Unit 6 Capacity and Representation PDF

Company Law CCO 3860 Unit 6: Capacity and Representation The purpose of this unit is to explain the capacity of companies under common law, the Companies Act 61 of 1973 and the Companies Act 28 of 2004, the ultra vires doctrine and its continued relevance, representation of companies...

Company Law CCO 3860 Unit 6: Capacity and Representation The purpose of this unit is to explain the capacity of companies under common law, the Companies Act 61 of 1973 and the Companies Act 28 of 2004, the ultra vires doctrine and its continued relevance, representation of companies, the doctrines of disclosure and constructive knowledge and how these doctrines have been affected by the Companies Act 28 of 2004, the meaning of the Turquand-rule and its relevance under the Companies Act 28 of 2004, and the application of estoppel to the representation of companies. PRESCRIBED READING Pretorius, JT, Delport, PA, Havenga, M and Vermaas, M. 1999. Hahlo’s South African Company Law. Cape Town: Juta & Co, Ltd (“Hahlo”) at 60 – 66; 346 – 363. Tuckers Land and Development Corporation (Pty) Ltd v Perpellief 1978 (2) SA 11 (T) RECOMMENDED READING Beuthin, RC & Luiz, SM. 2000. Beuthin’s Basic Company Law. Durban: Butterworth Publishers (Pty) Ltd at Chapter 10. Cilliers, HS, Benade, ML, Henning, JJ, Du Plessis, JJ, Delport, PA, De Koker, L and Pretorius, JT. (2000). Cilliers & Benade Corporate Law. (3rd ed) Durban: LexisNexis at Chapter 12. LEARNING OUTCOMES After completing this section, students should be able to: (i) explain the capacity of companies and the influence of the ultra vires doctrine; (ii) explain the representation of companies; (iii) explain the doctrines of disclosure and constructive knowledge and the relevance of these doctrines; (iv) explain the meaning and application of the Turquand-rule; and (v) explain how estoppel may be applicable in the representation of companies. 7.1. Introduction From the date on which a company is incorporated, it is a juristic person with perpetual succession. As a juristic person, the company can acquire rights and duties in its own name. A company can therefore generally enter into contracts, acquire assets, employ employees and sue and be sued. A company as juristic person also enjoys most fundamental human rights and freedoms enshrined in the Constitution of the Republic of Namibia, 1990. ð Cilliers & Benade at §1.07. ð Section 71 of the Companies Act 28 of 2004. ð Article 5 of the Constitution of the Republic of Namibia, 1990. While a company exists as a separate entity with legal personality, it does not exist as an entity in the physical sense. It does not have a mind or body of its own and, as such, cannot by itself conclude legal transactions. Instead, a company acts through its shareholders, directors and other officers, who act on behalf of the company. ð Cilliers & Benade at §1.07. ð Tuckers at 14. The ordinary rules of agency set out the foundation for representation in company law. Therefore: (i) the company must have the necessary capacity to perform juristic acts; and (ii) the company’s representatives must be properly authorised to bind the company in respect of particular acts. However, normal rules of agency cannot apply immutably to company law and, over the years, a distinctive branch of the law of agency developed in respect of company law. ð Cilliers & Benade at §12.01. ð Tuckers at 14 – 15. In Namibia, the Companies Act 28 of 2004 brought about substantial changes to the rules of capacity and representation of companies in Namibia. Below is a general discussion of capacity and representation under Namibian common law, followed by a discussion of particular rules developed in respect of companies and how these rules apply under Namibian company law. In this unit, the capacity of companies is first discussed. Closely linked with the capacity of companies is the doctrine of ultra vires, which deals with the consequences of actions beyond the capacity of a company. Next, the representation of companies is discussed, together with the specific doctrines that apply to the representation of companies. 7.2. Capacity of a Company and the Ultra Vires Doctrine Capacity, in a legal setting, refers to the competency of a legal subject to perform a legal act. The capacity of a company therefore refers to the competency of the company to perform legal acts. Stated in another way, a company’s capacity is the scope of its business. In general, a company can only enter into contracts or transactions that fall within its capacity. 2  (i) Ultra Vires Doctrine Traditionally (ie before the Companies Act 61 of 1973 came into operation), if a company acted outside its “Ultra vires” means “beyond / outside its powers” capacity, that act was void for being ultra vires. The doctrine seeks to protect shareholders and creditors of the company: shareholders want to be sure that those to whom they entrust control of the company actually pursues the purpose of the company in which the shareholders invest, while creditors want to be comfortable that directors or agents of a company will not waste time and money on transactions beyond the company’s powers. Lack of proper capacity had both internal and Under common law, therefore, external implications. The external the ultra vires doctrine in implication of a lack of proper authority was essence meant that acts that did not fall within the capacity that the ultra vires acts of the company were of a company, as determined absolutely void. The company was not by its main object, were absolutely void. bound be these acts and third parties could not enforce these acts. Both parties had to restore whatever has been performed, failing which the other party may institute a claim based on unjustified enrichment. The acts were not possible of ratification afterwards, even by unanimous consent of the shareholders, as it was void ab initio. The “doctrine of ultra vires” refers to the common-law rules relating to As for the internal implications, directors or agents the external and internal implications of a company acting