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The Contours of Profit-Making Activities of Non-Profit Companies: An Analysis of the New South African Companies Act

  • Maleka Femida Cassim

Abstract

While for-profit companies regularly embark on non-profit activities, the converse issue has recently come to attention, namely whether non-profit companies may embark on profit-making activities. This has given rise to a confusing conundrum of practical importance, not only in South Africa but also in other jurisdictions. This article discusses whether non-profit companies, under the South African Companies Act of 2008, may have purely commercial objects. It also addresses the intertwined question of the contours of permissible profit-making activities. Since the non-profit company is the modern successor to the section 21 company under the previous Companies Act of 1973, this article considers the recent case of Cuninghame v First Ready Development 249, in which the Supreme Court of Appeal was faced with the problem of a section 21 company with a commercial object. The article also explores the administration of rental pool agreements by non-profit companies, which arose in the Cuninghame case.

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1 New Act, sec 1.

2 Id, sched 1, item 1(1)(a).

3 See id, sec 10.

4 Id, sched 1.

5 On the basis set out in the company's constitution. See id, sched 1, items 4(1) and 5.

6 Nor to its incorporators, officers or persons related to any of them, except to the extent permitted by the New Act. See sec 1 read with sched 1, item 1(3).

7 See for example Oleck, HLMixtures of profit and non-profit corporation purposes and operations” (1988) 16 Northern Kentucky Law Review 225 at 236. See also Hansmann, HReforming non-profit corporation law” (1981) 129 University of Pennsylvania Law Review 497 at 500: “The basic corporate law applicable to non-profit organizations is at a remarkably immature state of development, and remains startlingly uninformed by either principles or policy. Confusion continues to surround even the most fundamental issues, including the purposes for which non-profit corporations may be formed”.

8 Ie the objects set out in its constitution (New Act, sched 1, item 2).

9 Id, sec 7(h).

10 According to statistics released by the Companies and Intellectual Property Registration Office.

11 1973 Act, sec 24 and New Act, sched 1, item 2(1).

12 2010 (5) SA 325 (SCA).

13 New Act, sched 1, item 1(3) states: “A non-profit company must not, directly or indirectly, pay any portion of its income or transfer any of its assets, regardless how the income or asset was derived, to any person who is or was an incorporator of the company, or who is a member or director, or person appointing a director, of the company, except (a) as reasonable (i) remuneration for goods delivered or services rendered to, or at the direction of, the company; or (ii) payment of, or reimbursement for, expenses incurred to advance a stated object of the company; (b) as a payment of an amount due and payable by the company in terms of a bona fide agreement between the company and that person or another; (c) as a payment in respect of any rights of that person, to the extent that such rights are administered by the company in order to advance a stated object of the company; or (d) in respect of any legal obligation binding on the company.”

14 Above at note 12.

15 Id, para 34.

16 Id, paras 19 and 25.

17 1973 Act, sec 21(1)(b).

18 Above at note 12, para 19.

19 Ibid.

20 As originally submitted by Cassim, MFTypes of companies” in FHI Cassim (managing ed), Cassim, MF, Cassim, R, Jooste, R, Shev, J and Yeats, JContemporary Company Law (2011, Juta and Co Ltd) 62 at 83–84.

21 “Memorandum on the objects of the Companies Bill, 2008” in the Companies Bill [B 61D-2008] at para 4. Furthermore, like a sec 21 company (see sec 21(2)(a) of the 1973 Act), the new non-profit company retains the restriction on the distribution of its income and property to its members, subject to reasonable exceptions. The New Act is also intended to retain the basic principle that the distribution of any residual assets of the company on dissolution is restricted. In this regard, on the winding-up or dissolution of both a non-profit company and a sec 21 company, no member or director is entitled to any part of the net value of the company, and this must instead be distributed to one or more non-profit companies or sec 21 companies, as the case may be, or other bodies that have objects similar to its main object (New Act, sched 1, item 1(4); 1973 Act, sec 21(2)(b)).

22 Above at note 12, para 24.

23 According to the main report of the Commission of Enquiry into the Companies Act: RP 45/1970 of 15 April 1970, para 25.02(c).

