Company Law Notes

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Company law notes
Company law (University of Namibia)
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Company law 1
COMPANY LAW
A. Introduction
Definition: a company is “a company incorporated under Chapter IV of the Companies

Act and includes any body which immediately prior to the commencement of this Act
was a company in terms of any law repealed by this Act”.
o Application of the Act: Section 2

(i) Every company incorporated under this Act.
(ii) Every external company = one incorporated outside SA/Namibia but that
lodged its memorandum in South Africa/ Namibia and has a place of business
in South Africa/ Namibia.
(iii) A company or body which existed prior to the commencement of the
Companies Act.
o Place of business: any place where the company transacts and holds itself out
as transacting business and includes a share transfer with share registration
office.
o Limitation: Section 3 provides that the Act does not apply to building societies,
pension funds, insurance companies etc. as these have their own Acts and are
governed thereby. In the case of inconsistency between the Act and the specific
Act this Act will also not apply. The question is, however, whether the common
law provisions of company law will apply to such entities.
This latter question was deliberated on in William James Nieuwoudt & Others v
Vrystaat Mielies (EDMS) BPK1wherein the court had to determine if the Turquand
rule applied to Trusts. This case must be read as it also contained reference to
cases that dealt with whether other company law principles applied to e.g. trade
unions.
In hoc casu the facts were that a Trustee entered into a contract of cession and
purported to bind the Trust without the consent of the other Trustee. The Trust
1
William James Nieuwoudt & Others v Vrystaat Mielies (EDMS) BPK delivered on 28th November 2003

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deed required the unanimous assent of both Trustees in the event that the Trust
had only two Trustees (as was the case here). The appellants wanted to get out
of the contract on the basis of a lack of authority. The respondents wanted to
hold them to the contract. The question was whether or not the Turquand rule
applied to Trusts such that the Trust will be bound to the contract. Page 3 of the
judgment contains the essence of the Turquand rule and the arguments by
respondent to found a case based on the Turquand rule.
The court held as follows:
a. That there are cases to the effect that the Turquand Rule
applies to trade unions2 and municipalities3.
b. The respondent relied on the judgment in Man Truck & Bus (SA)
v Victor en Andere4 to argue that the rule applies to Trust as
well.
c. Unfortunately the court of appeal did not decide the point and
rather based their decision on a construction of a clause in the
Trust deed.
B. The concept of a company.

o Registration of CC or Co endows it with legal personality. It can acquire its
own rights and liabilities.
o The risk of the contributors extends no further than the loss of the amount
which they have contributed to the venture as capital.
o The Co. and CC who enjoy the benefit of perpetual succession that their
continued legal existence is not influenced by any change n membership.
o The shareholders of a Co. do not usually participate in management of the
company.
o Shareholders exercise ultimate control over the Company (as opposed to a CC
where each member is entitled to participate in management and there is no
board of directors).
o CC is simpler and less expensive.
2
Mine Workers’ Union v Prinsloo 1948 (3) SA 831 (A).
3
Potschefstroomse Stadsraad v Kotze 1960 (3) SA 616 (A).
4
Man Truck & Bus SA Ltd v Victor en Andere 2001 (2) SA 562 (NC)

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C. The Company as a Legal Person.
o The definition of a company above does not really do justice to it. It can take so
many forms that it is actually incapable of a definition.
o Therefore, generally it is an association of persons for the common object
of the acquisition of gain; this does not however apply to all
companies. E.g. the s21 company does not have the object of acquiring
gain.
o Company can own assets
Company can be an employer
Company can be a party to a contract
Company can litigate (sue and be sued)
Company has rights and duties
o But for obvious reasons, the company has to act via organs or agents.
D. Acquisition of Legal Personality.

o How?
a. Separate Act (CC Act)
b. General enabling Act (Co. Act)
c. Conduct (if it conducts itself as a legal person and complies with certain
requirements).
{Only if the association is not carrying on business that has as its
object the acquisition of gain. Why? If it does then it will fall foul of
s30 & s31}
o NB: s30 & s31.
E. Theories of Legal Personality.
NOT IMPORTANT

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F. The company as a separate entity.
In Salomon v. Salomon & Co. Ltd5 the facts were that S sold his business to Co, a
company which he had floated himself. He received 20000 shares at R2 each and
debentures which valued at R20000, which were secured by a bond over the
company’s assets. Therefore, he became a secured creditor of the company.
The only other shareholders were his wife and six children who held one share each.
One year later, the company was liquidated. It only had sufficient assets to
discharge the secured debentures i.e. to pay out Salomon. Nothing remained for
the unsecured creditors.
The claim by Salomon’s creditors: The creditors submitted that Salomon and his
company was in essence the same person and that he, far from laying a claim as a
secured creditor to the assets of the company, should actually be liable for the debts
of the company.
The court held:
a. From its inception a company is legally separate from its members.

b. The extent of Salomon’s shareholding in S&Co was irrelevant in adjudicating in
the validity of his secured claim as debenture holder in full.
(Quotes on p. 7 ref 6.)
o Salomon case is the locus classicus on this aspect!!
In Dadoo Ltd. & Others v. Krugersdorp Municipality Council6 the facts were that the
SA Republic had a Statute, Law 3 of 1885, which prohibited the native races of Asia
from owning fixed property within the Republic. On 12 February 1915 Dadoo Ltd.
was formed with a share capital of ₤150000. This translated into 150 shares @
₤100 each. 149 of these shares were held by Dadoo and 1 was held by Dindan –
both were Indians. In March 1915 the company bought and took transfer of a stand
5
Salomon v Salomon & Co [1897] AC 22.
6
Dadoo Ltd. & Others v Krugersdorp Municipal Council 1920 AD 530.

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in the township of Krugersdorp (fixed property!). Company let the stand to Dadoo
where he opened a grocery and general dealer’s business.
The issue: The Krugersdorp Municipal Council applied to the T.P.D. for an order
setting aside the transfer as being a contravention of Law 3 of 1885.
The court held:
a. I come to enquire whether the transaction complained of is a contravention of

the Statute.
b. Is ownership by Dadoo Ltd. in this instance ownership by its Asiatic

shareholders? Clearly, this is not the law.
c. A registered company is a legal persona distinct from the members who

comprise it.
d. Property vested in a company is not and cannot be, regarded as vested in all or
any of its members.
G. Consequences of Legal Personality.
o Company estate is assessed apart from the estates of individual members.
o Company debts are its own.
o Member’s sequestration does not equal the liquidation of the company and vice
versa.
o Company profits are company profits.
o Company’s assets are not the members’ assets.
o No one is qualified by virtue of his membership, to act on behalf of the company.
o Having controlling shareholding does not make the company your agent.

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H. Piercing the Corporate Veil.
It does happen that a situation involving the company and its members and
representatives is judged with due consideration to the actual state of affairs pertaining
within the company behind the corporate entity.
H.1. Disregard by the Legislature.
This is the instance where the legislature renders persons other than the company liable
for the debts of the company as a sanction for non-compliance with a statutory
provision7.
1. S50 (3).This section imposes personal liability on directors, officers or agents of a

company where the company’s name is not publicized. In the event where he
issues a promissory note, cheque etc.on behalf of the company. He commits an
offence and is also personally liable to the holder of the promissory note etc.
unless it is duly paid by the company.
Section 56 is the Namibian equivalent hereof. The whole of it must be read as
it prescribes what the names of different companies must end with.
S56 (1) provides what the company must do to meet the publicity requirements.
S56 (2) provides what the names of companies must end with.
S56(3) is a prohibitive section and prohibits the director, officer or person from
doing certain things.
S56(4) is the penalty section and provides a penalty of not more than N$400. It
is to be noted that the old section 50 does not have a limit as to the penalty to
be imposed on a contravening director, officer or person.
S56 (5) is the piercing section and imposes personal liability on the part of the
director, officer or person to the holder of the promissory note, cheque etc if the
non-compliance with subsection 3 results in non-payment by the company. The
qualification herein is not worded like that in the old section 50. I, however,
submit that the interpretation is the same as it really has the same effect.
7
HS Cilliers at al 2000 3rd ed. Corporate Law Butterworths at 11.

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2. S66. Where a public company’s membership is less than 7 then the members
shall be liable for its debts. There are several exceptions hereto:
a. wholly-owned subsidiaries are excluded;
b. the company should have carried on business for more six months whilst
its members are less than seven;
c. only persons that were members for more than the six months in
question will be liable;
d. only those members that were cognizant of the reduced numbers will be
liable
In this instance such members shall be liable for the whole debts of the company
incurred during that period. It is to be noted that although the length should at
least be six months, the members shall be liable all debts contracted during the
period of reduction of the number of members.
Section 72 is the Namibian equivalent hereof and is exactly the same as the old
section 66.
3. S344 (h). This section provides that a company may be wound up if it is just and
equitable to do so. In this instance the court has regard to the actual state of
affairs between the members.
Section 349 (h) is the Namibian equivalent and is an exact replica of this
section.
4. S252 court’s discretion to make an order that it deems fit if X complains that he
company’s affairs are run in a manner that is unfairly prejudicial, unjust and
inequitable.
5. For purposes of AFS the different holding and subsidiary companies are not
treated as separate entities but as an economic unit or a business unit. This
stems clearly from section 288. Section 288(3) in particular provides that a
director or officer who does not comply shall be guilty of an offence.

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Section 296 is the Namibian equivalent hereof. Subsection 3 imposes a penalty

of N$2000 or a six months jail term or both on a director or officer who does not
comply.
6. S424. In the case of fraud, recklessness with intent to defraud creditors, any
person who was knowingly part of the carrying of the business in the said
manner will be personally liable, without limitation of liability, for the debts of the
company.
There are several important requirements to be derived and proven in terms of
subsection1.
a. It must appear that the business of the company was carried out
recklessly or with intent to defraud creditors or any person or that it was
carried on for a fraudulent purpose;
b. The Master, liquidator, judicial manager, any creditor or member or
contributory of the company may apply to court;
c. That any person who was knowingly part of the carrying on business in
the said manner;
d. Be declared to be personally liable for all or any of the debts or other
liabilities of the company as the court may direct.
Subsection 3 goes on to impose a penalty on such persons irrespective of any
other criminal liability the person may incur. Section 424 is further supplemented
by section 423, 425 and 426.
The Namibian equivalent hereof is section 430. Same is an exact replica of its
forerunner except that subsection 4 imposes a penalty of N$8000 or 2 years
imprisonment or both. This section is further supplemented by sections 429, 432
and 431.
7. S332 of CPA 51 of 1977 where X, a director or officer commits an offence

within the line of duty, the company incurs criminal liability.