were not authorised to execute or perform any acts beyond the scope of its capacity. that were ultra vires. Any member of a company could restrain the director or agent from performing an ultra vires act or, where the acts was already performed and damage caused to the company, claim damages from the director or agent. A court had discretion whether or not to order damages. The other contracting party could also, under certain circumstances, claim damages from the director or agent. ð Cilliers & Benade at §12.04 - §12.06. ð Hahlo at 60 – 62. ð Ashbury Railway Carriage and Iron Co v Riche (1875) LR 7 HL 653 at – , reproduced in Hahlo at 62. ð Gibson at 286 – 287. EXAMPLE If a company’s main object as stated in its Memorandum of Incorporation is to conduct prospecting and mining operations, the company cannot decide to open and run a supermarket. Under common law, a decision to open and run a supermarket is ultra vires the capacity of the company. The company cannot be held bound to that decision and no third party can enforce that decision (external). Any director who intends to proceed with enforcing this decision can be restrained by the company from proceeding (internal). Where the director did proceed to give effect to the decision and the company suffered damages, the director can be held responsible for the damages (internal). 3 It is not always easy to determine when a transaction falls within the purpose for which the company was established (ie whether the company has the necessary capacity to enter into the transaction). Read the extract from the decision by the House of Lords reproduced in Hahlo at 62 – 63 (Attorney General v Mersey Railway Co 1 Ch 81 (HL)) for a useful discussion on how this difficulty may be approached. Do you know what the ultra vires doctrine means? Would you be able to describe this doctrine in your own words? Do you know the external and internal implications of the ultra vires doctrine under common law? (ii) Provisions of the Companies Act 61 of 1973 The relevance of the ultra vires doctrine has been diminished greatly since the introduction of the Companies Act 61 of 1973, especially insofar as the external implications of the ultra vires doctrine are concerned. Why would the Section 33 of the Companies Act 61 of 1973, read with Legislature deem it section 34, set out the provisions relating to the capacity necessary to change the common law? of companies. These sections provide as follows (own emphasis): Section 33: Capacity main object and ancillary objects of company (1) Any company formed in pursuance of section 32 shall have the capacity determined by the main object stated in its memorandum and there shall be included in its capacity unlimited objects ancillary to the said main object except such specific ancillary objects as are expressly excluded in its memorandum. (2) If the main business actually carried on at any time by a company referred to in subsection (1) falls within the capacity of the company by virtue only of an object ancillary to the main object stated in its memorandum, such main business shall be deemed to be the main object of that company for the purposes of the said subsection. (3) Notwithstanding anything contained in the “Ancillary objects” are all memorandum of any existing company, the main objects which may be pursued business which it actually carries on at the in any way in the realisation of commencement of this section, shall be deemed the main object. to be its main object. Section 34: Powers of company Subject to any limitation imposed by this Act, every company shall have plenary powers, including the common powers stated in Schedule 2 to this Act, to enable it to realize its main and ancillary objects, except such specific powers as are expressly excluded or qualified in its memorandum. Under the 1973 Companies Act, a company’s capacity was limited to its main object and unlimited objects ancillary to the main object, unless any ancillary objects are expressly excluded. A company incorporated under the 1973 Companies Act could have more than one main object, and then unlimited ancillary objects. In fact, a practice quickly developed where lawyers, who attended to the incorporation of companies, were instructed to draft the main object clause as widely as possible. 4 ð Cilliers & Benade at §12.09 At the time the 1973 Companies Act came into operation, it was already common practice for the constitutional documents to limit the capacity of companies by clearly defining and limiting the main object of the company. The 1973 Companies Act, however, introduced another clause that dealt a fatal blow to the external implications of the ultra vires doctrine: section 36. Section 36: Acts ultra vires the company not void No act of a company shall be void by reason only of the fact that the company was without capacity or power so to act or because the directors had no Section 36 only refers to “directors”. Does it include authority to perform that act on behalf of the company cases where a company has by reason only of the said fact and, except as only director? What about between the company and its members or directors, other agents and officers? See or as between its members and its directors, neither Cilliers & Benade at §12.14. the company nor any other person may in any legal proceedings assert or rely upon any such lack of capacity or power or authority. So, where acts ultra vires the company were void under common law, section 36 changed this position by expressly stating that no act will be void merely because the company did not have the necessary capacity or power so to act. Section 36 changes the consequences of ultra vires acts (ie those acts are no longer void), but the acts remain ultra vires. Furthermore, neither the company nor any other person may assert or rely on a lack of capacity or authority in any legal proceedings, except as between the company and its members or directors, or as between its members and directors. ð Cilliers & Benade at §12.14. ð Hahlo at 61. ð Gibson at 288 – 289. What does the exception mean? While the external implications of ultra vires have been done away with, the internal implications remain in place. Can you explain the changes that the Companies Act 61 of 1973 brought about to the capacity of companies and the ultra vires doctrine? What remains of the ultra vires doctrine after the introduction of the Companies Act 61 of 1973? 