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CORPORATE LAW

Chap
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LEGAL NATURE OF A PARTNERSHIP
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The term ‘partnership;
General feature of partnership
Historical & Sources
Legal nature
Types of partnership
Rights and duties of partners
Liabilities of partners

1
...
Partnership as a form of Business Entity
Choosing the right format for your business is fundamental to its success, and will depend on
a range of factors
...

A Partnership is quite cheap to set up, as it does not have to be legally registered (like a
company)
...

Partnerships are governed by the common law; legislation has only played a limited role
...
However, the treatise on the law of partnership
by the French jurist Pothier has exerted great influence on this branch of South African law
...
There are many similarities between South African and English law in this field
...

1
...
What is a partnership?
A partnership is a legal relationship that derives from a contract
...
The legal definition of a partnership is generally stated
as "an association of two or more persons to carry on as co-owners a business for profit"
“… a business enterprise entered into for profit which is owned by more than one person
each of which is a "partner
...
F Kotze

“An agreement between two or more persons, for joining together their money, goods, labor
and skill, or either or all of them, for the purpose of advancing fair trade, and of dividing the
profits and losses arising from it, proportionally or otherwise, between them
...
A legal contract entered into by two or more persons in which each agrees to furnish a
part of the capital and labour for a business enterprise, and by which each shares a fixed
proportion of profits and losses
...
The persons bound by such a contract
...

Each partner contributes money, goods or services to a fund, agreeing that any profits made
will be shared between the partners as per their contract
...

(b) Characteristics of Partnerships
 Each partner must make a contribution to the Partnership
 It does not have a juristic personality separate from the partners
...
This means
that the rights of a partnership are vested in, and the liabilities are binding on, the
individual partners” [p209]
→A partnership is not a corporate entity
...

→Nevertheless, this notion that the partnership is not a separate juristic person is not
followed through consistently
...

 Each partner can bind the Partnership [mutual mandate]
 If the Partnership's estate is sequestrated, the estates of the partners can follow unless
the partners undertake to pay the debts of the Partnership
 The profits and net assets are usually distributed amongst the partners on dissolution
of the Partnership in proportion of their respective interests
 The life of the Partnership is not separate from the lives of the partners (if one partner
dies, leaves or is declared personally insolvent the Partnership becomes null and void)
 On dissolution, the assets are liquidated, creditors are paid and partners must stand in
for any shortfall
 The Partnership is not a "person" for tax purposes and is not taxed as a company
would be
 There are no statuary audit requirements

Adv
...
He
shares in the profits and losses, but his liability is restricted to his specific contribution
or an agreed amount
...
The partners are co-owners of
the Partnership's assets and are all personally liable for the liabilities of the business, but with
a right to recover a proportionate share from the other partners
...

Should the business fail, creditors must initially try to recover monies against the business's
assets
...

If the Partnership is declared insolvent by a court, every partner (except an anonymous
partner, a partner en commandite or a partner who gives security for the payment of debts)
must also be sequestrated at the same time
...

1
...
Establishing a Partnership under South African law
Partnerships are created by contract
...
South African law
imposes no requirement that partnership contracts be reduced to writing and signed by the
partners
...
A
company as well as another partnership may become a party to a partnership agreement
...
Where the partnership exceeds 20 members it will become illegal and it will not
revive once the membership falls below 21 again (although, it may be that a new partnership
contract is tacitly concluded where the number of partners falls below 20)
...

To date exemptions have been granted for:
- Accountants and Auditors,
3

Adv
...


For an agreement between parties to be one of partnership consensus must have been reached
on three essential issues
...

(a) Writing a Partnership Agreement

Key areas to cover in written partnership agreement:
Basics
 What is the name of the partnership?
 What is the purpose of the partnership?
 What is the duration of the partnership?
Responsibilities, performance and remuneration
 What is each partner's role?
 What are each partner's responsibilities within the company, and what level of
performance is expected?
 Are partners expected to make a full-time commitment to the venture, or are business
activities permitted?
 What will be the income of each partner, and how will profits or losses be distributed?
Contributions
 What will each partner be contributing to the partnership in terms of cash, assets,
loans, investments, and/or labour?
 If a partner loans the company money, what will be the terms or repayment?
 Will the partners be expected to make additional contributions to the partnership, and
if so, how will that be handled?
Withdrawal of partners/admission of new partners
 What guidelines should be followed if one partner wants to leave the partnership?
 Will partners be allowed to sell their interests in the business to outsiders?
 On what grounds can a partner be expelled from the partnership (misconduct, nonperformance of duties)?
 How will new partners be admitted to the partnership?
Buy-out procedures

Adv
...
THE ESSENTIAL ELEMENTS OF PARTNERSHIP IN SOUTH

AFRICAN LAW
General requirements for a partnership agreement are
(i)
(ii)
(iii)
(iv)
(v)
(vi)

Valid partnership agreement;
Contributions by the partners
Sharing of the profits
Common benefit of the partners
Lawfulness
Mutual mandate

2
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Essential elements
Note

5

Adv
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Purdon v Muller 1961 2 SA 211 (A): “… although the presence in an agreement of the
essentials will prima facie establish the existence of a partnership, such presence is not
necessarily conclusive but must yield to contrary intention as revealed in the agreement
itself read in the light of the other admissible evidence … In the ultimate analysis the
question is always one of construction
...
However, the court will find a partnership
established unless such a conclusion is negated by a contrary intention disclosed on a correct
construction of the agreement between the parties
...
In determining whether or not an agreement creates a
partnership a court will have regard, inter alia, to the substance of the agreement,
the circumstances in which it was made and the subseguent conduct of the parties
...
What is
necessary to create a partnership agreement is that the essentialia of a partnership
should be present
...


The three essentials are (1) that each of the partners bring something into the
partnership, whether it be money, labour or skill; (2) that the business should be
carried on for the joint benefit of the parties; and (3) that the object should be to
make a profit (Pothier: A Treatise on the Contract of Partnership (Tudor's
Translation) 1
...
8)
...
However, as has been pointed out previously, this
requirement is one common to all contracts and is therefore not a particular
essential of a partnership (see Bester v Van Niekerk (supra) at 784 A - B)
...
In essence, therefore, a partnership is the carrying on of a
business (to which each of the partners contributes) in common for the joint benefit
of the parties with a view to making a profit
...
The
business need not be a continuous one; a joint venture in respect of a single
undertaking can amount to a partnership provided the essentialia of a partnership
are present (Bester v Van Niekerk (supra) at 783 F - 784 F)
...
F Kotze

6

of partnership relied upon by Pezzutto
...
3
...
However, each partner must contribute something
"appreciable", i e something of commercial value, although such contribution need
not be capable of exact pecuniary assessment as, eg, where a partner contributes his
labour or skill
...
2
...
The first essential element: Each partner must make a capital
contribution
...

→Corporeal or incorporeal property or rights
→Money
→Labour or initiative or skills
→Anything else that may help the partners achieve their common goal [e
...
contacts that
bring customers to the business; data basis]
Ergo
Each partner must contribute something “appreciable”, something of commercial value
...

Contributions do not have to be of equal value, character or quantity
...
An agreement whereby a
person makes a contribution on the condition that he will receive it back whatever the fate of
the business is not a partnership
...

2
...

The element of joint benefit embraces several other related elements, namely
...
The business need not be a continuous one; a joint single
undertaking (referred to as a joint venture) may amount to a partnership
...
As a matter of ordinary language, it
connotes an association of persons for the purposes of a particular trading, commercial,
mining or other financial undertaking or endeavour with a view to mutual profit, with each
participant usually (but not necessarily) contributing money, property or skill
...
will often be a partnership
...
The borderline between what can properly be
described as a ‘joint venture’ and what should more properly be seen as no more than a
simple contractual relationship may on occasions be blurred
...
F Kotze

simple contract of loan or lease under which the interest or rent payable to the party providing
the money or property is determined by reference to the profits made by the other
...

→Business must be carried on in common
...

To constitute a partnership the business must be carried by, or on behalf of, all the partners;
however, all the partners need not take an active role
...

3
...

Profit: Usually courts adopt a simple balance sheet approach in relation to ascertaining
whether there is a partnership ‘profit’
...
Any gain in value will generally be
regarded as a profit
...
Profit in this sense does not only mean pecuniary profit but another
material benefit, such as the saving of costs, would suffice
...

If the possibility of making profits no longer exists, that is a ground for the dissolution of the
partnership
...
The aim of the partnership must be to divide profits
...

→If the agreement specifies how the profits are to be shared then the terms of the agreement
must be observed
...

In Fink v Fink and Another 1945 WLD 226 Ramsbottom J said:
“It is, in my opinion, impossible to say that the one partner contributed more than the other
and therefore they were entitled to share equally in the profits
...
” [p242]
Note
In Blumberg and Sulski v Brown and Freitas 1922 TPD 130 the court also required that
there should be a mutual mandate or a mandate between all the parties
...
This mandate need not be expressed
...
” [Wessels J
on p138]
Van den Heever The Partiarian Agricultural Lease in SA Law: Mutual Mandate [p27-29]
Cox v Hickman (1860) 8 HLC 268, Lord Cransworth said:
“It is often said that the test, or one of the tests, whether a person not ostensibly a
partner, is nevertheless, in contemplation of the law, a partner, is, whether he is
entitles to participate in the profits
...
But the real ground for the

Adv
...
When
that is the case, he is liable to trade obligations, and entitled to its profits, or to a
share of them … The correct mode of stating the proposition is to say that the same
thing which entitles him to the one makes him liable to the other, namely, the fact that
the trade has been carried on on his behalf, i
...
, that he stood in a relation of
principal towards the persons ostensibly acting as the traders, by whom the liabilities
have been incurred, and under whose management the profits have been made
...

General
→Finally, in establishing a partnership the partners must heed certain laws regarding its
name
...
The Act places
restrictions on the use of certain names such as “state” or “government” and the registrar of
companies may prohibit the use of a name by a partnership if it is in his opinion calculated to
deceive or mislead the public or to cause annoyance or offence to any person or class of
persons or is suggestive of blasphemy or indecency
...

→A partnership is not a separate legal entity and strictly speaking it cannot have an estate
...
These rights may take the form of co-ownership
...

However, the rights held by the partners are often of a more limited nature
...
It
will affect not only the obvious issues such as who is entitled to the asset, but also the issue of
insurance (who has the insurable interest) and whether or not the partnership must first be
discussed before resort can be had to the asset in question
...
It is uncertain how the law will deal with a case where
this intention is not clearly expressed by the parties
...

The partners will not become owners qua partners by mere agreement
...
However, corporeal movable property in the partnership context often will not be
transferred de manu in manum but by constitutum possessorium
...
RIGHTS & DUTIES OF PARTNERS
Partners are bound to carry on the business of the firm to the greatest common advantage
...
F Kotze

the partners, either express or implied
...
e
...

In many respects, the duties of a partner are the same as those of an agent – They are based
on good faith and reasonable care
...
1
...

Generally, there are 4 duties arising from good faith namely:
(a) No secrets profits,
(b) No competition;
(c) No conflict of interests;
(d) Full disclosure
1
...
All such benefits must be shared with
and accounted for to his fellow members” [p509]
2
...
F Kotze 10

Transvaal Cold Storage Ltd v Palmer 1909 TS 4: “If a partner without the consent of his copartners, carries on business of the same nature as, and competing with, that of the firm, he
must account for and pay over to the firm all profits made by him in that business” [p19]
3
...

Goldberg v Trimble & Bennett 1905 TS 255, Mason J: “It is the duty of a partner in all
matters concerning the partnership affairs to do his best for the partnership, preferring its
interests to his own in case of conflict, and accordingly not to enter into any transaction
which may place him in such a position that his individual advantage may be opposed to this
paramount obligation” [p272]
→partners cannot acquire property closely connected with the partnership if such acquisition
would be to the detriment of the partnership’s interests
...

→profits resulting from such activities cannot be retained by that partner and will be regarded
as having been acquired for the partnership
...
” [p582]
4
...

They may not hide facts if those facts could influence the decision of the co-partners
...
Breach of this duty may be a
ground to dissolve the partnership
3
...
Reasonable Care
A partner must use reasonable care in transacting the partnership’s business and is liable for
any loss resulting from a failure to act with reasonable care
...
3
...
3
...
Internal Management
Each partner has the right to take an equal part in transacting the business of the
partnership
...
This right may be limited or excluded by agreement
between the partners
...

(b) Share of Profits:
Each partner is entitled to a share of the profits
...
However, in the absence of such an agreement,

11

Adv
...

