CML3001W CORPORATION LAW 2010

TOPIC OUTLINE

COMPANY CONTRACTS, CAPACITY, REPRESENTATION AND LIABILITY

PRESCRIBED READING

1. Ss 36 & 214 of the Companies Act 61 of 1973

2. Henochsberg on the Companies Act – Commentary on ss 36 & 214 of the

Companies Act 61 of 1973 (available on Lexis-Nexis)

3. Ss 19 & 20 of the Companies Act 71 of 2008

1. INTRODUCTION

2 requirements for the company to be bound

- Agent must have been authroised on behalf of the company

- Company must be able to into the contract

Law has developed certain rules to protect the parties

-

1.1 The factual scenario

1.2 The legal issues

1.3 Application of the basic principles of the

law of agency

14. The position where the person who acted for the
company did have actual authority

1.5 The position where the person who acted for the
company did not have actual authority – the
'additional rules'

1.6 The position where the company had no capacity – s 36

of the Companies Act 1973 / s20 of the
Companies Act 2008
2. TYPES & EXTENT OF AUTHORITY
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2.1 Actual, ostensible/apparent and usual authority

2.2 The authority of the board of directors as a whole

2.3 The authority of the Managing Director (MD)

2.4 The authority of individual directors

2.5 The authority of the Chairperson of the Board

2.6 The authority of the company Secretary

3. THE POSITION WHERE THE AGENT HAD ACTUAL AUTHORITY

4. THE POSITION WHERE THE 'AGENT' DID NOT HAVE ACTUAL

AUTHORITY

4.1 The 'additional rules'

(a) The Doctrine of Constructive Notice

(b) The Turquand Rule

(c) Estoppel

(d) Ratification

(e) Section 214 of the Companies Act 61 of 1973

4.2 The Doctrine of Constructive Notice

(a) The nature and effect of the Doctrine

- Is the doctrine of notice available for director

- No real cases in support but Gouwer said that the parties should have
known since it was in the company’s constitution
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 - Idehonsen disagrees- the doctrine was meant to apply to companies and
not directors
-

Abrahamse v Connock's Pension Fund 1963 (2) SA 76

(W)

(b) Criticisms of the Doctrine

(c) Non-application of the Doctrine in cases of fraud

Oranje Benefit Society v Central Merchant Bank Ltd
1976 (4) SA 659 (A)

(d) Availability of the Doctrine to directors

4.3 The Turquand Rule

Derives from
Royal British Bank v Turquand 1856 6 E&B 327

(a) The nature and effect of the Turquand Rule

- It is the rule that qualifies the second requirements of the agency
requirements – the second one being that the contract will only be bidning if the
agent has the authority to enter into the contract on behalf of the company
- IT is a rule that protects 3rd parties- allows them to hold the company to a contract
in circumstances where teh agent did not have the necessary authority to enter into
the contract due to certain internal irregularity in relation to the company. Ie
procedural requirements
Facts

- The co’s con said that the BOD could borrow money from the company
provided that they first obtained the approval of the shareholders in the GM
- The directors borrowed money without approval
- The company subsequently argued that it was not bound with the lender
due to an internal irregularity
- They also argued the doctrine of constructive notice- they were in public
document
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 - The court said no that this would be unfair since how is a 3rd party to know
or check whether the procedures were complied with
- This rule trumps the doctrine
- The corut said that provided teh 3rd party acted in good faith they can
assume that all procedures were complied with and a company cannot get
out of the contract on a internal procedural irregularity

Morris v Kanssen [1946] AC 459:

'Persons contracting with a company and dealing in good faith may
assume that acts within its constitution and powers have been properly
and duly performed and are not bound to inquire whether acts of internal
management have been regular.'

(b) Exceptions to the Turquand Rule

(i) Knowledge of the internal irregularity

- Actual knowledge of the irregularity or where the party was put on inquiry (ie
given information that the told them) that the internal procedure had not been
complied with

Big Dutchman (South Africa) (Pty) Ltd v

Barclays National Bank Ltd 1979 (3) SA 267 (W)

(ii) The 'agent' must have been acting with usual authority
- They must have been doing the thing that people in their kind of position is
usually given actual authority to do (although in their case they were not)
Mineworkers' Union v Prinsloo 1948 (3) SA 831

(iii) The 'agent' must in fact have held the position he/she claimed
to hold
- There may have been a problem with the procedural appointing them but
they must have been de facto in that position
Registrar General v Northside Development [1896] 2 ChD 93

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 (iv) The Rule only protects outsiders