5  (iii) Provisions of the Companies Act 28 of 2004 Section 38 of the Companies Act deals with the capacity, powers and objects of companies incorporated in Namibia under this Act. Section 38: Capacity, powers and objects (1) Subject to this section a company has the capacity and powers of a natural person of full capacity in so far as a juristic person is capable of having that capacity or of exercising those powers. See also section 59(1)(b) of (2) The memorandum of a company – the Companies Act 28 of 2004. (a) may state the objects of a company; (b) must state the objects of the company where it is so required by this Act or any other law, but, where the objects of a company, or where any exclusion or qualification in terms of section 39 with regard to the objects or powers of the company, including an existing company, is stated, it only serves to restrict the capacity and powers of the company internally as between the company, its directors and its members, unless a person dealing with the company had actual knowledge or ought reasonably to have known of that statement of the objects of the company or of any exclusion or qualification in terms of section 39 with regard to the objects or powers of the company stated in the company’s memorandum. (3) A non-profit association incorporated under section 21 must state its object in its memorandum as provided in subsection (1)(b) of that section. (4) Subject to subsections (2)(b) and (3), any existing company may at any time after the commencement of this Act, in accordance with section 62(4), by resolution alter its memorandum in order to remove any objects stated in its memorandum and that alteration becomes effective on the date of registration of the resolution. (5) Subsection (2) must not be construed as in any way limiting the right of a company to – (a) claim damages from a director, officer or agent of the company for a transaction concluded; or (b) obtain a restraining order against a director, officer or agent from entering into a proposed transaction, where that transaction falls outside the objects or the powers of the company. Section 39 amplifies the provisions of section 38 and deals with the ancillary objects and powers of a company. Section 39: Ancillary objects and powers of company (1) Where the objects of a company are stated in its memorandum, there must be included in those objects unlimited objects ancillary to those stated objects except those specific ancillary objects which are expressly excluded in its memorandum. (2) Subject to any limitation imposed by this Act, a company referred to in subsection (1) has plenary powers, including the common powers stated in Schedule 2 to this Act, to enable it to realise its objects and ancillary objects, except those specific powers which are expressly excluded or qualified in its memorandum. 6 So, one of the major changes brought about by the Companies Act 28 of 2004 relates to the capacity of companies. Whereas previously a Form CM2 (Memorandum) company’s capacity was limited by its main requires promoters to state the “Main Business” and object, which it was obliged to state at “Objects” of the company, as incorporation, the Companies Act now states well as the exclusion of ancillary objects. What is the that that a company has full legal capacity and difference between “Main may state its objects. Interestingly, however, Business” and “Objects”? See Gibson at 282 – 284. the Companies Act 28 of 2004 does not have a separate clause similar to section 36 of the 1973 Companies Act, which deals with ultra vires. Instead, section 38(2) of the 2004 Companies Act deals with the application of the ultra vires doctrine (without expressly referring to “ultra vires”). The scope of section 38(1) and section 38(2) is as follows: a) A company incorporated under the Companies Act 28 of 2004 has full legal capacity. b) The memorandum of the company may state its objects, or state any exclusions or qualifications in respect of its objects or powers. c) As long as the company’s capacity is not limited, the ultra vires doctrine is not applicable. d) Where a company’s memorandum does state its objects (or any exclusions or qualifications in respect of its objects or powers), this only restricts the capacity and powers of the company internally as between the company, its directors and its members. i. The internal implications of the ultra vires doctrine are therefore applicable. So, a company (or the members of a company) may restrain a director, officer or agent from entering into a proposed transaction, or claim damages from a director, officer or agent as a result of a transaction, where the transaction falls outside the objects or powers of the company. ii. The external implications of the ultra vires doctrine do not apply (ie ultra vires acts are not void), unless a person dealing with the company had actual knowledge or ought reasonably to have known of a limitation on the capacity of the company, either through an express statement of the company’s objects or through an exclusion or qualification in respect of the objects or powers of the company. Section 38 of the Companies Act 28 of 2004 does not abolish the ultra vires doctrine in respect of the capacity of companies. It merely renders it not applicable as long as the company’s capacity is unlimited. Where the company’s capacity is limited in its articles, a limited application of the ultra vires doctrine kicks in. 7  What changes did the Companies Act 28 of 2004 brought about in respect of the capacity of companies and the ultra vires doctrine? What remains of the ultra vires doctrine after the introduction of the Companies Act 28 of 2004? After incorporation, can a company change its capacity either by defining objects (where