Sacks v CIR 1946 AD 31, Watermeyer CJ:
“It is clear that during the subsistence of the partnership agreement the partnership
property is owned in common undivided shares
...
Furthermore,
a partnership agreement almost invariable provides, either expressly or by
implication, for the division of profits after the lapse of the fixed periods of time
...
When that time arrives, then, for the first time under the partnership
agreement, a partner becomes entitles to claim a separate determinable share of the
partnership profits, and then, for the first time under the agreement, that determinable
share accrues to him as gross income
...
g
...
[p40]
(c) Contributions:
A partner must deliver what he has agreed to contribute to the partnership; if not, he
may be sued for that contribution
...
Property
contributed to a partnership vests in the members, not in their individual capacity, but
as partners
...
It seems, therefore, reasonable and just that
one partner should under favourable circumstances, such as where the partnership
business is in operation, be entitled to sue his co-partner for compliance with the
terms of the partnership deed
...
”
[p690-1]
Cf Robson v Theron & Purdon v Muller: - Another possibility would be to claim the
dissolution of the partnership for the breach of a material term of the agreement
...
If the partnership agreement provides how this should be
done [desirable] effect should be given to the relevant terms
...
F Kotze 12

by the partnership, according to Pothier (sec
...
The amount of the sums for which
a partner is a debtor to the partnership should be set off against those for which he is
a creditor
...

Pothier points out that this method of realisation is usually resorted to when the
distribution cannot take place otherwise, e
...
, when there is only a single partnership
asset which cannot be divided without depreciating its value (sec
...

It is to be readily conceded that, from a purely historical and technical approach, the
actio pro socio and the actio communi dividundo are separate and distinct legal
remedies, each having its own legal characteristics
...
Pothier, on the other hand, makes it abundantly clear
that, in the liquidation of a partnership, distribution or division of the partnership
assets may be effected among the partners in such a manner as not to involve the
physical division or partition of tangible assets of the partnership
...
His approach is both logical and practical
...
It is also basically
in conformity with our present day practice of liquidating partnerships
...
De Wet
and Yeats, Kontraktereg en Handelsreg, 3rd ed
...
583-584
...

Actio communi dividundo:
This action which originated in Roman law has been adopted in Roman-Dutch law as the
actie van deelinge or actie van scheydinge
...
Its chief
characteristics appear from Voet, 10
...
1
...
By it, those who hold property in common, generally by particular title,
claim to have it divided and personal items of payment made good
...
This is so
whether the property is common between them in a partnership or without a
partnership D
...
3
...
; whether they possess it, or neither of them or only one of them
is in possession D
...
3
...
10
...
8
...
”[853-4]
(e) Compensation:
In the absence of an agreement to the contrary, a partner is not entitled to
compensation for services performed for the partnership
...
This sometimes occurs in legal partnerships or accounting partnerships when
one of the partners is appointed managing partner
...
F Kotze

partner practices his profession, but also handles the business affairs of the
partnership and is paid or compensated in some way for this extra duty
...
If an employee of a partnership negligently
injures a third person while acting within the scope of employment, and if the injured party
collects damages from one partner, this partner is entitled to reimbursement from the other
partners in order to divide the loss equally
...
When partners are held to be liable for an injury
caused to a third person, the third person may sue all or any of the members of the
partnership
...


TOPIC – 4

4
...
1
...
”
4
...
SA Common Law:
→A person who contracts with a partner will be able to enforce the contract against the
partnership on the condition that the partner had the necessary authority to contract on behalf
of the partnership
...

→Authority will be either express or implied
...

→Due to the mutual mandate principle, all the parties in an ordinary partnership have the
authority to act on behalf of the partnership; each partner therefore has implied authority to
perform acts necessary for, or incidental to, the proper conduct of the business of the
partnership
...
F Kotze 14

Carrying on business in the usual way is one criterion
...

This is because the party dealing with the partner should have made further inquiries
...
In the case of
Goldberg v Jenkins (1889) 15 VLR 36 one partner borrowed money at 60% interest when the
interest rate was normally 6–10 %
...

The business of the firm
A partnership will be liable for the partners’ conduct only where it is in the course of
business which is related to or comes within the scope of the firm’s normal activities
...
In Mercantile
Credit Co v Garrod [1962] 3 All ER 1103 two partners owned a garage business, though only
one actually worked in the business
...
The finance
company sued both partners and the transaction was held to be within the normal course of
business, despite the fact that the partnership agreement did not allow for the selling of cars
...
The court will
consider the facts of each case when determining whether the transaction was within the
normal scope of the business
...
The goods were bought by Meyer junior; primarily
therefore he is liable for payment
...
That
he bought the goods for the partnership is false, nor did the partnership derive any benefit
from the goods
...
” [p284]
The partners may by agreement limit a partner’s implied authority to act on behalf of the
partnership
...

However, if the third party acted in good faith and was unaware of such lack of authority, the
partnership will be bound, provided the contract fell within the scope of the partnership
business
...
F Kotze

Goodrickes v Hall and Another 1978 4 SA 208 (N), Howard J: “Mr Gordon referred in this
connection to the law as summarised by Lee and Honoré The South African Law of
Obligations para 478 in the following terms:
“Authority of Partner
Every partner is an agent of the firm and of the other partner or partners for the purpose of the
business of the partnership and any contract made with third persons by a partner within the
scope of his apparent authority binds the firm and the other partners, provided that the
contract was entered into in the name and on behalf of the firm, unless the person with whom
he is dealing either knows that he has no authority to act for the firm in the particular matter
or does not know or believe him to be a partner, or unless such person is content to look to
the sole credit of the contracting partner
...

Eaton & Louw v Arcade Properties (Pty) Ltd 1961 $ SA 233 (T), Munnik AJ: “It is trite law
that a partner who acts on behalf of a partnership acts as an agent for the partnership and
thereby binds the partnership (including of course his co-partners)
...

This principle however does not apply to anonymous partnerships and partnerships en
commandite
...
e
...

Where, however, a partner who acts on behalf of the partnership has by reason of the
existence of a general partnership, authority to bind the other partner or partners, it seems to
me that the fact that the existence of such other partner or partners was unknown to the third
party at the time of entering into the contract, cannot operate so as to make the rule relating
to the acts of agents for undisclosed principals, to which I have referred above,
inapplicable
...

→The doctrine of the undisclosed principal will not apply where it could result in prejudice
to a third party which was not foreseen by him at the time of entering the contract
...

Liability
When a partnership enters into a contract all the partners are, during the existence of the
contract, joint co-debtors and co-creditors in respect of such contract
...
The individual partners are jointly and severally liable under the contract and
debts arising under the contract are owed to the individual partners jointly and severally
...
F Kotze 16

Standard Bank of SA Ltd v Lombard 1977 2 SA 808 (T), Botha J: “In the next place counsel
for the defendant submitted that, since a partnership was not a legal persona separate from
the individual partners, partners could not validly bind themselves as sureties for the
partnership, because they would in effect be standing in as sureties for themselves
...
(Cf
...
at p
...
) In
matters of practice and procedure, the law does to some extent recognise the existence of a
partnership as an entity in itself, albeit not as an entity endowed with legal personality
...
I
can see no reason in principle why partners should not bind themselves to a partnership
creditor in such a way that each partner is individually liable in solidum to the creditor for
payment of the whole of the partnership debts, even during the subsistence of the
partnership
...
3: COMPANY LAW
TOPIC 1
Monday 28 FEB 2011

INTRODUCTION TO COMPANY LAW


ARTICLE TO READ: South African company law for the 21st century: Guidelines
for corporate law reform

The history of Corporate Law:
What is a company?
A company is defined as an organization of individuals conducting commercial enterprises
...
Corporate law (also
"company" law) is the law of the most dominant kind of business enterprise in the modern
world
...

Corporate law is a part of a broader company law (or law of business associations) Other
types of business associations can include partnerships or trusts
...
It deals with the firms that are incorporated or registered under the Companies Act
...
e
...


17

Adv
...
It has something to do with the shareholders/members
eg shareholders paid R200, which, in exchange, a company gives you one share
...
At the end of the
year there are both benefits and debts incurred
...

If the company cannot pay, then it will be liquidated simply because there is not enough
money to pay the debts
...
But it does not
happen like that because the shareholders are protected by limited liability
...
Even if a
shareholder has benefited millions of rands cannot be liable for the company liabilities
...

Share Capitals
Shares in company – the shares are different in the company and shares are the
backbone/foundation of the company
...
Yes, a company without share capital exists but may not be a trading/business
company but a religious company
...
Each company
must have a director and two deputy director, who are called the Board of Directors (BD)
...
After
appointing directors, the shareholders will seat back and relax because the directors will
manage the company
...
The shareholders delegate all their powers to the BD
...
It is not anyone who can represent
the company
...


The defining feature of a company is its legal independence from the people who create it
...

Shareholders, however owning a part piece of the company, are not liable for debts that
remain owing to the company's creditors
...


Adv
...
The company exists eternally up until the legislation cut it off or until the
company deregistered
...
The Solomon principle is used in every
jurisdiction in the world
...
We follow English Company Law since 1809
...

Williams Blackstone, academic writer– he deals with perpetual succession – see p455:
Eternal existence – the company is an artificial person
...
The law pretends that this entity exists as a human
being, that it breaths, that it moves around on own account, and that it even commits a crime
...
A company cannot get married
...
A company as a legal
natural person exists, as it can be sued, sues and enter into a contract in its own name
...
The company comes into existence through the
incorporation
...
Shareholders do not own
the money or assets
...
The shareholders
are owner of the company BUT the term owner carries with it limited liability
...

Other officers and people involved in company are:
 Company secretary
 Auditor
 Employees
 Creditors:
 Trade creditors
 Debenture / bond holders
 Banks
Position of shareholders:

19

Adv
...

There is a restriction of transferability – if it is a private company, it will be easy to transfer
the shares
...
Note that if there is no share capital
there will be no shareholders
...

The difference between the shareholders and members is as follows:
- In company with share capitals, there will be shares
...

- A person who holds a share certificate will always be a member of the company
whereas that with a share warrantee is not a member of the company
...
Shareholder who is also member can
also vote in a meetings but a non member cannot vote
...

A shareholder who holds a share certificate can only vote
...

The management is distinct from the shareholders
...
The Board of Directors manages the company
...
As such, the shareholders can vote against the
directors or dismiss them
...

Five key features of the company [Summary]:
1
...
Limited liability of shareholders
3
...
Ease of transfer of shares
5
...
F Kotze 20



Limited Liability
...
Because a company is considered a
separate legal entity, the shareholders have limited liability for the company's debts
...

 Corporate Tax Treatment
...
Shareholders of a company only pay taxes on
corporate profits paid to them in the form of salaries, bonuses, and dividends
...

 Attractive Investment
...

 Capital Incentive
...

 Operational Structure
...
Shareholders
elect a Board of Directors, which then elects the officers
...

The Board of Directors is responsible for the management of and exercising the rights
and responsibilities of a company
...
The Board elects officers; usually a CEO, vice president, treasurer
and secretary, to follow the policies set by the Board and manage the corporation on a
day-to-day basis
...

 Perpetual Existence
...
The company is not terminated or
dissolved even when shareholders die or sell their shares
...
It costs money to incorporate – registration; legal fees
...
The proper corporate formalities of organizing and running a company
must be followed in order to receive the benefits of being a company
...
A huge aspect of the corporate formalities that must be followed consists
of paperwork
...

 Dissolution
...
Dissolution does not
happen automatically
...
A
company's officers and directors are charged with responsibility for dissolving the
company, including gathering corporate assets, paying creditors and outstanding
claims, and distributing remaining assets to shareholders
...
C corporations have potential double tax consequences: once
when the company makes its profit, and a second time when dividends are paid to
shareholders
...


21

Adv
...
the history of company in Britain
...
In 1711, there was a company situated in
UK called South Sea Company with 50 million pounds
...
People bought the shares in this company with the purpose to pay the British
government debts of war
...
The Lord
Treasurer came up with the idea of incorporation ie to buy share so that the debt can be paid
off
...
The share was 100 pounds each
...

In 1720, Bubble Act forced the company to be incorporated in terms of Act of Parliament
...

In 1856 there was a very first Company Act in UK and it was amended for number of times
...
Courts had no
discretion to lift corporate veil – piecing the veil by court was not allowed
...
There was a new
Act in 1973
...

The 1973 Company Act, due to some development in corporate led to 1999 amendment, but
everyone mentions that it was an outdated act, although it extremely amended important
aspects
...
The 2008 Company Act was a disaster from the beginning
...

In terms of 1856 Act, the Act shows two things:
(i)
Power value share

Adv
...


VEIL OF INCORPORATION
The court has no discretion to lift up the corporate veil
...
In the Cape Pacific Ltd (1995), the AD the
court attempted to lay down the criteria of how the court should lift the corporate veil
...
This is s
traditional grounds
...

The question is: Would be a good idea to lift up or piecing a corporate veil or to disregard it?
The limited liability is at the very heart of the reason for the existence of the company and it
cannot be interpreted away, without the most compelling of indications
...

However, in terms of English law, where there is evidence of a fraudulent intention or a
sham from the outset then the court will “pierce the corporate veil”
...
In 1951, the court, in Bank Voor Handel v
Slatford, held “no doubt, the legislation can forge a sledge-hammer capable of cracking open
the corporate shell, and it can, if it chooses, demand that the courts ignore all the conceptions
and principles which are at the root of company law
...
This conception of the existence of a company as a separate entity distinct from its
shareholders is no merely artificial and technical thing
...

