LEARNING UNIT 5:

LEGAL PERSONALITY AND THE COMPANIES ACT

 INTRODUCTORY NOTICE

Please Read:
Unless otherwise stated in these lecture slides, these lecture slides have been
prepared using the materials referred to in the Module Outline for LAES7411,
particularly the prescribed textbook, Dennis Davis, et al Companies and
Other Business Structures in South Africa 5th ed. Oxford (‘PM’ or
‘Davis’)
These lecture slides have been prepared specifically for the lecturer’s use for
purposes of presenting the class lectures and are not intended to be used by
students as a substitute for studying the full content of the PM and the other
materials (including the cases) referred to in the Module Outline, as well as the
content of VC Learn, all of which need to be fully studied by students.
 THEME 1(LO1): SEPARATE JURISTIC PERSONALITY

Davis, Chapter 2 para 2.2 – 2.3

Cases as per Module Outline
Company is a separate legal person (juristic person),
separate and distinct from its shareholders. This has the
following practical implications:
• Directors act on behalf of a company, not on behalf of the
shareholders;
THEME 1(LO1): SEPARATE JURISTIC PERSONALITY

• Shareholders have limited liability i.e. they are not

liable for debts of company;
• Assets belong to the company, not to the
shareholders;
• If a wrong is committed against the company, the
company and not the shareholders must bring the
action for redress.
 THEME 1(LO1): SEPARATE JURISTIC PERSONALITY

 Limitation of liability of shareholders

• General Rule: Shareholders not liable for company’s debts.
• Exception to general rule: in a personal liability company
(Inc.), the directors are jointly and severally liable with company
for contractual debts and liabilities (but not for delictual or
statutory liabilities) incurred by the company during their
term of office. If a director pays any such contractual debt or
liability of the company, he would have a right of recourse
against his fellow directors for their proportional share of
that debt or liability.
 THEME 1(LO1): SEPARATE JURISTIC PERSONALITY

 Shareholders do not own company assets

• Since a company is a separate legal person (juristic person), it
can acquire rights and duties separate from it shareholders,
including the ownership of its assets.
• See in Davis at p38 for a discussion of:
oDadoo case
oSalomon case
 THEME 1(LO1): SEPARATE JURISTIC PERSONALITY

 A wrong to a company is not a wrong to

a shareholder
• A shareholder cannot recover damages merely
because the company of which he is a
shareholder has suffered damages.
 THEME 1(LO1): SEPARATE JURISTIC PERSONALITY

Incorporation and registration

• Incorporation: when the incorporator files a notice of
incorporation. (Must first reserve the company’s name).
• Registration: when Commission issues a certificate of
registration. (Certificate of Registration issued by CIPC =
conclusive proof of incorporation of the company).
• It is an offence to commence business or exercise any
power of borrowing until the Registrar issues the
company with a Certificate of Registration.
 THEME 1(LO1): SEPARATE JURISTIC PERSONALITY

Branches or divisions of a company

• Branches or divisions of a company are a part of a
company itself, but does not have its own separate legal
existence.
• A company can for practical purposes have various
branches or divisions, each with own trading name and
separate business operations, but there is in law only one
legal entity, namely the company itself.
• See cases discussed in Davis at p 40 by way of illustration.
 THEME 2(LO2): THE COMPANIES ACT AND THE
COMMON LAW

Davis Chapter 1, para 1.9

• Notwithstanding the Companies Act of 2008, the common law still
applies and assists in the interpretation of that Act.
• Where the Companies Act is silent or ambiguous, the common law
will apply. It is also important for background understanding of
provisions of the Act since many provisions of the Act are merely
restatements of the common law, e.g. director’s fiduciary duties.
• Common law – all law other than legislation. It is a combination of
English and Roman-Dutch law. In company law, its especially English
law.
• Common law – found mainly in the case law.
 THEME 3(LO3): PIERCING THE CORPORATE VEIL

Davis Chapter 2, para 2.4

Davis Chapter 14, para 14.4
Cases referred to in Module Outline.
Also read article listed in Module Outline
Where a company’s separate legal personality is abused, court
may in certain circumstances disregard the separate legal
personality of the company in order to expose the persons behind
the company (i.e. the directors and or shareholders) to hold
them personally liable for the debts or losses of the company.
This is known as ‘piercing or lifting the corporate veil’.
 THEME 3(LO3): PIERCING THE CORPORATE VEIL

