BUSINESS ENTITY LAW

NAME MPENDULO

SURNAME MAPHUMULO

LECTURER S. CWELE

MODULE CODE BEL

TASK ASSIGNMENT ONE

CONTENTS
1.COVER PAGE………………………………………………………………………………1
2.CONTENTS PAGE…………………………………………………………………………2
3.QUESTION ONE……………………………………………………………………………3-4
4.QUESTION TWO……………………………………………………………………………5-6
5.REFERENCES………………………………………………………………………………..7
QUESTION ONE
Introduction
In company law, the restraint of trade clause succinctly sets that, “employees may
not seek any current or potential customers with the employer or aim to direct away
or attempt to do so, any business of the employer”. This in simple terms implies
that, after the termination of employment (as per section 37 of LRA), there’s a
restriction on the type of work performable by that ex-employee. Furthermore, that
this restriction prescribes after a specific set duration of time.
Argument
Jade Paintsil, upon signing the employment contract with Mondli Marketing (pty) Ltd.
She was in acknowledgement of the restraint of trade agreement accompanying the
employment contract. In terms of the agreement. Jade was not allowed to be
employed by a competitor of Mondli Marketing, share any trade secrets of the
company or be part of any business in direct competition with the company. This
restraint was said to be effective for three years1 after leaving such employment as
marketing director. Two years into the resignation, Jade incorporates Hurricane
Solutions (pty) Ltd, a business undoubtedly in competition with Mondli Marketing.
She hereafter claims, she is not employed by the entity. In the later, it is found that
she owns 80% of Hurricane Solution’s securities.
We are herein presented with a question of whether the incorporation of Hurricane
Solutions by Jade Paintsil, considering the restraint of trade agreement amounts to
the contravention of the law of contracts. The enforceability of the agreement and
furthermore, remedial procedure present in such an instance.
The restraint of trade agreement restricts the Common law right to trade. We must
note that restraint of trade agreements is not dealt through fast rules under labour
law but are in the ambit of Contract law. Furthermore, the Magna Alloy and
Research SA (pty) Ltd v Ellis’s2 case is important in the determining of cases of
similar nature. Along the line of departure in attempt to determine the presence of a
contravention and subsequently, adducing legal aid. We must determine the
presence of a protectable and enforceable legal interest. The case of Med 24-7 (pty)
Ltd v Kruger and others3 sets the general rule in terms of restraint of trade
agreements.
Restraint of trade agreements are enforceable under the law of contract. This
agreement between Mondli Marketing and Jade Paintsil did not prevent jade from
being economically active (public interest), it bound her to trade in specific matters
for a set duration of three years. Furthermore, the principles of enforceability and

