MRL2601_ Entrepreneurial Law Exam Pack 2021.

MRL2601_ Entrepreneurial Law Exam Pack 2021. Companies Act provides that each shareholder has a claim for damages against any person who fraudulently, or due to gross negligence, causes the company to do anything inconsistent with the Companies Act or a limitation, restriction or qualification on the powers of the company as stated in its Memorandum of Incorporation, unless ratified by special resolution in terms of section 20(2). This is in addition to the remedy provided in section 165. If the company or directors have not as yet performed the planned action (e.g. concluded the contract) that is inconsistent with a limitation or qualification of the company’s powers contained in the Memorandum of Incorporation, one or more shareholders may obtain a court order restraining (i.e. preventing) the company or directors from doing so. (section 20(4)).
Activity 2 Steelbelts Railway Carriages (Pty) Ltd’s Memorandum of Incorporation provides that only the board of directors, or any person authorised by the board, has the power to conclude contracts on behalf of the company. In addition, any transaction that exceeds R100 000 must first be authorised by the company in general meeting by way of ordinary resolution. Mr Buckley, one of the directors, is authorised by the board of directors to act on behalf of the company. Mr Buckley concludes a contact with Mr Matthews for the purchase of equipment that will be used in the process of manufacturing railway carriages to the value of R150 000 without the authorisation of the company in general meeting. Mr Matthews knows about this provision because he has dealt with the company before. He however assumes that the approval of the general meeting has been obtained since it had always been obtained for previous transactions. Is the company bound by the contract concluded by Mr Buckley? The company is bound by the contract concluded because of the operation of section 20(7) of the Companies Act. It provides that a person dealing with a company in good faith is entitled to assume that the company has complied with all of the formal and procedural requirements in terms of the Companies Act and the company’s Memorandum of Incorporation and rules unless the person knew or reasonably ought to have known of any failure by the company to comply with its formal and procedural requirements. There is no indication from the facts that Mr Matthews knew or reasonably ought to have known that Mr Buckley failed to comply with the procedural requirement in terms of the Memorandum of Incorporation. There is also no indication that Mr Matthews was aware of the fact that Mr Buckley did not comply with procedural requirement and had acted in bad faith. Based on these facts, the company is bound by the contract. The contract will also be binding because of the common-law Turquand rule since Mr Buckley is authorised to act on behalf of the company but this is subject to an internal formality. Although Mr Mathews knew about the internal formality, he was entitled to presume that it had been complied with and there is no evidence that he knew it had not been complied with or that there was anything to raise his suspicion. In some instances both the Turquand rule and section 20(7) of the Companies Act will apply, as in this case. This is however not always the case. PLEASE READ QUESTIONS CAREFULLY IN THE EXAM AS WE MAY RESTRICT THE SCOPE Downloaded by: studyengine | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 4 OF THE CORRECT ANSWER BY INDICATING EITHER IN TERMS OF THE COMPANIES ACT OR IN TERMS OF THE COMMON LAW
Activity 3 The Memorandum of Incorporation of Concord Ceramics (Pty) Ltd (RF) provides that the board of directors have authority to contract on behalf of the company subject to the condition that if the value of a contract exceeds R1 million the approval of shareholders by special resolution is required. The Memorandum of Incorporation further provides that this last-mentioned provision may only be amended by unanimous approval of all the shareholders. (a) Are third parties deemed to be aware that the consent of the general meeting is required for transactions in excess of R1 million? Yes, as this is a RF-company. Section 19(5) of the Companies Act determines that a person is deemed to have knowledge of any provision of a company’s Memorandum of Incorporation in terms of section 15(2)(b) (relating to special conditions applicable to the company and additional requirements regarding their amendment). This is subject to the condition that the name of the company includes the ending “RF” and that the company’s Notice of Incorporation contains a prominent statement drawing attention to such a provision as required by section 13(3). (b) To what extent is the doctrine of constructive notice still applicable to this company? Section 15(2)(b) of the Companies Act determines that a company may include restrictions and conditions in its Memorandum of Incorporation pertaining to the company’s capacity. Before a third party dealing with the company would be required to acquaint themselves with these restrictions and conditions, certain requirements must be met in terms of the Companies Act: - There must be a restriction or conditions in the Memorandum of Incorporation of the particular company. - A prohibition against amendment of the restriction or condition must be included in the Memorandum of Incorporation. - The company’s name must be followed by “RF” to warn the third party of the special restrictions or conditions. - The Notice of Incorporation that is lodged together with the Memorandum of Incorporation must include a provision that draws attention to the fact that special restrictions or conditions apply to the company. (c) Suppose that Mike, a site manager on one of the company’s plants, regularly contracts on behalf of the company without having a mandate to do so. The board of directors takes note of this behaviour, but never takes any steps to caution Mike against contracting on behalf of the company. Mike enters into a contract with Timothy for the purchase of raw materials. The company now