209  Determination of number of directors and appointment of first directorsSubject to the provisions of the articles of any company, the number of directors of the company may be determined and the first directors may be appointed in writing by a majority of the subscribers to its memorandum.

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NotesNumberThe power conferred by s 209 on the majority of the subscribers to the memorandum to determine the number of directors of the company, is subject to the statutory minimum (see s 208(1)) and to any provisions in the company's articles.

The articles of companies usually provide for a minimum number of directors, which number may not, of course, be less than the statutory minimum.1648  When a company has fewer directors than the minimum prescribed for in its articles, the directors in office cannot act at all, 1649  unless permitted to do so by the articles.1650  Articles 78 of Table A and art 77 of Table provide that the continuing directors may act notwithstanding any vacancy on their body, but, if and so long as their number is reduced below the number fixed by or pursuant to the articles as the necessary quorum of directors, the continuing directors may act only for the purpose of increasing the number of directors to that number, or of convening a general meeting of the company.

Where the articles of a company provide that 'until otherwise determined by the company in general meeting' the number of directors shall not be less than a specified minimum number and not more than a certain specified maximum number, the general meeting can raise the maximum number by ordinary resolution (art 71 of Table A and art 69 of Table B provide inter alia that the members in general meeting may from time to time determine the number of directors). Such a resolution does not alter the article, but rather fixes the number of directors by implementing the machinery contained in the article.1651  Where the members in general meeting have not formally decided how many directors they will appoint, this is done impliedly by electing a particular number within the limits laid down by the articles.1652

Articles usually confer upon the company in general meeting the power to 'increase or reduce the number of directors'.1653  Such articles are interpreted to mean that the general meeting may authorise any extra appointments of persons to act as directors at any time within the minimum and (if any) the maximum limits prescribed by the articles.1654  Where the articles so provide, the members have the power not only to increase the number of directors but also to make appropriate appointments.1655  A resolution of the general meeting increasing the number of directors is necessary, and therefore the directors

OS, 2002 ch8-p238

cannot simply convene a general meeting to elect additional directors and so usurp the members' power to decide whether or not additional directors shall be elected.1656  But where the general meeting has the power to increase the number of directors, it can, in the absence of a provision to the contrary, exercise that power by appointing directors to the extent to which it intends to increase their number.1657  Hence the directors can convene a general meeting to elect additional named directors, if the members choose to do so; and the members can then increase the number of directors by electing those directors.1658  Where the articles of a company empowered the members in general meeting to set a maximum and minimum number of directors and to increase or reduce the maximum or minimum number, it was held, applying the doctrine of unanimous asset, 1659  that a person who was the company's only shareholder had, by his actions, clearly reflected a determination by the company that the number of directors be reduced from two to one.1660

Appointment of first directorsThe first directors may be named in the articles.1661  Directors so appointed may be appointed to serve until the first annual general meeting or for a fixed period, or even indefinitely.

If they are not appointed in the articles, they may be appointed by the majority of the subscribers to the memorandum (s 209), who are deemed for all purposes to be the directors of the company until directors are appointed (s 208(1)).

The articles of companies usually provide that the names of the first directors may be 'determined' in writing by a majority of the subscribers. Article art 53 of Table A and art 54 of Table B provide that the names of the first directors may be 'determined' in writing by a majority of the subscribers of memorandum and that every subscriber of the memorandum is deemed for all purposes to be a director of the company until directors are 'appointed', and this 'whether or not the directors have been named' by a majority of the subscribers. It would seem, therefore, that these articles merely empower the subscribers to 'name' the first directors. The legal effect of so 'naming' directors is unclear. Presumably, a named director is appointed when he accepts the office.

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Although s 208(2) deems the subscribers to be the directors of the company until its first directors are appointed, if they choose not to act as directors, but appoint others, they act not as directors but as subscribers.1662  Thus a provision in the company's articles requiring that a valid directors' resolution be signed by all the directors and passed at a meeting of the directors does not apply to the subscribers when appointing the first directors.1663  Nor do the regulations of general meetings apply to them, and this despite the fact that s 103(1) provides that the subscribers to the memorandum are deemed to have agreed to become members of the company upon its incorporation and must forthwith be entered as members in its register of members. One consequences of this is that it is not necessary for them to be given the same notice of a meeting as it laid down for general meetings.1664  Finally, it was early concluded that where the subscribers act as such it is not necessary for them to meet together. As Sir Page-Wood V-C said inHallow v Fernie : 1665  'If any one of the subscribers to the contract raises the question, he may be entitled to say, "I will not have this decided without a meeting of us all"; but if they all concur . . . it seems to me hypercritical to say that the appointment [of the directors] was irregular.' It is sufficient if a majority of them make the appointment in writing.1666

  

    1648   Art 53 of Table A provides that the number of directors may not be less than two and art 54 of Table B provides that the number of directors may not be less than one.