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H.2. Disregard by the Court.

Where the court mero motu pierces the corporate veil
The facts in Daimler Co. Ltd. v. Continental Tire & Rubber Co8. were that D was
incorporated in 1905 to trade in England in motor car tires made in Germany by a
company incorporated in Germany, under German law. D had offices in London: ₤2500
in ₤15 shares. The German company held all the shares except one. The one share was
held by Wolter, born in Germany but resident in England i.e. a naturalized British
subject. Wolter was the company secretary. When war broke out between England and
Germany on 4/08/1914 the company had 4 directors. 3 resided in Germany. One, B, in
England before the war but left the country.
Issue: D sued defendant, Cont. Tyre Co. for payment of goods supplied by D before
the war.
Defendant says:
1. It is illegal to trade with or pay to or for the benefit o which enemies during the
war and that in substance and in fact D is an alien company.
2. The solicitors of the D had no authority to issue the writ in the action (irrelevant)
o Robinson v. Randfontein Estates Gold Mining Co. Ltd 1921 AD 168 @ 194 –
195.
o Botha v. Van Niekerk 1983 (3) SA 513 (W) 525 B: court refused to pierce the
corporate veil.
TYPES OF COMPANIES (Ch III of the Act)
Only two types (s19 (1)):

o A company with a share capital
o A company without a share capital and members’ liability is limited by the memo
of association. Therefore, a company limited by guarantee. So, an s21 company
is one such company/association not for gain.
FORMS OF COMPANIES
A. Company having a share capital
1. Public company
2. Private company
8
1916 AC 307

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o Obtains capacity by the issuing of shares.

o Normally its members stand to lose no more than the amount paid by them for
their shares.
o The law expects that the company’s capital will be to some extent at least,
contributed by the members (this distinguishes it from a company limited
by guarantee).
o Shares may have par value or they may not have par value:
Par value shares: where the shares are of a fixed amount (nominal value).
Non par value: where the shares are of a fixed number.
1. The Public company
o At least 7 persons (s. 32 – formation)

o Associated for a lawful purpose (s54 (2) signing the memo)
(s66 personal liability for the membership
if less than 7 at any point)
o Name ends with (Ltd) limited
o Can raise capital from the public
o Members can freely transfer their shares and interests in the company
o Members of the public are/may become freely interested in it i.e. its ‘open’
o Articles do not contain limitations on the number of members
o Articles do not restrict the offering of shares to the public
o Resultantly, there are comprehensive provisions for the compulsory disclosure of
info concerning the company to the public is concerned.
o Compulsory lodging of AFS with the Registrar of companies
o The company may list on the Stock Exchange if they can get consent from the
Stock Exchange committee
o WHY?
1. capacity as ‘capital pump’
2. ability to mobilize substantial capital from a large number of investors

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3. put the company at the disposal of specialists who employ it in economic

ventures for the benefit of investors
4. impersonal relationship between shareholders inter se and between them and
management.
2. The Private Company

o Need at least 2 persons
o Associated for a lawful purpose
o But if the company is to have only one member then only one person is needed
to form it. (s. 32 & s. 54(2))
o Ends in (Pty) Ltd
o Restricts the right to transfer its shares
o Limit its numbers to 50
o Must prohibit any offer it its shares or debentures to the public (s. 20(1))
o A private co with one member:
 He alone constitutes a meeting (s. 189)
 He alone constitutes a quorum (s. 190)
o NOTE: In 1968 a private accompany was introduced with unlimited concurrent
joint and several liability of the directors. WHY? To make it possible for
acknowledged professions practicing in partnership to become incorporated
under the companies Act of 1926.
o PRESENT: s. 53B – The private company inserts a provisio in its memo for the
joint liability of directors and past directors. For the debt of the company which
were/are contracted during their periods of office.
Therefore, ‘Incorporated’ or Inc. – (s. 49(4) and 50(1)) – cannot use the
words (Pty) Ltd.
o The provisio of joint liability may be included at any time in the memo by way of
a special resolution and n the written consent of the directors BUT it may only
be removed by special resolution if the court is satisfied that it is ‘just and
equitable’.
o ISSUE:
 Mainly for professional association

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 But other people may use it too

 Therefore, professional company
 Normally attorneys, stockbrokers and quantity surveyors
o CIR v. Louw 1983 (2) SA 551 (A) 575 – 576
B. Company not having share capital: Limited by Guarantee
o At least 7 persons needed (s. 32)

o Ends in Ltd. It must say “Limited by guarantee” to distinguish it from the
ordinary company
o No share capital (s. 19 & s. 40(2)) but the liability of its members is
limited by the memo to the amount (not being less than N$1,00 per
member) which the members undertakes to contribute in the event of the
company being wound up (s. 52(3)(a))
o (s. 20(1)) it cannot let X participate in the company’s profits when X is a
member
o All companies limited by guarantee are deemed to be public
companies for purposes of the Act (s. 19(3)).
o Therefore, must lodge AFS with the Registrar
o But it is exempted from the obligation to send and lodge interim reports
and provisional AFS
o It does not obtain its initial starting capital from its members but relies on
loans, donations, fees, etc.
o Not suitable for business purposes
o Used mostly where the object is not one of gain, e.g. research
associations, NGOs
o s.21 is an example
o But since there is a special section dealing with it (s.21) then the name
must end in ‘incorporated association not for gain’ e.g. arts, culture, etc.
C. Unlimited company

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o No more but those incorporated before the Act will continue
D. External company
o (s.322) lodging memo within 25 days of having established a place of business.
CONVERSIONS ALLOWED
1. public – private
2. private – public
3. company – s. 21 association
4. company – co. limited by guarantee
5. unlimited company – any form of company
6. co limited by guarantee – co with a share capital
CASES:
s. 53(b):
Fundtrust (Pty) Ltd (in liq) v. Van Deventer 1997 (1) SA 710 (A)
Question: What is the extent of the directors’ liability for the debts of an s.53 (b)
company?
o The liabilities and debts are limited to contractual ones. Not extended to delict,
enrichment or other statutory liability.
o The Act does not relate the directors’ liability to unusual events or anything other
than the ordinary financial or commercial commitments.
o It is limited to those liabilities arising out of the company’s ordinary business.
o Therefore, it leans more towards the preservation of legal personality.
o The provision (of liability) must be construed strictly. Precisely became the
section impinged on the principle of corporate existence and imposed upon
directors a liability which they did not have before.

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o CIR v. Louw
THE PROMOTER AND PRE-INCORPORATION CONTRACTS
o Promoter = the person that floats the company

o The promoter often needs to enter into contracts that will have a binding effect
on the company when it is formed.
o This is mostly done as a matter of expediency.
The common law rule

o Prior to incorporation, a company is not a legal person and hence cannot be a
party to a contract.
o Since the effect of ratification isa retroactive, a person cannot, as per common
law, act on behalf of a non-existent principal or mandatory.
o Under common law, promoter cannot act as or conclude contracts as the
representative of a company still to be formed. If such person so attempt,
he shall be personally bound by the contract. After incorporation, the
company will not be entitled to any of the rights under such a contract
o NB: McCulogh
o Had practical and economic consequences!
o Therefore, s. 35:
 Company may ratify/adopt as its own
 After its incorporation
 Any written contract
 Entered into by X purporting to act as the company’s
agent/trustee
 Before its incorporation
o BUT these requirements to be met:
a. Contract must be in writing: wide enough to cover oral contracts but

reduced to writing later. Q: When later, surely before incorporation.

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b. X must have acted as agent/trustee for a company not yet formed:

person must have acted as such. What is important is the capacity in which he
transacted not eh description he used.
c. Memo of company on registration must contain as an object the
ratification/adoption of the contract: object cannot be inserted
subsequently. The specific contract must be described in the memo so that it
can be identified with certainty.
d. Two copies of the contract must be lodged with Registrar; one of them
must be notarized. These are lodged together with the lodgment of the
memo: Can a lost copy be lodged subsequently?
e. Company must actually ratify/adopt the contract after its incorporation
and it is a company with a share capital, it must be entitled to
commence business: contract will then come into existence between the
company and the third person. If a company with a share capital, it cannot
ratify same unless it has a certificate to commence business. Therefore, the
contract will be provisional until the date that it gets the certificate.
o NB: Company may decide not to ratify the contract. If it does not then no one
incurs liability.
o Q: What if the other party incurred expenses etc?
o NB: Parties may argue no consequences if no ratification.
Cases:
1. McCullogh v. Fernwood Estate Ltd. 1920 AD 204:

A company can’t ratify a contract made for its benefit before its was formed nor can
adopt such contract by resolution. A new agreement on identical lines is necessary.
2. Botha v. Caraprax Shadeports (Pty) Ltd 1992 (1) SA 202 (A)
Alternative Methods:

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1. Stipulatio Alteri
o s.35 is permissive, not peremptory.
o Introduced to enable promoters to contract.
o Benefit of a third person.
o Need not comply with provisions of s.35.
o The third party needs not be in existence.
2. Cession
o If promoter contracts in his personal capacity prior to incorporation of
company.
o May cede his rights to the company.
3. Nomination
o Nominate company as purchaser.
RETROSPECTIVITY?
o S.35 No, contract comes into existence at the time of ratification and not
retrospectively to the time of contraction.
o Q: Why is this treated different from the ordinary rules of agency where
ratification is retrospective?
o Q: s.35 says “as if it had been duly incorporated…”
o Peak Lode Gold Mining Co Ltd. v. Union Government 1932 TPD 48:
 Issue of transfer duty on sale of base metal and gold

mining claims. Rooth was urgent for P.L.G.M.
 Q: Who was liable for paying the transfer duty?
 A: reference to the Co Act of 1926 which introduced co.
ratification, etc.
 “It is immaterial in which capacity the person acted
(trustee/agent). These are to be seen as the same”.