- It only protects outsiders

Re Patent Ivory Manufacturing Co (1888) 38 ChD 156
- The issue that arose in this case was who is classified as an outsider
- Normally depends on facts but shareholders are often considered
outsiders unless they are directors in which case they may or may not be
outsiders depending on the circumstances
- In most cases they are treated as insiders and cannot use the rule but
there are cases where they are outsiders- this is where the contract
concerned is not closely linked with their duties and functions of their
position

(v) The Rule does not apply in cases of forgery

Ruben v Great Fingall Consolidated [1906] AC 439 (HC)

- Facts
o Some new share certificates had been issued to 2 new
shareholders
o The co’s con sadi that all share certificates must be signed by the
directors (internal procedure)
o The directors had not signed the certificate and had in fact been
forged (signatures) by the company secretary
o The company said that the were not bound by the contract
o 3rd party tried to argue the TR but the court said no since it was
forged
o

4.4 Estoppel

(a) The nature and effect of estoppel

- It protects 3rd parties by allowing them to hold a comomay bound by a
contract in circumstances where a person who contracted on belhald of the
company did not have actual authority to do so
- It applies for the agency requirement relating to the agents authority
-

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 Totterdell v Fareham Blue Brick & Tile Co Ltd (1866) LRI CP 674

Freeman & Lockyer v Buckhurst Park Properties 1964 1 All ER 630

(CA)
- 4 basic requirements that must be fulfilled before the company can be
estopped from walking away from the contract (must be proved by the 3rd
party)
o 1st- some kind of representation made that the agent had the actual
authority- it can take any form ie statement, implied conduct
o 2nd requirement the representation must have been made by
someone else who did have actual authority to make that
representation- normally the board as a whole or the MD, - the
representation need not have been made intentionally but they must
have been aware of the facts
o 3rd the 3rd party must show prejudice- ie that they were prejudiced by
the representation
o 4thly the 3rd party must show that they were unaware of the agents
actual authority
- Together with TR these rules trump the doctrine
-
o
o 3rd

(b) The requirements for estoppel

4.5 Ratification
- It protects a 3rd party by allowing the 3rd party to hold the company to the
contract even though there was a problem with the contract. Ie that the company had
ratified by the contract through conduct etc. Can take any form.

4.6 Section 214 of the Companies Act 61/1973

(a) The provisions of section 214

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 'The acts of a director of a company shall be valid notwithstanding any
defect that might afterwards be discovered in his appointment or
qualification.'
- It is created to protect 3rd parties
- It enables them to hold the company to a contract that was entered into by
a director but that director did not have proper authority because there was
either a problem with their appointment as a director or there was a
problem with their qualifications as a director
-

(b) Application of section 214

- Covers two situations
o Where they were not appointed properly
o 2ndly where they were not properly qualified
- It will still be binding on the company
- This section only validates their acts. It does not convert them into proper
de jure directors
-

Morris v Kanssen [1946] AC 459

- Held that for the section to apply and be available to 3rd party the company
must have at least attempted to appoint the director concerned
- The section is therefore not available in circumstances where teh company
did not even attempt to appoint the director- ie does not protect imposers
- Like all protective measures it only protects innocent bona fide innocent 3rd
parties
- Not available to 3rd parties who knew at time of contracting of any defects
in the directors appointment or qualification
- Also not available to parties who ought to have known about the defect
- Rewlatioship btw this provision and Turquand rule
o S214 applies to certain kinds of qualifications and appointment
o TR also applies to certain internal procedures
o There is a overlap since they both cover internal irregularities
o TR is however much broader while s214 is much narrower
o S214 can be relied on by any bona fide 3rd party
o TR is only available to outsiders whoever they may be

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 o IN this respect s214 is broader
o S214 only applies where the contracting party was a director agent
of the company
o TR applies to any agent
o

(c) The position under the 2008 Act?

- Does not appear to be any provision that is a repetition of the s214 of 73
but there is a general contract chapter that will cover the same certain of
situations that s214 covers
-

5. THE POSITION WHERE THE COMPANY LACKED CAPACITY

5.1 Limitations on company capacity

• There are common law limitations on company capacity
• Secondly there are certain acts under the CL that can only be performed by
natural persons
• The CA imposes certain limitations on company capacity
• The most significant limitations will be found in the Companies constitution- ie
in its objects clause which gives the activeites and objects of the company and
under cl they only have capacity to enter into contracts within the ambit of that
clause
•