    1649   Re Alma Spinning Co (Bottomley's Case) (1880) 16 ChD 681; Re Scottish Petroleum Co (1883) 23 ChD 413 (CA); Re Sly, Spink & Co (Hertslet's Case) [1911] 2 ChD 430.

    1650   Re Scottish Petroleum Co (1883) 23 ChD 413 (CA); Re Sly, Spink & Co (Hertslet's Case) [1911] 2 ChD 430.    1651   Worcester Corsetry Ltd v Witting [1936] Ch 640 (CA); Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1

(HC of A); Partnership in Mining Bpk v Federale Mynbou Bpk 1983 (2) SA 222 (W); 1984 (1) SA 175 (T) 178. In the absence of words entitling the company in general meeting to increase the number of directors beyond the maximum specified, that number can be increased only by alerting the articles by a special resolution: Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1 (HC of A); Partnership in Mining Bpk v Federale Mynbou Bpk 1983 (2) SA 222 (W); 1984 (1) SA 175 (T) 178.

    1652   Aitchison v Dench 1964 (2) SA 515 (T).    1653   See art 71 of Table A and art 69 of Table B.    1654   Worcester Corsetry Ltd v Witting [1936] Ch 640 (CA); Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1

(HC of A); Woodroofe Ltd v McLeod (1986) 10 ACLR 129 SC(SA). And see Partnership in Mining Bpk v Federale Mynbou Bpk 1983 (2) SA 222 (W); 1984 (1) SA 175 (T) 178.

    1655   Worcester Corsetry Ltd v Witting [1936] Ch 640 (CA); Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1 (HC of A).

    1656   In Woodroofe Ltd v McLeod (1986) 10 ACLR 129 SC(SA) the company's articles provided that until otherwise determined by the company in general meeting the number of directors was to be not more than seven or not less than three. The company had five directors, two of whom were to retire pursuant to the articles at the next annual general meeting of the company. The notices sent out to shareholders stated that four directors were to be elected, which would result in there being seven directors. It was not proposed to seek a resolution from the shareholders approving the increase of the number of directors to seven, the company being of the view that the articles necessitated a shareholders' resolution only where it was proposed to reduce the number of directors below three or increase it above seven. It was held that the directors could not resolve to increase the number of directors; and, on application by a shareholder, the court granted an injunction preventing the company from conducting an election at the meeting. It held that on the proper construction of the articles a shareholders' resolution was required each time it was sought to alter the number of directors. As there has been no such resolution since incorporation, the correct number of directors was five, and any increase to seven required a resolution by the shareholders in general meeting.

    1657   Worcester Corsetry Ltd v Witting [1936] Ch 640 649-650 (CA). And see Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1 (HC of A).

    1658   Worcester Corsetry Ltd v Witting [1936] Ch 640 649-650 (CA).    1659   As to which, see notes on s 199.    1660   Southerland v Robert Bosch (Aust) Pty Ltd (2000) 33 ACSR 680 SC(NSW).    1661   See eg Re Sly, Spink & Co (Hertslet's Case) [1911] 2 ChD 430; Flegg v McCarthy & Flegg 1942 CPD 109.

    1662   Re Great Northern Salt & Chemical Works (1890) 44 ChD 472 480; Ex parte Umtentweni Motels (Pty) Ltd 1968 (1) SA 144 (D) 147-148.

    1663   Ex parte Umtentweni Motels (Pty) Ltd 1968 (1) SA 144 (D) 147-148.    1664   John Morley Building Co v Barras [1891] 2 Ch 386 394.    1665   (1867) LR 3 Eq 520 537.    1666   Ex parte Umtentweni Motels (Pty) Ltd 1968 (1) SA 144 (D) 148. Cf Re Great Northern Salt & Chemical

Works (1890) 44 ChD 472 480, where it was said that 'if all of them do in any way show their determination on the subject, that determination ought to be treated as valid'.

209  Determination of number of directors and appointment of first directorsSubject to the provisions of the articles of any company, the number of directors of the company may be determined and the first directors may be appointed in writing by a majority of the subscribers to its memorandum.

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NotesNumberThe power conferred by s 209 on the majority of the subscribers to the memorandum to determine the number of directors of the company, is subject to the statutory minimum (see s 208(1)) and to any provisions in the company's articles.

The articles of companies usually provide for a minimum number of directors, which number may not, of course, be less than the statutory minimum.1648  When a company has fewer directors than the minimum prescribed for in its articles, the directors in office cannot act at all, 1649  unless permitted to do so by the articles.1650  Articles 78 of Table A and art 77 of Table provide that the continuing directors may act notwithstanding any vacancy on their body, but, if and so long as their number is reduced below the number fixed by or pursuant to the articles as the necessary quorum of directors, the continuing directors may act only for the purpose of increasing the number of directors to that number, or of convening a general meeting of the company.

Where the articles of a company provide that 'until otherwise determined by the company in general meeting' the number of directors shall not be less than a specified minimum number and not more than a certain specified maximum number, the general meeting can raise the maximum number by ordinary resolution (art 71 of Table A and art 69 of Table B provide inter alia that the members in general meeting may from time to time determine the number of directors). Such a resolution does not alter the article, but rather fixes the number of directors by implementing the machinery contained in the article.1651  Where the members in general meeting have not formally decided how many directors they will appoint, this is done impliedly by electing a particular number within the limits laid down by the articles.1652

Articles usually confer upon the company in general meeting the power to 'increase or reduce the number of directors'.1653  Such articles are interpreted to mean that the general meeting may authorise any extra appointments of persons to act as directors at any time within the minimum and (if any) the maximum limits prescribed by the articles.1654  Where the articles so provide, the members have the power not only to increase the number of directors but also to make appropriate appointments.1655  A resolution of the general meeting increasing the number of directors is necessary, and therefore the directors

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cannot simply convene a general meeting to elect additional directors and so usurp the members' power to decide whether or not additional directors shall be elected.1656  But where the general meeting has the power to increase the number of directors, it can, in the absence of a provision to the contrary, exercise that power by appointing directors to the extent to which it intends to increase their number.1657  Hence the directors can convene a general meeting to elect additional named directors, if the members choose to do so; and the members can then increase the number of directors by electing those directors.1658  Where the articles of a company empowered the members in general meeting to set a maximum and minimum number of directors and to increase or reduce the maximum or minimum number, it was held, applying the doctrine of unanimous

asset, 1659  that a person who was the company's only shareholder had, by his actions, clearly reflected a determination by the company that the number of directors be reduced from two to one.1660

Appointment of first directorsThe first directors may be named in the articles.1661  Directors so appointed may be appointed to serve until the first annual general meeting or for a fixed period, or even indefinitely.

If they are not appointed in the articles, they may be appointed by the majority of the subscribers to the memorandum (s 209), who are deemed for all purposes to be the directors of the company until directors are appointed (s 208(1)).

The articles of companies usually provide that the names of the first directors may be 'determined' in writing by a majority of the subscribers. Article art 53 of Table A and art 54 of Table B provide that the names of the first directors may be 'determined' in writing by a majority of the subscribers of memorandum and that every subscriber of the memorandum is deemed for all purposes to be a director of the company until directors are 'appointed', and this 'whether or not the directors have been named' by a majority of the subscribers. It would seem, therefore, that these articles merely empower the subscribers to 'name' the first directors. The legal effect of so 'naming' directors is unclear. Presumably, a named director is appointed when he accepts the office.

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Although s 208(2) deems the subscribers to be the directors of the company until its first directors are appointed, if they choose not to act as directors, but appoint others, they act not as directors but as subscribers.1662  Thus a provision in the company's articles requiring that a valid directors' resolution be signed by all the directors and passed at a meeting of the directors does not apply to the subscribers when appointing the first directors.1663  Nor do the regulations of general meetings apply to them, and this despite the fact that s 103(1) provides that the subscribers to the memorandum are deemed to have agreed to become members of the company upon its incorporation and must forthwith be entered as members in its register of members. One consequences of this is that it is not necessary for them to be given the same notice of a meeting as it laid down for general meetings.1664  Finally, it was early concluded that where the subscribers act as such it is not necessary for them to meet together. As Sir Page-Wood V-C said inHallow v Fernie : 1665  'If any one of the subscribers to the contract raises the question, he may be entitled to say, "I will not have this decided without a meeting of us all"; but if they all concur . . . it seems to me hypercritical to say that the appointment [of the directors] was irregular.' It is sufficient if a majority of them make the appointment in writing.1666

  

    1648   Art 53 of Table A provides that the number of directors may not be less than two and art 54 of Table B provides that the number of directors may not be less than one.

    1649   Re Alma Spinning Co (Bottomley's Case) (1880) 16 ChD 681; Re Scottish Petroleum Co (1883) 23 ChD 413 (CA); Re Sly, Spink & Co (Hertslet's Case) [1911] 2 ChD 430.

    1650   Re Scottish Petroleum Co (1883) 23 ChD 413 (CA); Re Sly, Spink & Co (Hertslet's Case) [1911] 2 ChD 430.    1651   Worcester Corsetry Ltd v Witting [1936] Ch 640 (CA); Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1

(HC of A); Partnership in Mining Bpk v Federale Mynbou Bpk 1983 (2) SA 222 (W); 1984 (1) SA 175 (T) 178. In the absence of words entitling the company in general meeting to increase the number of directors beyond the maximum specified, that number can be increased only by alerting the articles by a special resolution: Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1 (HC of A); Partnership in Mining Bpk v Federale Mynbou Bpk 1983 (2) SA 222 (W); 1984 (1) SA 175 (T) 178.