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 Emphasis is that ratification is retroactive.

o NB: s.35 applies to where a person acted individually as an agent for the
company.
o Stipulatio alteri applies where a person acted individually for the benefit of a
third party.
o Nordis Construction Co (Pty) Ltd v. Theron, Burlet Isaac 1972 (2) SA

339 (N):
 N tendered to do work for a company. Tender as

accepted by T def who professed to act as agent of the
company. Both parties believed the company to be
already in existence. It was not, therefore s.71 was not
met. Company later incorporated but did not ratify the
contract.
 Issue: N wants to hold T personally liable on the
contract.
 Leon J:
1. S.71 is not applicable.
2. No stipulatio alteri as T acted as agent.
3. Therefore, company cannot ratify.
4. Issue: here the parties thought that the company existed
and T was therefore acting as an agent for an entity in
existence.
5. The principal was intended to be the company. To hold
defendant liable upon a contract would be to make a new
contract for the parties which neither of them intended.
o Sentrale Kunsmis Korporasie (Edms) Bpk v. MCP 1970 (3) SA 367 (A):
 Q1: Subsequent adding of ratification object: Test. Point

-s.25 has changed that.

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 Q2: Failure to lodge copies – Is this fatal? No but

Trollip dissented.
DUTY TO ACT WITH CARE AND SKILL
o A Director must exercise his powers and carry out his office bona fide and for the
benefit of the company. In so doing, he must exercise the required degree of
care and skill.
o Problem: It is not clear by what standards the ‘care’ and ‘skill’ are measured.
o ‘Care’ is objective but ‘skill’ differs from person to person.
o You need not be of a certain profession BUT directors are required to apply the
skill that they do possess to the advantage of the Company.
Fisheries Development Corporation of South Africa Ltd. v. Jorgensen 1980 (4)

SA 156 (W) @ 165:
(a) Care and skill depend considerable on the nature of the Company’s business
and any particular obligations assumed or assigned to the director. (E.g.
difference between executive and non-executive directors.
(b) Director is not required to have special business acumen or expertise or

singular ability or intelligence or even experience in the business of the
Company. BUT he is expected to exercise car which can reasonably be expected
of a person in his knowledge and experience. Important, a director is not liable
for mere errors of judgment.
(c) In respect of all duties that may properly be left to some other official, a director
is in the absence of specific grounds for suspicion, justified in trusting that official
to perform such duties honestly. Therefore:

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 Director is entitled to accept and rely on the judgment, information and

advice of the management, unless there are proper reasons for
questioning such.
 But reasonable care expects of director not to accept the information or
advice blindly.
 Director must also exercise his own judgment.
Breach?
1. Liable to the company in delict for damages.
2. Contractually too if there is a contract between the company and director.
CONDUCT TOWARDS MEMBERS
A. No fiduciary duties towards individual members

o Director must act in good faith towards the company; therefore, the
members will derive benefit out of his bona fides. BUT that is members
as a group. D has no fiduciary duties towards individual members.
o Is impossible for director to maintain a fiduciary relationship with both the
company and individual members. WHY? Their interests may diverge.
B. The right to deal in shares
o Percival v. Wright [1902] 2 Ch 421:
 D having inside information of company affairs at his

disposal may buy and sell shares in his company for his
personal gain without being required to disclose that
information to the other party.
 Issue: a shareholder who offered his shares for sale at his
price cannot have the transaction set aside by reason of
the fault that the director, with inside information at his
disposal purchased the shares at the member's price and it

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later appeared that the shares were worth considerable

more.
 Persons negotiating with directors over shares must know
that the directors possess special knowledge of corporate
affairs.
 BUT the major considerations were that:
1. There was no unfair dealing on the part of the directors.
2. The directors did not approach the members.
3. The members approached the directors.
4. Transaction was concluded at the member’s price
C. Prohibition of insider trading
o s.440F (1): Any person who directly or indirectly knowingly deals in a

security on the basis of “unpublished price-sensitive information” commits
an offence.
o s.440F(2): Unpublished price-sensitive information is defined as
information which:
1. Relates to internal matters of the company relating to operations, assets,
earning power, etc.
2. not generally available to the reasonable investor in the relevant market
for that security
3. Would reasonable be expected to affect materially the price of such
security if it were generally available.
o s.440F (3): Rebuttable presumption which favors of the state.
o s.440F (4): Civil remedy v. those who violated s.440F (1).
o s.440B: enacts a Security regulations Panel.
o Sentence: N$500 000 or 10 years or both. In SA this now stands at over
a million.

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D. Common Law Limitation on the Right to Deal
o Misrepresentation if director does not inform the other party.

o Director’s advice for shareholders in a take-over must be honest and not
misleading.
o So: In the case of misrepresentation by director, the transaction is
voidable at the instance of the shareholder.
RESTRICTIONS ON DIRECTORS (s.221 – ff)
Restrictions on benefits to Directors:

o In a take-over situation, directors may not be paid for loss of office (s.227).
WHY? They might abuse their influence!
o (s.222) it is only in limited cases that directors may issue shares to themselves
and their relatives.
o (s.223) Share option plans: Only valid in certain cases, namely-
a. where director receives no undue preference
b. if approved by a special resolution
c. where the right is given to director but in his capacity as an employee
o (s.225) Tax fall payments to directors are prohibited
o Loans to directors
o Issue of shares by directors is subject to prior by a general meeting (s.221)
o Ordinary resolution to dispose of the whole or a substantial part of the
company’s assets (s.228)
o (s.284) Directors have special responsibilities in regard to accounting records
and disclosure.
LOANS TO DIRECTORS
o That was prohibited because of the strong influence and pressure that directors
can exert on the company.
o Now: sections 37, 226, 295, 296

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o Therefore:
1. No loans to certain directors and managers
2. Disclosure of the binding company’s AFS in the case of those which have been
exempted from the prohibition
3. Disclose all loans made to X before he was a director or manager.
o Now:
o s.226:
 Prohibits loans of money, shares or any other property
 To directors and management of the holding company or subsidiary etc.
 Not only loans; also the provision of security, guarantees.
 Directly or indirectly
 Several exemptions:
a. prior consent of all members or special resolution
b. funds to director to meet company expenditures
c. anything done bona fide in the ordinary course of the company’s business
d. for purposes contemplated in s.38(2)(b) and (c)
e. approval of general meeting too
o s.295:
 Some of the loans exempted in s.226 must be disclosed in AFS of
the company. Therefore, state amounts and particulars of the
loans, every security given also.
o s.296:
 Disclosure in the AFS loans and securities to directors and
managers before their appointments as such.
CAPACITY AND REPRESENTATION OF THE COMPANY
GENERAL REQUIREMENTS FOR BINDING THE COMPANY:
o Use the general rules of agency:

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a. Company must have the necessary capacity and powers to perform the particular
juristic act.
b. Company representative must have the necessary authority to bind the company
I relation of the particular contract. In addition, the company can, in given
cases, complement the representative’s deficient authority by ratification
(expressly or tacitly) of his acts.
o All company law requirements could not be met by the general principles of
agency. Hence, a special branch of the law of agency evolved.
o Therefore, we deal here with:
1. Particular statutory provisions
2. Doctrine of constructive notice
3. Turquand rule
4. Estoppel
CAPACITY OF THE COMPANY
o Company possesses only those capacities and powers for which the objects
clause in the memo has made provision for.
o Prior to the companies Act 1973, transactions beyond the scope of the company
were ultra vires and void.
o Section 36 has now brought relief to the other party but the company’s limited
capacity and powers remain the basic premise.
THE ULTRA VIRES DOCTRINE
o The significance of this doctrine has rather diminished as a result of the statutory
arrangement
o Features:
 Developed on company law
 A company incorporated in terms of a general enabling Act such as the
Companies Act exists only for the objects for which it has been incorporated
and has only the capacity to perform acts as are indicated in its objects.

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 Also, the memo and articles constitute a contract between the company and a
member and between the members inter se so that a member in his capacity as
a member could invoke the objects as formulated to compel the company to
observe its objects.
 Ultra vires doctrine is contemplated by the doctrine of constructive notice:
therefore, anyone dealing with a company (including its members) is
deemed to be fully acquainted with the company’s public documents,
one of which is its memo with its objects clause. It means that no
person can assert as vs. the company that he was unaware of the
limitation placed on the company’s capacity by its objects as
formulated in the memo.
 An act ultra vires the company was void. Any contractual or other obligation
beyond the scope of the company’s objects was sought to be imposed on such a
company was unenforceable in law. Any of the parties to an ultra vires
transaction was entitled to invoke its invalidity.
 Since an ultra vires act was void, each party was obliged to restore to the other
what it had received.
 Or else, there was an action for unjustified enrichment.
 The company’s agent who conducted the ultra vires act was liable for damages
to the company but the court, in its discretion, could relieve the directors.
 The agent could also incur liability to the other party if the other party could
not have ascertained from the memo that the transaction was ultra vires.
 Q: On what basis? On the basis of an implied warranty given by the
agent that he had authority to bind the company or his
misrepresentation in this regard.
 NB: the present Act has by and large neutralized these set of rules
o Ashbury Railway Carriage & Iron Co. v. Riche (1875) LR 7 HL 653
Facts: Memo: co has power to make and sell railway carriages. Directors entered into
a contract to purchase a concession for constructing a railway in Belgium.