In 1980, the court in Lategan v Boyes expressed the view that South African courts will not,
at least at this stage, be prepared to disregard the corporate veil except upon proof of fraud
...

In 1995, the AD in Cape Pacific Limited v Lubner Controlling Investments (Pty) Ltd and
others expressed the view that it is a salutary principle that courts should not lightly disregard
a company’s separate legal personality, but should strive to give effect to it, as to do
otherwise would negate and undermine the policy and principles that underpin the concept of
separate corporate personality and the legal consequences that attach thereto, but held that
where fraud, dishonesty or other improper conduct is present, other considerations come
into play, in which event, the need to preserve the separate corporate personality of a

23

Adv
...

In 2001, the SCA in Hülse-Reutter v Gödde held that there can be no doubt that the separate
legal personality of a company is to be recognized and upheld except in the most unusual
circumstances
...
The
circumstances in which a court disregard the distinction between a corporate entity and those
who control it are far from settled
...

Nonetheless it is clear as a matter of principle that there must at least be:
 some misuse or abuse of the distinction between the corporate entity and those
who control it which results in an unfair advantage afforded to the latter
...


Therefore, the court created the door that the value of corporate veil can be lifted where there
is a proof of:
 Fraud;
 Dishonesty;
 Improper conduct
 Unconscionable injustice
BUT there is no general duty to the court to lift the veil – CONTRADICTIONS!
READ – CAPE PACIFIC
Wed 09 MARCH 2011
CORP TUT: Partnership

3 possible questions:
1
...
There must be confidence
between partners; or
 Because other partners is bringing nothing in the partnership;
 If a partner wants to leave – He must provide notice of intent to leave: This must be
done in good faith and within a reasonable time
...
However, agreement may set out the procedure to dissolve
a partnership
...
Why should a partnership give notice of the dissolution of partnership?

Adv
...
See Purdon V Muller
...
Why should the partnership liable to creditors who do not receive proper notice of the
dissolution?
 By giving a notice of dissolution to a 3rd party, it is to ensure that a 3rd party is not
under the mistaken impression that the partnership is still in existence
...

Case to read: Eaton and Louw v Arcade Properties (Pty) Ltd 1961
...

Explain the difference between anonymous and commanditarian
 Anonymous partner is not known to the public and liable to the partners for the pro
rata share
...
He shares in the profits and losses but
his liability is restricted to his specific contribution or an agreed amount
...
Incorporation brings about benefit, which includes legal personality
...

The incorporation comes with privilege to members of the company because they enjoy
limited liability – they are not responsible for any debts incurred
...
The
members would lose their money invested if the company goes bankrupt
...
The
members are not liable for any improper or fraud conduct
...


25

Adv
...
The corporate veil is created to protect the responsibility like
fraud, dishonest and improper conduct
...

See: http:/worksbepress
...
content
...
article=1008
...

South Africa case:
The case of Cape Pacific Ltd laid a foundation for future application for the lifting of
corporate veil
...
It is only the
occasion the court thought of lifting corporate veil
...
The court said that the court will have
to look at the requirement set out in this case in order to piece the veil
...

What is unfair advantage? Is it different to unconscionable injustice? No it is not
...
Smalberger JA, in Cape Pacific Ltd weighed up the
protection given to the members of the company against the protection of public
...
Nonetheless, this does not give any court discretion to lift up
the corporate veil for a fraud
...
The defendant conduct was clearly stated as gravely improper and
morally unspeakable
...
The categories that must be present
are:
 Categorization approach;
 Alter ego approach (a mask for the people who are behind the company)
If categorization or alter ego is not present, court will not lift corporate veil rather sue on the
basis of traditional grounds
...
The fact that Lubner had a morally
unspeakable conduct, could not found liable
...
Traditional ground must be first exhausted
...
But before lifting the veil, there must be
reasonable grounds
...

Simple EXAMINATION Question:
The Salomon decision was a scandalous one which unleashed a tidal wave of irresponsibility
into the business community
...


Adv
...
However, the court does not have discretion
to disregard legal personality
...

Court: His conduct is improper

CP has two claims:
- PCV – Piecing Corporate Veil
- TR – Traditional Grounds
If u have two remedies you have to choose one – One should first exhaust the traditional
remedy first and therefore, if does not succeed he can opt to the second remedy
Test/Exam:
Discuss: Does court has discretion to disregard legal personality?
- Discuss Cape Pacific case:
- Discuss two remedies
- Discuss majority and minority decision
- Categories: Fraud, Dishonest and Improper conduct
Die Dros case
It deals with close corporation
...
Close Corporation was
formed and ratified the contract
...
4th respondent is using the 3rd respondent in order to try to hide behind
27

Adv
...
The court said the respondent tried to use the business of his brother as
disguise
...
as a disguise to enter into a
dealings that were prohibited in ……”
Hulse-Reutter v Godde case
All parties are Germany
The company has a lot of creditors
Godde suppose to receive 4 million – Hulse-Reutter to cede his claim to him
Godde want to claim from shareholders, whom were husband and wife;
They were attempting to defraud the company
TIP: Look at whether natural person is misusing the company
...
In company law, there are two
extremely important principles determining, not only the company’ existence but also the
relationship between a company and its creditors; and, a company and its members
...
There is a perpetual obligation to disclose certain
information
...

The company has a duty to disclose this information
...
F Kotze 28

Once a company has published/disclosed information, the focus shifts to public members vis
third parties who deal with a company
...
This is a common law doctrine that creates a legal fiction which deems that you
have read such information
...
A person
who deals with company cannot claim, after concluding a transaction; that he did not know
that the company had to disclose
...
” The
doctrine of constructive notice requires to know certain information regarding the company
...
The doctrines are very important because they are the body of the company
...
If published a third party must
read
...
In fact, these two documents must bear registration of the company and whether
it is incorporated
...
The registrar
scrutinizes these 2 documents and put it together
...
Therefore, a
third party dealing with a registered company is deemed to have read the memorandum and
article of association
...
The consequences is overrated in cases where did not read
these documents
...
” The law does not require a person to read
these documents before concluding a contract – There is no such obligation
...

In terms of 2008 Company Act, the situation has lightly changed
...

Types of Company: 1973 Act
There are two types of company:
 Company with share capital, and
 Company without share capital

29

Adv
...
It has to be
incorporated as a public company only
...
The members do not have idea of sharing profit because they have
no right to claim any profit made by the company
...
If the
company turns out to make a profit, the money is used to further the company objective
...
The
company with share capital should make profit and once the profit is made is distributed
among the members
...

What the difference between private and public company?
The difference can be noticed from the names of a company
...

 The company will be regarded as a private company is it meets the requirement in
s20
...

 It may not issue funds to the public and
 The shares are not freely transferable
The company without share capital consists of members and board of directors but no
shareholders
...
A member must pay any
amount not less than R1, with agreement
...
The company must have register of
members which reflect all members of a company
...
The company without
share capital, member will make contribution when it is going to wind up
...

The 1993 Company Act provides for ‘External Company
...

Types of Company: 2008 Act
S8 introduces two types of a company:
(i)
Non-profit company;
(ii)
Profit company
Profit Company is a company incorporated for the purpose of financial gain for its share its
shareholders
...
F Kotze 30

(iii)
(iv)

Personal liability company;
Public company

NOTE: Personal Liabilities Companies: Look at s53(b) of 1973 Act, the provision provides
that , in the case of private company, directors and past directs are jointly and severally liable
, together with the company , for such debts and liabilities of the company
...

In terms of s66 of 1973 Act, the incorporated company must have 7 members, but if the
company runs business for 6 months while it has less than 7 members, every member of the
company will be liable for the payment of the whole of the debts of the company – Parties
are accountable
...
There is no
use of members if there is no profit to pay them
...
S53(a) states hat it must be clear in the memorandum of association that the
members will be accountable – directors are jointly and severally liable
...

Pre –existing companies
If incorporated in terms of 1973 Act, they will continue with the same name and registration
number
...
Companies registered in terms of old Act will be given two year to change the
memorandum and article of association into memorandum of incorporation
...

External Company (2008 Act) – must at least maintain office in South Africa [23(3)]
...


Mon 04 APRIL 2011

TOPIC 4
PRE-INCORPORATION CONTRACTS: METHODS, REQUIREMENTS
& EFFECT
In principle, if there is no legal personality there is no legally existing company
...
However, an agent

31

Adv
...
In terms of English law, if an
agent contracts on behalf of the principal who does not, on that particular time of a
conclusion, exist the principal is not liable
...

In the case of Makhala,1920 the court interpreted that agent who acts on behalf of nonexisting principal is liable
...
One must look at the contract and intention of the parties (this is first
approach referred to as ‘constructive approach’)
...
(FIND
OUT THE CITATION OF THE CASE)
...
Usually, before the incorporation, the company will need
equipments inter alia, premise, office furniture, motor cars, employed people, etc
...

In terms of common law, if the company is not yet incorporated, the agent may be personally
liable but first look at the contract
...
Therefore, if the contract is entered before the company is incorporated the
company will not be liable
...
A company starts off to the need of preincorporation contracts but however in South Africa it is not allowed because you cannot
conclude a contract as an agent on the behalf of non-existing principal
...
Therefore, in terms of the common law, it is
absolutely impossible for the company to be liable
...

The 1926 Company Act was the first general South African Company Act
...
S35 creates the statutory provision that an
agent can act on behalf of a non-existent principal or not yet incorporated company and not
be held liable
...

S35 provides for the powers as to pre-incorporation contracts and thus reads:
“Any contracts made in writing by a person professing to act as agent or trustee for a
company not yet incorporated shall be capable of being ratified or adopted by or
otherwise made binding upon and enforceable by such company after it has been duly
incorporated at the time when the contract was made and such contract had been
made with without its authority: Provided that the memorandum of its registration
contains as an object of such company the ratification or adoption of or the
acquisition of rights and obligations in respect of such contract has been lodged with
the Registrar together with the lodgment of the registration of the memorandum and
articles of the company
...
F Kotze 32

The contract must be in writing because it is possible for the parties to breach an oral
agreement
...
Again, two concepts are referred to namely an agent and a trustee
...
Both are similar words
...
In 1973, the legislature had in mind the operation
of stipulatio alteri, under which a person contracts on the benefit of a third party
...
This means that an agent or trustee can enter
into a contract on the benefit of a third party, which is the not-yet-incorporated company
...
Without such autonomy, it does not exist
...

(4) Memorandum must contain an object of such company, the ratification or, the
adoption or, the acquisition of rights and obligations in respect of such contracts
...

(5) Contract must be lodged with the Registrar together with the lodgment of the
registration of the memorandum and articles of the company
...
If they are registered, they become public documents as anyone has
access to such doc
...
Thus,
the company is no longer in a position to hide its competitors whatsoever it wants to hide
from them
...
S176 deals
with the certificate to commence the business
...
’ The certificate
to commence business referred to under s176 must be issued for the company to start a
business
...
If the company does not possess s 172 certificate, the consequence
prescribed under s176(5)(a) will follow
...

Note that if the requirements laid down under s35 if are lacking, s35 finds no application
...
S 35 applies in instance where
agent acts on behalf of not-yet-incorporated company
...
Authority is given by the
principal
...
As such, authority is a legal fiction
in the case of not yet incorporated company, that is why an agent must conform with s35 or
otherwise he will be liable
...
F Kotze

S 35 is divided into categories, namely:
(a) administrative formalities (requirements one and two);
(b) structural formalities (requirements three to five)

How does s35 operate?
In principle, the contracts that concluded by an agent who lacked authority, may be ratified
by the principal to become legally binding on the principal
...
The ratification is thus necessary for the
company to be liable
...
S35
ratification should however occur to shift the liability from agent to the company
...
In case one of the requirements is not complied with, the agent will be liable,
because the protection under s35 will lapse, and the agent will be liable under
misrepresentation
...
Where an agent acts
without authority and principal ratifies the actions, principal will be liable
...
Therefore, the ratification works retrospectively
...
However, there is an exception in terms of
s35
...
June is applicable in terms of common law
...
It takes the effect from the day
it is ratified [see the case Union Government]
...
This shows retrospectivity operation of
ratification but the court decided that ratification in terms of s35 does not operate
retrospectively
...

There is a big advantage to the pre existing company, because the contracts concluded cannot
be referred to the Registrar to be disclosed to the public
...
Pre incorporation contracts are very
important because they are creator of the company and therefore s 35 must be followed
...
Kotze, the court should include stipulatio alteri in the requirement of s 35
...
F Kotze 34

In practice, s35 is very often not followed
...
Therefore, it is in practice useless
...

- s 176 = additional requirements = certificate to commence a business;
- certificate of registration
Note:
- Stipulatio alteri is under common law but not under s35
Wed 06 APRIL 2011
CORP TUT: Corporate veil

Doctrine of Disclosure + Doctrine of Constructive Notice (DCN)
In terms of DD, the company needs to disclose certain documents, inter alia:
(i)
Company name;
(ii)
Memo of association;
(iii) Article of association
All public documents must be disclosed
In terms of DCN –a third is deemed to know the power of a company and members ie who
has authority to act on the behalf of the company
...

