THE ESSENTIALIA OF PARTNERSHIPS

The essentialia of a partnership were set out in the case Joubert v Tally and Company 1915 some time ago.  The four essential elements are:

1)     Each partner contributes something to the partnership, whether it be money, skills or labour.

2)     The business should be carried on for the joint benefit of the partners

3)     The objective of the partnership should be to make a profit

4)     The contract between the parties should be a legitimate contract.

The contribution made by each partner does not necessarily have to be of a monetary nature.  As long as such contribution has commercial value, it is acceptable.

With reference to the second element, “business” is defined as “anything which occupies the time, attention and labour of a person for the purpose of profit”.  Whether the business activity is of an indefinite nature or aimed at completing a single, particular project, a partnership can exist.  The concept of “joint benefit” illustrates that a partnership can only exist if all the members thereof benefit from the business activities of such a partnership.  Therefore it is deduced that each partner must share in the profits as well as in the losses of the partnership.  One partner cannot benefit from the profits while another is responsible for all the losses.  The latter concept is, after all, not recognised in South African law.

In the case Ally v Dinath 1984 (2) SA 451 (T) it was reported that the following would suffice as “carrying on business to make a profit”:

1)     a pure economic/financial profit motive

2)     a joint effort in order to save costs

3)     to provide for the livelihood and comfort of the parties and their children

4)     the purpose to accumulate an appreciating joint estate

The above clearly excludes charitable and welfare institutions as well as sports clubs from the partnership list.

The agreement concluded by the parties to a partnership must be valid.  The agreement must contain the essentialia of a partnership.  Furthermore, the parties involved must have the intention to establish a partnership.  Should the agreement not be indicative of the nature of the relationship between the parties, the subsequent conduct of the parties can be referred to. This may very well paint the true picture of the parties’ intention.

Although the parties may agree, whether it be by verbal agreement or in writing, on certain formalities concerning the parties and the relationship between them, should the essential formalities not be complied with, no partnership would have been established.

In South African law, a partnership is viewed according to the aggregate theory of partnership, which means that a partnership is regarded as a collection of individuals and not an entity.  Therefore, a partnership does not enjoy legal personality, as it is the individual partners in their personal capacities who are co-owners of assets and jointly and severally liable for losses.

One of the exceptions to the lack of legal personality of a partnership is in the case of insolvency of the partnership estate.  According to Section 13(1) of the Insolvency Act 24 of 1936, if the partnership estate is sequestrated by a court, the personal estate of every partner will simultaneously be sequestrated.

With regards to the personal liability of the individual partners the following applies:  each of the partners is jointly and severally liable for all partnership debts.  The case of Geldenhuys v East and West Investments (Pty) Ltd 2005 (2) SA 74 (SCA) is relevant in this instance.  The facts of the case in short are that the appellant, an attorney, was ordered by the court to pay his previous landlord a sum of R36 761.10 in respect of arrear rental.  The attorney’s partner had settled a larger amount with the landlord.  The question which then arose was to what extent the appellant was liable?  The court ruled that the partners could be held jointly and severally liable for the full amount of the disputed debt and therefore the landlord could, and should, sue both the partners.  Subsequently, judgement was given against both partners.

During the existence of the partnership, the partners are co-debtors and jointly and severally liable for all partnership debts.  Creditors must sue all of the partners and cannot institute action against only some of the partners.  However, as soon as the partnership is dissolved, this rule falls away and the creditors may seek satisfaction for their claims from the individual assets of any of the partners.

 

A SPANNER IN THE WORKS – Ensure that your company secretarial matters are up to date

An event worth popping the champagne for is one where you finally conclude a property sale transaction by signing your name on the dotted line.

How annoying would it not be if you should find out that there is a major spanner in the works (that you were blissfully unaware of) which will delay the conclusion of the transfer of a property with almost 2-4 months?

This, unfortunately, can happen to both the seller and the purchaser.  The obstacle referred to here is the silent deregistration of a company by the Companies and Intellectual Property Commission (“the CIPC”) due to outstanding annual returns.  That such an insignificant misstep can have such serious repercussions, is hard to imagine.  It is definitely not a pleasant experience to find out that your company does in fact not exist, even if the situation is just temporary.  The result is that your company can not be party to any agreement while it has a “deregistered status”.

Should you be in a position where your company, as the seller or the purchaser, intends to enter into an agreement for the sale or purchase of a property, ensure that all your company’s secretarial matters are in line to avoid unnecessary delays.

If, after further investigation, you come to learn that your company has actually been deregistered, here is what you need to do:

If your company does not have a designated person attending to the company secretarial work, you can appoint an independent expert or company to manage this process on your behalf.