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Q1: Was this contract valid?
Q2: If not, can it be ratified by the members?
Lord Cairns:
o (666) a contract of this kind was not within the words of the memo.
o The purchase of the concession was not within the memo.
o (667) by so contracting they then employed the plaintiff to construct the
railway.
o That was reversing entirely the whole hypothesis of the memo and was the
making of a contract not included within, but foreign to, the words of the memo.
o (670) the mode of incorporation contain in it both that which is affirmations and
that which is negative. It states affirmatively the ambit and extent of vitality and
power which by law are given to the company and it states therefore that
nothing shall be done beyond that ambit…and that no attempt shall be
made to use the corporate life for any other purpose than that which is
so specified.
o (671) The memo is, as it were, the area beyond which the action of the
company cannot go, inside that area the shareholders may make such
regulations for their own government as they think fit.
o (672) Contract was entirely beyond the company’s objects; therefore
the company did not have the power to contract on that. Contract was
void because co could not make it. Even the unanimous assent of all
shareholders cannot ratify the contract.
o NB: Paragraph h on p.118 Student Casebook on Partnerships & Entities
o Attorney-General v. Mersey Railway Co. [1907] 1 Ch 81 (HL):
 How to determine ultra vires

 Incidental/consequential acts
 All such steps as are reasonable necessary for ensuring that
purpose are intra vires

lOMoARcPSD|37193597
Company law 26
THE STATUTORY ARRANGEMENT
o The Act now has a different approach to the ultra vires doctrine. It is
summarized as follows:
a. The premise that a company possesses limited capacity remains intact.

b. The memo must set out the company’s powers clearly and concisely.
c. Directors must act within the company’s capacity as set out in the memo. Or
else?
-they may be called to account
-this protects the company and its members against abuse
d. The provisions relating to the capacity form part of the contract that exists in
terms of s.65 (2) between company and its members.
e. s.36 removes the unfair operation of the ultra vires doctrine as it states that no
act of the company shall be void by reason of lack of capacity
o Now: the memo and the company’s powers:

1. s.33 Capacity, main object, ancillary objects
2. s.34 Powers
3. s.52 Requirements of the memo
Main import of section 36 – changed drastically the common law ultra

vires position:
o No act of the company is void merely by lack of capacity. It does not abolish the
ultra vires rule. It only changes the effect of ultra vires acts. Therefore, in
the put it was void, now it is valid BUT it still remains ultra vires.
o s.36 does not abolish the doctrine of constructive notice. But it has become
irrelevant as far as the main objects clause in the memo is concerned.

lOMoARcPSD|37193597
Company law 27
o Doctrine of constructive notice still applies to other provisions of the memo. In

other words, a company may still avoid liability by proving that its agent lacked
the necessary (capacity) authority to bind the company.
o Q: Can one neutralize s.36 by providing in the Articles that the board of
directors will not have the authority to perform an act outside the objects clause
of the company? No! Such a provision will be pro non scripto!!!
o Company is bound even though the other party may have known that the act is
outside the company’s capacity or power and even though this type of
transaction may have been specifically excluded in terms of s.33 or s.30.
o As to directors lack of authority? The word used is ‘directors’. Will the section
apply if one/sole director acts? It could be a problem technically but it is
submitted that ‘directors’ must also include the singular!!
o Will the section apply if a manager or other person acted? No for he will not be
a director, in other words, this will curtail the impact of s.36.
o S.36 allows for ‘internal purposes’ a member, director or company to apply for an
interdict to prevent an ultra vires act. I.e. you want the company to be
conducted within its capacity.
o In order to be effective, the injunction must be made before the company
contracts in an ultra vires manner. It if does then the members will be penalized
and must yield to s.36.
o The company can proceed against a director who has acted ultra vires.
o There are certain principles which are not affected by the import of
s.36 as far as the Representation of the company is concerned, they
are:
1. Doctrine of Disclosure
2. Constructive Notice
3. Turquand Rule
4. Estoppel
DOCTRINE OF DISCLOSURE

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Company law 28
o The crux of the doctrine lies in that his disclosure of prescribed information
provides protection for certain interested parties and disclosure serves to
regulate corporate conduct better than imposing a regulatory and prescriptive
provision.
o By registering the Articles and Memo the company discloses.
o Company has a duty to disclose at every stage of its time from incorporation to
deregistration. The history of the company is kept at the Registrar of companies.
o AFS, Prospectus published in papers etc. therefore protects potential
shareholders or investors, creditors and other 3rd persons dealing with the
company.
CASES
o Freeman & Lockhyer v. Buckhurst & Park (Mangol) Ltd 1964 All ER 630
(A) @ 640F-G, 641E-H, 648C-F
o Royal British Bank v. Turquand (1856) 6 EHB 327; 119 ER 886
REDUCTION IN SHARE CAPITAL
o The rule: Maintenance of share capital: the rule protects the integrity of
contributed capital.
o Protects the interests of creditors.
o Besides the capita maintenance rule, there are two other rules:
1. Reduction of share capital
2. Variation of the composition of share capital
1. Reduction:
o A statutory exception to the capital maintenance rule
o To protect the rights of creditors
o The share capital must be maintained for their benefit
o Many reasons for reducing share capital:

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Company law 29
a. less accumulated losses

b. excessive capital
c. fixed assets are overvalued
d. preliminary expenses are too high
Therefore, by reducing the company’s balance sheet will reflect a more
realistic picture.
o Only issued share capital is affected

o s.83: no need for court confirmation
o By special resolution
o If there are no creditors – the creditors all agree
o All shares are affected
o s.84: subject to court confirmation:

o Where 83 cannot apply.
o Company may reduce in any way but subject to confirmation b a court.
o Apply for confirmation within 60 days of passing the resolution to that
effect.
Q: How reduction is done

1. By canceling any paid-up share capital.
2. Paying back any paid-up share capital which is in excess of the needs of the
company.
Creditor’s right to object

o s.85(1); s.86
o If the reduction involves the payment of paid-up share capital to a
shareholder or if the court so directs.
Powers of the Court:

o When asked to confirm a reduction, the court has several powers:
1. Confirm reduction.

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Company law 30
2. Grant a rule nisi calling on all persons concerned to show cause why an order
confirming the reduction should not be made.
3. Where the reduction involves a repayment of capital to shareholders or where
shareholders are entitled to object, the court must issue a rule nisi.
Specific duties of the Court:
1. Ascertain that all formalities have been met.

2. Consider whether the proposed reduction is fair and equitable as between
shareholders inter se and particularly as between different classes of
shareholders.
3. Court must safeguard the interests of existing creditors.
4. Court must safeguard the interests of the general public, etc.
Generally:
1. Special resolution is needed for reduction of capital.

2. Reduction will only be effective when the special resolution is registered by the
Registrar (s.88).
3. Publication of the reduction capital by Registrar within 1 month of registering the
special resolution (s.89).
3. Alteration of Share Capital & Shares (s.75)
o Capital Maintenance:
1. Protect the fund
2. Must only be lost/diminished in the course of the company business
3. Do not impair it otherwise
Common law rules:
1. don’t pay dividends out of share capital

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2. company cant buy its own shares

3. don’t issue shares at a discount
FINANCIAL ASSISTANCE IN THE PURCHASE OF SHARES
s.38 (1):
o Give
o Directly & indirectly
o Loan, guarantee, provision of security or otherwise
o Financial assistance
o For the purpose of or in connection with a purchase or subscription
o By any person…
s.38 (2):
o Exceptions:
1. lending of money in the ordinary course of business, in other words, money-
lending company
2. trust (employee share trust) Pay n Pick
3. loans to employees to subscribe for shares
s.38 (a)
Offences, etc.
o Now: common law: a company cannot purchase its own shares because if it
does so, it forfeits the purchase price and thereby reduces its share capital.
EXAMPLES:
1. Co lends money to A to put A in funds to buy shares from existing member.

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Company law 32
2. Co guarantees B bank overdraft and on the security of this the bank advances
money to B so that he can buy shares in company.
3. Co lends money to C so that C can repay a loan provided earlier by C’s bank
which C has already used to buy shares.
4. Company buys a piece of land form D knowing that D will use the purchase
money to pay for his shares in the company.
o If the company is a subsidiary, the prohibition also extends to financial

assistance in respect of the purchase or subscription of shares in its holding
company.
Exceptions:
1. Company’s main business is money-lending and the lending is done in the
ordinary course thereof.
2. Employees share trust
3. Co bona fide employees to purchase shares in the company on their own behalf.
CONTENT OF SECTION 38
o Section 38 is too wide and too general

o Lipschitz v. UDC Bank 1979 (1) SA 789 (A): the prohibition consists of the
giving of financial assistance and the purpose for which it is given.
Giving of financial assistance

o Financial assistance not defined
o Test: impoverishment: Q: has the company become poorer in
consequence of what it did for the purpose of or in connection with the
purpose or subscription of its shares. If yes, then it is impoverished
and has therefore given financial assistance.
o Gradarell v. Rostra Printers 1959 (4) SA 419 (A)
o Problem with Lipschitz supra norms:
1. this is not the only test
2. this test is not accurate

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3. s38 expressly includes in financial assistance acts not necessarily involving

impoverishment of the company or the employment of pecuniary resources e.g.
giving guarantees and security
4. Therefore, the test must be used depending on the form of financial assistance.
Purpose of financial assistance
o For the prohibition to link in, the purpose must enable X to purchase and
subscribe to the company’s shares or in connection with the purchase of such.
o A: “In connection with” Lipschitz:
1. means ‘for the purpose of’
2. It was inserted merely to close possible loopholes.
Consequences
o Civil and criminal:

1. transaction is void
2. any accessory obligation which is not severable from it is also void
3. directors could be held liable for breaching their fiduciary duties
4. company has remedy against both parties
Other cases:
Fidelity Bank Ltd v. Three Women (Pty) Ltd [1996] 4 All SA 368 (W)
Facts: Y sued X for money lent to it on two acknowledgement of debt. Other

defendants were sued in their capacity as trustees. V, 2nd defendant, was the sole
shareholder of X until shares were transferred to 3rd and 4th defendants. Loan was
applied prior to the share transfer. Company mortgage, V …..
Q: Did the 2nd loan agreement contravene s.38 and therefore the acknowledgments of
debt unenforceable?

lOMoARcPSD|37193597
Company law 34
Court: Impoverishment test is not always suitable.
MINORITY PROTECTION
o Company law is based on the principle of majority rule

o Company affairs are decided by majority of votes.
o As long as the majority acts lawfully, no court will interfere with its decisions.
o Implication: Majority rule implies that the majority may under certain
circumstances ratify an unlawful acts.
o The Q: when will the court be prepared to restrict the majority?
(a) Company itself to assert corporate rights

o If a company is wronged, it must itself act to have the wrong redressed.
A member or a group of members cannot normally do so for the
company.
o But if the company is unable to act, e.g. since the managers are in
control of the company, them via a derivative action, someone else may
act.
(b) Foss v. Harbottle

Based on the principles of separate legal personality and majority rule.
RULE:
When a wrong is done to a company, it is the company that must institute
action.
If the company fails to do so, a member may, in certain cases, institute
action on behalf of the company but then in the3se cases a member
cannot act if the wrong concerned is one which a simple majority can
condone or ratify.

lOMoARcPSD|37193597
Company law 35
In wrongs done to company on internal irregularities, it is the managements

of the company minorities all powerless if the acts complained of can be
ratified condoned by a simple majority.
Minority cant institute action against the majority.
But a minority is not liable for the unlawful acts of the majority.
Certain wrongs or irregularities cannot be ratified. If an attempt by the
majority to ratify such acts is not binding on minorities and they can
therefore institute action to assert their rights.
Issue: the rule does not protect the minority; it just confirms the majority rule.
Real protection of minority rights is to be found outside the rule.
Unratifiable acts fall outside the scope of the rule
Q: Which wrongs can be ratified?
Remedies:
1. Derivative action: Where the company does not act, the member derives that
right of action from the company.
2. Individual action: to assert his individual membership rights and to protect his
rights and the company constitution or on other grounds and refer to his
members as such. These rights belong to him personally are\d are not subject
to majority rule (E p.292)
1. Personal Action
o He can sue the company instead of relying on the derivative action
o When:
Breaches of the rights of a member deemed from the memo or articles.
Unratifiable illegal conduct
Fraud on the minority: from English law:
‘fraud’ is wider than fraud in ordinary language
It denotes abuse of power not fraud per se
Therefore covers wrongs to the company and wrongs to the
members.
X must have been prejudiced by the wrong.

lOMoARcPSD|37193597
Company law 36
Note: abuse of power is only if it cant be ratified.

