Section 19(1)(b) of the Companies Act, Act 71 of 2008 (the “Act”) provides that a company has all legal capacity and powers of a natural person as far as it can be applied. The purposes and powers of a company may be limited, restricted, or qualified in the Memorandum of Incorporation (“MOI”).
When the MOI of a company contain special conditions the name of the Company should be followed by the suffix “RF”, which means “ring-fenced”. The notice of incorporation must contain a prominent statement drawing attention to the special conditions. Examples of special conditions are that the company may deal in certain business activities or that specific provisions in the MOI may not be amended.
A special condition thus restricts the company. The purpose of the suffix “RF” is to draw the attention of third parties to the existence of special conditions in the MOI.
Should the company then enter into an agreement with a third party for services which fall outside of its scope of business, such agreement will not be enforceable since the third party is deemed to be aware of the restrictions contained in the company’s MOI.
However, should the company have special conditions, but the suffix “RF” is not included in the name of the company, and such company enter into any agreement with a third party which fall outside the ambit of the provision of its MOI, the question following questions may arise:
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Is such an agreement enforceable?
Such restriction, limitation, or qualification on the powers of the company will not invalidate the agreement concluded with the third party. The contract will thus be legally valid and enforceable and the fact that the agreement falls beyond the objects of the company is irrelevant.
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Can the directors be held liable by the shareholders for losses sustained by the company?
In the case where a company is harmed by the actions of a director and the company’s share price consequently diminishes in value, a shareholder is ordinarily not entitled to institute proceedings to recover his / her losses from the relevant director. This is referred to as the principle of reflective loss since the shareholder’s loss is said to be a mere reflection of the loss suffered by a company, rather than the personal loss of the shareholder.
Shareholders may only have recourse against the directors of a company in limited circumstances. Said shareholders should institute such proceedings against the directors in terms of the correct section/s of the Act as shareholders’ rights to claim for damages are commonly misconstrued.
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Can the directors be held liable by the company for losses sustained by the company?
In term of section 76(3) of the Act, “directors must perform their duties -- in good faith and for a proper purpose;
- in the best interest of the company; and
- with the degree of care, skill and diligence that may reasonably expected …”