Firstly, you need to inspect and ensure that the names of all (and only) the current directors of the company are displayed on the CIPC’s records.  If this is not the case, the CIPC will request the signatures of all the directors on their records before making any changes to your company profile that you may request.  This becomes problematic if one or more of the directors might have died or has resigned from the board of the company.  If it is established that the list of directors on the CIPC’s records does not accord with the list of current directors of your company then one has to submit a C.o.R 39 form in order to notify the CIPC that the composition of the board of directors have changed.  This process takes approximately 6 – 8 weeks.

Only once you receive confirmation that the above changes have been effected (if applicable), you may launch an application to have your company re-instated.  This process also takes approximately 6 – 8 weeks to conclude.

Upon receipt of confirmation that your company has been re-instated and is again active, the value of the outstanding annual return can be determined, after which same can be submitted to the CIPC.

As soon as the above procedures have been completed and your company secretarial matters are up to date, you are entitled to enter into an agreement with another party for the sale or purchase of a property, or any other agreement for that matter.

We appreciate that the periods mentioned above (6-8 weeks) are fairly lengthy.  The processing time is solely dependant on the workload, processing time and backlog of the CIPC and is unfortunately not in our hands.

All the abovementioned procedures can be done and managed through our correspondent.  Please contact us at 021 461 0065 or alternatively at legalassist@oostco.co.za for more information in this regard.

 

BUYING YOUR PROPERTY IN A TRUST: IS IT REALLY WORTH IT?

To buy or not to buy, that is the question.

A trust is a legal entity with its own distinct identity. It has the contractual capacity to acquire, hold and dispose of property and other such assets for the benefit of its nominated beneficiaries. All trusts are governed and administered in terms of the Trust Property Control Act, and formed and governed in terms of a trust deed, a written agreement concluded between the trustees and the founder of the trust.

Perhaps the most significant purpose for establishing a trust is the separation of ownership, which is often desired for reasons including asset protection, risk mitigation and limiting ones tax liability. In order for the trust to transact, a trustee(s) are duly appointed in the trust deed who are thereby authorised to act on behalf of the trust. A trustee may act on behalf of a trust provided that he has been duly appointed to act in this capacity in the trust deed, that the trust has been registered with the Master of the High Court and the Master has authorised such appointment in writing by issuing Letters of Authority to this extent. Further, the trustees’ powers to transact are set out in and may be limited by the trust deed.

There are various advantages related to purchasing property in a trust as opposed to buying it in your personal capacity of which the following are the most prominent:

A trust is a flexible vehicle, capable of catering for various changes and uncertainties occurring in one’s life over time e.g. a larger family, death, insolvency, legislative and financial changes and other circumstances.

Since the property is not registered in your name, the value of your personal estate upon death is reduced. The direct implication hereof is a reduction in your estate duty exposure. Also, should the asset value have increased over time, this growth will be excluded from your estate and the capital gains tax (“CGT”) payable on your estate is reduced accordingly. Executor’s fees pertaining to these assets will also be eliminated.

Provided that you do not establish your trust(s) with the intention of prejudicing creditors, purchasing or transferring a property into a trust helps to protect the specific asset from creditors.

It is advisable to create and operate a trust with appropriate tax advice. In this way a trust will enable you to mitigate your tax liability with specific reference to income tax, CGT, estate duty, donations tax and transfer duty.

Trusts are excellent succession planning tools as a property bought in a trust can remain in the trust indefinitely. Consequently, there is no need to transfer the property from the deceased into the name of his heir. In turn this saves on unnecessary transfer costs and CGT duty.

When finance is required to purchase a property in the current “market” the banks are less likely to grant a 100% bond to a trust and demand a deposit of up to 20% when a trust acquires a property. It appears in some instances individuals may receive up to 100% property finance.

Looking at the downside, the following count under the most burdensome disadvantages of purchasing property in a trust .

All trusts are taxed at an income tax rate of 40%. Consequently, it seems to be more favourable to buy a property in your individual capacity rather than in a trust. Here is why: CGT on the growth of the value of the property comes into play once a property is sold.

Trusts are subject to the highest inclusion rate. 66.66% of the net gain must be included in the trust’s taxable income for the year in which the property is sold. Consequently trusts are taxed at an effective rate of 26.6%. This is compared to individuals who are subject to an inclusion rate of 33.33% and a maximum effective rate of only 13.33%. However, if the profit or gains are distributed to the beneficiaries of the trust during the same tax year, the tax payable may end up being the same amount, as if a natural person is disposing of a second property.

Another downside of the trust owning the property is that the founder does not enjoy control over that property as the trust will be the legal owner of the property and the trustees will have the power to administer same.

Therefore based on the above, if administered correctly, one can benefit tremendously from the exercise of purchasing a property in a trust. It is, however, crucial to determine whether the addition of a trust to your portfolio is necessary and beneficial based on your individual needs and circumstances.