Problem: up to how far can the company ratify abuse of power?
2. Derivative Action
o For wrongs done to the company
o If co does not wish to or cannot act against wrongdoers, then in certain cases X
may act on its behalf
o X acts on behalf of himself and all the other shareholders except the wrongdoers
o Company is added as a criminal defendant
o When instituted? When an unratifiable wrong has been don to the company and
company cant/wont institute action because the wrongdoers control the
company
Unratifiable wrongs:
o Ultra vires acts
o Unlawful conduct
o Fraud on the minority
o Therefore, a wrong is not ratifiable if:
a. the wrongdoer in his capacity as director acted mala fide towards the company
b. if the resolution to ratify results in the wrongdoer receiving a benefit at the
company’s expense.
o S.266 The statutory derivative action
Power of curator ad litem 301/2
o S.252 Relief from oppression
Duty to Act with Care and Skill
o must exercise his powers and carry out his office bona fide and for the benefit
of the company.
o In so doing he must exercise the required degree of care and skill.
Problems
o It is not clear by what standards the 'care' and skill are measured.

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Company law 37
o 'care' is objective 'skills' differ from person-to-person.

o You need not be of a certain profession. But Directors are required to supply the
skill as they do possess to the advantage of the company.
o Therefore Fisheries Development Corporation of SA Ltd v Jorgerisen

1980 (4) SA 156 (w) 165
a. Care and skills depend considerably on the nature of the company's business and
any particular obligations assigned to him. (e.g. difference between executive and
non-executive.)
b. D is not required to have special business acumen or expertise or even experience

in the business of the company. But he is expected to exercise the care which can
reasonably be expected of a person with his knowledge and experience.
Questions
o NB: A Director is not liable for mere errors of judgment
o C In respect of all duties that may properly be left to some other official, a
director is, in the absence of specific grounds for suspicion, justified in trusting
that official to perform such duties honestly.
o B is entitled to accept and rely on the judgment, information and advice of the
management, unless these are proper reasons for questioning such.
o But reasonable care expects of the director not to accept the information advice
blindly.
o B must also exercise his own judgment.
Breach
o Liable to the company in delict for damages
o Contractually too if there is a contract between the company and director.

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Conduct towards members:

o
No fiduciary duties towards individual members:
o Directors must act in good faith towards the company therefore the members
will derive benefits out of his bonafides. But: that is members as a group. has
no fiduciary duties towards individual members.
o Is impossible for Directors to ------- a fiduciary help with both the company and
individual members. Why? their interests may diverge.
The right to dial in shares:

Perciral v Wright ( 1902) 2 (421) England)
o Director having inside information of company affairs at his disposal may buy
and sell shares in his company for his personal gain without being required to
disclose that information to the other party.
o A shareholder who offered his shares for sale at his price cannot have the trans
set aside by reason of the fact that the director, with inside information at his
disposal purchased the shares of the members' price and it later appeared that
the shares were worth considerable more.
o Persons negotiating with directors over shares must know that the directors
possess special knowledge of corporate affairs.
But the major consideration was that:

1. There was no unfair dealing on the part of Directors
2. The director did not approach the member
3. The member approached the Directors.
o Trans was concluded at the member's price
Prohibition of insider trading:
s440 F (1) :
"any person who directly or indirectly , knowingly deals in a security on the hairs of
'unpublished price-sensitive information,' commits an offence.

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s440 F(2) :
Unpublished price-sensitive information is defined information which:
1. relates to internal matters of the company such as operation, assets, carrying
power, etc;
2. not generally available to the reasonable interest in the relevant market for
that security;
3. would reasonably be expected to affect materially the price of such security if
it were generally available.
s440 F(3) : seb--

presumption in favour of the state
s440 (4)
civil remedy vs those who violated S440 F (1)
S440B
enacts a Security Regulations Panel
Sentence :
500 000 or 10 years: or both. In South Africa, this now stands over a million
Common Law limitations on the rights to deal

o Misrepresentation if the director did not inform the other party.
o Directors advise for shareholder in a takeover must be honest and not
misleading.
o So, in the case of misrepresentation by the director, the transaction is voidable
at the distance of the shareholder.
Restrictions on directors s221(FF)

o a restrictions on benefits to Directors
o in a takeover situation, the director may not be paid for loss of office.

lOMoARcPSD|37193597
Company law 40
o s227
o WHY?
they might abuse their influence!
o s222 Its only in limited cases that Directors may issue shares to themselves and
the in relations.
o s223 share option plans: Only valid in certain cases:
a. where directors have no preference
b. If approved by a special resolution
c. Where the right is given to D but in his capacity as an employee.
s225 Tax fall payments to directors are prohibited

o Issue of shares by directors is subject to/prior a general meeting. s221
o Ordinary resolution to dispose of the whole or a substantial part of the
company's assets. s228
o s284 Directors have special responsibilities in regard to accounting records and
disclosures
Loans to Directors:
o This was prohibited because of the strong influence and pressure that D's can
exert on the company.
o Now: See s37, 226, 295, 296.
Therefore
1) No loans to certain directors and managers
2) Disclosure of the landing company's is the case of who have been exempted from
the prohibition 3) Discourse all loans made for before he was a director or manager.
Now:
s226
o prohibits loans of money, shares or any other property
o to directors and manager of the landing company, holding company or

lOMoARcPSD|37193597
Company law 41
subsidiary, etc.
o not only loans: also the provision of security, guarantees
o directly and indirectly
General Exemptions:
prior consent of all members or official resolution
o funds Director to company expenditures
o everything done bonafide in the ordinary cause of the company's
business.
o for purposes contemplated in s38(2) (b) and (c)
o approval of general meeting to housing of director or manager
s295 :
o Some of the loans exempted in S226 must be disclosed in AFS of the company.
o State amounts and particulars of the loans
o every security given
s296 :
o Disclosed in the AFS loans and securities to Directors and managers before their
appointment as such
Capacity and Representation of the Company:
General Rights for binding Company
o use the general rules of agency

Therefore:
o a). Company must have the necessary capacity powers to perform the particular
juristic act.
o b). Company representative must have the necessary authority to bind the
company i.r.o. the particular contract. In addition, the company can, in given

lOMoARcPSD|37193597
Company law 42
cases, complement the representatives deficient authority by ratification

(expressly or tacitly) of his acts.
o All company law requirements could not be met by the general principles of
agency. Hence special branch of the law of agency evolved.
Therefore, we deal here with:

1. Particular statutory provisions
2. Docrtine of constructive notice
3. Turquand Rule
4. Estoppel
Capacity of the Company

o Company possesses only those capacities and powers for which the objects
clause in the Memo has made provision.
o Prior to the Companies Act 1973, transactions beyond the scope of the company
were ultra vires and void.
o s36 has now brought redress to the other party. But the company's limited
capacity and powers remain the basic premise.
o Ultra Vires Doctrine
o NB the significance of this doctrine has rather diminished as a result of the

statutory arrangement.
Features:
o developed on company law
o A company is corporated in terms of a general enabling Act such as the
Companies Act. Exists only for the objects for which it has been incorporated and
has only the capacity to perform acts as are indicated in its objectives.

lOMoARcPSD|37193597
Company law 43
o the Memorandum and Articles constitute a contract between the company and a
member and between the members inter pe se that a member in his capacity as
a member should involve the objects as formulated to the company to observe
its stated objectives.
o UV is complemented by the doctrine of constructive Notice: Therefore anyone

dealing with a company (including its members) is deemed to be fully acquainted
with the company's public comments, one of which is a memo with its objects
clause. Therefore, no person can assert as the company that he was unaware of
the limitation placed on the company's capacities by its objects as formulated in
the Memorandum.
o An act ultra vires the company was void. Any contractual or other obligation
beyond the scope of the company's objectives was sought to be imposed on
such a company was unforeseeable in law. Any of the parties to an ultra vires
transaction was entitled to involve its invalidity.
o Since an ultra vires act was void, each party was obliged to restore to the other
what it had received.
o Or else there was an action for unjustified enrichment.
o The company's agent who concluded the U.V. act was liable for damages to the
company. But the court, in its discretion, could relieve the directors.
o The agent could also incur liability to the other party if the other party could not
have ascertained from the memo that the transaction was ultra vires.
Question
On what basis?
NO the basis of an Implied warranty given by the agent that he had authority to

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bind the company or his misrepresentation in this regard.
o NB The present has by and large neutrailsed these set of rules.
Ashbury Railway Carriage and Iron Co. v. Riche (1875) LR 7 HL 653
Facts:
o Memo: company has power to make it sell railway carriages. Directors entered
into a contract to purchase a concession for constructing a railway in Belgium.
o Question 1. Was this contract valid?

o Question 2. If not, can it be ratified by the members?
Lord Cairns:
o (666) A contract of this land was not within the words of the memo.
o the purchase of the concession was not within the Memo

o (667) By so contracting they then employed the plaintiff to construct the railway.
o That was rendering entirely the whole hypothesis of the Memo and was the
making of a contract not in divided within but foreign to, the words of the Memo.
o (670) The mode of incorporation contains in it both that which is affirmation and
that which is negative. IT states affirmatively the ambit and extent of vitality and
power which by law are given to the company and it states...., that nothing shall
be done beyond that ambit... and that no attempt shall be made to use the
corporate life for any other purpose than that which is so specified.
o (671) The Memo is, as it were, the area beyond which the action of the company
cannot go inside that area the shareholders may make such regulations for their
own governance as they think fit.

