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Company Law A > CHAPTER 5 Corporate Capacity, Agency and the Turquand Rule > Flashcards

CHAPTER 5 Corporate Capacity, Agency and the Turquand Rule Flashcards

1
Q

What are the additional company law requirements for a contract to be legally binding and enforceable against a company?

A
  1. Company was required to have the legal capacity to enter into the contract
  2. Director/officer representing the company had to have authority to enter into the contract on behalf of the company.
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2
Q

What is capacity?

A

The legal competency and the powers of the company.

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3
Q

What is authority?

A

The power of a company’s director or officer to act on behalf of the company.

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4
Q

What is the ultra vires doctrine?

A

A company existed in law for the purposes of the object stated in the objects clause of its memorandum of association including any objects that were reasonably incidental or ancillary to the company’s main object.

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5
Q

What is an ultra vires act?

A

An act or transaction entered into by a company which, although not unlawful or contrary to public policy, is beyond the legitimate powers of the company.

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6
Q

What are the objects of the ultra vires doctrine?

A
  1. Protect investors and shareholders so that they would know the purposes for which their money would be used
  2. Protect creditors
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7
Q

What are the external consequences of the ultra vires doctrine?

A
  1. Contract is null and void
  2. Contract is unenforceable by the company or the other party to the contract
  3. Contract cannot be ratified even by the unanimous assent of all the shareholders of the company.
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8
Q

What are the internal consequences of the ultra vires doctrine?

A
  1. Breach of fiduciary duty which results in liability to the company for damages
  2. Shareholders were entitled to restrain the company from entering into or performing an ultra vires contract.
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9
Q

What is the legal capacity of a company under the Act ito section 19(1)(b)?

A

A company has the legal capacity and the powers of an individual.

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10
Q

What does section 19(1)(b) of the Act hold?

A

A company has all of the legal powers and capacity of an individual, except to the extent that a juristic person is incapable of exercising any such power or having any such capacity and the company’s MOI provides otherwise.

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11
Q

What does section 20(1) hold?

A

A company’s MOI may, on an optional basis, impose restrictions, limitations or qualifications to its purposes, powers or activities.

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12
Q

What does section 20(1)(a) hold?

A

Such restrictions (restrictions of powers by MOI) does not have an effect on the validity of the contract between the company and the other party to the contract (external consequence).

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13
Q

What is the effect of section 20(1)(a) on directors liability?

A

Liability may be incurred for failing to comply with the restrictions in the company’s constitution.

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14
Q

What does section 20(1)(a)(ii) hold?

A

No action of a company is void by reason only that, as a consequence of a limitation, restriction or qualification to the purposes, powers, or activities of the company as specified in its MOI, the directors had no authority to authorise the action by the company.

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15
Q

What does section 20(1)(b) contain?

A

A statutory estoppel that precludes either the company or the other party to the contract from relying on the limitation, restriction or qualification on the company’spurposes, powers, or activities, in order to assert that the contract is void.

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16
Q

What is the 2008 Act legal position regarding the ultra vires doctrine?

A
  1. Abolishes the ultra vires doctrine externally
  2. Preserves it internally to the extent that a lack of capacity may be raised only as between the company, its directors, prescribed officers and its shareholders.
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17
Q

What are the internal consequences of an ultra vires contract?

A
  1. It enables shareholders to exercise some control over the activities of its directors and to restrain them from entering into ultra vires contracts in contravention of the provisions of the company’s MOI.
  2. Shareholders have a right to institute legal proceedings to prevent the company or its directors from contravening the relevant provisions of its MOI.
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18
Q

How does the ultra vires doctrine operate as an internal control mechanism under the 2008 Act?

A

Breach of constitutional restrictions = breach of company’s MOI = Breach of fiduciary and statutory duties.

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19
Q

What does section 20(1)(b)(i) and (ii) do?

A

It preserves the internal consequences of an ultra vires contract by permitting the issue of capacity to be raising in proceedings between the;
1. Company and its shareholders, directors and prescribed officers
2. Shareholders and directors, prescribed officers of the company.

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20
Q

What does section 20(2) hold?

