Often as an attorney involved in debt recoveries I have asked a client what type of business their debtor is and I am shocked at the number of times I get the proverbial shrug of the shoulders.

It is very import to know exactly what type of business animal you are doing business with. There are basically six main business creatures that are found in the South African business jungle.

These are:

• Public Companies (represents itself by having the word "Limited" or the abbreviation "Ltd" after its name);
• Private Companies (which is denoted by the use of the words "proprietary limited" or "(Pty) Ltd" after its name);
• Close Corporations (which is denoted by the use of "CC" after its name);
• Trading Trusts;
• Partnerships; and
• Sole Proprietorships.

The first three entities referred to, namely the private company, the public company and the close corporation ("incorporated businesses") are all creatures of statute (in other words they existing by complying with an Act of Parliament) and have limited liability.
For you as a creditor the words limited liability are swear words of the crudest kind. What is meant by limited liability is that the incorporated business has a separate legal personality to that of its shareholders/members or directors. Furthermore the liabilities of the incorporated business ( i.e. your unpaid account amongst other things) is limited to that separate personality of the incorporated business. At the end of the day the shareholders/members or directors or are not generally personally liable for the debt of the business.

What this means is that generally if an incorporated business which owes you money ceases trading or is liquidated you as creditor will have no right of recourse against the members/shareholders or directors. I have seen many very irate creditors who have been left with a major financial setback while the members or directors of the debtor incorporated business have been left personally unscathed and/or have started a new business entity conducting the same line of business as the one which was indebted to the creditor. Admittedly there are provisions in the statutes that provide for personal liability in the event of reckless and negligent trading. But to prove this is very difficult as it involves the subjective state of mind of that the shareholders, members or directors were trading in when the debt was incurred, which is extremely difficult to prove from a legal perspective.

Trading trusts are partly creatures of the Common law ( that is the law that we have inherited from our Roman-Dutch/English law heritage) and partly creatures of statutes. Strictly speaking though they are not separate personality in the same iron cast manner of incorporated business. However the law has come to accept that there are factors which give rise to the trading trust being virtually a separate personality, much the same as an incorporated business. In fact this area of law is very grey and because of that the question of trustee liability in the case of trust is probably even more problematic in the case of incorporated businesses.

Partnerships are a grouping of 21 or less people (there are certain professional exceptions to the number limit) who are operating together as a business for purposes of making profit and are not an incorporated business. In such a case the partners are personally liable for the debt of the business save that while the partnership is still in business a creditor is obliged to proceed firstly against the partnership business assets before proceeding against the partners personal assets. There are circumstances where partners are not liable for the case silent or sleeping partners. In such partnerships the silent partner who is not known to the world at large is not liable for the debts of the partnership.

The final business entity is that of the sole proprietor which is a single businessman who trades in his own name or simply uses a trading name. In such circumstances the sole proprietor is personally liable for the debt of the business. In other words a creditor has a judgment against the business could proceed against the personal assets of the debtor such as his home and personal belongings.

Therefore you can see the importance of knowing exactly who you are considering granting credit to. The obvious question is what do you as a creditor do when faced with the prospect of doing business with a company, close corporation or even a trading trust for that matter. Firstly the risk varies according to type of business entity that you are doing business with. For example the risk of doing business with a public company is a lot less than doing business with a close corporation. The public company being usually, but not necessarily a Johannesburg Stock Exchange listed company, where the public owns shares, therefore it has some sort of capital base. This does not mean that businesses are immune to going under but probably less likely. The close corporation on the other hand is the most simple form of corporate business entity in the country, which was introduced in 1984 to accommodate small business with the "benefits" of limited liability in the same way that a company does without the burden of extensive and complicated administration procedures that are associated with companies. Being smaller and more prolific, the risk factor with close corporations is a lot higher .

The most obvious way of circumventing problems associated with limited liability and of getting some or all of the members/shareholder or directors to sign a suretyship on the debt and the company or corporation or trust. There are other methods of securing the debt the assets of the business and these possibilities should be explored with your attorney.

So please remember it's a jungle out there and some of the animals you encounter in the business environment are a lot more slippery than others.


Brett Bentley
Bentley Attorneys, Durban