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o (672) Contract was entirely beyond the company's objectives. Therefore, the
company did not have the power to contract on that. Contract was void because
company could not make it. Even the unanimous assent of all shareholders
cannot ratify the contract.
Attorney-General v Mersey Railway Company [1907] 1 Ch 81 (HL)
o How to determine U.V.

o Incidental/ Consequential Acts
o "All such steps as are reasonably necessary for effectuating that purpose are
intra vires"
The Act now has a def approach to the U.V. doctrine It is summarised
as follows:
a.) The premise that a company possesses limited capacities remains intact.
b.) The memo must set out the company's powers clearly and concisely.
c.) Directors must act within the company's capacities as set out in the
memo. or else?(i)they may be called to account
(ii) therefore it protects the company and its members vs above.
d.) The provisions relating to capacities form part of the contract that exists i.e.
s65(2) between the Company and its membrs.e.) S36 removes the unfair operation
of the ultra vires doctrine as it states that no act of the company shall be void by
reason of lack of capacities.
Now: The Memo and the company's powers:

o s33 Capacities, main objectives, civilary objects
o s34 Powers
o s52 Requirements of the memo
o
o Now: Main impact of s36
o Changed drastically the common law U.V. position

lOMoARcPSD|37193597
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a.) No act of the company is void wisely by lack of capacity. It does not abolish
the ultra vires rule. It only changes the effects of ultra vires acts.
Therefore in the past it was void; now it is valid. But: IT still remains ultra
vires.
b.) S36 does not abolish the doctrine of constructive notice. But it has become
irrelevant as far as the main objectives clause in the memo is concerned.
c.) Doctrine of constructive notice still applies to other provisions o the memo.
therefore, a company may still avoid liability by proving that its agent lacked the
necessary (capacities) authority to bind the company.
d) Question:
Can one neutralize?
s36 by providing in the Articles that the board of directors will not have the
authority to perform an act outside the objects clause of the company?
No! Such a provision will be pro non scripto!!!

e.) Company is bound even though the other party may have known that the act is
outside the companies capacities or power and even though this type of transaction
may have been specifically excluded in terms of s33 or s30.
f.) As to directors lack of authority? The word used is "directors."
QUESTION
g.)Will the section apply if one/sole 'director' acts? It could be a problem
technically but it is submitted that 'directors' must also include the singular!!
Will the section apply if a manager or other person acted? NO, for he will not be a
director, therefore this will curtail the impact of s36.
s36 allows for 'internal purposes' a member, director or company to apply for an
interdiction to prevent an ultra vires act. Therefore you want the company to be
conducted within its capacities.
Therefore, in order to be effective, the injunction must be made before the company
contracts in an ultra vires manner. IF it does then the member will be powerless and

lOMoARcPSD|37193597
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must valid to s36
h.) The company can proceed vs a director who has acted ultra vires
Now: There are certain principles which are not affected by the impact of 36 as far
as the Representation of the company is concerned.
These are:
1.) doctrine of disclosure
2.) constructive notice
3.) Turquand rule
4.) Estoppel
Doctrine of Disclosure:
the crux of the doctrine lies in that the disclosure of prescribed information
provides:
1. protection for certain interested parties
2. disclosure serves to regulate corporate conduct better than imposing a regulatory
and prescriptive provision.
Therefore by registering the Articles and memo the company discloses.
o Company has a duty to disclose at every stage of its life from incorporation to
deregistration. The history of the company is kept at the Registrar of companies.
o AFS Prospectus published its papers, etc. Therefore protects potential

shareholders or investors, shareholders, creditors and other 3rd persons dealing
with the company.
Doctrine of Constructive Notice

o based on disclosure
o turquand rule
o limits the doctrine of constructive notice

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o Estoppel
o Alternative
Cases:
1. Freeman and Lochyer v Buchhurst Parta (Nangal) Ltd 1964 All ER 630
(CA) @ 640 F-G 641 E-H 648 C-F (353)
2. Royal British Bank v Turquand (1856) 6 E 4 B 327; 119 ER 886 (348)-

363
Reduction in Share Capital

o The rule : Maintenance of share capital: The rule protects the integrity of
contributed capital
o Protecting the interests of creditors
o Besides the capital maintenance rule, there are two other rules
1.) Reduction of share capital

2.) Variation of the composition of share capital
Reduction:
o a statutory exception to the capital maintenance rule
o to protect the rights of creditors
o the share capital must be maintained for their benefit
o many reasons for reducing- share capital:
1.) Company has accumulated losses
2.) Fixed assets are overdue
3.) Excessive capital
4.) Preliminary expenses are too high
Therefore, by reduction the company's balance sheet will reflect a more realistic

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picture.
Only issued share capital is affected.
s83:
o no need for court confrimation.
o by special resolution
o if there are no creditors or the creditors all argue.
o phases are affected
s84: Subject to Court confirmation:

o where 83 can not apply
o company may reduce in any way but subject to confirmation by a court
o apply for confirmation within 60 days of passing these resolutions to that effect.
Question: How Reduction is done

1. by cancelling any paid -up share capital
2. paying back any paid-up share capital which is in excess of the needs of the
company.
Creditor right to object

o s85(1); s86
o if the reduction involves the payment of paid-up share capital to a shareholder
o or if the court so directs.
Powers of the Court:

When asked to confirm a reduction, the court has several powers:
1. confirm reduction
2. grant a rule nisi calling on all persons concerned to show cause why an order
confirming the reduction should not be made.
3. where the reduction involves a repayment of capital to shareholders or where
shareholders are entitled to object, the court must issue a rule nisi.

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Specific duties of the court:

1. Ascertain that all formalities have been met
2. Consider whether the proposed reduction is fair and equitable as between
shareholders inter se particularly as between different classes of shareholders.
3. Court must safeguard the interests of existing creditors.
4. Court must safeguard the interests of the general public, etc.
Generally:
1.) Special resolution is needed for reduction of capital,2.) Reduction will only be
effective when the special resolution is registered by the Registrar s88.
3.) Publication of the reduction of capital by Registrar within 1 month of registering the
special resolution
Alteration of Shares Capital and Shares: s75

First: Capital Maintenance
1. Protect the fund
2. Must only be lost/diminished in the course of the company business
3.) Do not impair it otherwise.
Common Law Rules:

o - do not pay dividends out of share capital
o - do not/ company can not buy its own assets.
o - do not issue shares at a discount
Financial Assistance In the Purchase of Shares
s38:
ss1: 1. Give
2. Directly and Indirectly
3. Loan, guarantee, provision of security or otherwise
4. Financial assistance

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5. FOr the purpose of or in connection with a purchase or subscription

6. by an person
s38 (2)
Exceptions:
1. Lending of money in the ordinary course of business, therefore money-lending
company.
2. trust ( employee share trust) Pay n pick.
3. Loans to employees to subscribe for shares.
s38 (a)
o offence, etc
Now:
o Common Law: a company can not purchase its own shares because if it does so,
it forfeits the purchase price and therefore reduces its share capital.
Examples:
1. Company lends money to A to put A in funds to buy shares from an existing
member
2. Company guarantees B bank overdraft, and on the security of this , the bank
advances money to B so that he can buy shares in company.
3. Company lends money to C so that C can repay a loan provided earlier by
company's bank which C has already used to buy shares.
4. Company buys a piece of land from D knowing that D will use the purchase
money to pay for shares in company.
o if the company is a subsidiary, the prohibition also extends to financial

assistance in respect of the purchase or subscription of shares in its holding
company.
Exceptions:

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1. Company's main business is money-lending and the lending is done in the

ordinary course thereof.
2. Employees share trust, e.g.
3. Company bonafide employees to purchase shares in the company on their own
behalf
Content of s38:
o s38 is too wide and too general
o Lipshritz v UDC Bank 1971(1) SA 789 ( A):
the prohibition consists of
a. the giving of financial assistance, and
b. the purpose for which it is given.
Giving of F.A.
o F.A. not defined
o Test: 'impoverishment' :
Question: has the company become poorer in consequence of what it did for the
purpose of or in connection with the purpose or subscription of its shares.
IF yes, then its impoverished and has therefore given F.A. Gradweel v Rostra
Printers 1959 (4) SA 41
Problem: Lipschitz supra warns:

1.) this is not the only test
2.) this test is not accurate
3.) s38 expressly includes in f.a. acts not necessarily involving impoverishment
of thecompany or the employment of 'pecuniary resources'e.g. giving guarantees
and providing security
4.) Therefore the test must be used depending on the form of f.a.
Purpose of F.A.
o for the prohibition to which in , the purpose must be to enable x to purchase or

lOMoARcPSD|37193597
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subscribe for the company's shares or in connection with the purchase or such.
Question: "In connection with" Lipschitz:

1. means 'for the purpose of'
2. it was inserted merely to close possible loopholes.
Consequences:
Civil and Criminal
1.) transactions in void
2.) any accessory obligation which is not separable from it is also void.
3.) directors could be held liable for breaching their fiduciary duties
4.) Company has remedy vs both party(ies).
Other cases:
Fidelity Bank Ltd v Three Women (Pty) Ltd [1996] F ALI SA 368 (W)
Facts: Y sued x for money lent to it. On two acknowledgements of debt. Other
defendants were sued in their capacities as trustees. , 2nd def, was the sole
shareholder of X until the shares were transferred to the 3rd and 4th defendants.
Loan was applied for prior to the share transfer.
Company mortgage, V surety, etc.
Question: did the 2nd loan agreement contravene s38, and therefore the
acknowledgements of debt unenforceable.
CnA:
1. Impoverishment test is not always suitable
2. etc
Minority Protection:
o Company law is based on the principle of majority rule
o Company affairs are decided by majority of votes
o As long as the majority acts lawfully, no court will interfere with its decisions.