none were stated at the incorporation of the company) or changing its objects? Yes, this is done by a special resolution under section 62(4) of the Companies Act 28 of 2004. Company capacity and continued relevance of the ultra vires doctrine Under the common law, a company’s capacity was limited by its main object as stated in its constitutional documents. All acts by a company outside its capacity were void and could not be enforced by any person (absolutely void). Internally, the company or its members could restrain a director from pursuing a transaction outside its capacity, or claim damages from the director. The Companies Act 61 of 1973 required all companies, on incorporation, to have a main object stated in its memorandum. The company’s capacity was limited by this main object. However, this Act changed the external consequences of ultra vires actions by stating that these actions are not void merely because they fall outside the capacity of the company. Externally, therefore, the ultra vires doctrine no longer applies. Internally, however, the company or its members could restrain a director from pursuing a transaction outside its capacity, or claim damages from the director. The Companies Act 28 of 2004 brought about further changes by stating that a company has full legal capacity. A company may limit its capacity by stating specific objects, or exclusions or qualifications in respect of its objects or powers. However, where its capacity is so limited, transactions outside its capacity are not void but remain enforceable. Internally, however, the company or its members could restrain a director, agent or officer from pursuing a transaction outside its capacity, or claim damages from the director, agent or officer. Before moving on to the representation of companies, it is necessary to consider the provisions relating to special conditions which may be included in a company’s memorandum. Section 60(a) of the Companies Act 28 of 2004 states that the: memorandum of a company may … contain any special conditions which apply to the company, and the requirements, if any, additional to those provided for in this Act for the alteration of those conditions According to section 62(1), such a special condition may be changed by a special resolution of the members, unless the condition itself prohibits a change of the condition or states another method of changing the condition. Special Conditions in a Company’s Memorandum Section 60(a) is wide and allows several different types of special conditions. A special condition may, for example, relate to the use of profits. See Quadrangle Investments (Pty) Ltd v Witind Holdings Ltd 1975 (1) SA 572 (A). Would an action in contravention of a special condition be ultra vires? According to Henochsberg with reference to the Companies Act 61 of 1973 (as applicable in South Africa), it will be ultra vires. But is the situation the same in Namibia under the Companies Act 28 of 8  2004? Internally, the consequences of the ultra vires doctrine will apply, but externally the consequences will not apply, unless a person dealing with the company had actual knowledge or ought reasonably to have known of the special conditions. Normally, a company’s memorandum is amended by special resolution. However, if the special condition sets out specific requirements or procedures for amending that special condition (or prohibits that condition from being amended at all), then that condition cannot be amended by normal special resolution. Either the condition is unamendable, or it can only be amended by following the procedure set out in the condition itself. ð Quadrangle Investments (Pty) Ltd v Witind Holdings Ltd 1975 (1) SA 572 (A). ð Henochsberg at 105 – 106. The discussion of section 53(b) is not applicable to this Unit, only the discussion in respect of section 53(a). Why would a company want to impose special conditions in its memorandum? How does the ultra vires doctrine apply in respect of special conditions? 7.3. Representation of the Company While capacity deals with the competency of a company to perform legal acts, representation deals with who may exercise a company’s competencies on behalf of the company. So, for a company to enter into valid transactions, it must have the capacity to enter into the transaction and the person representing the company must have the necessary authority to do so. ð Cilliers & Benade at §12.19. ð Tuckers at 14 – 15. Companies in Namibia are in general represented by two organs: the shareholders in general meeting, and the board of directors. In certain circumstances, the managing director of a company may also be a company organ. An “organ” of a company is more than a mere functionary of the company. When an organ acts, it is for all practical purposes the company that is acting, so actions of organs will be actions of the company. Other functionaries, such as the secretary and employees, are not organs of the company and their actions are not the actions of the company. Unit 11 will expand further on company officers. ð Cilliers & Benade at §7.02. Section 76 of the Companies Act deals with contracts by companies. Section 76: Contracts by Companies (1) Contracts on behalf of a company may be made as follows – (a) any contract which if made between individual persons would by law be required to be in writing signed by the parties liable to be sued on that contract may be made on behalf of the company in writing signed by any person acting 9  under its authority, expressed or implied, and may in the same manner be varied or discharged; (b) any contract which if made between individual persons would by law be valid though made orally only and not reduced to writing, may be made orally on behalf of the company by any person acting under its authority, expressed or implied, and may in the same manner be varied or discharged. (2) All contracts made in accordance with this section are valid and bind the company and its successors and all other parties. Under this clause, verbal and written contracts are binding on a company if made on behalf of the company by any person acting under express or implied authority. But what about ostensible authority? The clause does not refer to ostensible authority. Ostensible authority is not real authority, but is instead based on estoppel. So, ostensible authority is not actual authority, but the person whose conduct has given rise to the estoppel is simply precluded from denying authority. So, a company can be held liable on express, implied or ostensible authority. ð Hahlo at 285. ð Tuckers at 14. ð Gibson at 284 – 286. 