24 Id, para 25.02(d); Cuninghame, para 24.

25 This item provides, in respect of the objects of a non-profit company: “each such object must be either - (i) a public benefit object; or (ii) an object relating to one or more cultural or social activities, or communal or group interests”.

26 South African Income Tax Act 58 of 1962, sec 30(1) and 9th sched, which sets out a list of public benefit activities for the purposes of that act.

27 New Act, sched 1, item 1(6).

28 Above at note 12, para 25.

29 1973 Act, sec 21(1)(b).

30 Income Tax Act 58 of 1962 (as amended by sec 54(1)(a) of Act 7 of 2010), sec 30A(1).

31 New Act, sched 1, item 4(2)(e)(iii). The Income Tax Act 58 of 1962 (sec 30B(1)) now also envisages that a non-profit company may be established “to promote the common interests of persons (being members of the company) carrying on any particular kind of business, profession or occupation”.

32 New Act, sec 1.

33 1996 (4) SA 159 (A) at 169J – 170A.

34 (1875) 10 Ch App 542 at 545. South African company law has traditionally been based on English company law, as discussed further below.

35 1938 CPD 199 at 202.

36 These two dicta were referred to in Cuninghame at para 22, ie in the context of an “association not for gain” (as per the heading of sec 21 of the 1973 Act) which is now an obsolete term under the New Act. It is submitted that the interpretation in Cuninghame of the term “gain” nonetheless remains relevant to the New Act, albeit in quite a different context, in view of the use of the term “gain” as the crux of the definition of a profit company. It is also relevant in this regard that the Supreme Court of Appeal in Cuninghame relied on Mitchell's Plain even though it concerned a different provision of the 1973 Act (viz secs 30(1) and 31, as opposed to sec 21), on the basis that the meaning of “gain” should be the same.

37 Above at note 35 at 202–04.

38 Above at note 33 at 169–70.

39 As noted in note 36 above, it is also relevant that the Supreme Court of Appeal in Cuninghame relied on Mitchell's Plain even though that case concerned a different statutory provision, on the basis that the meaning of “gain” should nevertheless be the same.

40 The definition of “business” as laid down in Smith v Anderson [1880] 15 Ch 247 (CA) 258 and adopted in South African law, is “everything which occupies the time and attention and labour of man for the purpose of profit”.

41 New Act, sched 1, item 1(2)(b).

42 Id, item 1(2)(b)(ii).

43 Id, item 1(2)(a).

44 1973 Act, sec 21(1)(c); see also Cuninghame, above at note 12, para 19.

45 Based on a similar example to that in used by the court in Huey Extreme Club v McDonald t/a Sport Helicopters [2004] 3 All SA 702 (C), para 19.

46 Ibid. See also Cassim, FHICompanies (including close corporations)” in Annual Survey of South African Law 2005 (2007, Juta and Co Ltd) 466 at 473–74.

47 Cuninghame, above at note 12, para 17.

48 Id, para 25.

49 Ibid.

50 Id, para 4.

51 See for example Davies, PLGower and Davies' Principles of Modern Company Law (8th ed, 2008, Sweet & Maxwell) at 8 for the position under English law.

52 See for example Hocking v Dubois 839 F 2d 560 (9th cir 1988).

53 An “investment contract” is a contract, transaction or scheme for the placing of capital or laying out of money in a way intended to secure income or profits from its employment. The classic definition of an “investment contract”, as laid down in SEC v WJ Howey 328 US 293 (1946), entails inter alia that the purpose or goal must be profit realization. Although investment contracts concern US federal securities law, it is submitted that the Howey test is relevant to the meaning and interpretation of a profit-making purpose or commercial object.

54 United Housing Foundation, Inc v Forman 421 US 837 (1974).

55 See the US Securities and Exchange Commission release no 33-5347 (4 January 1973): guidelines on the offering of condominium units.

56 For example see generally: Oleck “Mixtures of profit and non-profit”, above at note 7 at 225; Hansmann “Reforming non-profit corporation law”, above at note 7 at 497; Moody, LAThe who, what, and how of the Revised Model Non-profit Corporation Act” (1988) 16 Northern Kentucky Law Review 251.

57 (1984), as amended.