In terms of 2008 Act, we have a memo of incorporation
In terms of s21 of 1973 Act, the company can adopt its own memo of association and article
of association [SECTION NOT CORRECT – FIND OUT]
...

Types of 2008 Companies:
 Profit Companies vis Private, Public, Personal Liability and State-Owned Company;
 Non profit company
S35 Requirement:
35

Adv
...


RATIFICATION:
 NOTE – Read Cases

11/04/2011
Ratification under South African law
In South Africa, the ratification takes effect retrospectively where an urgent acted on behalf
of unduly principal (without authority)
...

Ratification takes back the contract back as from the date it was concluded while there is no
authority, if ratified by the principal
...


Within the period of a contract conclusion without authority and the ratification, although that
an agent acted with good faith, the third party can withdraw if discovers that the agent acted
without authority
...
Therefore, any time before ratification, the
contract is incomplete
...

In corporate law, the 3rd party know that the principal does not exist ie he knows the fact that
the company is yet to be incorporated
...
There is nothing suggests that a third party is bound or
not
...
However, the lecturer cannot say that s35 is not bad section
in Company Law; because if the company is incorporated and does not ratify, the agent will
not be liable, but the agent will be liable under the common law
...
F Kotze 36

INCORPORATION & REGISTRATION OF COMPANIES: NAME,
MEMORANDUM & ARTICLES OS ASSOIATION & THE COMPNAY
ONTRACT

MISSED LECTURE

The operation of section 21 of 2008 Company Act
S 21 = Pre-incorporation:
Pre-incorporation contract means a written agreement entered into before the incorporation of
a company by the person who promotes …[FIND OUT]
...
A person may enter into a written agreement in the
name of, or purport to act in the name of, or on behalf of
...

A person is severely and jointly liable with any other party for liabilities created
...
However, a 3rd party may be company agent or promoter
...
It refers to
unfairness
...
However, s21 is
not going to be used by clever people because it is not clear because, the agent of a company
is paid by a company if the company is incorporated, that is, when the contract concluded by
an agent is adopted or ratified
...

S21(4): in terms of section 35 of 1973, there is no timeframe of ratification, the company
should have adopted the contract within a reasonable time
...
S21(4) of 2008 therefore requires that the adoption be made within 3 months
period
...

S21(5): The directors should better move fast
...
However, the question is whether the
retrospectivity takes effect from the date of incorporation or the date of the conclusion of the
contract? All provisions of s 21 refer to the date of incorporation
...
F Kotze

was incorporated, either automatically or by resolution of the board of directors
...
Well, if one
looks at s35 of 1973, it was not clear, too
...
But an agent can approach
the company to inform of its liability to a third party
...
An agent will claim his loss from the
company
...

Test/Exam/Assignment
The operation of ratification in terms of s35 of 1973 and s21 of 2008

Umgeni Road v Bali
Where a person has entered into a contract in the capacity of trustee (agent) for a company to
be formed, the trustee is not personally entitled to exact or, obliged to render, the
performance which is stipulated for the third party (principal) unless the contract so provides
...
The applicant was found to be liable for the lessee’s
obligation
...
As such it becomes one of its conditions
...

Monday, 09 May 2011

Ultra vires doctrine– Internal v External operations: s36

Adv
...

 Internal effect of ultra vires has been maintained in 1973 and 2008 Act
...
Such contact was void – It was simple to
understand the effect thereof
...

The question is how ultra vires operated before 1973, and the change made after 1973
...
What the company
should do, could be illustrated under object clause of MOA eg the company will sell
secondhand motor vehicle
...

See Cotman v Brougham case – “the function of the object clause was not to specify not to
disclose but to bury beneath a mass of words the real objects of the company…
...
It must be read together with ss33 and 34
...
”
 S36 – ultra vires transaction of the company is not void
...
”
S36 was drafted to protect the creditors, shareholders and its members
...
The legislature found that common was no longer
functioning
...

Ultra vires act is not void – refers to external ultra vires act as it was, before 1973, was void
ab initio
...
The effect of this change is
that the companies can no longer escape liability
...
F Kotze

provides that the company must sell secondhand motor vehicles, but the company sells
houses, the transaction will not be void as a third party is concerned
...
Remember that a third party is subject to the doctrine of
constructive notice
...
However, whether a third
party knows that the company concluded a contract ultra vires is immaterial
...
It means that it is not covered by s36 and as such remains as it was before 1973
...
A member can
sue if suffered loss or damages because of the directors’ breach of fiduciary duties owed to
the company
...

There is number of issues to be carefully considered, which continue to exist up to date
...

S36 can be divided into three parts:
Part 1 of s36:
“No act of a company shall be void by reason only the fact that the company was
without capacity or power so to act”




It proceeds to provide a number of interpretation;
There may be another reason why the act should be void;
If the company enters into a contract ultra vires, the contact is no longer void
...
If acts on behalf of a company, he is
viewed as an agent, and a company is regarded as a principal
...
The directors (agents) cannot have authority to act
beyond the company capacity
...
The company is, by law, prohibited to act ultra viles
...


There a huge difference between the concept of capacity and authority
...

Part 3 of s36:
“by reason only of the said fact”



This means that the company was without capacity
S36 will only apply if the director has valid authority
...
F Kotze 40



S36 finds no application if the directors has no necessary authority ie Director is not
given authority at all by principal or he has authority to act but exceeded such
authority;

Requirements for s36 of the Act:
(i)
The company exceeds its capacity or acts beyond its main object;
(ii)
The director lacks authority on the virtue that the company lacks capacity;
(iii) The transaction was concluded by a director acting as an agent
...

S36 finds application if the directors have necessary authority, but the
company has no necessary capacity
...


Ultra vires in terms of common law is void ab initio
...

Test/Exam – problem Q:
- Look at the object in memo;
- Look at the transaction;
- If the transaction is not reflected in the object, then investigate s36 (are the
requirements met? If yes, the ultra vires act is validated);
- Difference between ultra vires and intra vires
...
S36
validates ultra vires act and it is thus enforceable
...
F Kotze

Directors’ powers are postulated in the article of association (AOA)
...
Note that where s36 does not apply, the
common law position will apply
...

 If directors acts ultra vires but the transaction has not yet took place, a shareholder or
a member can apply for an interdict
...
You should have
advised whether there would be personal liability or whether Ben (agent) could have been
relieved of any liability on the contract by section 21 of the Company Act, 71 of 2008
...

Was it ratified?
The agreement was not ratified at all
...

- On 25 Cape Bicycles Ltd adopted the Titanium Towers lease contract,
What the Cape Bicycle adopt on 25 July? Which contract adopted?
Regarding the Sale and Purchase, if an agent sells things belongs to the principal without
authority, the contract is void; and is valid until it is ratified by the principal
...


Adv
...
An
agent has no authority from the principal
...
Therefore,
the principal cannot, after contract being cancelled, ratify the contract as the contract does not
exist any longer
...

When the company was incorporated and adopted/ratified the agreement, there was no longer
a contract between agent and a third party
...

Ben therefore will be sued and he will not be protected because the company the company
did not ratify the contract
...

S21 of the 2008 Company Act is a risky
...
The ratification is possible where there is a
contract to ratify
...

NOTE: S21 of 2008 Company Act is applicable in Canada, USA, UK and Australia
...
In the future, the agent will, to avoid the risk, use
stipulation alteri
...

In dealing with this issue, you should have referred to case law in answering the following
questions:
- Does SA law on the right track? Is the court prepared enough to expose those who are
responsible for fraud to incur their liability?
Can the court lift the veil or do you think the court goes far enough to uplift the corporate
veil? [Most students did not answer the question]
...
Other judges believe
that it should be lifted due to other unusual circumstances/grounds
...
Therefore there is
contradiction/conflict of judgments
...
Therefore, one can argue that the South African law is not going far enough in
protecting a third party
...
F Kotze

TOPIC 6
CAPACITY & REPRESENTATION OF THE COMPANY/EXTERNAL
RELATIONS






The doctrine of disclosure;
The doctrine of constructive notice;
The traditional ultra vires doctrine;
Turquand rule,
Estoppel and ostensible authority

Intro:
Topic 6 deals with common law and the law of agency
...
In fact 1973 Co
...

The rule formulated in English case law, became to be known as binding rule due to TWO
English cases and has become a rule in South Africa
...

New Co
...

In terms of the common law, a third party dealing with a company is subject to ‘constrictive
notice’
...
Every third party is
bound by terms provided under public document
...
There will be no excuse if the company has acted ultra vires or if an agent
acted on behalf of the company without authority
...
A third party is
supposed to know this from the public document (Article and Memorandum of Association)
...
It is thus deemed that he did read the
article and memo
...
It is apparent
that most people do not know about constructive notice even law students know until they
learn about it in this course
...
A third party ought to know of this fact from public document
or should make his own investigation before concluding any contract eg John, an agent of

Adv
...

If this information is available in the public document, a third party will be deemed to be
aware of these facts:
- That John is an agent of the company;
- He may purchase on behalf of the company;
- He may not spend more than R100, 000
- He may be permitted to exceed such amount up to R120, 000

These facts are CLEAR but here there is a problem: How should a third party know that John
(agent) has given permission to buy a car of R120,000?
- A third party concludes the contract;
- Delivers the car and waits for payment;
- Company denies liability – John enters into a contract without permission
Do you agree that only based on this technical issue, the company can escape liability on the
strengths that it did not give permission to agent (John) to contract with third party for the
purchase of a motor car worth R120,000
...

In the case of Royal British Bank v Turquand, the court came to the decision that the
doctrine of constructive notice will not bind if internal formalities are not complied with
...
In dealing with agent, the third party can
assume that internal rules have been complied with
...
Based on this rule, the agent can
therefore say that I did not know if the agent had or had not an permission
...
A third party must
know whether agent has authority to act
...
Therefore a third party must comply with the doctrine
of constructive notice
...
Authority of an agent comes from the documents of
association
...


45

Adv
...
An agent
will therefore have necessary authority if the condition is met
...
This can be any condition eg
procedural condition
...

A third party will deal with Agent provided that the condition is complied with eg Agent can
sell the car provided that the resolution of members of the board of directors approves it
...
How should a third party know that agent has necessary
authority? How should a third party deal with this problem? The question that should be
asked is as follows: Was it possible from a reasonable perspective for a third party to know
that the condition has been met?
The answer is no! One cannot burden a third party with what the common law does not
prescribe
...
A third party can make a follow up and make an
inquiry from the company of whether an agent has an authority BUT there is no such
obligation to know internal affairs or how the company is administered/run
...
See Royal British Bank case
...
’ It was incorporated under the Joint Stock
Companies Act 1844
...
The bond was under the
company’s seal, signed by two directors and the secretary
...
A resolution had
been passed but not specifying how much the directors could borrow
...
The court held that ‘the third party transacting with companies
are entitled to assume that internal company rules are complied with, even if there are
not’
...
The decision in Turquand mitigated the harshness of the
doctrine of constructive notice
...

(ii)
NG may enter into a contract not exceeding R100,000;

Adv
...

(iii) NG may enter into a contract exceeding R100,000 except with approval of all the
company directors
→ Here we have a condition attached –a possibility of exceeding the amount specified
provided that the condition is met
...
It is referred to “Indoor management rule or Turquand rule
...
Only what a third party is aware of is
what written in memo and article of association (that he should know in terms of the doctrine
of constructive notice)
...
If he suspects something he cannot rely on it
...

The fact that article of association provides for appointment of an agent, who must act on
behalf of the company; and provides that certain condition should be attached to an agent
authority, Turquand rule will provide for relief where a third party did not know that the
attached condition was met
...

If there is a condition attached, the condition must be in writing
...

Whether a third party has read or did not read the article and memorandum of association is
immaterial because it is, in terms of law, deemed that he has read them
...

Delegation of the power:
See powers and duties of Directors – [s60???] – The Board of directors can only represent the
company; therefore, they cannot delegate their power
...

Test/Exam:
Expect a question on operation of Turquand rule
...


47

Adv
...

S36 of 1973 Company Act brought some relief where a company acts ultra vires
...
S36 has limitation, too
...
It is very important to know that an agent can be anyone but
necessarily one of the Directors of the Compamy
...
In case the Director was not appointed to act
as a company agent, the Turquand rule will not find its application
...

S20 of Company Act, 2008 – Validity of company actions:
This section has limited application
...
The company may be incorporated in such way its memo will limit its capacity or
authority of agent, I am not sure to what extent they may be limited
...

S20(1) provides that if a company’s memo of incorporation limits, restricts or qualifies the
purpose, powers or activities of that company, no action of that company is void by reason
only that the action was prohibited by the limitation, restrictions or qualification; or as a
consequence of these limitations
...
S20
refers to s19 of Company Act, 2008 (Legal Status of the Company) – S19 provides that if a
company is incorporated is no longer limited
...