argues that Mike did not have authority to enter into the contract and that it is not bound to the contract. Advise Timothy on whether the company can be held bound to the contract. Estoppel applies only when the agent did not have actual authority to bind the company. Take particular note of the fact that the misrepresentation (i.e. that the agent had the necessary authority when, in fact, he or she did not) must have been made by the company as principal. In Freeman and Lockyer v Buckhurst Part Properties (Mangal) Ltd, the court decided that estoppel could not only arise from the Downloaded by: studyengine | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 5 Articles (note that this would be the Memorandum of Incorporation in terms of the current Companies Act), but also because the company with full knowledge and approval allowed an ordinary director to act as the managing director and, in this manner, culpably represented that he was entitled to act. Based on such misrepresentation, the company will be prevented (estopped) from denying liability if the third party can prove that -the company misrepresented, intentionally or negligently, that the agent concerned had the necessary authority to represent the company -the misrepresentation was made by the company -the third party was induced to deal with the agent because of the misrepresentation Example of questions from previous exams dealing with this topic: QUESTION 1: By means of an example, explain the operation of the provision similar to the Turquand Rule that has been included in the Companies Act 71 of 2008, (4) To trigger the protection provided by the Turquand rule, there must have been an internal requirement present. • A company’s Memorandum of Incorporation determines who has authority to act on behalf of the company. • The Turquand rule applies where the authority is subject to an internal requirement. Example: Company A’s Memorandum of Incorporation determines that the board of directors has authority to conclude all contracts on behalf of the company. If the amount of the transaction exceeds R50 000, consent must be obtained from the shareholders at a general meeting. The underlined part in the block above contains an internal requirement. Even though the Memorandum of Incorporation is registered and available to the public, a third party contracting with the company would have to conduct a further investigation to ascertain whether or not consent was obtained from the shareholders. The Turquand rule makes this unnecessary, as, in terms of this rule, third parties who act in good faith may assume that such internal requirement has been complied with. QUESTION 2: Read the following statement and explain whether or not it is correct: “In terms of the Companies Act 71 of 2008 companies have all the legal capacity and powers of a natural person, and such capacity cannot be restricted”. No, the statement is not completely accurate. Section 19(1)(b) of the Companies Act provides that a company has all the legal capacity and the powers Downloaded by: studyengine | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 6 of a natural person, except to the extent that a juristic person is incapable of exercising any such power, or the company’s Memorandum of Incorporation provides otherwise. Although, the capacity of a company is no longer limited by its main or ancillary objects or business, and these objects need not even be stated in the Memorandum of Incorporation, it is still possible to restrict the company’s capacity and companies can still not perform all acts that a natural person can, for instance getting married. QUESTION 3: The main object of ABC (Pty) Ltd is manufacturing furniture. The Memorandum of Incorporation provides that the board of directors may appoint a managing director who will be authorised to enter into contracts on behalf of the company. Should the contract, however, exceed the amount of R150 000, prior consent of the general meeting is required. Godfried, one of the directors, buys a beach house for R3,5 million from Nomagugu on behalf of ABC (Pty) Ltd. With reference to the set of facts above, answer the following questions: (a) Explain whether or not ABC (Pty) Ltd can raise the restrictions to its capacity as contained in its Memorandum of Incorporation as grounds to avoid being bound to the contract. (5) No. Section 19(1)(b) of the Companies Act provides that a company has all the legal capacity and the powers of a natural person, except to the extent that a juristic person is incapable of exercising any such power, or the company’s Memorandum of Incorporation provides otherwise. Therefore, the capacity of a company is no longer limited by its main or ancillary objects or business, and these objects need not even be stated in the Memorandum of Incorporation. (b) Assume that Godfried had contracted on behalf of ABC (Pty) Ltd with Nomagugu on previous occasions. What would Nomagugu have to prove if ABC (Pty) Ltd denies being bound to the contract on the basis that Godfried lacked express authority to conclude the contract? Refer to relevant case law in your answer. (5) Estoppel applies only when the agent did not have actual authority to bind the company. Take particular note of the fact that the misrepresentation (i.e. that the agent had the necessary authority when, in fact, he or she did not) must have been made by the company as principal. In Freeman and Lockyer v Buckhurst Part Properties (Mangal) Ltd, the court decided that estoppel could not only arise from the Articles (note that this would be the Memorandum of Incorporation in terms of the current Companies Act), but also because the company with full knowledge and approval allowed an ordinary director to act as the managing director and, in this manner, culpably represented that he was entitled to act. Based on such misrepresentation, the company will be prevented (estopped) from denying liability if the third party can prove that -the company misrepresented, intentionally or negligently, that the agent concerned had the necessary authority to represent the company -the misrepresentation was made by the company