58 Third edition (2008).

59 SC 2009 c 23.

60 RSC 1970.

61 Moody, LARevising the Model Non-profit Corporation Act: Plus ça change, plus c'est la même chose” (2006–07) 41 Georgia Law Review 1335 at 1346.

62 Sec 2(c). A similar definition appeared in the Model Non-profit Corporation Act (1952) at sec 2(c).

63 Sec 3.01.

64 Moody “The who, what, and how”, above at note 56 at 266.

65 Sec 3.01(a).

66 This takes account of the constraint on distributions to members and controllers.

67 Save for the retention of a very few provisions that apply specifically to charitable or religious corporations.

68 Moody “The who, what, and how”, above at note 56 at 262. See for example Oleck “Mixtures of profit and non-profit”, above at note 7 at 245.

69 Ohio Revised Code, Non-profit Corporation Law, sec 1702.01(C).

70 Id, sec 1702.04(A).

71 Oleck “Mixtures of profit and non-profit”, above at note 7 at 235.

72 2005 Illinois Code / General Not For Profit Corporation Act of 1986 art 3, sec 103.05(a). See also the definition of a not-for-profit corporation in sec 103.05.

73 New York State Not-For-Profit Corporation Law (1970) art 1, sec 102(a)(5); 2006 New York Code sec 102(a)(5). However, the New York legislation then confusingly continues to classify (in sec 201) not-for-profit corporations into types A, B, C and D, of which types A and B may be formed for certain non-business purposes, type C for any lawful business purpose to achieve a lawful public or quasi-public objective and type D (which is intended simply as a connector to other special purpose statutes governing particular types of non-profits) which may ambiguously be formed for a business or non-business, pecuniary or non-pecuniary purpose specified in other corporate laws of the state.

74 188 IMI 268, 59 NE 432 (1900).

75 RSC 1970.

76 Id, sec 154.

77 In the Ontario Corporations Act, RSO 1990, c 38 for instance, non-profit corporations, which are corporations without share capital and incorporated under part III of that act, are subject to the provision in sec 126(1) that: “A corporation … shall be carried on without the purpose of gain for its members and any profits and other accretions to the corporation shall be used in promoting its objects” (emphasis added). See also generally Burke-Robertson, RJ and Drake, ANon-Share Capital Corporations (1996, Thomson-Carswell); Canadian Encyclopedic Digest Associations and Not-for-Profit Corporations (2012, Thomson Reuters Canada Limited) at I.2.

78 SC 2009, c 23.

79 Id, sec 34.

80 Id, sec 2(1).

81 Commentary to the Bill C-21: Canada Not-for-profit Corporations Act (LS-498E).

82 However it is significant that this statute extends more widely than just to non-profit corporations. Some of its provisions are designed to apply also to other corporations without a share capital, which were previously regulated by part III of the Canada Corporations Act (see the Commentary to the Bill, ibid).

83 Ie a company without a share capital that limits the liability of its members by its constitution to such amount as the members undertake to contribute to the assets of the company in the event if its being wound up (UK Companies Act 2006, sec 3).

84 Davies Gower and Davies', above at note 51 at 8–9. Incidentally, the New Act now departs from the previous 1973 Act by abolishing the concept of the company limited by guarantee in South Africa.

85 Hannigan, BCompany Law (2nd ed, 2009, Oxford) at 15.

86 Under sec 30 of the Companies Act of 1985 and sec 60 of the Companies Act of 2006.

87 It must be stressed that the “promotion of commerce” under the UK provision must be distinguished from a commercial object and would include, for instance, a chamber of commerce.

88 Davies Gower and Davies', above at note 51 at 84.

89 See the Companies (Audit, Investigations and Community Enterprise) Act 2004, sec 26(1).

90 Id, sec 35.

91 Davies Gower and Davies', above at note 51 at 20.

* MBBCh (cum laude), LLB (cum laude), LLM (cum laude) (Witwatersrand); senior lecturer, Faculty of Mercantile Law, University of Pretoria; attorney and notary public of the High Court, South Africa.

The Contours of Profit-Making Activities of Non-Profit Companies: An Analysis of the New South African Companies Act

  • Maleka Femida Cassim

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