A

If a company’s MOI limits, restricts or qualifies the purposes, powers or activities of the company or limits the authority of the directors to perform an act on behalf of the company, the shareholders may, by special resolution, ratify any action of the company or the directors tjhat is inconsistent with any such limit, restriction or qualificatiton.

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21
Q

What does section 20(3) hold?

A

No action of the company may be ratified if it isin contravention of the Act.

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22
Q

What is the effect of ratification of the ultra vires contract?

A

The internal conseqeuences of the ultra vires contract fall away.

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23
Q

What is the effect of the lack of reference to the prescribed officers in section 20(2)?

A

The unauthroised act of a prescribed officer may not be ratified by special resolution ito section 20(2).

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24
Q

What does section 20(6) provide?

A

Each shareholder of a company has a claim for damages against any person who intentionally, fraudulently or due to gross negligence causes the company to do anything inconsistent with:
(a) Companies Act
(b) Limitation, restriction or qualification contemplated in section 20, unless it has been ratified by a special resolution of the shareholders ito section 20(2).

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25
Q

Which provision of the Act deals with the shareholder’s claim for damages?

A

Section 20(6).

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26
Q

What happens if the act of the director has not been ratified ito section 20(2)?

A

Director could be declared delinquent ito section 162(5)(c)(iv)(bb).

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27
Q

Which provision of the Act allows shareholders to institute legal proceedings to prevent the company/directors from contravening the relevant sections of the MOI?

A

Section 20(5).

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28
Q

What does section 20(5) hold?

A

That one or more shareholders, directors, or prescribed officers fo a company may apply o the High Court to restrain the company or the directors from doing anything inconsistent with a limitation, restriction or qualification on the purposes, powers or activities of the company as specified in its MOI.

29
Q

What does section 20(4) hold?

A

That a one or more shareholders, directors or prescribed officers of a company, or a trade union representing the employees of the company, may apply to the High Court to restrain the company from doing anything inconsistent with the Act.

30
Q

To what right of a third party is section 20(5) subject to?

A

The right to damages of a third party who:
(a) obtained the rights in good faith
(b) did not have actual knowledge of the particular limit, restriction or qualification.

31
Q

What are the requirements for the protection of the third party’s right to damages?

A
  1. Actual knowledge
  2. Good faith.
32
Q

What is the doctrine of constructive notice?

A

A doctrine that states that persons dealing with a company were deemed to be aware of the contents of the constitution/MOI and other public documents of the company that were lodged with the Registrar of Companies/CIPC and were open to public inspection whether they had read these documents or not.

33
Q

Which provision of the Act abolishes the doctrine of constructive notice?

A

Section 19(4).

34
Q

What does section 19(4) hold?

A

Subject to section 19(5), a person may not be regarded as having received notice or knowledge of the contents of any document relating to a company merely because the document has been filed or is accessible for inspection at an office of the company.

35
Q

Which section reintroduces a muted version of the doctrine?

A

Section 19(5).

36
Q

What are the two specific circumstances in which the muted version of the doctrine would apply ito section 19(5)?

A
  1. If the company’s name include ‘RF’
  2. If the company’s NOI or a subsequent Notice of Amendment has drawn attention to the relevant provision as contemplated in section 13(3).
37
Q

In what instance will the doctrine of constructive notice apply?

A
  1. In the case of a personal liability company
38
Q

What does the Turquand rule hold?

A

A person contracting in good faith with a company may assume that the necessary cts of internal management have been properly and duly performed.

39
Q

What is the Turquand rule also known as?

A

Indoor Management rule.

40
Q

What does the indoor management rule mean?

A

Those dealing with a company are not affected by the company’s indoor management rules or by the company’s internal irregularities.

41
Q

What is the basis of the Turquand rule?

A

It was designed to mitigate the severe effects of the doctrine of constructive notice, particularly on bona fide third parties dealing with the company

42
Q

What is the effect of the Turquand rule?

A

A 3rd party acting in good faith is under no duty to enquire whether the company has complied with its internal formalities and procedural requirements.

43
Q

On what basis is the Turquand rule justified?

A

Business convenience.

44
Q

What is the essence of the principle of business convenience?

A

A business cannot carry on if a person dealing with a company was compelled to call for evidence that all internal regulations have been observed.

45
Q

What is the practical effect of the Turquand rule for companies?