• Piercing the corporate veil is a common law

principle that has been given effect to in section
20(9) of the Companies Act.
• Section 20(9) – if court finds that the
incorporation of a company, its use or any act by
it constitutes an ‘unconscionable abuse’ of
the juristic personality of a company as a
separate entity, the court may:
 THEME 3(LO3): PIERCING THE CORPORATE VEIL

Declare that the company is deemed not to be a

juristic person for a specific purposes; and
Make any other order it deems appropriate.
• Section 20(9) is however an exceptional or
drastic remedy and applied cautiously by the
courts.
 THEME 3(LO3): PIERCING THE CORPORATE VEIL

•In addition to section 20(9), section 218(2)

provides that any person that contravenes any
provisions of the Act is liable to any other
person for any loss or damage suffered by that
person as a result of that contravention.
 THEME 3(LO3): PIERCING THE CORPORATE VEIL

Case Law (in addition to the cases discussed in Davis)

• In the Hülse-Reutter v Godde case the SCA emphasised that, as a
matter of principle, there must at least be some misuse or abuse of
the distinction between the corporate entity and those who control
it that results in an unfair advantage being afforded to those who
control the corporate entity. (This case was decided in 2001 before
the Companies Act, 2008 and reflected the common law position at
the time).
 THEME 4 (LO5): CAPACITY

Davis Chapter 2, para 2.12

Cases referred to in Module Outline
The impact of the Companies Act on the ultra vires and
constructive notice doctrines
• These two doctrines are related – both are concerned with
effect of the company’s MOI on the validity of actions taken by
the company and its agents.
• Historically, these two doctrines were used to nullify certain
unauthorised actions, but they have both been severely limited by
the Companies Act, 2008.
 THEME 4 (LO5): CAPACITY

COMMON LAW POSITION PRE-COMPANIES ACT:

The Ultra Vires Doctrine
• What did it state?: In its common law form, it stated that acts of a company and
its agents that fell outside the scope of its powers as determined by its MOI - i.e.
which are ultra vires (or outside) its powers – were null and void.
The Constructive Notice Doctrine
• What did it state?: In its common law form, it stated that anyone dealing with a
company was deemed to know the contents of its MOI (since it is a public
document filed at the CIPC). Applying the constructive notice doctrine, it could
therefore be contended that the third party contracting with the company was
deemed to have knowledge of the fact that the company may have been acting
ultra vires (i.e. outside the scope) of its powers in terms of its MOI, when the
third party contracted with it.
 THEME 4 (LO5): CAPACITY

Turquand Rule
• What did it state?: To mitigate the harsh effect of the constructive notice
doctrine, the English courts developed (and the SA courts adopted) the
Turquand rule which, in its common law form, stated that a third party
contracting with a company could assume that there was compliance with
all the internal requirements of the company (e.g. that a certain act needed
to be approved by a special resolution of shareholders), unless the third
party knew or should reasonably have suspected that the internal
requirement had not been complied with and made no enquiry in regard
thereto. The Turquand rule thus restricted a company’s ability to resile from
a contract on the grounds of non-compliance with an internal requirement
contained in its MOI.
 THEME 4 (LO5): CAPACITY

IMPACT OF THE COMPANIES ACT ON ULTRA VIRES, TURQUAND

AND CONSTRUCTIVE NOTICE DOCTRINES
• Section 20(1) of the Companies Act, 2008 has now made the ultra vires doctrine
inapplicable between a company and a third party.
• Section 20(1) of the Companies Act, 2008 states that no action of the company is
void if the only reason therefor is that the action was prohibited by a limitation,
restriction or qualification in the MOI or that a consequence of this form of
limitation was that the directors who purported to act on behalf of the company
had no authority to do so.
• Section 20(2) provides that the shareholders, by way of a special resolution, may
ratify any such action.
 THEME 4 (LO5): CAPACITY

• If there is no such ratification in terms of section

20(2), then in terms of section 20(4) read with
section 20(5) a shareholder, director or prescribed
officer may apply to court for an order restraining the
company from performing any such act that breached
a limitation, restriction or qualification in the MOI.
 THEME 4 (LO5): CAPACITY