The Consequences:
 If the capacity is restricted, a third party dealing with a company will hold the
company liable if it acted beyond its capacity, alternatively, it will not escape liability
if an agent acted without authority
...
If a third party lodges a legal
proceeding against the company, the directors and shareholders may not rely on such
limitation to assert that an action was void [see s20(1)(b)(ii)]
...
F Kotze 48

S20(7) provides that a person dealing with a company in good faith is entitled to presume
that the company, in making any decision in exercising its powers, has complied with all of
the formal and procedural requirements, its memo and any rules of the company, unless, in
the circumstances, the person knew or reasonably ought to have known of any failure by
the company to comply with such requirement
S20(7) is a formulation of Turquand rule BUT only relates where the company has limited its
power
...

NOTE: YOU should know the difference between:
 Reasonably ought to have known (2008 Company Act) and suspiciously have known
(common law)
...
In the main objects clause, one would find the contractual capacity of the
company
...
From objects clause,
you will find what the company can do or what the company cannot do eg the company has
capacity of buying and selling cars – This will be main object
...
In principle, if a party performed in terms of ultra vires act, that performance had to
be returned
...
The ultra vires doctrine and the doctrine of
constructive notice, go hand in hand
...
Therefore, s36 is not applicable if the company acts within the
boundaries of its MOA
...
F Kotze

(b) Person acting on behalf of the company must be a director:
If any other person acted on behalf of the company other than a Director would appear in
article of association
...

(c) Director’s authority is lacking only because the company does not have capacity:
Agent would not have authority if the company itself does not have capacity
...
Therefore agent’s authority is lacking not only because the company
acted outside of its memo (objects clause), but also because agent would not bind the
company without principle’s signature
...
The DCN does
not apply the memo of a company only
...

Turquand Rule:
Turquand rule only applies to acts that fall within memo of a company and not ultra viles
acts
...
This rule comes from Royal British Bank case, where it was held that a third party
dealing with a company can assume that all internal formalities have been complied with
...
One cannot expect a third party to go beyond public documents of
the company
...

Exception to the Turquand Rule:
 If the 3rd party was aware that the internal requirements have not met;
 Circumstances under which the contract was concluded was suspicion;
NOTE: A 3rd party would not be able to rely on Turquand Rule if the above is applicable
...
Actual authority can
be given expressly or by implication
...
It is an authority which is connected with
express authority
...
F Kotze 50

P sued the company for a payment of a sum of money
...
P’s attorney wanted to obtain the consent of the
company to the jurisdiction of the Magistrate Court in Johannesburg
...
P’s attorney called Coleman and asked him if the company would
consent to magistrate court in Johannesburg
...
The court found that there was no express authority to bind the principal because
Coleman was only an accountant and his job description was to overlook books of the
company
...

Court found that there was no evidence that there was any discussion about the issue with
inside people, despite that P’s attorney thought that he had necessary authority
...
The court
determined whether Coleman had an implied authority, and held that his work was limited to
accountancy, in that, he did neither have express nor implied authority to bind the principal
...
This power is derived
from section 33 of the Company Act
...
Any contract must fall
under objects clause, if the contract does not fall under object clause, will be void in terms of
common law
...
Ultra vires act continued to exist
after the introduction of 1973 Company Act
...
S36 was clear –
the consequence of ultra vires will not fall away if a third party contracts with the Director in
breach of main clause, however, the board of directors or shareholders could stop the Director
from entering such a contract
...
Therefore,
no agent should have purported to act on behalf of the company if he does not have necessary
authority
...

Exception:

51

Adv
...
S20 is
applicable to RF companies
...
S20 provides that it will apply where the power of the
company is restricted/limited/qualifies its power
...

S20 explains what the ultra vires will be even though it does not refer to it as ultra vires
...

If the company does not have authority, s20 makes it clear that if a Director does not have
authority because company does not have capacity, then s20 applies
...

What has changed? S36 applies to all companies whereas s20 applies to only RF company
...
In respect of internal perspective,
ultra vires continue to exist
...



S20(2) refers to a special resolution by shareholders to ratify the directors ultra vires
action
...
In the 1973
Act, this could not happen
...
Now it is no longer the case
because it can be ratified
...
Internal operation of ultra vires can be
validated in terms of s20(2) by special resolution
...
A third party should know that the company is RF, and due to such
fact, the ultra vires act is no longer void in terms of s20(1)
...

Again, shareholders may ratify the transaction in terms of s20(2)
...



S20(3) – an act may not be ratified if it is in contravention of the new Act;

Adv
...

 20(6) – Each shareholder has a claim for damages against any person who
fraudulently or due to gross negligent causes a company to do anything inconsistent
with this Act
→This provision opens more actions by a single person who believes that a director was
negligent
...

However, there is no need to prove nexus between directors and a third party
...
A person dealing with a company will assume that internal
rules/facilities are complied with eg if the memo provides that an act of directors
should be approved by 75% vote or a decision taken unanimously
...
No internal party
will rely on Turquand rule
...
A
third party should have been put on inquiry, but suspicion should have been determined with
a narrow inquiry
...

Any party dealing with company is generally not subject to common law rules any longer
except the doctrine of constructive notice
...
However, the doctrine of constructive notice is applied to only RF companies
in term of the Company Act, 2008
...
The certificate of the company must contain the fact that it has limited
its power
...
There is no law or principle that requires a third
party to act on assumption that an agent represents the company
...
Therefore, do not assume that an agent is acting in
good faith – ALWAYS INVESTIGATE
...
However, his act can be:
- Ratified;
- Subject to Turquand Rule;
- Estoppel
When does estoppel defence raised?
If an agent does not have authority, but the third party has concluded transaction based on the
fact that he was made to believe that an agent has necessary authority by the principal, the
principal will not escape liability
...
F Kotze

Ostensible authority: There is really no authority – but the fact that a third party believes that
there is necessary authority is based on the conduct of principal (a third party is made to
believe that agent has authority)
...
It is only an
impression created for a third party to believe that agent has authority
...
The company misrepresentation must have induced the third party to enter
into a contract and such conduct has, as result, prejudiced the accused
...

NOTE that estoppel is a defence
...
If an agent acts beyond an
actual authority, he will exceed his implied authority as well
...
The Act
introduces normal company with unlimited contractual capacity
...
Further, the 2008 Act introduces the RF company with restricted
or qualified contractual capacity
...

-

s20(1) is similar to s36 of 1973 Act → Company must have a Director;
s20(2) – When acted ultra vires, shareholders can validate ultra vires action for the
Directors not to be liable
...


Estoppel:
Take this example, if special resolution must be passed to give the power to a particular
Director to enter into a transaction, but the Director entered into such transaction without
such resolution, it means that a director acted ultra vires
...
If shareholders do not validate it, the third party may rely upon estoppel as a
defence
...


Adv
...
Act:
In terms of the 2008 Act, a company is incorporated with only one document which is called
‘Memorandum of Incorporation
...
In terms of 1973 Act, there was
a memorandum of association which was regarded as the Constitution of a Company
...
Article of association should contain
information about the meetings, company’s directors, contractual capacity, etc
...

The 2008 Act, in terms of ss13 and 14, refers to incorporation
...
’
These two documents are:
(i)
Notice of incorporation – indicates an intention to register a new company
...
It is a prescribed fee and receipt must be
attached to the notice
...

S13(3) of 2008 Act relates to RF companies and its registration procedure
...
In terms of s1 (definition), the
registration certificate means the evidence of registration
...
And the certificate is no longer
called ‘certificate of incorporation’ BUT registration certificate and may be referred to as

55

Adv
...
NOTE that memorandum of incorporation is a founding document of
incorporation
...


Memorandum of incorporation, shareholders agreements and rules of the company:
S15 of 2008 Act provides for flexibility of the company
...
S15 is generally deal with the power of the company
ie what the company may do or cannot do
...

S15 of the Act: Memorandum will at most times contain procedure of amendment of such
document
...
Memorandum should contain the procedure, rules and the requirements of
amendment
...

Memo provides company ability to make rules
...
NOTE that the article no longer exists but a company has
attained the power to create rules
...

Also in memo, you will find information on shares and securities, how members may vote,
information about shareholders/shareholding, meetings and its procedure, board of directors,
communications, dismissal, quorum, number of directors, etc
...

S66 of the Act provides for how business and affairs of the company should be managed
...

Model of memorandum of incorporation:
The content of the memo of incorporation will differ from a company to a company eg
private to public – the memos are completely different
...
The model of memo
provided in the Act may be used by any company irrespective of whether the company is
public or private
...

The model: The legislatures are more specific with what memo of incorporation must
contain
...
It is mandatory
because it contains the core provision which cannot be altered/changed
...

Unalterable provision is defined in terms of s1 of the Act as ‘a provision of this Act that does
not expressly contemplate that its effect on any particular company may be negated,
restricted, limited, qualified, extended or otherwise altered in substance or effect by a
company’s memorandum of incorporation or rules
...
F Kotze 56

►These unalterable provisions are similar with those of s76 of 1973 Act and common law
...
There are also referred to as
“defaulted provisions”
...
They may be adopted the way they
are in model document or may be amended
...
Default rules provided that:
- Shares are of the same class: Shares have the same right attached to them but these
rights can be amended;
- S66(2) provides a number of directors required BUT the memo may contain this
provision as a default ie the company may have less or more than directors prescribed
in the Act
...

In the past, it was not possible to rectify the memo or article of association if there was a
mistake
...
The only way to remove the error, there should
have been a resolution, which should have been registered to the Registrar
...
In the content of memo, you will
find the capacity of the company to make rules
...
These rules of a company are very essential, and the company may formulate them in
any form
...
There are
binding
...
The rules cannot alter a provision in memo
...

Shareholders agreement:
S1 of the Act provides that an agreement ‘includes a contract, or an arrangement or
understanding between or among two or more parties that purports to create rights and
obligations between or among those parties’
...
The
significant of the agreement can be undermined because it required consensus between the
directors and shareholders
...
In case there was a conflict between the memo and agreement, the memo should prevail
...
The agreement document may contain
voting procedures and voting rights
...
The company is not party to these
agreements of shareholders
...
The company plays no role
...

Existing companies that were incorporated in terms of 1973 Act, which have concluded
agreement in terms of the old Act, will have to follow their agreement within two years after

57

Adv
...
The articles and memorandum of association are expected to have changed into a
one document vis the memorandum of incorporation within two years
...

Memo of incorporation: What is the status of this document?
In the past, the memo of association was a form of a contract between the members and the
company and among members themselves
...
The assumption is that it does
...

S15(6) of 2008 Act refers to a number of legal relationship between shareholders and the
company
...

This contractual relationship is not just ordinary agreement but a funny agreement based on
the fact that there is no consensus
...

If the company breaches the agreement, there is no compensation for contractual damages –
A director cannot sue and claim damages
...
Here, there is no remedy stems
from such instances
...
The Director’s consent is not required to amend the contract
...

NOTE: - LOOK AT SS13,14 & 15
...
But share capital is the money or
assets the company receives upon the issue of shares
...
This is
not only the source of capital
...
” Capital is something that company

Adv
...
The capital belongs to a company and becomes its
property
...
The company owns its property and shareholders
own their property apart from the company’s unless upon the liquidation or winding-up
...
Shareholders have the right to
dividend + the right to vote + the right to share the liquidated assets
...
Then what is a share?
It is a personal right of action claimed through a share certificate
...
Share is an incorporeal property
...
Law of Cession plays a meaningful role in the
corporate law
...

Legal nature of a share:
S35/2008 provides the legal nature of the shares: 35(1) – Movable property;
 35(2) – Share does not have nominal value or par value;
 35(3) – A company may not issue shares to itself;
 35(4) – Authorized share of a company has no right until it has been issued
...
The issue may happen in
different class of shares
...
Note that
voting rights attached to a share may differ eg two votes per share or one vote per share
...

There are 3 classes of shares:
(i)
Preference Shares;
(ii)
Ordinary Share, and
(iii) Deferred Share

Wednesday, 03 Aug 2011
TUTORIAL CLASS – ISSUE OF SHARES AT DISCOUNT
Some company has share capital comprised with shares which are sold to generate money
...

Eg: 1st issue = 5,000 share at R1
...
00
= R10,000 = Share Capital Account= R5,000
= Share Premium Account = R5,000 (here there is a profit)
59

Adv
...
00 being initial amount of issue or that
which was agreed on
...
In
terms of s82(1) of 1973 Act, if the company issues first share eg at R1
...
00, the third issue must be sold on the average of first and second issue, which
according to the above-mentioned example, it would be R1
...
00 = R3
...
50
...
50
...
”

Non Par-Value Share
There is no value attached to it
...
MOA and AOA
should set an amount at which the shares should be issued
...
50 – This is not fair for the first
and second share buyers
...
A company should not issue share at price
under the Non Par-Value Share ie R1 according to our example
...
For Par Value Share, the profit goes to your Share Premium
Account
...
There are other different type
of shareholders – redeemable share, participating share and cumulative preference
share
...
If the company declared dividend in 2005 and skip 2
years and then declared it in 2008, the shareholder is entitled to the portion of
dividend of these two years
...
F Kotze 60

Whether or not a share is cumulative is usually expressly stated in the class rights of
the shares, but if the class rights do not indicate of such fact, there is a presumption in
favour of cumulative
...

Deferred shares:
Deferred shareholder is the one who sells his business to the company and receive the
shares
...
The company gives him a share
as a thank you and is called ‘deferred shareholder
...
In terms of s81 of 1973 Act, the
company could issue shares at discount if certain requirements are met ie
- Special resolution;
- Year must lapse from the date of issue;
- Court order;
- One month must lapse after a court order
FIND OUT whether these requirements are still followed ito 2008 Act
...
Also, if the company wants to buy
shares back, the preference shareholder should know that this will happen from the outset
...
The company is solvent
where its assets exceed liability and the company is liquidity if after transaction it can pay its
debts in the ordinary course of business
...
If the company is experiencing financial problem, it is not liquid and it cannot
therefore buy back shares
...

Buying back shares
When a shareholder buys shares he/she does not know that the company will buy back the
shares at a later stage
...
F Kotze

company will buy back the shares
...

Thus the modern model of AOA does not allow for buying back shares
...


Monday, 08 August 2011
RECAP:
Share is nothing more than personal right, an incorporeal movable property, transferable in
terms of memo
...
Generally, it is known as share capital
...
Actually, the
company provides shares
...

►Share is something as interest
...

In Cooper v Boyes – Whether or not a share could be the subject of one or the other of these
institutes could not have known…
...
Note that normally does not mean always
...
What law applies to a
particular share eg if there is a lawsuit regarding the share’s ownership/interest? In 1973
Act, there was real value attached to the share which was called ‘power value
...
Power value was mystical
...
In term of 2008 Act, there is no value attached to it
...

Rights – Dividend – Voting – claim against company assets if liquidated
...
In terms of 2008 Act, all class of shares enjoys equal rights
...
F Kotze 62

(a) Income rights – ie Dividend: A person has a right to dividend if the company makes
money;
(b) Capital right – If a company is liquidated, or wound up, a person has the right to the
company asset;
(c) Control right – ie right to vote – In 1973 Act, it was extreme important bcz the
company should provide share with no right to vote attached
...
In a particular class of shares,
there is a dilution of the right to vote
...

These rights are determined by the following factors:
(i)
Terms of issues of the shares establish the rights attached to it;
(ii)
MOI – Class of Shares are written and covered in memo – The Act presumes that
all shares have equal rights – this has nothing to do with the company
...

(iv)
Shareholders agreement: in the past had a huge significance
...
Shareholders agreement are binding to those who participated in
it but not a company;
(v)
Legislation: may provide different right attached to the shares
...
The covenant comprises issue, memo, rules,
agreement and legislation
...
’ This means that you
must look at all these factors/aspects so that you can determine whether there are other rights
attached to shares
...

Traditionally, shares are divided into 3 classes namely preference shares, ordinary shares and
deferred shares
...


Classes of shares:
PREFERENCE SHARES [PS]
It is an income rights
...
A shareholder has no enforceable rights before dividend is declared
...
No shareholders can sue the company
before declared dividend
...
Calculation is done by variety of ways eg
10% of R1 ie to be paid 10 cents of each share he holds
...

(i) Participating Right
However, there is a possibility that PS has participating right in preferential shares ie a
shareholder will get fixed dividend and if there is profit left, the shareholder will get other
right attached to share in the way of participating right
...


63

Adv
...
It may be provided
under the company rules, shareholders agreement, legislation, etc
...
It must be written somewhere
...

(ii) Cumulative Preference Shares [CPS]:
If the company generates profits and declares a profit, shareholders will benefit
...
That is because there will be no income rights eg the company has not yet made a
profit in 5 years
...
The company may declare dividend for the company
asset
...
If a company has been operating for 5 years without declaring
dividend because it would not generate income right, however, on the 6th year, the company
generates a huge benefit, and fortunately declares dividend, if the PS holder has a cumulative
right, he will get dividend for all 6 years
...
If the
company does not want cumulative right to be attached thereto, it must appear in memo
...
PS holder will get a huge dividend on the
6th year, as he did not during 5 years receive a dividend
...
A right to dividend is a
strong one and it is wrong to speak of real dividend
...
If the asset must be liquidated, the creditors
are paid first and money left goes to shareholders
...
What do shareholders get?
Preference right is not extended to capital rights
...

READ:
- Cooper v Boys (1994) 2 All SA 475 (c);
- Randfontein v The Master (1969) TS 978;
- SA Mutual v Anglo – Transvaal Colliers 1977 SA 648 (A) (For tutorial class)
ORDINARY SHARES [OS]
Usually, OS has a voting right attached to it
...
In the past, this was not possible
...
The OS holder has not a fixed
dividend
...
If the company
is liquidated, the OS holder divides pro rata (equally)
...

DEFERRED SHARES [DS]
If OS holders are paid, then the DS will be paid
...
It is not common
...

REDEEMABLE SHARES [RS]

Adv
...
In the past, it was possible to issue redeemable shares if it is
preference shares
...
Redeemable shares are shares that can be bought by the company at any future
occasion
...
It is very
important to note that:
- RS is bought at discretion of Board of Directors;
At a fixed date, the shareholders can require the company to redeem
...
Memo establishes different
classes of shares but other documents (covenant) may specify other rights attached thereto or
how those rights can be changed eg Shareholders may be allowed to vote or not, some may
have a higher percentage whereas others may have lower percentage in dividend – the memo
will provide how these rights will be changed
...

And if the memo provides the procedure of how to change the class rights, then the change
that should e made must comply with such procedure, otherwise, the amendment will be
void
...
The memo will exist until the company is liquidated or wound up
...
In 1973, you would consider the document under which the
protection appeared ie if the protection appears in article of association, there should be no
protection
...
But if the memo does not provide that there should
be such a change, alteration or variation, there should be no change, alteration or variation
...
If the class rights are not protected in the memo, and some other rights attached to
them appears in covenant documents, such rights are subject to change, alteration or variation
as they are not protected
...
The company can do whatever it likes
as long as internal management formalities are complied with
...
F Kotze

►Look at other documents ie issue, shareholders agreement, legislation, company rules, etc
...

►Nature of shares (s35) – shares are movable incorporeal and transferable property
...


Issue of shares and authorized shares:
These two terms are not used in the Act
...
Authorization may be increased or decreased by
shareholders
...
The number of shares that are
allocated in memo is from legal perspective irrelevant subject to one understanding that issue
will come from authorized share capitals
...

The term ‘issue’ is very closely related to the nature of shares – incorporeal movable
property
...
A share must be allowed to be
incorporeal movable which can be transferred
...

READ the following case that explains issue (find the definition of issue and how it
operates):
- Moosa v Lalloo and Another [1957] 4 All SA 62 [D]
Issue of shares – Meaning:
Shares provided in memo are ‘authorized shares’
...

Issue procedure:
Subscription contract: If the company wants to issue shares, prospective shareholders will
have to subscribe as a person subscribe if wants to buy a newspaper
...
There will be offer and acceptance
...

However, note that this is not a contract of Purchase and Sale despite of the fact that one pays

Adv
...
A buyer has money and the company has object
...

Share is not a thing Why? The share does not exist until such time it is issued
...
This is therefore a contract of subscription
...
The company’s acceptance is referred to as ‘allotment’ – Prospective shareholder is
allotted
...
He/she
makes such offer after he/she sees an advertisement
...
The company has to take a decision relating to who will get more or
who will get less shares
...
The company’s
acceptance is called allotment and allotment is unilateral internal act of the company (This is
a contract of allotment)
...
The company informs the offeror if wants to allocate to him shares
...
When the shares are in existence that is when
shareholders can exercise his rights
...
As a result of issue, a SH may have
right to dividend or to vote, etc
...
After issue, the SH has the proprietary rights
...
SH would receive the share certificate
...

REMEMBER: Before the issue, there is no share; therefore the time is so important
...
If the issue of shares is subject to condition, then such condition must be complied
with
...

Usually, the company attracts your attention through adverts
...
If you submit a form to the company to buy a 100 shares
which costs R100, you will attach the proof of the payment
...
The company may decide to allocate to one client 5 shares
...
The company will accept in the form of allotment and once the
shares issued, that is when the shares comes into existence and you will be entitle to enjoy the
right attached to them (see Moosa case – Nature of Sales)
...
In the past, the authority to issue shares was afforded to shareholders
...
Now, the directors must
take the decision
...
As a result, dividend allocated to each SH will decrease
...
F Kotze

S40 of 2008 – Consideration for shares:
There are 3 things listed under this section that must be considered
...

(a) Capitalization Share:
CS is a share issued to existing shareholders
...
The CS is created when the
company is capitalized
...
The shareholders will share by pro rata basis
...

There is no definition of CS
...
CS is issued if
the company foresees that the company needs capital
...
In terms of
S38/1973, the decision is taken by the BoD, but this decision can be challenged ie where the
BoD wants the profit to be capitalized
...

(b) Company Capital:
Where does this capital come from? The position before 1999 was different from what it is
now
...
In
terms of 1973 Act, there was corporate finance founded on the principle know as ‘share
capital maintenance
...
The company has
to take extraordinary measure to protect its capital
...

Share capital was only the source of a company capital
...
If there is no share capital the company could not pay
...
’ These
rules are:
(i)
No dividend to be paid out of share capital maintenance;
(ii)
Company could not buy its own shares;
(iii) Company could not sell share on discount
...
However, these
rules kept changing eg company could not by its shares in terms of 1926 Act
...
The rules have
developed because it could not work properly
...
The discretion attached to rules is no longer applicable
...
F Kotze 68

allowed to buy its shares after 1999
...
The company can use its share capital as pleases
provided that the company must be solvent and liquidity
...
After 1999, the company
can buy its own shares or it can use its share capital to pay dividends
...
Since 1999, a company can
purchase shares previously issued by it
...
S95 provides a number of requirements
...
S90 deals with the distribution
...
Now, this position has changed
...

The new legislation has built on the basis of 1999 Amendment which deals with the
distribution and buying its own shares (see discussion in the textbook, p85-90)
...
In terms of 1973 Act, there was no definition
...
In terms of 2008 Act, there is a definition in
terms of s4 – ‘A company satisfies the solvency and liquidity test at a particular time if,
considering all reasonably foreseeable financial circumstances of the company at that time,
the asset, as fairly valued, equal or exceeds the liability of the company; or it appears that
the company will be able to pay its debts as they become due in the ordinary course of
business
...
S46(1)(b) (c)
provides that ‘a company may not make any distribution unless it reasonable appear that the
company will satisfy the solvency and liquidity test immediately after completing the
proposed distribution; and, the board , by resolution, has acknowledge that it has applied
the solvency and liquidity test
...

READ: Van der Linde, 2009 article
...
Also, S46 of 2008 Act provides the
power of BoD, which differs from that of 1973 Act
...
F Kotze

(a) the distribution:- (i) is pursuant to an existing legal obligation of the company,
or a court order, or (ii) the BoD of the company, by the resolution, has
authorized the distribution;
(b) it reasonably appears that the company will satisfy the solvency and liquidity
test immediately after completing the proposed distribution; and
(c) the board of the company, by resolution, has acknowledged that it has applied
the solvency and liquidity test, as set out in section 4, and reasonably
concluded that the company wills satisfy the solvency and liquidity test
immediately after completing the proposed distribution
...

A distribution is a direct/indirect:
(a) transfer by a company of money or other property of the company, other than
its own shares, to or for the benefit of one more holders of any shares of that company
or of another company within the same group of companies whether in the form of
dividend, as a payment in lieu of capitalization share, or consideration for acquisition;
(b) incurrence of a debt or other obligation by a company for the benefit of one or
more holders of any of the shares of that company or of another company within the
same group of companies; or
(c) forgiveness or waiver by a company of a debt or other obligation owed to the
company by one or more holders of any of the share of that company or of another
company within the same group of companies, but does not include any such action
taken upon the final liquidation of the company
...
It provides that ‘a director of a company
is liable for any loss, damages or costs sustained by the company as a direct or indirect
consequence of the director
...

Excluded is liquidation distribution – Why? If the company is liquidated, shareholders are
paid first, that is why liquidation is excluded
...

Authorization of distribution – s46(1)(a)(ii):
(1) No shareholders approval is required – In the past, shareholders should have decided
on distribution but now it is a BoD;
(2) MOI cannot impose any restriction, or prohibition, or conditions, or requirement
relating to distribution [see s15(2)(a)(ii)];
(3) See s46 of 2008 is an alterable provision
...
F Kotze 70

Q1: Is the test purely objective – Would a hypothetical reasonable board have been satisfied
with the solvency and liquidity of the company?
The lecturer suggest that the test is purely objective because s4 of 2008 Act is not clear on
this
...

Q2: Objective + Subjective – Would a hypothetical reasonable board with the knowledge,
skills, and experience of the particular board in question have been satisfied with the
solvency and liquidity test of the company?
The test under ss44 and 45 seems to be different from that of s46 of 2008 Act:
 S44 deals with financial assistance for subscription of securities;
 S45 deals with loans or other financial assistance to directors
...

Problem: In the 2008 Act, solvency and liquidity test is based on predictions and not an
actual solvency and liquidity
...

How is inquiry made?
The board should make a prediction that at the time the distribution will be made the
company will be made the company will be liquid and solvent
...

The moment the decision is made shareholders’ expectation becomes a personal right and can
hold the board responsible
...

What happens to shareholders’ rights? The 2008 Act does not refer to actual solvency and
liquidity test, that is why the distribution is based on predictions
...
The Board must rely on other sections
...

Wednesday, 24 Aug 2011
TUTORIAL CLASS – MUTUAL CASE + Redeemable shares + Distribution
ISSUE: Mutual said by allowing preference shareholders to acquire loan notes, ATC will be
giving profits while the memo says they are allowed 0% of the dividend
...
This cannot be
deemed a profit of ATC as the preference shareholders are investing in Witbank
...
A company will issue shares to a specific
shareholders and later one will be notified that the company wants to buy the back shares
...
F Kotze

The shareholders unlike the redeemable shareholders do not have knowledge of the company
buying back shares in the company
...

Insolvency and liquidity test must be satisfied for the company to buy back its shares
...
S46 allows distribution
...

When a company can be solvent and liquid?
In terms of s46 of 2008, a company must be solvent and liquid when it makes its distribution
...
They must ascertain whether the company
after distribution will meet the solvency and liquidity test
...
S46 of 2008 Act is not
alterable provision
...
It cannot
be changed in memo or, rules or, resolution
...
Now the board
decides and ascertains whether the test is met
...
Remember that Share Capital Maintenance falls under
Shares
...
Now we follow solvency and liquidity test
...
”


Share Capital Maintenance Rule

It terms of common law, the company could not buy its shares
...
The
prohibition was adopted under 1926 Act and 1973 Act
...

Lawyers who advised companies found a loophole in this prohibition eg where the
transaction would be given to a person but not to buy shares; but to assist someone else to
Adv
...
It would not be said in such instance that the company buy its shares
...

Before 1946, the common law was drafted prohibiting the company to deal with share capital
in the manner that will prejudice its shareholders
...

Between 1946 -1948 – s44 of the Company was drafted
...
The
legislature devised the company will not buy its shares but it will provide money as to look as
if someone bought shares
...
The
company exchanges its assets in a particular form, after the transaction, the company will
claim personal usus
...

Portion 1 was owned by B Co and portion 2 was owned by Oneanate
...
Co
...
5
M but Lewis paid 7M in cash and the balance could be financed by way of mortgage to be
granted by Oneanate and payable over period of 3 to 5 years with interest of 15%
...
Oneanate refused to transfer the property because its
portion was paid by mortgage bond
...

Holding of the court:
The court, after discussing the Lipschitz case, held that the impoverishment test should apply
...
If yes, it has made financial
assistance, bcz, the purpose of s38/1973 was to avoid that fund being
employed/depleted/exposed to possible risk in consequence of transaction concluded for the
purpose of or in connection with the purchase of its own shares
...
it will not bind any of the assts which will be held by a company at the
moment immediately prior to the passing of the assets
...
Therefore, the transaction does not
amount to financial assistance
...

In 1973 Act, s 38 – Financial assistance was prohibited
...


73

Adv
...

→S85 makes reference to the insolvency and liquidity test
...

The meaning of Financial Assistance
Excluded is the lending of money in the ordinary course of business by a company, whose
primary business is the lending of money
...
If
there is impoverishment, it can be accepted that there is a financial assistance
...
What if the company
makes a profit/does not show impoverishment/ increases in value of its assets? Obviously,
impoverishment test can assist us in this matter
...
The court approached the matter in the following manner:
 What the purpose or aim of financial assistance;
 Is it given in connection with or for the purpose of purchasing share?
Nothing that stops the company from giving financial assistance; if the purpose is anything
but the purchase of shares, then s38 finds its application
...
What s38 deals
with is – Financial assistance for the purpose or in connection with a purchase of share of the
same company
...

S44 of 2008 Act allows Financial Assistance (FA)
...
F Kotze 74

- Extent of s44 includes a loan, a guarantee, provision of security for purpose of
lending shares
...
In the past, the company would provide
fA in the form of security; and should use security to guarantee the payment
...
If not met the
transaction is void
...
And the board should face the dire
consequences because they breached their fiduciary duty
...

(i)
Employee share scheme;
(ii)
Shareholder Special resolution
The board should be satisfied that:
(iii) Insolvency and liquidity test;
(iv)
Terms to fair and reasonable
The test is purely objective – if the transaction is made, immediately after the transaction the
test must be met
...
If the board finds that if the transaction is made will fail
to meet the test, the board had to abandon the transaction
...

Terms must fair and reasonable:
The terms must be reasonable but the transaction may not
...

S44(4) – Board must ensure that additional requirements written in MOI are met
...
If the transactions entered into and falls fouls of s44,
there will be always issue of liability
...

S44(6) – If the transaction is void, the board is liable in terms of s 77
...

NB: There is case law dealing with s44(2) – This is the most tricky and technical part to
determine whether the FA was given
...
F Kotze

-

Whether FA was given or not;
What constitutes FA?

Lewis entered into an agreement with Lubener to acquire a farm constituted of two portions
...
Lewis wanted Oneanate to transfer the farm to Bergriviershoek
...
5M, but Lewis paid 7M in cash and the balance would
be financed by way of mortgage to be granted by Oneanate and repayable over a period of 3
to 5 years with interest of 15%
...
The
Oneante refused to transfer the property because its portion was paid by mortgage bond
...
The transaction is void because money paid
was a loan from Oneante
...
If yes, it has made financial assistance
...

The court looked further at:
- What is the purpose of financial assistance?
The purpose of s38 of 1973 Act was to avoid the fund being employed or depleted or exposed
to possible risk in consequence of transactions concluded for the purpose of or in connection
with the purchase of its shares
...
It will not bind any of the assets which will be held by the company at the moment
immediately prior to the passing of assets
...

“unless the amount of the mortgage debt exceeds the realizable value of portion 2, the
company financial position will in no way be altered by the transaction, and it will not be
exposed to any possible risk in consequence of it
...
”
Analysis
If X does not own any asset and applies for mortgage bond of R10,000 to purchase shares, if
the person does not pay the company will suffer or if a shareholder in a company receives
information that Mr X (another shareholder) wants to sell his shares worth R10,000, and
applies for the company to loan him money to buy shares in his colleague
...
F Kotze 76

-

Common law prohibition;
Gradwell case – the impoverished test ie if the company has become poorer
after the transaction, then it amounts to financial assistance
...
If you compare two sections, it covers FA
and contravention of s44 leads to the same consequence of s38, namely void
...
’ The test formulated by the
court in terms of s38 of 1973 Act, is not changed
...
– FA is void
unless the test is satisfied
...
S44 also
raises a number of requirements in terms of s44(3), namely:
- Employee share scheme;
- Special resolution by shareholders adopted within previous 2 years
►Nobody knows how it will work in practice
...

Group of potential recipients – The board will decide who these people are – the shareholders
would take a special resolution
...

Further requirements are:
- The board must be satisfied that insolvent and liquidity is met – This implies
that the test should be applied objectively;
- Fair and reasonableness – What constitute as fair and reasonableness differ
from company to company – look therefore at what the company wants to do
or what it will acquire if provides for FA – the board will decide whether the
term is fair and reasonable
...


77

Adv
...
The board is
liable; however, a director who was not in a meeting is not liable
To sum up, the requirements for provision of FA are:
(i)
Employee share scheme;
(ii)
Special resolution;
(iii) Insolvency and liquidity test;
(iv)
Fair and reasonable term;
(v)
Conditions in MOI
Breakage of s38 provides a good test in which FA could be tested
...
The court tried to provide its own (common law) definition
...

For over 20 years, South African courts tested the FA to ascertain whether it was given by
applying impoverishment test – whether the company has become poorer
...
’
In terms of 1973 Act, if the transaction was void, and the company liable, the penalty was a
fine of R1000
...
However, the company could
decide to conclude an invalid transaction if it will benefit millions from that transaction, and
be liable of ridiculous amount of R1000
...
In 1979, the Appellate
Division put an end to the uncertainty of the test – Why? Because sometimes,
impoverishment test become superfluous
...

The court did not abolish it completely but provided another test
...

“The financial assistance is given for the purpose of or in connection with the purchase
of company shares”

S44(2) provides that:
“To the extent of memorandum of incorporation of a company provides otherwise, the board
may authorize the company to provide financial assistance by way of a loan, guarantee, the
provision of security or otherwise to any person for the purpose of, or in connection with, the
subscription of any option, or any securities, issued or to be issued by the company or a
related or inter-related company, subject to sections 3 and 4
...

In 2008 Act, s44 goes wider than that – it makes reference to any option (normal option)
...
It covers a range of other documents other
than shares
...
F Kotze 78

S38/1973 – there is a prohibition of giving of FA;
BUT see the purpose of which is given – See Lipschiltz v UDC Bank, 1979
...
The test has two leg:
(i)
Was there FA?
Look at the financial position of the company, then if it is impoverished, the FA was given, if
the FA was given, then the other question to be asked is:
(ii)
Was FA given for the purpose or in connection with the purchase of company
shares?
Sometime, the purpose of transaction is not known because there is neither fact nor enough
fact
...

See Lipschiltz – in connection with is an alternative and in the context of its connotation--The issue is: Was it for the purpose of/in connection with the share purchase?
Even if there FA, there may be other reason for effecting transaction eg the company needed
a new office – whatever the reason may be
...

To ascertain this, the question to be asked is: Was it for the purpose/in connection with the
share purchase?
In 1973 Act, the director could not buy shares without the approval of shareholders
...
Look at the
company money and see what has come of it
...
You will then see if the company’s money has
been used to finance the purchase
...
What he is in event entitled to , even where the
transaction involves is not a transfer of value from the company
...
It relates to any
FA, whether given directly/indirectly;

79

Adv
...


Monday, 19 Sept 2011
BUYING BACK SHARES
Find the summary of 1999 Company Amendment Act
...
The inclusion of s85 in the 1973 Act
deals with buying back shares
...
It provides a list of requirement to buy back shares, which also protects the
creditors
...
This does not appear in terms of
s38/2008
...
There is a major difference
...
They are bought at the discretion of the board
...
F Kotze 80

knows that the company will buy when it wants to redeem (time unknown)
...

Deference between Redemption and Repurchase
-

Redemption: Company acquires shares in terms of a contract contained in
either MOI or in terms of the issue of shares;
Repurchase: Transaction entered into between shareholders and company in
terms of which it is agreed that the company will acquire shares
...
There may be a provision in memo
but not necessarily so
...

- For shareholders – it is possible for the company to approach us and make an
offer to buy back our shares
...

The company can buy shares of some shareholders
...

A contract between shareholders and a company: The contract is concluded when the shares
have been already issued
...

NOTE look carefully if the company gets back shares by redemption or repurchase of shares
...
A
purchase is a:
- Distribution of company’s assets;
- Recognition of its share capital and accordingly a change in ownership;
- Transfer of shares;
This means that may impact on
- corporate governance;
- take over regulation;
- credits protection;
- discrimination between shareholders;
- proper functioning of the securities market;
NOTE: Repurchase is a distribution (see above)
...
If buys; shareholders and creditors will be affected
...
F Kotze

approve that the company will repurchase shares
...

S48(2) refers to subsection (3):
- The company may not acquire back its shares, if, as result of that acquisition,
there would be no longer any share in the company other than:
(a) share held by one or more subsidiaries of the company; or
(b) convertible or redeemable shares
...

- If shares are repurchased, the requirement of s46 of the Act will be met –
Insolvency and liquidity test
S48(4) – If a company makes offer and the offer is accepted by the buyer, the company
cannot invoke that offer – the contract is enforceable against the company
...

NOTE - s85 of 1973 required special resolution – the shareholders were afforded protection
because shareholders could give permission to the board to repurchase shares
...
The company however will have to approach the court to set aside
the transaction, otherwise, the contract is enforceable against the company in terms of s48(4)
...
The codefendants had bound themselves to the plaintiff as sureties of the defendant
...
As a result, the defendant and co-defendant became jointly
and severally liable to the plaintiff
...

Court held:
In terms of common law rule entrenched the Share Capital Maintenance rule which prohibit a
company from buying its shares
...
F Kotze 82

shares provided that its article of association authorizes it and members of the company
approve it by special resolution
...
Only payment made in contravention of solvent and liquidity test (s85(4)) would result
in legality
...

(1) FA does not include a company that lends money in its ordinary course of business;
(2) The board may authorize a company to provide FA, unless the MOI states otherwise
...
If any of these conditions is not complied with, the transaction wld be void
and the performance wld be returned
...
Any provisions that are written into the
MOI would be subject to these requirements:
FA is allowed in the following circumstances:
(i)
Employee share scheme;
(ii)
If a special resolution has been adopted within the previous two years that allows
a specific person or category of potential recipients and that particular person
falls within this category of potential recipients
...