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o Implication: Majority rule implies that the majority may under certain
circumstances ratify unlawful acts.
The question therefore is : When will the court be prepared to restrict the majority?
Company itself to assert corporate rights

o If a company is , it must itself act have the wrong redressed. a member of a
group of members cannot normally pro for the company.
o But if the company is unable to act, e.g. since the wrongdoers are in control of
the company
o then via a derivative action, someone else may act!
o Fres v Harbottle
Based on the principles of
1 seperate legal personality
2 majority rule
Rule: 1.) When wrong is done to a company, it is the company that must
institute action
2.) If the company fails to do so, a member may, in certain cases, institute
action on behalf of the company, but even in these cases a member cannot act of
the wrong concerned in one which a simple majority condone or ratify
Therefore, in wrongs done to company on internal irregularities in the management

of the company minorities are powerless if the acts compliant of can be
ratified/condoned by a simple majority.
Therefore, minority cannot institute action vs majority.
But: a minority is not subject to unlawful acts of the majority.
* Certain wrongs/irregularities can not be ratified. If attempts by the majority to

ratify each act is not binding on minorities and they can therefore institute action to
assert their right.

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Issue: the rule does not protect the minority. IT just confirms majority rule. Real
protection of minority rights is to be found outside the rule.
o Unratifiable acts fall outside the scope of the rule

Question:
which wrongs can be ratified?
Remedies
1. Derivative action: where the company does not act, the member derives that right
of action from the company.
2. Individual: to assert his individual memberships rights and to protect his rights
under the company constitution or on other grounds and which refer to his
membership as such. These rights belong to him personally and are not subject to
majority rule.
1 Now: Personal Action

He can sue the company instead of relying on the derivative action:
When: 1. Breacher of the rights of a member derived from the memo or articles
2. Unratifiable illegal conduct touching on his membership
3. Fraud on the minority : from English
-'fraud' is wider than fraud in ordinary language
-it denotes 'abuse of power' not fraud per se.
-therefore covers i)wrongs by the company
ii) wrongs to the members
- X must have been prejudiced by the wrong
- Note: use of power is only if it cant be ratified;
- problem- up to how far can company ratify abuse of power.
2. Derivative Action:
o For wrongs done to company
o If company does not wish to or cannot act vs wrongdoers, then in certain cases,
X may act on its behalf

lOMoARcPSD|37193597
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o X acts on behalf of himself and all the other shareholders except the
wrongdoers.
o Company is added as a nominal defendant
When: Instituted
1. When an unratifiable wrong has been done to company
2. Company can not/ will not institute the action because the wrongdoers control
the company
Unratifiable wrongs:
o ultra vires cts
o unlawful conduct
o fraud in the minority
Therefore a wrong is not ratifiable if:
a.) the wrongdoer in his capacities as director acted mala fide towards the company
b.) if the resolution to ratify, reslts in the wrongdoer recieveing a benefit at the
company's expense.
s266 Government : - The Statutory Act

o Power of Crator ad litem 301/2
3. s252 Relief from Oppression
Pearle Lode may be overruled.

Question: Act on trust in a personal capacity?
o retrospective
a. Formulation:
o by registrar of the companies Articles and Memo

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o company only comes into existence when the Registrar of Companies issues the
certificate of incorporation
o this certificate proves: a.) compliance with all the rights
b.) company has been dully incorporated.
o –
o company constitution consists of the a.) Memorandum and b.) Articles:
o memo of the founding/ superior document
Memorandum
o Companies external relations
o provides the company's corporate structure
o determines the nature of the company
Articles
o company's internal relations
o subordinate to the memo
o deals with rights/duties of members, directors and general meeting inter alia
o who contracts for the company
o Doctrine of Constructive Notice requires all the members to fully be acquainted
with the contents of the memo and articles. Also s65.
o Memo and Articles constitute a contract between company and members
Memorandum
s52
o Name of company; purpose of main business
o main objet; ancillary objects; powers
o object of adopting pre-incorporated contracts
o amount of the share capacity for its divism into shares
o association clause

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o Not desirable
o not be deicing
o Not pass of company as anther entity
o Name must be conspicuous
Purpose describing main object

o state the general sphere of economc activity within which falls the main
business
o main object: company's capacities.
Ancillary objects
o Yes, a company may pursue them
A1 Alteration:
o by special resolution
Variation
o Class rights may only be varied i.t.v. the memos provisions.
B Articles
o Reformise the manner in which the company functions.
o The Act contains variation pro-forma Articles depending on the type of company
being incorporated
o No prescription as to contents.
o Provided: they are not in conflict with the general law or with the Act.
o Buts59(2) prohibits compulsory locus provise

o CM 44 in the form that articles must take.
o signed by each member
o full names
o * two witneses
o * Residential and postal addresses of witnesses and subscribers

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Interpretation:
o Not too literally
o Interpret that suits/ is practicable from a business viewpoint.
o give effect to the intention of the parties
Amendment
o Special resolution
NB In the event of conflict, the memo overrides

65 (2) Articles and Memo bind the company and its members. They create a
contractual agreement between company and its members.
1.) Binding on members inter se.

2) Binding between company members
3.) Not binding between company director (reference is made to the contract of
Cases
o * Eley v Positive Government Security Life Assurance CO. Ltd (1876) 1 Ex D 88.
o * Hicleman v Kent or Rommney Marsh
o Sheeps-Breeds Aslo [1915] 1 Ch 881
o Arbitration issue
o * Rayfield v Hands 1960 1 CH [1958] 2 All ER 194
o Forced to take transfer of shares
o *Devilliers v Jacobsdal Saltworks1959 (3) SA 873 (0)
o contract only between company and members

o and members inter se.
o do not relate to political or director.
o - Directors can only enforce a claim vs company if there is a contract between
them.
NB These was an employment contract but there were also made subject to the

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articles.
Directors
o * Every one must have directors both private and public companies.
o * appointment of directors the members are deemed to be directors
o * Board of Directors performs certain acts of management and acts of agency.
Only it can do so.
Legal Position
o Internally- Board of Directors is an organ of the company. The articles provide
for the division of internal powers between BOD and general meeting.
o Intra vires acts of the BOD are also the acts of the company save for the MD.
o
o Externallydirectors are agents of the company with the exception of delictual and
criminal matters.
o Acts of
o Directors- In certain cases, the act of a director is taken not as that of an agent,
but as an act of the company.
o E.G. S69. The signature herein is seen as that of the company.
o
Contractual Rule v Co:
o were directorship does not create a contractual relationship between company
and directors
o the article also does not read as a contract
o Because they only bind the members.
o A contractual rule can be created in various ways:
1.) Contract
2.) Director may act as a mandatory for the company in terms of a special mandate
3.) be an employee as an ordinary employee
NB As acceptance, the director becomes a functionary of the company.

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o NB The office of directorship improves a set of rights and duties on the director.
Appointment of Director George v Firmead; NOD v Potato

o completed an offer of appointment and acceptance by x
o But he has to be appointed properly by persons with the right/authority
o C/F S 214
Power to appointment
o must be done by persons with authority to do so
o this authority is determined in reference to the Act and the Articles
o Vacancy + directors - explain (only where the nomination does not act
himself)
o Directors consent to Act: CM (s211). Regulates procedure for appointing
directors.
Publication
o company must publcise the names and materialisation ( if not name) of all its
directors in all its correspondence
o - company may publicise names of people not directors as directors ( s171)
Irregular Appointment
o may be disproved
o but acts of director are valid (214) provided:
a.) there was some knid of opportunity
b.) there was no fraudulent assumption of power.
c.) it concerns an act performed before the irregularity had been discovered.
Resignation
o Director simply tenders it
o It’s a unilateral act and need not be accepted by the company.

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Qualifications of directors:
Share Qualifications:
o no obligation on company to require share qualifications for directors.
o the quality are stated in the company articles.
o any qualification must be complied with within two months or such shorter
period as prescribed.
o failure?
vacate office and can be reappointed on obtaining the qualifications.
Statutory Disqualification: s218

o body corporate
o a maim (legal disability)
o -disguised by article order.
o Unless otherwise authorised by a court.
a. unrehabilitated insolvent
b. removed from office of trust on account of misconduct
c. convict, etc
Disqualified by order of court : s219

o Purpose of the section is to give the court power to restrain persons, who have
shown themselves to be dishonest in the formation and running of companies,
from continuing to do so.
o Therefore, court directs that or a specified period, such a person may not,
without leave of the courts, be a director or take part in the management of the
company.
NB On application by Master, AG, the liquidator, judicial management, creditor,

member or past member
o s219(2)(a) court
Question: Why not fellow directors? s219 (2) (a) (ii)

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When
1. X convicted of an offense concerning the promotion, formation or management of
a company
2. Winding up company and Master has reprieved fraud by X
3. X, in the course of winding up or fraud has been guilty of...
a.) s424 offence
b.) fraud in to company or breach of his fiduciary duties
4. when a s424 (i) order was made vs X
Case Law:
o Marroch Plase (Pty) Ltd v Advance Seed Co (Pty) Ltd 1975 (3) SA 403
o Cohen v Segal Legal position of directors 1970 (3) SA 700(W)
o a creature of statute
o commercial men managing a company
o fiduciary position towards company
o must exercise their powers bona fide, solely for the benefit of the company as a
whole and not for alterior motives
o may not advance their interests at the expense of the company
o agents of company.
Rights and Powers of Directors:
a.) Management:
o the board exists to manage the company
o the board itself may manage or it may delegate the duties of management ot
some directors or managers. In this instance, the board will retain a supervisory
role.
o the time extend of the directors management is to be found in their articles of
assessment.
o therefore, the directors are usually rs\responsible for the management of the
company, except in the matters specifically allocated to the organs by the Act or

lOMoARcPSD|37193597
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the Articles.
b.) Remuneration
o appointment on a director does not ipso facto entitle x to remuneration.
o If the Articles state some remuneration that will ( but note the problem)
o If the Articles do not provide for remuneration, the company may pay x so that
this will be a gift.
o A director is not an employer of the company with the fact that he has no right
to the ordinary benefits of services and is not entitled to the usual rights found
from a contract of service
o But he can enter into a service contract with his company with the result that in
addition to his position as director, he also stands in the position of an employee.
c. ) Access to company rewards

o Entitled to inspect the books and accounts of the company and to be assisted by
an acceptable accounting officer.
d.) Rights to discharge duties

o may not be prevented or restrained from exercising his rights and duties as
much. If he is so hindered, he may institute action against wrongdoers.
Rights and Duties

o determine primarily with reference to
a.) their contract
b.) the company's act
c.) the company's constitution
d.) the common law
Now: Common Law

a. Fiduciary Duties towards company
o Director must exercise his powers bona fide
o Director must act for the benefit of the company

