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LML4806EXAM
Company Law Exam Pack Semester 2 2023
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LML4806 Latest Exam Pack with
Current
Exam Answers, Semester 2 2023.
Exam Date: 3 November 2023
COMPANY LAW
EXAM OCTOBER 2022 SEMESTER 2
Bibliography included.
,QUESTION 1
1.1 Discuss the relevant section of the Companies Act 71 of 2008 that appears to be a
codification of the common-law Turquand rule and highlight the similarities and the differences
between the provisions of that particular section and the common-law Turquand rule. (10)
In terms of the common law Turquand rule, if the person acting on behalf of the company has
the authority to do so, but this is subject to an internal formality, such as approval by the board,
an outsider contracting with the company in good faith is entitled to assume that this internal
requirement has been complied with. Based on this, the company will be bound by the contract
even if the internal formality has not been complied with. A third party acting in good faith is
under no duty to enquire whether the company has complied with its internal formalities and
procedural requirements.
The basis of the Turquand rule is that bona fide third parties should not be prejudiced by a
company’s failure to comply with its own internal procedures and formal requirements.
The Turquand rule was formulated to keep an outsider’s duty to inquire into the affairs of the
company within reasonable bounds. To trigger the protection provided by the Turquand rule,
there must have been an internal requirement present. The practical effect of the Turquand rule
is that it prevents a company from escaping liability under an otherwise valid contract solely on
the grounds that some internal formality or procedure was not complied with. Proof by the
company that it has failed to fulfil its own internal formalities is not a sufficient basis for escaping
liability under the contract.
The formulation of the Turquand rule is regulated by Section 20(7) of Companies Act 71 of 2008
(the Act). Section 20(7) of the Act provides that a person dealing with a company in good faith,
other than a director, prescribed officer or shareholder of the company, is entitled to presume
that the company, in making any decision in the exercise of its powers, has complied with all
the formal and procedural requirements in terms of the Act, its Memorandum of Incorporation
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 any such requirement. This
provision applies to internal procedures and formalities even if they are prescribed by the Act.
, The fact that the internal formality is contained in a statute should make no difference to the
application of the section. Section 20(7) of the Act also applies to all of the company’s formal
and procedural requirements in terms of the company’s Memorandum of Incorporation or rules.
However, it does not replace the Turquand rule, in the sense that section 20(8) provides that
subsection (7) must be interpreted concurrently with, and not in substitution for, any relevant
common law principle relating to the presumed validity of the actions of a company. The
exceptions to the application of the statutory rule are not expressed in exactly the same way as
the common law exceptions: section 20(7) determines that the rule will not apply if the third
party knew or reasonably ought to have known that the internal requirement had not been
complied with.
1.2 David is a non-executive director and chairperson of Free State Airlines SOC Ltd, a
company that operates commercial flights between Johannesburg and Bloemfontein. David is
also one of the major shareholders of Aerial Lease (Pty) Ltd, an aircraft leasing company. In a
meeting chaired by David, and by a resolution proposed and supported by David, the board of
directors of Free State Airlines SOC Ltd decides to lease three commercial aircrafts from Aerial
Lease (Pty) Ltd. David does not inform the other directors of Free State Airlines SOC Ltd about
his existing shareholding in Aerial Lease (Pty) Ltd. The entire board of directors of Free State
Airlines SOC Ltd considers and approves the relevant lease agreement with Aerial Lease (Pty)
Ltd. However, the other directors of Free State Airlines SOC Ltd subsequently become aware
of David’s shareholding in Aerial Lease (Pty) Ltd and they now want to retract the lease
agreement.
With reference to the relevant provisions of the Companies Act 71 of 2008, advise the board of
directors of Free State Airlines SOC Ltd on the following matters:
1.2.1 Whether David has breached any specific duty that he owes to Free State Airlines SOC
Ltd by not informing the board of directors about his shareholding in Aerial Lease (Pty) Ltd. (10)
Directors have a fiduciary duty not to use confidential information for personal purposes and
such use would amount in a breach of fiduciary duties. Some of these include:
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