10 The rules governing the manner in which a company may be bound in contract are set out in the leading case of Tuckers Land and Development Corporation v Perpellief 1978 (2) SA 11 (T) at 14 – 15. (a) A company, as legal person, can contract in the same as an individual. It cannot, however, contract in person but must do so through a person acting under authority. (b) Authority may take the usual forms of express, implied or ostensible authority. i. Express authority may be given by a company’s articles of association, or by resolution of the members or board of directors. ii. Implied authority exists where the an official, acting on behalf of the company, purports to exercise an authority which that type of official usually has, even though the official is exceeding his actual authority. iii. Ostensible authority is based on estoppel and to prove such authority, facts raising an estoppel against the company would have to be proved. (c) When contracting with a company, the following categories of person or persons acting or purporting to act on behalf of the company may be encountered: i. the board of directors; ii. the managing director or chairperson of the board of directors; and iii. any person or persons such as an ordinary director or branch manager or secretary. (d) When someone contracts with a company through the board, managing director or chairperson, the company will usually be bound because these persons or bodies will, unless the articles of association decree otherwise, be taken to have authority in one form or another to bind the company in all matters affecting it. (e) When contracting with the company through any other person (such as an ordinary director, branch manager or secretary), the third party cannot automatically assume that such person has authority and the company is not precluded from repudiating liability on the ground the “representative” had no authority to bind it. 11 In addition to the above rules of representation, the Companies Act 28 of 2004 introduced a new provision dealing specifically with dealings between a company and other persons. Section 40: Dealings between Company and Other Persons (1) A company or a guarantor of an obligation of a company may not assert against a person dealing with the company or with a person who has acquired any property, rights or interests from the company that – (a) a person named as a director of the company in the most recent return lodged with the Registrar under section 224 – (i) is not a director of the company; (ii) has not been duly appointed; or (iii) does not have authority to exercise a power which a director of a company carrying on business of the kind carried on by the company customarily has authority to exercise; (b) a person held out by the company as a director, officer or agent of the company – (i) has not been duly appointed; or (ii) does not have authority to exercise a power which a director, officer or agent of a company carrying on business of the kind carried on by the company customarily has authority to exercise; (c) a person held out by the company as a director, officer or agent of the company with authority to exercise a power which a director, officer or agent of a company carrying on business of the kind carried on by the company does not customarily have authority to exercise, does not have authority to exercise that power; (d) a document issued on behalf of a company by a director, an officer or agent of the company with actual or usual authority to issue the document is not valid or genuine, unless that person has, or ought reasonably to have, by virtue of his or her position with or relationship to the company, knowledge of the matters referred to in paragraphs (a), (b), (c) or (d), as the case may be. Section 40 is designed to protect third parties dealing with the company. (a) Where a person is named in the latest Form CM29 (Content of Register of Directors, Auditors and Officers) as a director, the company (or a guarantor of an obligation of a company) may not asserts against a third party dealing with the company, or a person who has acquired any property, rights or interests from the company, that the director is actually not a director of the company, or has not been duly appointed, or does not have implied authority. (b) Similarly, a company (or a guarantor of an obligation of a company) may not assert against a third party dealing with the company, or a person who has acquired any property, rights or interests from the company, that a person held out by the company as a director, officer or agent of the company has not been duly appointed, does not have implied authority, or is not entitled to exercise that implied authority. 12  (c) The above, however, does not apply where the third party has, or ought reasonably to have, but virtue of his or her position with or relationship to the company, knowledge of the above matters. Do you understand the difference between capacity and representation? Do you understand the different forms of authority? The above rules invoke the general principles of the law of agency. However, despite the fact that the general rules of agency apply, certain doctrines and rules have developed specifically in respect of companies, which affect the application of the general rules of agency. Each of these is discussed in more detail below. (i) Doctrine of Disclosure The doctrine of disclosure is one of the fundamental doctrines of our company law and was received in Namibian law from English law via South African company law. The essence of the principle is to be found, firstly, in the fact that the requirement to disclose prescribed information protects certain interested parties, and secondly, that disclosure better regulates corporate conduct than the imposition of regulatory and prescriptive provisions. ð Cilliers & Benade at §12.22. Under the doctrine of disclosure, the disclosure requirements are of a continuous nature and apply to the company throughout its existence, from incorporation to dissolution or deregistration. ð Cilliers & Benade at §12.24. Various classes of persons whose interests are protected by the disclosure of information can be distinguished. These classes are: shareholders, potential shareholders (investors), creditors, persons dealing with the company and the company itself. ð Cilliers & Benade at §12.22. The doctrine of disclosure is given effect to under the Section 8 of the Companies Act Companies Act 28 of 2004 through various provisions 28 of 2004 deals with access to requiring the lodgement of information with the Business the records kept by BIPA. and Intellectual Property Authority and the right of the public to access the documents so lodged. So, a person who requests access to a company file kept by the Business and Intellectual Property Authority will be able to see the history of the company, its incorporation documents, share issues, details of auditors, directors and officers, as 13 well as special resolutions registered. In respect of public companies, the public will also be able to see annual financial statements. The most important documents that companies are required to disclose are the memorandum and articles of association. Any amendments to a company’s memorandum and articles must be lodged with the Business and Intellectual Property Authority as well. The doctrine of disclosure, however, does not only cover documents to be lodged with the Business and Intellectual Property Authority, but also documents that the company must keep at its registered address (or, under certain circumstances, at its principal place of business). For example, share registers are not kept with the Authority, but at the registered address. The public, however, has access to share registers as well. As you work through this course and the Companies Act 28 of 2004, make a list of all statutory disclosures under the Act. Divide the list in columns with the following headings: (i) section of the Act; (ii) document to be lodged / kept; (iii) whether it is lodged with BIPA; (iv) if not lodged with BIPA, where it should be kept; (v) whether it is accessible to the public; and (vi) procedure to obtain access. This list is self-study aimed at giving you a better idea of the scope of the doctrine of disclosure. It will also be useful for you in practice one day. In the exam I may also ask you to list examples of documents that must be disclosed under the Companies Act 28 of 2004 and how disclosure is to take place (eg: lodged with BIPA / kept at the registered office). The doctrine of disclosure is the foundation of another doctrine that, until the Companies Act 28 of 2004 came into operation, was another fundamental doctrine of Namibian company law: the doctrine of constructive knowledge. Do you understand the doctrine of disclosure? Would you be able to identify how the Companies Act 28 of 2004 gives effect to the doctrine of disclosure? (ii) Doctrine of Constructive Knowledge The Companies Act 28 of 2004 gives statutory effect to the “Constructive notice” and doctrine of disclosure, as did its predecessors. Under the “constructive knowledge” are Companies Act, the constitutional documents of a often used interchangeably. Here, “constructive company, as well as other documents, have to be lodged knowledge” will be used to with the Business and Intellectual Property Authority and is reflect the wording of the Companies Act 28 of 2004. available to the public. Since the public can at any time access this information, the doctrine of constructive knowledge ascribes knowledge of the public documents of companies to third parties dealing with the company. 14 Under the doctrine of constructive knowledge, therefore, third parties are deemed to have knowledge of the content of public documents lodged with the Business and Intellectual Property Authority in respect of companies, including the objects and powers of companies, any exclusions, limitations and special conditions, and the provisions of the articles. ð Cilliers & Benade at §12.26. EXAMPLE If, for example, the articles of the company provided that the board of directors must approve the acquisition of any immovable property by the company, a seller who enters into a deed of sale with one of the directors cannot rely on an argument that the particular director held out to be mandated to negotiate the acquisition of the property. Since the articles clearly state that the board must authorise the acquisition of immovable property, the seller is deemed to be aware of this provision. The doctrine of constructive knowledge is related to the ultra vires doctrine and together these two doctrines had detrimental effects on third parties who dealt with a company. Before the introduction of the Companies Act 61 of 1973, where a company entered into a transaction that was ultra vires, the transaction was void (under the ultra vires doctrine). Furthermore, the company directors could escape liability from an ultra vires transaction by claiming that the third party was assumed to have knowledge of the fact that the contract was ultra vires (under the doctrine of constructive knowledge). This led to an unwanted situation where directors could rely on their own mala fides to escape liability by just relying on the doctrine of constructive knowledge. The harsh effects of the ultra vires doctrine, coupled with the doctrine of constructive knowledge, were alleviated after the introduction of the Companies Act 61 of 1973, when the external consequences of the ultra vires doctrine were abolished. But what effect, if any, did the Companies Act 61 of 1973 have on the doctrine of constructive knowledge? Section 36 of the Companies Act 61 of 1973 and the Doctrine of Constructive Knowledge Consider the following quote from Gibson at 295: “The doctrine of constructive notice, in view of section 36, is no longer of much significance where the relationship between a third party and a company in respect of an ultra vires transaction is concerned, for such transactions are no longer automatically void. But in all other respects the doctrine remains valid, such as in regard to whether a director has been properly authorized to act on a company’s behalf (even if the transaction is intra vires).” Go back to the discussion of the ultra vires doctrine under the Companies Act 61 of 1973. Under that Act, under what circumstances were ultra vires transactions still void? Where ultra vires transactions were void (ie falling beyond the scope of section 36), did the doctrine of constructive knowledge apply? 15 The doctrine of constructive knowledge is a negative doctrine, not a positive doctrine. This means that it operates in favour of the company against the third party who did not read the memorandum or articles. The third party cannot plead that he did not have knowledge of the provisions of the memorandum or articles, as he is deemed to be aware thereof. At the same time, the third party cannot insist that he be treated as having knowledge of the memorandum or articles if he in fact did not; the doctrine of constructive knowledge cannot be relied upon by the third party. ð Blackman at 4-31. The doctrine of constructive knowledge is abolished by section 41 of the Companies Act 28 of 2004. Section 41: No Constructive Knowledge A person is not affected by, or deemed to have notice or knowledge of the contents of, the memorandum or articles of, or any other document relating to a company, merely because the memorandum, articles or other document – (a) is registered by, or lodged with, the Registrar; or (b) is available for inspection or kept at the registered office of a company in accordance with this Act. So, under section 41, just because a document is lodged with the Business and Intellectual Property Authority or available for inspection to the public at the registered office, does not mean that a third party is deemed to have knowledge thereof. This presents another major break from common law introduced by the Companies Act 28 of 2004. Do you understand the doctrine of constructive notice? Can you explain the continued relevance, if any, of this doctrine? (iii) Turquand-rule Under the doctrine of constructive knowledge, a third party was in a difficult position. If the capacity of a company’s organs or agents were circumscribed or limited in the company’s articles, the third party was deemed to have knowledge thereof under the doctrine of constructive knowledge. But even if a third party had knowledge of the articles, it was not always possible to know with certainty whether the organ or agent was authorised to represent the company. Often, the authority of a company’s representative is subject to compliance with internal requirements and normally compliance with internal requirements are not published. Consider the following example: 16  EXAMPLE The articles of a company state that the managing director may acquire assets on behalf of the company, provided that an acquisition of assets valued in excess of N$50,000 must be authorised by the board of directors. The managing director visits Pupkewitz BMW to purchase a new 3-series BMW on behalf of the company. Before the introduction of the Companies Act 28 of 2004, the salesperson who read the articles or who was deemed to have knowledge of the provisions of the articles, would be aware that the acquisition of a new BMW required a majority resolution of the board of directors. But, the salesperson would not necessarily be aware whether the transaction was approved by the board. If the board indeed approved the transaction, there would be no issue. If the board did not approve the transaction, the transaction would be irregular. If the internal procedures of Pupkewitz BMW did not require the salesperson to obtain the necessary corporate approvals, is there any requirement under company law for a third party to ascertain whether internal approvals have been obtained? By studying the content of public documents, in particular the memorandum and articles, a third party can at most acquaint himself with the potential authority of a company’s representative. In fact, the doctrine of constructive knowledge may trigger additional obligations on a third party to determine whether internal requirements have been complied with, since by having access to the public documents the third party should know that additional requirements must be complied with for a company’s representative to be properly authorised. But, to require third parties to investigate whether internal requirements have been complied with, would impose impossible and unrealistic expectations on third parties. To temper this unsatisfactory situation, the British courts formulated the Turquand-rule (or “indoor The doctrine of disclosure requires a company to disclose certain statutory management rule”) to keep the third circumscribed information, while under the doctrine of constructive knowledge third party’s duty to make inquiries within parties were deemed to have knowledge of all documents made public. The doctrine reasonable bounds and to restrict it to of disclosure therefore complements the doctrine of constructive knowledge. The matters which were granted publicity. full impact of the doctrine of constructive knowledge (before the Companies Act 28 So, under the Turquand-rule, of 2004) was tempered by the Turquand- outsiders contracting in good faith with rule, with the latter rule limiting the duty of third parties to inquire into the compliance the company are entitled to assume of internal requirements. that the internal requirements and procedures have been complied with. The company will therefore be bound by the transaction, even if the internal requirements and procedures have not been complied with. ð Cilliers & Benade at §12.30. ð Hahlo at 295. ð The Royal British Bank v Turquand (1856) 6 EL & BL 327. 