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o director stands in a fiduciary relationship with his company, therefore he has the
duty to act in good faith
o 1.) towards his company,
2.) exercise his powers for the benefit of company,
3.) must avoid a conflict between his own interests and those of the company.
o Therefore, the duty of good faith is sacrosanct and cannot be waivered in any
institution.
o This duty ensures that company and its members are protected vs exploitation
by the director. If company suffers as a result of breach then the company can
recover some from the director.
NB Dower the duty only to his company but if D of a holding company also owe the
duty to the subsidiaries
Therefore, if director acts to the prejudice of company or if director acts to his own
benefit then he is in breach of the duty and company may sue for that breach
NB: the cause of action is neither contractual nor delictual, it is ai genems
NB Breach may also render director criminally liable.
Now : Different types of the duty:

a.) Conflict of interest
b.) Not exceed the limitation of this power
c.) must maintain unfiltered discretion.
d.) must exercise their powers for the purpose for which they were conferred.
Conflict of Interest
o prevent a conflict between own interest and those of the company
o he may obtain no other advantage from his office as director other than
directors remuneration.
o NB : the rule alone applies even if the advantage was obtained openly bona fide,

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it is no way at the company's expense. Therefore, 'secret profits' is a misnamer!!
Test:
Did the advantage arise from the directors occupation of his office?
o It is immaterial whether or not the company itself has been deprived; therefore
prejudice is not an issue.
NB Director may not use information which he acquired in his capacity as director
for his personal gain.
o If director contracts with his company, there is a conflict of interest. Such a
contract is not valid but voidable at the instance of the company except: if the
articles provide for an exclusion clause wherein director may contract with his
company.
Case Law:
Coole v Dolus [1916] I AC 554 (PC)
Directors/ Members
o company railway construction contractors
o company carried in construction for Canadian Pacific railway Company.
Problem 1 : US Deel, LM Deeh, + Hinds Leard of a new contract company obtained

this contract in their same names, to the exclusion of the company, and formed a
new company, Domination Construction Company to carry out the work
Problem 2: they had a general meeting. Because of their majority the three won.
a.) Sale of part of the plant of Toronto to Dominion

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b.) That Toronto has more inherent in the new contract with the Canadian Pacific
Railway Company
Therefore, Cook was excluded.
Held:
o If the 3 did not want to work with Cook any longer they should have terminated
that relationship, dissolved the company.
o But they did not
NB.. men who assume the complete control of a company's business must
remember that they are not at liberty to sacrifice the which they are required to
protect, and while ostensibly acting for the company, divert in their own favour
business which should properly belong to the company they represent
o T Hinds, Gs + GM Deeh one guilty of a distinct breach of duty in the course they
took to secure the contract, and they cannot retain this benefit of such contract
in themselves but must be regarded on holding it in behalf of the company
2.) Robinson v Randfontein Estates Gold Mining Co Ltd 1921 AD 168
Facts:
Three forms Randonten, Uifvalfonein and Waterval. All had minerals. The interests in
these were held by several companies all members of the Robinson group. The
plaintiff (therefore respondent on appeal is REGM) was the parent company.
Robinson is the chairman of the board of REGM.
Now: REGM - ceased interest in Waterval. Lease mineral rights.
Robinson wanted to purchase the farm for REGM but could not come to terms with
the farm owner
o Therefore Robinson bought through an agent, an individual to share of Waterval
$ 60 000 (R120 000) and soon thereafter sold it to Waterval Trust Company, a
co-subsidiary of REGM formed specifically to acquire and hold Waterval for $ 275
000 ( R550 000).

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Company law 68
o REGM paid the R550000 to Robinson.

o Therefore, Robinson made a profit of R430 000!
Held:
o 177) where one man stands to another in a position of confidence involving a
duty to protect the interests of that other, he is not allowed to make a secret
profit at the other's expense or place himself in a position where his interests
conflict with the duty.
o This duty underlines many relationships:
a. guardian- ward
b. attorney- cilent
c. agent- principal, etc
o he can not make any profit from this numeration except the agree
remuneration.
o All projects made belong to the principal, not to him.
o (178)Thesis only one way by which such a transaction can be validated and that
is by the due consent of the principal following upon a full disclosure of the
agent. In practicality a case the relationship falls away and the parties deal with
each other at an arm's length
o (178) Remedies: Repudiate it

Confirm it: claim the profit
But: in the latter case he must prove that the transaction falls within the prohibitive
operation of the relationship.
NB Company retains the property and still demand a refund of the profits
therefore, Robinson to pay the R 430 000 to REGM
Bellairs v Hodnett 1978 (1) SA 1109 (A)
Facts:

lOMoARcPSD|37193597
Company law 69
Before 1966, Bellairs was the sole shareholder in Northcilff Township (Pty) Ltd
o 07/05/04 Director's Duties (...contd)

b.) Exceeding limitations of powers
o Director must observe the limitations of the powers of the company as well as
the limits of his own authority to act on company's behalf
o If a contract in ultra vires the company neither the company nor the other party
can that the transaction is void. (s36) The section also refers to where director
has acted beyond his authority.
o but; within the company, director may in and liability
o Normally an agent can only bind a principal contractually to a 3rd party if he

acted within the scope of the authority conferred upon him by his principal. But
in the case of the company, director can bind his company even when not
authorised to perform a partionalised act, provided it is a situation sobered by
Estoppel or the Turquand rule
Turquand Rule:
o Royal British Bank v Turquand (1856) 437; 119 ER 886
o applies in the case where there are internal requirements (e.g. prior approval)
that must first be met before director may exercise authority.
Problem:
a person who reads the Articles would still be uncertain whether the said internal
requirements were met, etc.
Issue: where they are met = no problem
Issue: where not met?? ( the mandate would be irregular)
The rule:
NB Purpose: is to limit the third parties duty to enquire and to restrict it to matters
which were granted publicity.

lOMoARcPSD|37193597
Company law 70
o therefore, an outsider contracting with the company in good faith is entitled to

assume that the internal requirements and procedures have been complied with.
o Company will be based, by the contract even though all matters had not been
complied with ( internal requirements)
Exceptions
NB The rule is available only to X if X believes bona fide that an agent of the
company is properly authorised to act on behalf of the company
But NOT applicable if:
1. X or that mandate was defective
2. the circumstance surrounding the negotiations are suspect and he has been
placed on his guard accordingly.
e.g. where an internal corporate for vesting a director with authority has not been
observed and the third party is not aware of the non-observance.
o Where director has received unauthorised director's remuneration or if payment

for los of office is made without approval of a special resolution as per s227, the
company may recover that loss from director.
c.) Failure to maintain and exercise an unaltered discretion

o director must consider company affairs objectively
o he must not contract to act in a certain manner
o therefore a director's undertaking to vote in a certain manner cannot be
enforced
o
Coronatim Syndicate
o director may be appointed as a nominee representing certain shareholders or
others interest but: director is obliged to exercise his discretion without being
feltered.
o director cannot be appointed as a puppet or tool for a third party since it is

lOMoARcPSD|37193597
Company law 71
illegal.
o a director may not resign just to secure the appointment of a puppet in his
place. The director is still bound by the fiduciary and other duties of directors.
d.) Failure to exercise his powers for the purposes for which they were
conferred.
1.) Director may not use their powers to issue unissued shares just to remain in
control. e.g. the issue shares is intended to raise capital and not to enhance
control
2.) Director may not use their powers to foil a take-over bid for the shares of
members
3.) Powers must be used for their true purpose. Not to frustrate the wishes of
the majority. Therefore, they cannot be used to allot shares in the company
with the object of defeating the pre-existing majority.
Case Law
1. Unfeterned Discretion
Coronation Syndicate
2. Powers for intended purpose

Howard Smith.

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lOMoARcPSD|37193597

Company law notes

Company law (University of Namibia)

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Definition: a company is “a company incorporated under Chapter IV of the Companies

o Application of the Act: Section 2

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B. The concept of a company.

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C. The Company as a Legal Person.

D. Acquisition of Legal Personality.

E. Theories of Legal Personality.

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F. The company as a separate entity.

The court held:

a. From its inception a company is legally separate from its members.

o Salomon case is the locus classicus on this aspect!!

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The court held:

a. I come to enquire whether the transaction complained of is a contravention of

b. Is ownership by Dadoo Ltd. in this instance ownership by its Asiatic

c. A registered company is a legal persona distinct from the members who

G. Consequences of Legal Personality.

o Company estate is assessed apart from the estates of individual members.

o Company debts are its own.

o Company profits are company profits.

o Company’s assets are not the members’ assets.

o No one is qualified by virtue of his membership, to act on behalf of the company.

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H. Piercing the Corporate Veil.

H.1. Disregard by the Legislature.

1. S50 (3).This section imposes personal liability on directors, officers or agents of a

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Section 296 is the Namibian equivalent hereof. Subsection 3 imposes a penalty

7. S332 of CPA 51 of 1977 where X, a director or officer commits an offence

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H.2. Disregard by the Court.

TYPES OF COMPANIES (Ch III of the Act)

Only two types (s19 (1)):

A. Company having a share capital

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o Obtains capacity by the issuing of shares.

1. The Public company

o At least 7 persons (s. 32 – formation)

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3. put the company at the disposal of specialists who employ it in economic

2. The Private Company

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 But other people may use it too

B. Company not having share capital: Limited by Guarantee

o At least 7 persons needed (s. 32)

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o No more but those incorporated before the Act will continue

o (s.322) lodging memo within 25 days of having established a place of business.

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THE PROMOTER AND PRE-INCORPORATION CONTRACTS

o Promoter = the person that floats the company

The common law rule

a. Contract must be in writing: wide enough to cover oral contracts but

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b. X must have acted as agent/trustee for a company not yet formed: