The Capacity Provisions in the Companies Act 71 of 2008

• Jurisdiction: South Africa
• Published date: 26 January 2021
• Pages: 526-547
• Date: 26 January 2021
• Citation: (2020) 31 Stell LR 526
• Author: Olivier, E.A.

526

THE CAPACITY PROVISIONS IN THE

COMPANIES ACT 71 OF 2008*

Etienne A Olivier

LLB LLM

Lecturer, University of the Western Cape

Abstract

This article analyse s the capacity provision s in the Companies Act 71 of

2008 (the “Act”). According to section 20(1) of the Act, ultra vires contracts

are not void; the application of this r ule should not depend on the title of

the company’s representative. It should be possible to restrain proposed

ultra vires action and executor y ultra vires contracts by means of section

20(5). However, wholly exec uted ultra vires contracts should be irre versible

on capacity grou nds. Furthermore, once an ultra vires contract has been

ratied by a special resolution in terms of section 20(2), the company’s

insiders should lose the right to re strain the contract in terms of section 20(5);

conversely, su ccessful restraint should prevent subsequent ratication. The

authority of the board of a limited capacity company should still be limited

to the conclusion of intra v ires acts, regardless of the validity of ultra vir es

contracts. The pur pose of the optional RF provisions and the capa city-linked

statutory doct rine of constructive notice is not cle ar: section 19(5)(a) does not

provide any obvious bene t to limited c apacity RF companies with regard s

to avoiding liability on an ultra vires contract. In conclusion, the capacit y

provisions create too much u ncertainty and risk for a company’s existing and

future creditors and sho uld be amended.

Keyword s: company, capacity, ultra vires contract, ratication, restraint,

RF companies

1 Introduction

According to the str ict common-law ultra vires doctri ne, contracts beyond

a company’s capacity were void ab initio and incapable of ratication.

1 In

South Africa, t his approach was amended by sect ion 36 of the Companies

Act 61 of 1973 (“1973 Act”).2 The Companies Act 71 of 2008 (the “Act”) ha s

* This art icle is based on my LLD thesis, E A Olivier Corporate Cap acity, Special Purp ose Vehicles, and

Traditional Sec uritisation in Sout h African Company Law Unive rsity of the Western Cape (2019) The

doctoral res earch was supp orted wholly by t he National Resea rch Foundation of South Africa (G rant

number: 11875), for which I express my t hanks I am also gratef ul to my superv isors, Dr Brig hton

Mupangavanh u and Prof Riekie Wandrag , for their superv ision of the thesis, and to t he reviewers of this

article for the ir valuable input

1 Ashbury Ra ilway Carriage and I ron Co v Riche (1875) LR 7 HL 653 672

2 JS McLennan “T he Ultra Vires Doctri ne and the Turquan d Rule in Company La w – A Suggested

Solution” (1979) 96 SALJ 329 334; HS Cilliers, ML Be nade, JJ Hennin g, JJ du Plessis, PA Delport & L de

Koker Cilliers & Ben ade Corporate Law 3 e d (2000) 182

(2020) 31 Stell LR 526

© Juta and Company (Pty) Ltd

made fur ther changes to the cor porate capacity fra mework in South African

company law.

Limited capacity compa nies are used for various pur poses in comme rce,

from nominee compan ies in the asset manageme nt environment to special

purpose vehicles used in t raditional securitisation scheme s. Since the position

on corporate capacit y can therefore have an impact on valuable and complex

commercial tra nsactions, it is impor tant to maintai n a clear understandi ng of

the effect of capacity restr ictions in South Afr ican company law. This article

will interp ret and critically analyse the capacity provisions in the Act.

2 Restrictive conditions

Section 19(1)( b) of the Act best ows upon all companies practically the same

capacity as natu ral persons, allowing t hem to conclude any type of contra ct

in connection with a ny lawful business.3 Sect ion 19(1)(b)(ii) acknowledges

that a company may deviate from t he broad capacity confer red by the Act by

stipulating in a “rest rictive condition” in its Memorandu m of Incorporation

(“MOI”) which acts the company is not entit led to pursue.4

The Act does not have an equivalent of section 52(1)(b) of the 1973 Act,

which required compan ies to st ate their main business in an objects clause in

the memorandu m of association. A prot company is unde r no obligation to

state its intended busi ness activities in its MOI.5 The Act now only requi res

non-prot compan ies to have an objects clause in their MOIs.6 The Act has

also abandoned the concepts of “ancil lary objects” and “plenar y powers”

as provided for by the 1973 Act.7 The new position should be applauded

for eliminating much of the un necessary com plexity surround ing capacity

that existed under t he 1973 Act.8 Although the Short Standard Form MOI

for private companies (CoR 15.1B) contains a claus e titled “Powers of the

Company”, what follows thereunder is a simple statement to the effect th at the

company’s powers are not subject to any limitation as contemplate d by section

19(1) (b)(ii) of the Act.

Potentially, the interpretation of the te rm “restrict ive conditions” can have

an importa nt bea ring on the commercial activities of all companies gover ned

by the Act. The Act fails to dene “restrictive conditions”, but the Companies

and Intellectual P roperty Com mission suggests that “rest rictive conditions”

should be read against the ba ckdrop of the objects clause under the previous

Act, the ultra vires doct rine and the constr uctive notice doctrine.9 This implies

3 FHI Cassim “C orporate Ca pacity, Agency and t he Turquand Rule” in F HI Cassim, M F Cassim, R Cassi m,

R Jooste, J Shev & JL Yeats (eds) Contemporary Company Law 2 ed (2012) 169

4 N Locke “The Leg islative Framework Dete rmining Cap acity and Represe ntation of a Company in Sou th

African la w and its Implications for the Str ucturing of Special P urpose Companies” (2016) 133 SALJ

160 16 4

5 Cassim “Cor porate Capacit y” in Contemporary Company Law 169

6 Item 1(1) of Sch 1 to the Act

7 Ss 33 and 34 of the 1973 Act, resp ectively

8 Cassim “Cor porate Capacit y” in Contemporary Company Law 169

9 Item 3 1 of Practice Note 4 of 2 012 in terms of s 188(2)(b) of the Compan ies Act, 2008

files/9613/9565/1718/PracticeNote 4of2012 pdf> (acce ssed 02-11-2020) (“Practice Note 4 of 2012”)

THE CAPACITY PROVISIONS IN THE

COMPANIES ACT 71 OF 2008 527

© Juta and Company (Pty) Ltd