17 The Turquand-rule is named after the British case of The Royal British Bank v Turquand (1856) 6 EL & BL 327. The rule has been accepted by the South African courts and adopted as part of Namibian company law as well. ð Legg & Co v Premier Tobacco Co 1926 AD 132 at 144: In Namibia, the Turquand- “…a person in dealing with a company is entitled, in certain rule has been applied to municipalities as well. See circumstances, to presume an authority on the part of directors Walvis Bay Municipality v purporting to deal on its behalf, where in reality no such authority Occupiers of the Caravan existed.” Sites at Long Beach ð Walvis Bay Municipality v Occupiers of the Caravan Sites at Long Caravan Park, Walvis Bay 2007 (2) NR 643 (SC). Beach Caravan Park, Walvis Bay 2007 (2) NR 643 (SC) from onwards. The Turquand-rule only applies to persons who bona fide believes that an agent of the company is properly authorised to act on behalf of the company. Therefore, the third party will not enjoy the protection of this rule if: (i) he knew that the mandate of the agent was defective; or (ii) if the circumstances surrounding the negotiations were suspect and he (the third party) had accordingly been placed on his guard. ð Cilliers & Benade at §12.31. The Turquand-rule prevents a company from resiling from a contract with a bona fide third party on the ground only that an internal requirement was not complied with. It does not prevent a company from resiling from the contract on any ground other than non-compliance with an internal requirement. ð Henochsberg at 131. The Turquand-rule developed as a result of the unfair consequences of the doctrine of constructive knowledge on third parties, as an attempt to limit the third party’s duty of inquiry into a company representative’s authority to matters which were granted publicity. The question now is whether the abolishment of the doctrine of constructive knowledge has any effect on the Turquand-rule. It may be argued that the abolishment of the doctrine of constructive knowledge may likely lessen the need to rely on the Turquand-rule. However, there is nothing in the Companies Act 28 of 2004 to indicate that the Turquand-rule is no longer of importance. There is also nothing strange or nonsensical in preserving the Turquand-rule even after the abolishment of the doctrine of constructive knowledge. ð Cassim, FHI, Cassim, MF, Cassim, R, Jooste, R, Shev, J and Yeats, J. 2012. Contemporary Company Law. Claremont: Juta & Co Ltd at 186. 18 The better view is that the Turquand-rule still has a Do you think section 40 of the place in Namibian company law, despite the Companies Act 28 of 2004 abolishment of the doctrine of constructive codifies some aspects of the Turquand-rule? knowledge. Remember, this rule does not necessarily apply to companies, by also to other juristic persons. The Turquand-rule is often confused with estoppel and described as a form of estoppel. However, the Turquand-rule is a substantive rule of company law that should not be confused with estoppel. Do you understand the Turquand-rule? Can you explain the continued relevance, if any, of this rule? (iv) Estoppel The Appellate Division in South Africa (Aris Enterprises (Finance) (Pty) Ltd v Protea Assurance Co Ltd 1981 (3) SA 274 (A) at 291) succinctly summarized the doctrine of estoppel as follows: “The essence of the doctrine of estoppel by representation is that a person is precluded, ie estopped, from denying the truth of a representation previously made by him to another person if the latter, believing in the truth of the representation, acted thereon to his prejudice.” Used in the context of representation of Do you think section 40 of the companies, the effect of the doctrine of estoppel is Companies Act 28 of 2004 that a company will be prevented, or estopped, codifies some aspects of the from denying liability if a third party, who entered doctrine of estoppel? into a transaction with the company, can prove that: a) the company misrepresented (either intentionally or negligently) that the agent concerned had the necessary authority to represent the company; b) as a consequence of this misrepresentation, the third party was induced to deal with the agent; and c) the third party was prejudiced by the misrepresentation. ð Cilliers & Benade at §12.33. The misrepresentation must be one by the company, not by the agent, and it must be intentional or negligent. So, if a directors of a company holds out to be the managing director without actually being appointed as such and the board of directors (whose 19 actions, as organ of the company, are the actions of the company) promotes this misrepresentation, the company is prevented (or estopped) from escaping liability if a third party acted on this misrepresentation to his detriment. ð Cilliers & Benade at §12.34, with reference to the Freeman-case. The particular circumstances of a case may allow a third party to invoke the Turquand- rule or estoppel, since they do not exclude each other. It is easier, however, to invoke the Turquand-rule than estoppel, as the latter has more stringent requirements. ð Cilliers & Benade at §12.35. Do you understand the doctrine of estoppel? Can you explain how estoppel applies to the representation of companies? 20  TEST YOURSELF! Question 1 Explain the difference between the capacity and representation of companies. [4 marks] Question 2 Critically discuss the capacity of companies, with reference to the ultra vires doctrine and the influence of the Companies Act 61 of 1973 and the Companies Act 28 of 2004 on this doctrine and capacity of companies in general. [15 marks] Question 3 Explain the following doctrines and rules in your own words: (i) the doctrine of disclosure; (ii) the doctrine of constructive knowledge; (iii) the Turquand-rule; and (iv) the doctrine of estoppel. [12 marks] Question 4 Discuss the general principles of representation of companies as set out in Tuckers Land and Development Corporation v Perpellief 1978 (2) SA 11 (T). [10 marks] 21