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An analysis of corporate capacity and authority of agents under South African company law.

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Date

2020

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Abstract

The common-law ultra vires doctrine has played a major role in the development of company law globally. It simply entails that if a company or its directors entered into an agreement or conducted activities that were beyond its legal scope of powers, that contract or conduct was illegal and would be rendered void ab initio. This doctrine followed the common-law principle that when a company was formed, it could only conduct business within the limited scope as prescribed by the company’s charter or constitution. It protected interests of shareholders of the company where a contract was entered into either without their consent or without all the internal requirements having been complied with. However, its application became problematic as expecting company executives to obtain shareholders’ approval for all intended transactions would render business untenable. Also, companies abused the doctrine by simply invoking it in order to escape performance of certain contractual obligations. Hence, several legal principles such as the Turquand rule and the doctrine of Estoppel were introduced in order to balance the interests of all parties. The Turquand rule simply protects bona fide third-parties transacting with a company from suffering harm due to the company’s failure to comply with its internal procedures. This rule proscribes companies from escaping liability from a valid contract solely on the grounds that it was ultra vires. Although the rule was incorporated into the Companies Act 71 of 2008, section 20 (7) and (8) of the Act is seemingly confusing regarding the application of the ultra vires doctrine in tandem with the Turquand rule. Evidently, there are gaps that need to be addressed regarding the interests of shareholders and third parties who transact with the company. Hence, this study sets out to critically analyse corporate capacity and how the ultra vires principle on the company and its agents has evolved. The research will further explore the Turquand rule, portray the challenges encountered in the interpretation and application of the rule in South Africa, and ascertain its future in the corporate system. The doctrines of estoppel and constructive notice will also be discussed in the study.

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Masters Degree. University of KwaZulu-Natal, Durban.

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