• Section 20(5) provides, however, that such

restraining order will not prevent the third party
from suing the company for damages on the basis of
a breach of contract, provided that the third party
had acquired the rights in good faith and had no actual
knowledge of such limitation, restriction or
qualification in the MOI. (Mere reason to suspect is
not sufficient to bar a claim in tems of section
20(5)).
 THEME 4 (LO5): CAPACITY

• Section 20(6) provides that each shareholder

has a claim for damages against any person who
intentionally, fraudulently or due to gross
negligence caused the company to breach such
limitation, restriction or qualification in its MOI
or to act contrary to the Companies Act in any
way.
 THEME 4 (LO5): CAPACITY

Section 20(7) codifies to some extent the common

law Turquand rule by providing that a person other than
a director dealing with a company in good faith, is
entitled to presume that the company, in making any
decision, has complied with all the formal and
procedural requirements of the Act, MOI and any
company rules, unless in the circumstances of the case
the person knew or ought reasonably to have known
of any failure by the company to comply.
 THEME 4 (LO5): CAPACITY

• Section 20(8) states that section 20(7) must be construed

concurrently with and not in substitution for any relevant
common law principle relating to the presumed validity of the
actions of a company in the exercise of its powers [i.e. the
common law Turquand rule].
• The Turquand rule has in essence been codified in section
20(7) and (8) of the Companies Act, which do not intend to
change the well-established principles of the common law
Turquand rule - One Stop Financial Services (Pty) Ltd v Neffensaan
Ontwikkelings (Pty) Ltd and Another [NB: Read this case].
 THEME 4 (LO5): CAPACITY

Abolition of the Doctrine of Constructive Knowledge

• Section 19 of Companies Act, 2008 – effectively abolishes constructive
knowledge, except in respect of ring-fenced companies whose name includes
the letters ‘RF’ and personal liability companies.
• Each RF company must in its MOI include a prominent statement drawing
attention to the existence of restrictive provisions, any special procedures
required to amend any provisions in the MOI and where those provisions can
be found in the MOI. A third party will then be deemed to have knowledge of
the applicable restrictions. Thus the doctrine of constructive knowledge still
applies in respect of RF companies and third parties dealing with it cannot
therefore rely on the Turquand Rule.
 THEME 4 (LO5): CAPACITY

Example of an assessment question

Question
Chevon, the Chief Financial Officer of Kiting (Pty) Ltd, was the only manager in
the office in December and was requested to sign-off on an invoice for R2,5
million from Designz CC. According to the delegation manual, her authority is
capped at Rl,5 million. The invoice was for packaging required for their courier
service. Without the packaging they would not be able to function and do the
necessary deliveries to clients in January.
Chevon signs off on the invoice mentioned in the scenario with the
understanding that it was necessary. Unknown to Chevon, marketing had signed
a Service Level Agreement with a new packaging company.
Explain whether the contract between Kiting (Pty) Ltd and Designz CC is valid.
[10 marks]
 THEME 4 (LO5): CAPACITY

Possible answer
• Chevon acted ultra vires i.e. beyond the scope of her
mandate and knowingly signed the agreement she had no
authority to sign.
• The ultra vires doctrine is no longer applicable in terms of
s 20 (1) of the Companies Act, therefore the contract
cannot be declared void.
• The contract will be valid between Kiting (Pty) Ltd and
Designz CC.
 THEME 4 (LO5): CAPACITY

• The Turquand rule provides that a bona fide third party

(like Designz CC) could safely assume that the person
signing (Chevon) has the necessary authority to do so.
• The shareholders of Kiting (Pty) Ltd would, however, in
terms of section 20(5) have a damages claim against
Chevon for any damages that Kiting (Pty) Ltd may have
suffered as a result of her ultra vires act.
• The shareholders of Kiting (Pty) Ltd could, however, ratify
her ultra vires act, thereby absolving her of such
damages.
 THEME 5 (LO6-10): COMPANY
FORMATION

Textbook Chapter 2, para 2.9 and 2.10

Case law referred to in Module Outline
Incorporation of a company
In the corporate law reform process in SA (in the run up to
the passing of the Companies Act, 2008), the following 5 key
objectives were agreed to at NEDLAC (National
Economic Development and Labour Council) and taken into
account when drafting the Companies Act, 2008:
 THEME 5 (LO6-10): COMPANY
FORMATION

Simplification
Flexibility
Corporate efficiency
Transparency
Predictable Regulations
 THEME 5 (LO6-10): COMPANY
FORMATION

