• The memorandum of incorporation of Simla (Pty) Ltd provides that the company does not
have the capacity to make political donations. The directors of Simla (Pty) Ltd conclude a
written contract in terms of which the company will make a donation of R60 million to XYZ
political party, payable in two equal instalments. After the first R30 million has been paid,
Tebogo, a shareholder, finds out about this donation.
• Explain whether the contract is binding on Simla (Pty) Ltd and, if so, what rights Tebogo
will have in this regard.
This question is about the validity of a contract concluded on behalf of the company. whenever you
are asked if a contract is binding most probably there could be one of two problems:
- The first one could be that the company lacks capacity.
- The other is whether the directors can actually conclude the contract on behalf of the
company (whether they are authorised).
- Or whether there is some internal formality in the company’s MOI.
In this case, the Company’s MOI clearly states that the company does not have the capacity to make
political donations.
- The starting point when we look at the capacity of parties is that they have the capacity to do
anything that an individual can do and that can actually be done by a juristic person. In this
case a contract to make a donation to a political party would be in the normal capacity of a
company.
- But section 19 also tells us that the company can limit its capacity in its MOI and this is
clearly an example of that and the question is whether that has any influence on the validity
of the contract.
In that regard we have an important provision of the Companies Act namely section 20(1).
- The section says that no act of a company is void simply because the company does not have
capacity.
- The section applies to all companies that have limited their capacity in their Memorandum of
Incorporation which is the case with Simla Pty Ltd.
- So we know that in terms of section 20(1) the contract is binding on the company.
,But that is not necessarily the end of the matter. There are other provisions in section 20 that says
that shareholders can possibly stop the company from going beyond its capacity.
- In terms of section 20(5) a shareholder can interdict or restrain the company from
performing any act inconsistent with the company’s MOI.
- Seeing that the contract has not been fully concluded as only half of the donation has been
paid, Tebogo can approach the court and obtain an order to restrain the company from
making the rest of the payment.
- In terms of section 20(6) Tebogo, the shareholder, can also claim damages for any ;loss
suffered in terms of the contract.
The Act also tells us that if a shareholder gets such an interdict against the company, there are
certain rights that the other party will have. Particularly, the right to claim damages:
- In this case, the other party (political party) cannot claim specific performance or force the
company to pay the other 30 million, but it will have a claim for damages if it acted in good
faith and without actual knowledge that it was prohibited by the company’s MOI.
QUESTION 2
• The memorandum of incorporation of Benmore (Pty) Ltd provides that before the company
may take up credit in the amount of R1,5 million or more, such a decision must be approved
by the shareholders at a general meeting. A director of Benmore (Pty) Ltd signs an
agreement on behalf of the company with ABC Bank, for a loan in the amount of R2 million,
without obtaining prior consent from the shareholders.
• Explain whether this agreement is binding on Benmore (Pty) Ltd.
We see that this is not a restriction on the capacity of the company or an exclusion of its capacity, it is
just a requirement in the company’s memorandum of incorporation that has to be complied with.
So in such a case, there are two possible rules that could apply:
- One is the common law rule in terms of the Turquand case (the so-called Turquand rule).
- The other one is section 20(7) of the Companies Act.
Turquand rule:
- The common law rule, as seen in the case of British Royal Bank v Turquand rule could apply,
which states that a third party dealing with a company in good faith, can assume that the
, internal or formal procedures required for the company’s decision-making have been
complied with provided that the third party had no knowledge or suspicion that there was
non-compliance.
- Section 27 of the Companies Act codifies this rule as it states that a person dealing with a
company in good faith is entitled to assume that the formal and procedural requirements of
the Act, the company’s MOI, and any other company rules, have been complied with.
Provided that the party had no knowledge or suspicion of non-compliance.
- In One Stop Financial Services, the court held that the purpose of section 20(7) was not to
modify the existing law relating to when a company can be bound by ostensible authority.
Therefore, the phrase “formal and procedural requirements” must be interpreted in line with
the typical meaning of the turquand rule.
Therefore, the contract would be binding as the third party, which is ABC Bank, had no knowledge or
suspicion of non-compliance on the part of the company.
• Explain whether your answer wouldl differ if ABC Bank was a shareholder of Benmore (Pty)
Ltd.
Normally, it would be expected of sharholders to know the contents of a company’s MOI. However,
the common law turquind rule does not state that shareholders cannot rely on the rule, it simply
states that the person must have acted in good faith and that they had no knowledge or supicion of
non-compliance.
- Therefore, if ABC Bank was a shareholder who contracted with the company, it would still be
able to rely on the turquand rule, provided that they can prove that they acted in good faith
and that they had no knowledge or suspicion of non-compliance.
- However, in terms of section 20(7) the answer would differ, as directors, shareholders or
prescribed officers are exempted from relying on this provision. So, the contact would not be
binding in terms of this section.
• Explain how your answer would differ if the memorandum prohibited the amendment of
this provision on the taking up of credit, the notice of incorporation drew attention to it,
and Benmore (Pty) Ltd had the expression RF in its name.
- The answer would differ as the doctrine of constructive notice still applies to ring-fenced
companies (RF). Constructive notice means that anyone dealing with a company is deemed
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