved of personal liability.
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123RF.comIn the recent judgment of Crous v Wynberg Boys High School and Others [2025], the Supreme Court of Appeal (SCA) provided clarity on whether, in terms of 65 of the Close Corporations Act, No. 69 of 1984 (Act), all members of a close corporation are automatically jointly liable when a gross abuse of juristic personality of the close corporation occurs.
Member resigned
Herman Crous and his daughter, Lorraine Fourie, were members of Eastco Travel CC (the Travel Corporation) with Crous holding 49% of the members interest and Fourie holding the remaining 51%.
Wynberg Boys High School (WBHS) alleged that it fell victim to a fraudulent business scheme conducted by Fourie through the Travel Corporation whereby Fourie offered discounted flights on major airlines. Once the client accepted the offer, Fourie required an upfront payment and after the tickets were purchased, she would cancel the reservation and misappropriate the amount refunded by the airline.
Crous maintained that he was not involved in the running of the business and submitted that despite “resigning” as a member in 2014 and Fourie undertaking to remove his name from the official records, it came to light in 2023 that he was still a member of the corporation.
High Court
Notwithstanding the High Court seemingly accepting that Crous was not party to the gross abuse of juristic personality of the Travel Corporation and the fact that he was not linked to the scheme, the High Court noted that:
- Crous should have ensured that the CIPC records were updated,
- from a third party’s perspective he was a member and as such had a fiduciary duty to make sure that the corporation was run in a manner that was not detrimental to members of the public,
- ignorance of the fact that his letter of resignation was legally ineffective was not a defence, and
- it was commonly understood that registered members of a close corporation are liable for the actions of the close corporation.
The High Court accordingly found that the Travel Corporation was deemed not to be a juristic person in respect of its liability towards WBHS, and that he and Fourie had unconscionably abused the juristic personality of the Travel Corporation and were jointly and severally liable for the actions of the Travel Corporation in relation to WBHS.
Raphael Chitambira 6 May 2020 Supreme Court of Appeal
On appeal Crous submitted that mere membership of the Travel Corporation was insufficient to impute liability to him for the alleged fraudulent scheme conducted through the corporation.
As a general rule (section 2(3) of the Act), mere membership of a close corporation does not lead to liability in and of itself, however, sections 63, 64 and 65 of the Act provide exceptions thereto.
The SCA noted that given the general rule, the exceptions demonstrate that in order to impute personal liability to members and to persons, who need not be members, that member or person must have contributed to the impugned conduct.
The court concluded that to impose liability on a member or other person in terms of section 65, as relied on by WBHS, the conduct of that person must amount to gross abuse of juristic personality or must have contributed thereto.
Berné Burger & Daniel Vale 4 Sep 2018 Mere membership, the court added, was not sufficient.
Section 65 states that “[w]henever a Court […] finds that the incorporation of, or any act by or on behalf of, or any use of, that corporation, constitutes a gross abuse of the juristic personality of the corporation as a separate entity, the Court may declare that the corporation is to be deemed not to be a juristic person in respect of such rights, obligations or liabilities of the corporation, or of such member or members thereof, or of such other person or persons, as are specified in the declaration, and the Court may give such further order or orders as it may deem fit in order to give effect to such declaration.”
The SCA therefore found that the High Court had erred in finding that mere membership was sufficient to impose liability on a member in terms of section 65; and had further erred in finding that mere membership of a close corporation imposed a fiduciary duty on a member to ensure that the affairs of a close corporation are managed in a manner which is not detrimental to members of the public, adding that section 42 of the Act sets out clearly that the fiduciary duty owed by members is to the close corporation itself, not to external parties.
The SCA therefore found that the High Court had incorrectly found Crous to be personally liable and Crous’ appeal succeeded.
Mere membership does not give rise to personal liability
Although the SCA has concluded that mere membership of a close corporation is not sufficient to impute liability on its members, matters such as these are determined on a case-by-case basis and adequate care should always be taken when conducting business through a close corporation or other corporate entity.
