LML4806 ASSIGNMENT 1

DATE: 20 AUGUST 2024

UNISA
LML4506 – Company Law
Question 1
The facts in this matter are that only directors hold the authority to enter into contracts
with third parties. James, the branch manager, attended to an outdoor show on behalf
of the company to look for products. James saw a special on electric bicycles and
proceeded to contact the directors via Zoom call. While on the Zoom call, on speaker
phone, the directors gave instructions to proceed to purchase six electronic bicycles.
Nancy, the owner of Cycle for Life (Pty) Ltd heard the instructions from the directors
and proceeded to enter into the purchase contract.
In the matter of Hely-Hutchinson v. Brayhead, Lord Pearson stated that:1
“…There is not usually any direct communication in such cases between the board of
directors and the outside contractor. The actual communication is made immediately and
directly, whether it be express or implied, by the agent to the outside contractor. It is,
therefore, necessary in order to make a case of ostensible authority to show in some way
that such communication which is made directly by the agent is made ultimately by the
responsible parties, the board of directors.”

Futher Lord Pearson said that “… placing the agent in a position where he can hold
himself out as their agent and acquiescing in his activities, so that it can be said that
they have in effect cause the representation to be made”. The directors, in placing
James in the position to scout for products, and expressly indicated via Zoom that he
needs to proceed to purchase the electronic bicycles, caused that James possesses
the necessary authority to enter into the agreement. James' position as branch
manager could be perceived as implying authority to purchase goods for the
company's operations in that area. Further to this, Nancy have concluded contracts
with James on behalf of Touring Africa by Bicycle (Pty) ltd previously and therefore the
assumption that James required the necessary authorization to enter into the contract.
The contract is therefore binding and enforceable, and Touring Africa by Bicycle (Pty)
ltd is liable for paying Nancy.
Nancy can institute legal action against Touring Africa by Bicycle (Pty) ltd and rely on
the Turquand Rule. The Turquand Rule is a special rule that entitles a third party who
acted in good faith to assume that the contracting company complied with the
necessary formalities for a valid contract.2
In Conclusion, Cycle for Life (Pty) Ltd has a strong case to argue that Touring Africa
by Bicycle (Pty) Ltd is bound by the contract, despite James' lack of express authority.
By proving one or more of the above legal principles, they can overcome the
company's argument that it is not bound.

1 Hely-Hutchinson v. Brayhead (London) Ltd [1968] 1 QB 586

2 Companies Act, s20(7)

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Question 2
2.1 In terms of section 76 of the Companies Act (hereinafter called the Act), a director
carries a fiduciary duty to the company and must act with a certain degree of care, skill
and diligence. This fiduciary duty entails that a director must perform his or her
functions in good faith, for a proper purpose, and in the best interests of the company.3
In CyberScene Ltd v iKiosk Internet and Information (Pty) Ltd 2000 (3) SA 806 (C) the
court held that a director is in breach of his/her fiduciary duty to the company if he/she
sabotages the company’s contractual opportunities for personal gain or advantage. A
director is also in breach when confidential information is used to advance the interests
of his or her own pocket to the prejudice of the interests of the company.
In Robinson v Randfontein Estates Gold Mining Co Ltd 1921 AD 168 the court held
that there is a duty that rest upon a director to not misappropriate corporate
opportunities.
Since all directors were aware of the dire financial situation of Abby Realtors Ltd, and
proceeded to invest the money, it is undeniable that the directors did not act in proper
purpose and in the best interests of the company. They also did not act with care in
that they had to foresee the impending collapse.
There is also the clear conflict of interest in that Tebogo’s wife controls Abby Realtors
Ltd and he should have recused himself from the decision to invest, but instead he
convinced the other directors that it will be a fruitful investment.
With regards to the unsecured loans to Mbali and Dominique, the unilateral decision
to grant themselves loans without the knowledge and approval of the shareholders
constitutes as dishonest and self-dealing.
The actions and decisions of the directors is negligent and in breach of their duty as
per section 76(3) of the Act. They are the be held liable for any losses suffered by the
company as a result of their misconduct and breach.

2.2 Section 76(4) of the Companies Act provides a defence for directors against liability
for decisions made in good faith and with reasonable care.4 This is the business
judgment rule. To be able to rely on this rule, the directors must prove that they have
acted in good faith and have taken the reasonably diligent steps to be informed about
the matter. The directors have to proof that the decision was in the best interests of
the company.
The business judgment rule protects directors from liability for decisions that turn out
poorly, as long as those decisions were made in good faith, with due care, based on
informed judgment, and believed to be in the best interests of the company.
Essentially, the rule acknowledges that even well-intentioned decisions made with the
best information available can sometimes have negative outcomes. Therefore,

3 Companies Act 71 of 2008, s76(3)

4 Companies Act, s76(4)

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directors are not automatically liable for such outcomes if they can demonstrate they
acted responsibly and, in the company’s, best interests.5
The directors will likely not be able to successfully rely on this rule due to the fact that
they lacked good faith, in that they knew about the financial situation of Abby Realtors
Ltd, and the obvious conflict of interest. There was no reasonable belief that the
investment would yield a return, and they only trusted the word of Tebogo. Lastly, the
directors failed to do their due diligence regarding the investment.
They also did not act within the best interest of the company when they proceeded to
obtain unsecured, interest free loans for themselves without the knowledge and
approval from the shareholders.

5 FHI Cassim, Companies and other Business Structures, (Oxford University Press, 2nd ed,
2011)

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Declaration

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of passing it off as his or her own work.
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