Unit 5

Question 1

When is a director is liable for loss, damages or costs sustained by a company?

Answer 1

A director is liable for loss, damages or costs sustained by a company if the director:
* Knowingly acted for the company without authority
* Acquiesced in the fraudulent or reckless conduct of the company’s business
* Knowingly was a party to an act intended to defraud a creditor
* Knowingly consented to materially false or misleading financial statements or a prospectus
* Acted in breach of common-law fiduciary duty
* Failed to exercise reasonable care, skill and diligence
*

Question 2

Which directors are liable uder s77?

Answer 2

Liability of a director in terms of section 77 is joint and several with any other person facing liability in respect of the same act.

Question 3

When can a director be held liable under s22?

Answer 3

In addition, where a director agrees to the business of the company being carrying on recklessly as contemplated in section 22, they may be held liable. Such as:
* Fraudulent or reckless trading, or
* Trading whilst unable to pay company debts

Question 4

What documents govern corporate governace?

Answer 4

Documents that govern corporate goverance:
* MOI
* Companies Act

Question 5

What is the doctrine of constructive notice?

Answer 5

• Historically, companies had to write in their founding documents the purpose and scope of their commercial actions.
• Puts the onus on the third party
• Third parties contracting with a company are deemed (assumed)to be aware of the companies’ constitution and other public documents
• Doctrine meant to protect the company from unauthorised acts of its directors or officers.
• Doctrine of abolished by s19(4) of the Companies Act 2008

Question 6

What are two exections to the doctrinee of constructive notice abolishment?

Answer 6

Two exceptions to the doctrine of constructive notice found in Section 19(5), A person must be regarded as having notice and knowledge of -
* any provision of a company’s Memorandum of Incorporation contemplated in section 15(2)(b) or (c) if the company’s name includes the element “RF” as contemplated in section 11(3)(b), and the company’s Notice of Incorporation or a subsequent Notice of Amendment has drawn attention to the relevant provision, as contemplated in section 13(3); an
the effect of subsection (3) on a personal liability company

Question 7

What is held in s19(2)?

Answer 7

Section 19(1)(b) held that from the date and time that the incorporation of a company is registered, the company has all of the legal powers and capacity of an individual, except to the extent that. A juristic person is incapable of exercising any such power, or having such capacity; or the company’s Memorandum of Incorporation provides otherwise

Question 8

What does s11(3)(b) hold?

Answer 8

Section 11 (3)(b) holds that if the MOI includes any provision contemplated in s15 (2)(b) or (c) restricting or prohibiting the amendment of any particular provision of the memorandum, the name must be followed by the expression

Question 9

What was held in Mokegthi about a juristic act on behalf of principles

Answer 9

If an agent aims to perform a juristic act on behalf of the principle they require authority to do so for it to be binding, if they dont have the authority to do so it is void. (Mokegthi).

Question 10

What are the steps to determine estopel as held in Mokegthi?

Answer 10

A third party can hold an individual to a contract through estoppel, the estoppel steps as held in Mokegthi:
* negligent misrepresentation
* Must be made by the principal to the person raising the estoppel (have had authority)
* the principle must reasonably have expected that there conduct would mislead the misrepresentation.
* the person acted on the misrepresentation and led to the determination
* The third party was prejudiced, the reliance must be determinental to them

Question 11

What is the turquand rule?

Answer 11

The Turquand rule holds that a bona fide third party is entitled to assume that all internal formalities relating to the granting of authority to a particular person have been satisfied Except:
* If the third party had actual knowledge of a defect in the granting of authority to the person (does not apply to insiders)
* If there were circumstances that put the third party ‘on guard’ and which would have led a reasonable person to make further enquiries

Question 12

What is held in One stop financial?

Answer 12

A bona fide third party may assume that all acts of internal management or organisation on which the exercise of authority was dependent may be assumed (One Stop Financial Services (Pty) Ltd v Neffensaan Ontwikkelings)

Question 13

Where is the turqand rule codiefied and what dose it state?

Answer 13

The Turquand rule is codified in Section 20(7) of the CA.

Section 20(7) holds that a person dealing with the 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 of the formal and procedural requirements in terms of this Act, its MOI 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

Question 14

What does s66 hold?

Answer 14

Section 66 holds that the business and affairs of a company must be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions of the company.

Question 15

What was held in Automatic self cleansing filter syndicate?

Answer 15

Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuningbame highlights the broad powers of directors. The court held that it was not competent for the majority of the shareholders at an ordinary meeting to affect or alter the mandate originally given to the directors, by the articles of association

Question 16

Whay is the organ that controls the affairs of the business?

Answer 16

The board of directors is the organ which controls and governs the affairs and business of companies. The board of directors (the directorate) is thus the ‘controlling mind’ of the company.

Question 17

What are the types of directors?

Answer 17

Types of directors:
* An executive director is a director who is involved in the day-to-day management of the company and/or is in full-time salaried employment of the company or of its subsidiaries.
* A non-executive director is an individual not involved in the day-to-day management and not a full-time salaried employee of the company or of its subsidiaries.
* Shadow directors are individuals whose directions or instructions the directors of the company are prone to act. Such a person is not formally appointed by the company as a director, but formally appointed directors will usually act in accordance with their instructions.
* Independent director is a director whom ensures that executive directors are accordingly monitored and supervised in their execution of their corporate decision-making role.

Question 18

What does 41(1) state?

Answer 18

In terms of section 41(1) CA directors may not issue shares, securities, options or rights to current or future directors and prescribed officers or related or inter-related persons without
approval by way of a special resolution of the shareholders.

Question 19

What does 67(1) provide?

Answer 19

Section 67(1) provides that before and until directors are appointed, every incorporator of the company will be deemed to be a director of the company, until directors that satisfy the
minimum requirements of the Act or the company’s MOI have been appointed or elected.

Question 20

What does 66(4)(a) hold

Answer 20

Section 66(4)(a) holds that the MOI of the company may provide for the direct appointment of named directors, ex officio directors and alternate directors. It is mandatory that atleast 50 per cent of the directors of profit companies, save for those in state-owned companies, be elected by the persons entitled to exercise voting rights in respect of the election.

Question 21

What was held in Pulrook v Richmond?

Answer 21

In Pulbrook v Richmond Consolidated Mining Co, its stated that a director, you have the right to the exercise of your office.

Question 22

What are the number of directors in companies?

Answer 22

Number of directors and Consent
* Private or personal liability company – at least one director
* Public companies or non-profit companies – at least three directors (s66(2))
* Where the company does not have prescribed minimum number of directors, any act done by the board will remain valid
* A person only becomes director if they deliver a written consent accepting the position of director

Question 23

What does John Shaw & Sons hold?

Answer 23

John Shaw & Sons (Salford) Ltd v Shaw holds that the board is an independent organ of the company and must be free to exercise its judgment in the best interests of the company and the shareholders cannot interfere in the functions of the board, any more than the directors can interfere in the proceedings of the shareholders.

Question 24

Who is disqualified from being a director?

Answer 24

The following are disqualified from being appointed as director:
* If they are prohibited by court
* Declared delinquent by a court of law - in terms of section 162 of the CA or section 47 of the Close Corporation Act.
* Removed from office for being dishonesty
* Prohibition by public regulation
* Convicted and imprisoned without option of a fine for offences listed in s 69(8)(b)(iv).
*

Question 25

What does s66(9) hold

Answer 25

Section 66(9) holds that where the board does not have the prescribed minimum number of directors, as required either in terms of the Act or the company's MOI, this does not limit or negate the board's authority; neither does it invalidate any of the actions of the board.

Question 26

What are the three grounds for ineligibility as a director?

Answer 26

Section 69(7) provides for three absolute grounds for ineligibility of directors: * a juristic person (only natural persons can be directors) * an unemancipated minor or other person under legal disability; or * A person lacking legal capacity a person who is disqualified in terms of the company's MOI (subject to the Constitution)

Question 27

When will the court allow a disquialified person from being a director?

Answer 27

Section 69(8)(b)(iv), holds that when a court disqualifies a person from being a director, these disqualifications aren't permanent; a court has the power to step in and allow the person to serve as a director anyway: * a person who is unrehabilitated, insolvent * declared delinquency by a court of law * a person who is prohibited from being a director in terms of any public regulation; * a person removed from an office of trust for misconduct that involves dishonesty;or * a person who has been imprisoned without the option of a fine or has been fined more than R1000 in respect of fraud, theft, forgery, perjury and other offences.

Question 28

Who can remove directors?

Answer 28

Director can be removed by: Shareholders by ordinary resolution Board of directors’ resolution

Question 29

How do shareholders remove directors?

Answer 29

Section 71 holds that shareholders can remove directors through an ordinary resolution, through showing they have been negligent or derelict, ineligible or disqualified, or has become incapacitated, or per the MOI. In the interests of procedural fairness, section 71 provides that when removing a director they must be given notice of the meeting to attend it for the purpose of persuading the meeting to vote the resolution down.

Question 30

Can a director appeal a removal

Answer 30

Where the removal process has been undertaken by resolution of the board, the director may apply to the court to have the decision reviewed within 20 business days. The removal contemplated in section 71 does not deprive the director of any right to claim compensation or damages arising from the premature termination of the contract.

Question 31

Two types of duties a director has to a company?

Answer 31

The directors' duties to a company fall, under two heads * fiduciary duties * duties of care and skill

Question 32

Who are the common law duites owed to?

Answer 32

Directors' common-law duties are owed to: * Generally not owed to individual shareholders (Shareholders have no fiduciary duties themselves) * Enforceable only by the company * Paramount duty: to act in good faith and in the best interests of the 'company', i.e. shareholders as a whole.

Question 33

Who are the common-law fiduciary duties?

Answer 33

The common-law fiduciary duties: * The duty to act with unfettered discretion and exercise their power for a proper purpose, which requires that the directors act with good faith and in the best interests of the company; (Fulham Football Club v abra Estates Plc) * Every power must be used for the purpose for which it was conferred on the board or on the director concerned. Directors must not use their powers to achieve indirect objectives or for ulterior motives. s76(3)(a) holds that they must act in alignment with the company * Duty to act in good faith and in the interests of the company – with honesty and loyalty (s76 (3)(a)) (uberrimae fides) - Exercise their powers bona fide in the best interests of the company. (Fulham Football Club v abra Estates Plc,) * The duty to avoid conflict of interest (Robinson v Randfontein Estates Gold Mining Co Ltd) * the duty not to exceed powers. (s76(3)(a)) * Duty to disclose material information - When a company has a material interest in something and the director wishes to enter into a contract where there might be a conflict of intrest they must make a full disclosure to the board (section 76(2)(b))

Question 34

What does it mean for directors to act with unfettered discretion and exercise their power for a proper purpose?

Answer 34

Directors must act with unfettered discretion and exercise their power for a proper purpose: * Shareholders are not in a fiduciary position, and in general are free to fet their vote as they please. However Directors are not able to fet their vote and should act in the best interest of the company. * As Coronation Syndicate Ltd Lilienfield and the New Fortuna Company Ltd indicates, an undertaking to vote in a certain way cannot be enforced against a director. But the directors are in a fiduciary position, and it is their duty to do what they consider will best serve the interests of shareholders. * A company is entitled at all times to the free, objective and unbiased judgment of its directors. A director must consider the affairs of the company in an objective manner.

Question 35

What does it mean for a directors to avoid a conflict between their own interests and those of the company?

Answer 35

Directors must avoid a conflict between their own interests and those of the company: * Must guard against a conflict of interests, the rule is that directors may not derive any personal gain or advantage in the course or execution of their office as directors, except such gains as they are lawfully entitled to (agreed remuneration for their services) * Robinson v Randfontein Estates Gold Mining Co Ltd case dealt with a person who bought a company knowing that they could later sell it for a higher price to a third party. They were aware of this, as the shareholder of the smaller company that bought the land was also a shareholder in the bigger company. * Corporate opportunity rule - Prohibits the director from taking any contract or opportunity that belongs to the company and that came to them as a director of the company, even after the director has resigned ( Da Silva v CH Chemicals) s76(2)(a)(ii) * Non-profit rule - Directors may not retain profits made in their capacity as directors while performing their duties as directors, even if the profit was not at the expense of the company and any profit must be disgorgement to the company (Philips v Fieldstone) s76(2)(a)(i) * A director should not enter into engagements in which they have a personal interest conflicting, or which possibly may conflict, with the interest of the company (Aberdeen Rly Co v Blaikie Bros) * Where the director has entered into a contract, despite the existence of a conflict of interest, and failed to disclose such conflict, at common law, the contract will be voidable at the instance of the company.(Caracto Pty Ltd v Independent Advisory (Pty) Ltd) * This conflict of interest can be in bad or good faith *

Question 36

What does section 75 require?

Answer 36

Section 75 requires financial interests or conflicts of interest to be disclosed. Once the personal financial interest is properly disclosed and approved in accordance with the requirements of section 75, the contract or the matter concerned becomes valid despite the existence of the financial interest.

Question 37

What does it mean that a Directors must not exceed the limits of their powers?

Answer 37

Directors must not exceed the limits of their powers: * A director is under a duty to observe limitations of the powers of the company, as well as the limits of his own authority to act on behalf of the company. However, if a director should enter into a transaction on behalf of the company, which falls beyond the capacity of the company, neither the company nor the other party can claim that the transaction is void (section 20(1)) * Cullerne v London and Suburban General Permanent Building Society shows that if a director made payments as a result of transactions beyond the capacity of the company, he may then be called upon to compensate the company. * A director can thus bind his company even when not authorised to perform a particular act, the director concerned would have acted in breach of a fiduciary duty and would be liable to the company for any loss suffered. (s77)

Question 38

What is reckless trading?

Answer 38

Reckless trading s22 directors can not enter into financial risky discions when the company cant pay its debts it triggers liability under s77.

Question 39

What was held in Piercy v S Mills?

Answer 39

In Piercy v S Mills & Co Ltd held that directors are not entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholders.

Question 40

How is the duties of care and skill determined?

Answer 40

The duties of care and skill is determined by considering what is required of the director subjectively: (Visser Sitrus Pty Ltd v Goede Hoop Sitrus (Pty) Ltd) * takes reasonably diligent steps to become informed about the matter; * subjectively believes that his decision is in the best interests of the company, and * that belief should be on a rational basis.

Question 41

How do you determine the duty of care?

Answer 41

The duty to care from common law is essentially a subjective one (Fisheries Development Corporation v Jorgensen 1980)

Question 42

What is the Statutory duty that requires that a director must exercise a degree of care, skill and diligence?

Answer 42

Statutory duty (Section 76(3)(c)) requires that a director must exercise a degree of care, skill and diligence that, may reasonably be expected of a person: * Carrying out same functions in relation to the company, and * Having the general knowledge, skill and experience of that director * The standard of care is partly objective and partly subjective (Organisation Undoing Tax Abuse v Myen)

Question 43

What is the business judgment rule?

Answer 43

The business judgment rule prevents courts from second-guessing corporate decisions as long as they are made in good faith and with a rational purpose. Consequently, directors cannot be held liable for poor outcomes or "wrong" choices provided the process they used to reach the decision was honest and logical. This is an objective inquiry (Schlenky v Wrigley)

Question 44

What was held in isberies Development Corp v Jor-gensen?

Answer 44

In Fisberies Development Corp v Jor-gensen, the court held that the extent of a director's duty of care and skill depends to a considerable degree on the nature of the company's business and on any particular obligations assumed by or assigned to him

Question 45

How is the business judgment rule codified in section 76(4)?

Answer 45

The business judgment rule is now catered for under the Companies Act, Section 76(4) of the Act provides a director with protection from liability where that director: * took 'reasonably diligent steps to become informed about the matter'; * either had no material personal financial interest, or duly complied with the prescribed disclosure requirements; * had a rational basis for believing, and did in fact believe, that the decision was in the company's best interests.

Question 46

What was highlighted in Organisation Undoing Tax Abuse v Myeni?

Answer 46

In Organisation Undoing Tax Abuse v Myeni, highlighted that wilful misconduct, recklessness and dishonesty are not protected under the business judgment rule. The rule can only be used to protect directors acting diligently and in good faith.

Question 47

What was held in In Re City Equitable Fire Insurance Company?

Answer 47

In Re City Equitable Fire Insurance Company stated that a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. They are not liable for mere errors of judgment. This test is subjective.

Question 48

What is the statuory liability of directors found?

Answer 48

The statutory liability of directors is regulated in terms of section 77 of the Act. The provision allows directors to be held personally liable where they act in breach of their duties, the Act or the company's constitutional documents.

Question 49

What does s77(2)(a) state?

Answer 49

According to s77(2)(a), a director may be held liable in terms of the common-law principles for breach of a fiduciary duty and cannot be exempted from liability

Question 50

What does s77(2)(b) state?

Answer 50

In order to establish liability under section 77(2)(b), the company would need to ensure that the five elements of delicts are present.