5.2 Ultra vires acts and the common law Ultra Vires Doctrine

- Any act that falls outside of the objects clause is considered UV

- In terms of the doctrine there are two consequences:
o Internal
 Refer to the consequences to company insiders
 Firstly if the UV act had not yet been entered into then a
shareholder may get an interdict against the act since they

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 have right to ensure that the company comply with its
obnjects clause
 IF the UV act had already occurred and was entered into by
the directors then they would be in trouble- they would be in
breach of the duty to act for a proper purpose and not to
exceed the power of the company
o External \
 Concern the consequences btw the company and 3rd parties
 The contract will be void which meant that neither the
company or the 3rd party could enforce the contract
 Becuase it was void the contract could not be ratified by the
company
 There are claims for restitution by the parties
 Claim for unjust enrichment
o Ignorance is no defence- 3rd party cannot simply say that they did
not know- because of the doctrine of constructive notice
o It is a situation where the 3rd party will be prejudiced

5.3 The changed position under section 36 of the Companies Act

61/1973

(a) The provisions and application of section 36

- Changed the law completely

- It changed all the external consequences of the acts
- It did not change the internal consequences of the act
- It did not change the nature of the UV act
- S36- basically says that if you have a situation where someone has
purported to act on behalf of the company and it turns out that the
company did not have the capacity or that the agent who contracted for the
company did not have proper authority simply because the company did
not have capacity then the act is still bidning on the company and is
enforceable by 3rd parties
- It is a provision to protect 3rd parties
-

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(b) The effects of section 36

- They are to valid contracts with 3rd parties and it is make contracts binding
although the contracting agent lacked capacity
- Note that there may be situations where there is another problem with the
agents authority in which case you must apply the other rules
- A threatened UV act can still be interdicted and a director will stil be in
trouble

(d) The effect of section 36 on the Doctrine of Constructive Notice

- It abolishes the Doctrine in realtion to the company’s objects clause
-

(e) Application of section 36 to contracts between companies and their

own directors
- What happens when the contract is btw the company and its directors?
o Presumably the director should have known better- ie that it was UV
o The better view is that the director must have genuinely and
ignorantly not known about the UV nature
o It appears that the director may argue s36 and hold the company to
the contract

(f) Non-application to illegal acts

a. Does not apply to illegal acts
b. One exception

(g) Relevance of the directors' state of mind?

a. What happens if the directors knew that they were doing something
wrongful?
b. Subjective approach
i. Must look at the directors mind and categorise an act as UV if
the director knew that it was UV
ii.
Rolled Steel Products (Holdings) Ltd v British Steel Corp 1985 3 All
ER 52 (CA)
- Court said that it was ultimately objective test for UV

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5.4 The provisions of section 20 of the Companies Act 71/2008

- This is the equivalent of the s 36 of 73 Act

- SS(1) deals with UV acts and their legal consequences
- SS(1)(a) says taht in relation to 3rd parties UVAs are not void and are
binding on the company
- Even if the agent lacked capacity to enter into the agreement
- There has been no change in relation to the external consequences of
UVAs
- SS(1)(b) deals with the internal consequences of the act and the
conseuqneces can still be raised in proceedings btw the company,
directors, shareholders, and officers etc
- All the internal consequences of the UVAs are the same
- SS(2) & (3)
o SS(2)-UVAs may be ratified by the shareholders by special
resolution
o There is one exepction to the ratification principl;e
 SS(3)- syas that an act cannot be ratified if it contravenes the
CA
- 20(4)
o Deals with interdicts relating to illegal acts
o IF an illegal act is imminent then any shareholder, director or
prescribed officer or any Trade union can apply for an interdict to
prevent that the act from going ahead
o It is broader than the common law interdict as it encompasses a
larger group
- 20 (5)
o Deals with interdicts relating to UVAs or acts inconsistent with the
company’s constitution
o An interdict may be obtained to prevent the Act by a shareholder,
director or prescribed officer but NOT TRADE UNION
o If such an interdict is available an innocent 3rd party who did not
have actual knowledge of the contravention of the CC and who
suffered loss as a result can claim damages

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 o In determining whether the party had actual knowledge you must go
back to s19(5)
- S20(6)
o Gives shareholders a damages claim against any person who by
fraud or gross negligence causes the company to contravene the
CA or the Co’s own constitution.
- 20(7)- it is the first statutory confirmation of the Turquand Rule with some
exepctions
o Any person, other than a shareholder, director or prescribed officer
is enetitled to assume that all the internal procedures were complied
with
o It is different to the CL TR as the CL applies to shareholders who
are also considered outsiders
- 20(8)- operate concurrently with the CL rules
-
o
;
o
-

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