In addition to the requirement, the board must ensure that the additional requirement
contained in MOI are met> If one of the requirement is not met, then the transaction is void
...
F Kotze

(1) Gradwell v Rostra Printers (1959):



Impoverishment test:
Look at the financial position before and after the transaction
...
/has become poorer in consequences of what it did for
the purpose of/in connection with the purchase of shares
...


(2) Lipschiltz v UDC Bank (1979):
 A two prong test
(i)
Was there a FA?u
(ii)
Was it for the purpose/in connection with the purchase of shares?
Both leg must be met – The court said that the impoverished test is not the ideal test but it
is a factor to take into account;
(3) Lewis v Oneanate (1992):
 Discussed the Lipschiltz case in 7 points and favoured it, but resolved the matter
by application of the impoverishment test
...
Article 1
...
of the MOI reads inter
alia as follows:
“The company may only manufacture bicycle made in titanium
...
All directors share the same
passion for horse racing
...
The stud farm wants
to sell a horse to Merlin company
...
The purchase of the horse is approved
...
3M
...


Adv
...
He has also been negotiating for a while with Jack who holds 10% of
the shares in Merlin company on condition that Greg pays him in cash for the share, the value
of which is about R1 M
...

Discuss the validity of the above transaction
...


TOPIC 9
MEMBERSHIP, ALLOTMENT & ISSUE OF SHARES: OFFER OF
SHARES TO THE PUBLIC, PROSPECTUS








Offer in the primary market
Offer in the secondary market
Prospectus;
Liability of untruths in prospectus
Allotment and acceptance
Transfer of shares
Security by means of shares

Intro:
2008 Act deals with public in a similar way the 1973 Act did
...
F Kotze



S144 – Offers not being offers to the public
...
Difference between the old Act and the
new Act is that the new Act makes the provision clear than the 1973s
...

Share market offers primary and secondary market – See chapter 4
Primary share market v Secondary share market



Primary Share Market: is a market where a company serves its shares to the public
(company is seller whereas public is a buyer)
...
This transaction is thus secondary
...

- New Act is similar to old Act;
- Offer of security happens against the principles of discounts;
- Seller (company) must give information to buyer (buyer);
Primary v Secondary
When does information required?
There are three principles used to determine whether there must be a disclosure:
(1) There must be an offer (for the subscription or purchase);
(2) Of shares;
(3) Made to the public
Public investors:
How does the statute make sure the company discloses this information?
The statute prohibits the offer to the public which do not comply with the stringent
requirements in the Act:
- Definition – offer to the public – s95;
- General restrictions offer to the public – s99;
- Types of offer – ss99 – 101;

Adv
...
Offer to the public goes hand in hand with ‘public’ unless if it is an offer
not to the public
...
In terms of statutory, they can be liable either civilly or criminally
...

If not they will also be liable
...
Disclosure is made in terms
of the document which is called ‘prospectus
...
However,
disclosure is not limited to prospectus
...
4 requirements
...
It a document issued by the company in which the
principle features of the company’s operation has set out
...
The term
prospectus is not legally limited to the formal document
...
However, even though it is informal, it is used to invite the
public to subscribe to share debentures, or any other interest of the company
...


87

Adv
...




Primary Offer = Offer is made by the company;
Secondary Offer: Offer is made by existing shareholder and the company is
excluded from this transaction
...
It must however comply with JSE conditions
...
If it is unlisted securities, the prospectus is
required with no exceptions – the rule of JSE finds no applications
...

- S95(h)(ii)(bb) – offers listed securities are required to comply with JSE rules
...

Test/Exam
How to answer question if facts are given? Ascertain whether offer is primary or secondary
market – Look at the requirement because the requirements are different
...


Note: Prospectus is extremely technical document which is not easy to draft
...

General restrictions on offers to the public:

Adv
...
Always, it has been problematic
...
It
must be an offer made to the public and must fall within chap 4 of the Act
...
It lists offers which cannot be regarded as offers to the public
...

See the case of Gold Fields Ltd v Harmony Gold Mining Co Ltd (2005) which deals with
two questions:
(i)
Was the offer made for subscription (this has disappeared in terms of 2008 Act)?
(ii)
What constitutes an offer to the public (relevant in terms of 2008 Act)?
Judge said ‘I think it is unhelpful and potentially misreading to attempt to determine by
inference what is included in offer
...
It is narrowed by s96 of 2008 Act
...
It may not
comply with requirements
...
Therefore to qualify as an offer to the public, the term of
the offer would, at least, need to be capable of being offered to and accepted by public at
large
...
Nor
is it to say that an offer must be necessarily be made to the public at large in order to qualify
...
An offer to sell shares eg in return for cash, is capable of being made to
the public at large, and might thus be made as much to that section of the public that resides
in Bloemfontein as to section of the public that resides in Upington (see para 13)
...
The offer in the
present case is in that category
...

Look at the statute definition and exceptions – look at the circumstances of each case – offer
to one or some people is not public offer
...
F Kotze

-

S100(2)(b) – Content + Regulations (ss54 – 80)
...
The
liability is not in terms of the board
...

It is important to note that s104 provides for civil liabilities for directors and others
...
If a person who buys shares on the
strengths of that untrue statement, the owner must show that there was prospectus, untrue
statement, and that he bought shares on the strengths of untrue statement, then the person will
be exempted from liability, otherwise civil liability will ensue
...
Experts may be a lawyer, doctors, accountant,
and other professionals
...
If the report attached and contains untrue
statement, they will become liable
...

-

Untrue statement or misrepresentation must be proved
...
Then look at the Act, to see what happens to secondary market
...

In terms of Purchase and Sale, if a public buys from a shareholder and there was
misrepresentation, the other remedy will ensue vis actio quanti minoris or actio quanti bitoris
– if there is a defect in something you buy, you do not have to prove negligence see Paizer
case
...

In terms of a contract, the aggrieved party must prove that there was fraudulent and negligent
...

Monday, 03 Oct 2011
MISSED
Monday, 10 Oct 2011

Adv
...
If a person makes an offer, acts independently from the company, he is not required to
issue prospectus
...

S141(1) of 1973 Act provides that:
“No person shall either orally or in writing make an offer of shares for sale to the
public or issue, distribute or publish ant such material which in its form and context is
calculated to be understood as an offer as aforesaid unless it is accompanied by a
written statement containing the particulars required by this section to be included
therein
...
Although s141 is formulated in
peremptory terms, the provisions of s141(9) are in conflict with an intention that a
contract which was concluded in conflict with s141 is void
...

Transfer of Shares
Three elements of full and technical transfer do not make reference to security certificate,
namely:
(i)
(ii)

(iii)

Agreement of transfer: Full and complete transfer in the sense of words –
transfer is made in the form of cessation;
Execution of deed of transfer: The company normally use a standard form – this
instrument contains the name of buyer and seller, their personal info, class of
shares etc;
Registration of transfer: The company does administration thing
...
If the shares reached a
company with share certificate accompanied them, the company must destroy the certificate
and issue a new certificate
...
F Kotze

The court in Smuts v Booyens (2001) held that “[i]n regard to shares, the word transfer in
its full and technical sense, is not a single act but consists of series of steps, namely an
agreement to transfer, the execution of a deed of transfer and, finally, the registration of
transfer
...
Once the agreement is reached,
the parties draw instrument of transfer – certificate is given to the buyer
...

There is a huge difference between ‘agreement of transfer’ and ‘certificate of transfer
...

Registration of transfer – see the definition of a shareholder under s1 – a name that is
recorded in the company share registry
...

The company will for instance allow a shareholder to vote
...
New shareholder may not exercise the
rights attached to shares as to do so will depend on the cession agreement
...
Sometimes, there is a split between shareholding and shareholder
...
It refers to these parties as beneficiary
shareholder and nominee shareholder
...

There are examples of beneficiaries under s36
...
A shareholder must have a right to vote, to dividend and so forth
...

There may be various reasons why for that intention – some does not want to appear in the
company share registry – people holds the shares on their behalf
...

There are a number of cases about this issue:
Oakland Nominee (Pty) Ltd v Gelria Mining and Investment Co (Pty) Ltd (1976) – “A
nominee is an agent with limited authority: he holds shares in the name only
...
The principal,
whose name does not appear on the register, is usually described as beneficiary owner”
In casu, the respondent (Gerlia Co), the beneficial owner of certain shares, had had such
shares registered in the name of its nominee company, administered by Poplak who had
stolen the shares and sold the shares to respondent
...
The purchaser pleaded that the beneficial owner had

Adv
...

Court held:
“The court in dismissing the appeal held that ‘the word on behalf of the transferor’ in
s3(1)(a) of the Securities on by a Transfer Act, 1965, as amended, must be confined to
execution by a person authorized to do so, for it could have been the intention of the
legislature to confer validity on unauthorized acts
...

The court held that the rights embodied in the shares can be transferred by way of cession
...
MOI rules may restrict transferability
...

Note transferability against restrictions is ineffective and void
...
If there is a restriction on ‘transfer’ three requirements
must be met
...

Security by means of shares – cession in securitatem debiti:
Security can take many forms including farm, house, car, etc
...
Once the loan paid, the bank will release shares
...

There are two structures/constructions:
- Pledge;
- Out and out cession with pactum fiduciae
Pledge structure:
Cession takes as a pledge ie movable property is given as a security
...
The pledgor remains
the owner
...

Out and out cession with pactum fidiciae structure:

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Adv
...
The shareholder ceases the share to the bank
...

Pactum fidiciae – means to return what was ceased after the money loaned is paid
...

If a shareholder loans funds in the way of pledge construction, the bank becomes owner with
limited rights
...
If the owner becomes
insolvent, the bank will have to relinquish shares because they form part of the debtor’s
estate
...
If the
shareholder becomes insolvent, the creditors of shareholders will have no claim over those
shares given to the bank as security
...

Pactum fidiciae is the best way the bank can use to secure the loan
...
Most of changes were minor but of
importance eg s36 of 1973 which validates ultra vires and currently s21(1), the financial
assistance in terms of s38 of 1973 and now s44 which allows financial assistance
...
Rights and duties – New company prescribes and extends these rights
...

- Common law and statutory rights and duties – Obligations: See textbook
Fiduciary relationship continues to apply however there is a long lists about rights and duties
...
S71(1) of 2008 Act does not
provide protection to directors
...
S71(1) gives power to shareholders to remove a director
...
F Kotze 94

-

MOI cannot protect the director;
S15 – Rules of the company cannot protect the director;
Shareholders cannot enter into agreement not to dismiss/remove the director

S20 and s24 of 2008 Act is better
...

In terms of the new Act, there is a loophole, too
...
They could agree that
they will not dismiss the director
...
The agreement not to dismiss would be inconsistent with the spirit of s71
...
This cannot be
increased to either 60% or any other percentage
...
It is possible for a director
to have loaded votes
...
Each share
holder has one vote
...
Brother had only
100 votes
...
There were only 3 shareholders
...
Sisters decided to remove him
...
He had therefore 300 votes
...
Matter went to court
...

Exam Q: Would this be allowed in South Africa under 2008 Act? Surely, if voting rights
would be extended that nothing can override the director’s power, this cannot be said that it
was the intention of legislature in enacting s71
...
The invocation of loaded rights would be allowed but not to the extent to
override the power of shareholders
...
A director may be appointed in terms of MOI and MOI is subject to
amendment by special resolution
...
If MOI is
amended and as a result, the director is dismissed,…
...
The contract of employment
may lead to negotiation for remuneration
...

S68(9) – Remuneration must be approved by special resolution
...
Note that the time frame is two

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Adv
...
Remuneration paid without approval by special resolution is invalid and company may
recover money from director
...
In 1973 Act, one could judge a director’s behaviour and now
remains like that
...

Fiduciary duties are fundamental importance
...
They apply to all companies
...

Under 2008 Act, these common law duties and duties of care and skills have been partially
codified under ss75 and 76
...

Fiduciary duties:
They are mainly derived from English law – see Fisheries Development at p165
...

(iii) The beneficiary is vulnerable to the mercy of fiduciary
...
In terms of s76(3)(a)-(b), a director must act:
(i)
In good faith and for a proper purpose;
(ii)
In the best interest of the company
...

- Not meeting the solvent and liquidity test,
- Fraudulent/reckless and insolvent trading;
- And so forth,…
S22 of 2008 Act which is similar to s424 of 1973 Act which prohibits a company to carry on
its business recklessly, with gross negligence, with intend to defraud any person or trade
under insolvent circumstances has many cases which tried to define what constitutes
‘reckless trading’ – see Philotex (Pty) Ltd v Snyman and Others 1998
...
F Kotze 96

The problem in the future will be based in the interpretation of s22 eg intention to defraud or
carrying on business recklessly: When does a company carry on business recklessly?
S22(2) makes reference to the commissioner
...

There is no application needed for the commissioner to intervene
...


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