• The incorporation provisions in the Companies

Act, 2008 demonstrate the principles of flexibility
and simplicity.
• The Act provides for a full range of corporate
structures, from simple to complex. These
different types of corporate structures were
discussed in Learning Unit 1,Theme 1.
 THEME 5 (LO6-10): COMPANY
FORMATION

The Notice of Incorporation and MOI

• Start of incorporation process – filing Notice of
Incorporation – a notice by the incorporators to CIPC
informing it of the incorporation of the company for
purposes of having it registered.
• Notice of incorporation must be accompanied by the
prescribed fee and a copy of the MOI (unless the company
uses the standard form MOI in the Companies Act, 2008).
 THEME 5 (LO6-10): COMPANY
FORMATION

• One or more persons may incorporate a profit company.

• Three or more persons may incorporate a non-profit company.
• Each incorporator must sign the MOI.
• Commission may reject notice of incorporation if incomplete or
improperly completed, or if the number of initial directors is
less than the prescribed minimum (Private company its one
director and for a public company or non-profit company its
three directors).
 THEME 5 (LO6-10): COMPANY
FORMATION

• Upon acceptance of the Notice of Incorporation, Commission issues a

unique registration number to the company.
• Company’s details are inserted in the Commission’s register. Open to
public.
• Registration certificate issued. It is conclusive evidence that the
company is incorporated. Date on certificate is the date that company
comes into existence as a separate entity.
• Each company must have a registered office – it must be the address
where the company’s principal place of business is situated. Legal
documents, official notices etc may validly be served at this address.
 THEME 5 (LO6-10): COMPANY
FORMATION

MOI – It is the document, as amended from time to time, that

sets out the rights, duties and responsibilities of shareholders,
directors and others within and in relation to the company, and
other matters as contemplated in section 15 (e.g. altering any
alterable provision, inserting any restrictive provisions etc). It also
determines the nature of the company, whether it is public,
private or another type of company.
 THEME 5 (LO6-10): COMPANY
FORMATION

Flexibility of MOI
• Flexibility permissible for MOI (allowed to include any
provisions), but must be consistent with Companies Act,
2008
• Provisions in MOI that are inconsistent with or contravene
provisions of Companies Act – void
 THEME 5 (LO6-10): COMPANY
FORMATION

• In terms of the Companies Act, 2008, there are certain:

Unalterable provisions (which MOI cannot abolish or make
more lenient, but may make them more onerous or provide for a
higher standard)
Alterable provisions (MOI may alter them)
Default provisions (which will automatically apply if MOI does
not deal with a specific matter or if they are not altered by the
MOI)
 THEME 5 (LO6-10): COMPANY
FORMATION

The MOI can deal with a number of issues, such as:

• Objects and powers of the company
• Authorised shares and types of shares
• Election and removal of directors etc.
See full list of possible issues in Davis at p56
 THEME 5 (LO6-10): COMPANY
FORMATION

Rules made by the board

• Unless MOI provides otherwise, directors may make,
amend or repeal rules relating to governance of
company in respect of matters not addressed in Act
or MOI.
• If rules inconsistent with Act or MOI – void.
 THEME 5 (LO6-10): COMPANY
FORMATION

• Rules take effect 20 business days after rules are published or

on date specified in rules, whichever is the later.
• Rules binding on an interim basis until put to vote at next
general shareholders’ meeting – becomes permanent once
ratified by ordinary resolution of shareholders at the
meeting.
• If not ratified, directors may not make a substantially
similar rule in next 12 months, unless approved in advance
by an ordinary resolution of shareholders.
 THEME 5 (LO6-10): COMPANY
FORMATION

Legal Status of MOI and Rules

• They are binding as follows:
Between company and each shareholder
Between shareholders
Between company and each director
Between company and each prescribed officer and
members of audit and other committees
 THEME 5 (LO6-10): COMPANY
FORMATION

Ring-fenced companies
• Company’s name must be followed by ‘RF’ if a
company’s MOI contains:
Any restrictive condition applicable to the company
and any procedural requirement (in addition to normal
amendment requirements) for the amendment of such
condition; or
 THEME 5 (LO6-10): COMPANY
FORMATION