A

It prevents a company from escaping liability on the basis of non-compliance with an internal formality or procedure.

46
Q

When does the TR not protect a third party?

A
  1. When they know about the non-compliance with the internal formalities
  2. When they suspect the non-compliance but turn a blind eye
  3. When they rely on a forged document
47
Q

What are the competing interests in the application of the TR?

A
  1. Promotion and protection of business convenience
  2. Over-extensive application of the rule may facilitate the commission of fraud and unjustly favour those who deal with companies.
48
Q

What principle of law is the TR?

A

It is an independent rule of company law in that it is a special rule relating to companies rather than an instance of general principles of agency law.

49
Q

Can the TR be applied to be impose liability on the company for unauthorised contracts?

A

Yes in so far as all that was lacking was compliance with internal formalities.

50
Q

What does section 20(7) state?

A

That a person dealing with the company in good faith, other than a director, prescribed officer or shareholder of the company, is entitled to presume that the company, in making any decision in the exercise of its powers, has complied with all the formal and procedural requirements in terms of the Act, its MOI and any rules of the company, unless, in the circumstances, the person knew or ‘reasonably ought to have known’ of any failure by the company to comply with any such requirement.

51
Q

What is section 20(7)?

A

Statutory formulation of the TR with modifications.

52
Q

How is section 20(7) different from common-law TR?

A
  1. Applies to internal procedures and formalities even if the Companies Act prescribes them.
  2. Applies to all of the company’s formal and procedural requirements ito the company’s MOI or rules.
  3. It preserves the common-law rule that if the 3rd party is a director, PO, or SH of the company, they will not be protected by the section.
53
Q

What does section 20(8) do?

A
  1. Preserves the TR as developed at common law
  2. Provides that section 20(7) must be construed concurrently with the common-law TR.
54
Q

What is the difference between the statutory TR and the common law TR?

A

Statutory TR the test is objective and common-law TR the test is subjective.

55
Q

What is the effect of the abolition of the DON irt to the TR?

A

It will apply even where a special resolution is required as an internal formality to some matter.

56
Q

What does the law of agency state?

A

If an agent contracts with a 3rd party on behalf of the company, the contract will bind the third party and the principal as if concluded between them.

57
Q

What are the three types of authority?

A
  1. Actual
  2. Usual
  3. Ostensible
58
Q

What is actual authority?

A

Depends solely on the relationship between the principal and agent.

59
Q

What does actual authority consist of?

A

Express and implied authority given by the board of directors or a person with the authority to delegate such authority.

60
Q

What is implied authority?

A

Authority that arises as a reasonable inference from the conduct of the principal or is necessary/reasonably incidental to the performance of the agent’s express authority.

61
Q

What is ostensible authority?

A

Arises where a principal has made a representation, whether by their words or conduct, to the third party that the agent has the requisite authority to act on their behalf, and if the third party has reasonably relied on this representation, the principal will be estopped from denying the authority of the agent.

62
Q

What are the synonyms for ostensible authority?

A
  1. Apparent authority
  2. Agency by estoppel
63
Q

Which case sets out the requirements for ostensible authority?

A

NBS Bank v Cape Produce, approved by SCA in Northern Metro Local Council v Company Unique Finance

64
Q

What are the requirements for ostensible authority?

A
  1. A representation whether by words or by conduct
  2. Made by the principal
  3. In a form such that the principal should reasonably have expected that outsiders would act on the strength of the representation
  4. Reliance by the third party
  5. Such reliance must be reasonable
  6. There must be consequent prejudice to the 3rd party.
65
Q

What is the effect of ostensible authority?

A

Breach of fiduciary duty.

66
Q

What happens if the principal is not bound to the 3rd party at all, on the basis of a lack of authority?

A

The 3rd party may have a delictual action against the director or agent based on misrepresentation or an action for breach of warranty of authority.

67
Q

What are the types of implied authority?

A
  1. Implied usual authority
  2. Restricted usual authority
68
Q

What is ratification?

A

A retrospective authorisation or conferral of authority by the principal or the company.

69
Q

What is the effect of ratification?

A

The contract becomes fully binding with retrospective effect on the company.

Company Law A (8 decks)

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