1
It is significant to note that our South African courts have found restriction duration more than 6-24 months
unreasonable. However, it has been emphasised that each case is decided on its own merits.
2
(109/84) [1984]
3
(5872/2021)
legitimacy are core to such legal advice. Mondli Marketing had a legal interest to
protect, hence such an agreement is signed upon taking employment. Secondly, any
act contrary to such a contract consciously signed threatens this protectable interest.
It was set in the Med 24-7 (pty)Ltd v Kruger case that, as a rule, a restraint of trade
agreement is generally enforceable unless they are proven unreasonable or unlawful
and against public policy. We can infer that onus to prove that the restraint of trade
in not reasonable does not rest on Mondli Marketing. Rather, Jade Paintsil.
Conclusion and Advise
To conclude and adduce the final standing on advising Mondli Marketing. I would
assert that considering the conditions set in the restraint of trade agreement and the
factors such an agreement is weighed against to determine enforceability. I find the
incorporation of Hurricane Solutions by Jade in breach of the agreement under the
law of contract and in contravention of the obligations founding the agreement. In
support, I quote clause two and three of the restraint of trade agreement, restricting
Jade from, “revealing any trade secrets of the company or engage in any business in
direct competition with Mondli Marketing. I hereby advise the company to enforce
the agreement as it is reasonable and legitimate when a valuation against public
policy is made. In support, Jade Paintsil was not prevented from earning, but
restricted in some matters in business. She held an important position as marketing
director thus undoubtedly exposing her to sensitive insight of the company and its
clients. These factors prove she was bound by the agreement meant to shield a legal
interest.
In enforcing such agreements under company law, Mondli Marketing can file a suit
for damages because of the breach of contract. Chapter 7 of the act, quoting section
156 to 158, specifically deals with remedies and enforcement of such remedies. In
concurrent, Mondli Marketing suffered the loss of two of its major clients to the
newly incorporated Hurricane Solutions. The defence of not being an employee of
the company herein carries little weight considering Jade’s 80% tie with Hurricane
Solutions. Her engagement in this direct competitor is a breach of contract. Finally,
the judgement of Reddy v Siemans Telecommunications (pty) Ltd sets, I quote, it is
not that the possession of knowledge is enough to enforce an agreement of restraint
in trade, but that the ex-employee would be part in an entity carrying synonymous
business as that of the previous employer.
QUESTION TWO
Introduction:
Amongst others, determining the type of business and legal entity is undoubtedly
one of the first steps in the incorporation of a business. This step determines
important factors such as, personality of the entity, its founder’s extent (liability) in
terms of risk which would be subsequently subject to their personal estate, and how
capital would be accumulated for the expansion of the business idea. The type of
business venture also determines the set of legislation and legal formalities to be
complied with. Furthermore, the ability to legally continue (perpetual succession).
As per the Companies Act No 71 of 2008. The company upon incorporation, must
have a document setting out the rights and obligations of shareholders, its directors,
and other matters in relation to the entity. This constitution of the company defines
its flexibility and legal status. Lastly, it caters for the special conditions that apply to
the business entity. This document is the Memorandum of Incorporation (MOI) as
asserted in section 15 of the Act.
Argument:
Nicole and her two friends wish to venture into a business entity providing a specific
service for a consumer in the eastern cape region. They also wish to maintain
control over the sale of their company’s securities in future. Furthermore, one that
has a separate legal personality from that of its incorporators. Hence, matters of
that company remain that of the company virtue of it being a juristic person.
Considering the intentions, it is evident that the business venture contemplated is
that of a profit company, specifically, a Private (proprietary limited) company. In
support, a private company’s corporate governance document sets the conditions of
separate legal personality, limited liability, and its restrictions on the sale or transfer
of its securities (attempt to maintain existing shareholders voting influence).
 Separate legal personality
This is a concept in company law setting that a company is a separate legal person
with the ability to acquire legal rights and be bound by subsequent legal duties
remote from that of its shareholders. This feature creates a corporate veil
distinguishing the company from its shareholders and board of directors. It is
however fundamental for any incorporator to note that this curtain is not absolute.
The ability to acquire rights and legal duties regardless of physical existence is the
core of separate legal personality as contemplated in the Companies Act 71, 2008,
specifically section 19 of the Act.
 Limited liability
The benefit of limited liability flows from the concept of separate legal personality.
This implies that the liability of shareholders fort the company’s debts is limited to
the amount they have invested for its shares. The general principle of this benefit
means that the shareholders are not liable for debts of the company virtue of the
rule that, company debts belong to the company. In Salomon v Salomon and Co
Ltd4, it was found in favour of Salomon as the House of Lords found that the
business carried belonged to the company and not to Salomon, who was not liable
for the debts for the company. Subsequently, creditors cannot claim outside the
assets of the company. Considering that Nicole and her two friends do not wish do
not wish to expose their personal estates to personal liability. This benefit matches
the business contemplated herein.
 Securities
Two characteristics best define this preventative and restrictive concept. Firstly, a
private company prohibits offer of its securities to the public. Secondly, it restricts
the transferability of its securities. In company law, securities imply to shares, an
instrument or debenture of the company. In our case, considering that the
incorporators wish to keep the sale under strict control, we can infer that they wish
to maintain power within existing partners. The disposal of shares and transfer of, is
restricted to the approval by other shareholders. In such a company, existing
shareholders are granted a chance to purchase shares prior to any involvement of
external investors.
Conclusion
We can here in decide that Nicole and her friends wish to venture into a private
company (pty) Ltd. The concepts discussed herein of separate legal personality,
limited liability, and control over securities align to the facts of the case. Hence, the
wishes of the incorporators.

4
[1897] AC 22 (HL).
REFERENCES

List of Cases:
 Magna Alloy & Research (SA) (pty) Ltd (109/84) [1984].
 Med 24-7 (pty) Ltd v Kruger & others (5872/2021).
 Salomon v Salomon Co Ltd [1897] AC 22 (HL).
List of Statutes:
1. Companies Act 71 of 2008:
 S15
 S19
 S156
 S158