 If a company’s MOI contains any provision restricting or prohibiting

the amendment of any particular provision of the MOI.
• Each RF company must in its MOI include a prominent statement
drawing attention to the existence of the restrictive conditions or any
special procedures required to amend those restrictive conditions or
any other provisions in the MOI, and where those provisions can be
found in the MOI. NB: A third party will then be deemed to have
knowledge of the applicable restrictions. Thus the doctrine of
constructive knowledge still applies in respect of RF companies and third
parties dealing with it cannot therefore rely on the Turquand Rule.
 THEME 5 (LO6-10): COMPANY
FORMATION

Amending MOI
MOI may be amended in the following 3 ways:
In compliance with a court order
By the board in certain circumstances [section
36(3) and (4)]
By special resolution of shareholders
 THEME 5 (LO6-10): COMPANY
FORMATION

Amendment of MOI: by court order

• If court order so directs, an amendment of MOI
must be done by means of a board resolution.
• No special resolution of shareholders required.
 THEME 5 (LO6-10): COMPANY
FORMATION

Amendment of MOI: by board

• Section 36(3) – Except to extent that MOI provides
otherwise, board may itself –
Increase or decrease number of authorised (but
unissued) shares of any class of shares.
Reclassify any classified shares that have been
authorised but not issued.
 THEME 5 (LO6-10): COMPANY
FORMATION

Classify any unclassified that have been authorised but

not issued.
Determine the preferences, rights, limitations or other
terms of any authorised but not issued shares in a class
to which no preferences, rights or limitations were
initially assigned.
The company must then file a notice of amendment of its
MOI to reflect such changes made by the board.
 THEME 5 (LO6-10): COMPANY
FORMATION

Amendment of MOI: by special resolution

• It could either be by way of:
• substituting the MOI with a whole new MOI; or
• Deleting, altering and/or replacing any provisions in the existing MOI.
• If change affects the type of company (e.g. Shares become freely
transferable) than the MOI also needs to make appropriate change to
company name (e.g. changing (Pty) Ltd to Ltd, if company has due the
change now become a public company).
 THEME 5 (LO6-10): COMPANY
FORMATION

Effective Date of Amendment of MOI

• If MOI changes name – name change effective when

amended registration certificate issued by CIPC.
• Other amendments – effective on later of:
o Date when notice of amendment filed; or
o or date specified in notice of amendment.
 THEME 5 (LO6-10): COMPANY
FORMATION

Miscellaneous Matters
• Board may alter MOI or Rules to correct clerical errors (e.g.
spelling mistakes or punctuation).
• Company may file a translation of its MOI. Must be
accompanied by sworn statement by translator. If conflict
between the two, original MOI prevails.
 THEME 5 (LO6-10): COMPANY
FORMATION

If MOI has been amended one or more times:

*company may file a consolidated version. *CIPC may
also call for one. *Sworn statement by a director,
attorney or notary is required confirming that the
consolidation is true, accurate and complete. *If
there is a conflict between the two, original versions
prevail.
 THEME 5 (LO6-10): COMPANY
FORMATION

Pre-incorporation contracts
• Before company is incorporated (which happens when
CIPC issues the Registration Certificate) it does not exist
and cannot perform juristic acts. Agent also can’t act for a
non-existent principal.
• Section 21 of Companies Act, however, allows for pre-
incorporation contracts to be entered into, if certain
requirements are complied with.
 THEME 5 (LO6-10): COMPANY
FORMATION

• A pre-incorporation contract is when someone

enters into a contract with the intention that once
the company is incorporated, the company will be
bound by it. (Intention is normally indicated by
words to that effect. E.g. ‘Mr A acting on behalf of a
new company to be formed.’)
 THEME 5 (LO6-10): COMPANY
FORMATION

• That person will be jointly and severally liable if the

company is not incorporated or if it is, but rejects
all or part of the agreement.
• Once company is incorporated, board of directors
may within 3 months after date of incorporation,
completely, partially or conditionally ratify or reject
the pre-incorporation contract.
 THEME 5 (LO6-10): COMPANY
FORMATION

• If board fails to do so within the 3 months –

deemed to have ratified the pre-incorporation
agreement.
• A pre-incorporation agreement must be in writing.
 THEME 5 (LO6-10): COMPANY
FORMATION

Shareholders’ agreement
• The shareholders of a company may enter into an
agreement with each other concerning any matters relating
to the company.
• Must however be consistent with the Companies Act, 2008
and the MOI – any provisions of the shareholders
agreement that are not, are void.