    1652   Aitchison v Dench 1964 (2) SA 515 (T).    1653   See art 71 of Table A and art 69 of Table B.    1654   Worcester Corsetry Ltd v Witting [1936] Ch 640 (CA); Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1

(HC of A); Woodroofe Ltd v McLeod (1986) 10 ACLR 129 SC(SA). And see Partnership in Mining Bpk v Federale Mynbou Bpk 1983 (2) SA 222 (W); 1984 (1) SA 175 (T) 178.

    1655   Worcester Corsetry Ltd v Witting [1936] Ch 640 (CA); Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1 (HC of A).

    1656   In Woodroofe Ltd v McLeod (1986) 10 ACLR 129 SC(SA) the company's articles provided that until otherwise determined by the company in general meeting the number of directors was to be not more than seven or not less than three. The company had five directors, two of whom were to retire pursuant to the articles at the next annual general meeting of the company. The notices sent out to shareholders stated that four directors were to be elected, which would result in there being seven directors. It was not proposed to seek a resolution from the shareholders approving the increase of the number of directors to seven, the company being of the view that the articles necessitated a shareholders' resolution only where it was proposed to reduce the number of directors below three or increase it above seven. It was held that the directors could not resolve

to increase the number of directors; and, on application by a shareholder, the court granted an injunction preventing the company from conducting an election at the meeting. It held that on the proper construction of the articles a shareholders' resolution was required each time it was sought to alter the number of directors. As there has been no such resolution since incorporation, the correct number of directors was five, and any increase to seven required a resolution by the shareholders in general meeting.

    1657   Worcester Corsetry Ltd v Witting [1936] Ch 640 649-650 (CA). And see Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1 (HC of A).

    1658   Worcester Corsetry Ltd v Witting [1936] Ch 640 649-650 (CA).    1659   As to which, see notes on s 199.    1660   Southerland v Robert Bosch (Aust) Pty Ltd (2000) 33 ACSR 680 SC(NSW).    1661   See eg Re Sly, Spink & Co (Hertslet's Case) [1911] 2 ChD 430; Flegg v McCarthy & Flegg 1942 CPD 109.    1662   Re Great Northern Salt & Chemical Works (1890) 44 ChD 472 480; Ex parte Umtentweni Motels (Pty)

Ltd 1968 (1) SA 144 (D) 147-148.    1663   Ex parte Umtentweni Motels (Pty) Ltd 1968 (1) SA 144 (D) 147-148.    1664   John Morley Building Co v Barras [1891] 2 Ch 386 394.    1665   (1867) LR 3 Eq 520 537.    1666   Ex parte Umtentweni Motels (Pty) Ltd 1968 (1) SA 144 (D) 148. Cf Re Great Northern Salt & Chemical

Works (1890) 44 ChD 472 480, where it was said that 'if all of them do in any way show their determination on the subject, that determination ought to be treated as valid'.

210  Appointment of directors to be voted on individually(1) At a general meeting of a company a motion for the appointment of two or more persons as directors of

the company by a single resolution shall not be moved, unless a resolution that it shall be so moved has first been agreed to by the meeting without any vote being given against it.

(2) Subject to the provisions of section 214, a resolution moved in contravention of this section shall be void, whether or not its being so moved was objected to at the time, but if a resolution so moved is passed, no provision for the automatic reappointment of a retiring director in default of another appointment shall apply.

(3) For the purposes of this section, a motion for approving a person's appointment or for nominating a person for appointment shall be treated as a motion for his appointment.

(4) This section shall not apply to a resolution altering the company's articles.

NotesAppointment of directors by membersThe purpose of s 210 'is to stop the practice of putting a single resolution at general meetings for the election of two or more persons as directors'.1667  In Harman v Energy

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Research Group Australia Ltd1668  all the shareholders of the company attended the meeting and voted unanimously on a single resolution for the appointment of all present as the company's board of directors. It was held that, because there had been no preliminary resolution as required by the section where a single resolution is to be moved, the resolution was void: the policy of the section 'is quite clear and it can equally apply to a meeting where all the members are present or only some of them, and irrespective also of the numbers of the members which constitute the totality of them', and 'because, in the particular facts of the case, it is unlikely that the section would have achieved any purpose, it does not mean therefore that it has no application in that case'.

In Rentekor (Pty) Ltd v Rheeder and Berman1669  it was held that, where a resolution of the members at an annual general meeting purporting to appoint directors is invalid by reason of s 210, the board of directors can fill the vacancies under a power to fill casual vacancies. It would seem to have been assumed that the vacancies were caused by the invalid en bloc election. But, of course, the en bloc election merely failed to fill vacancies that arose, routinely, as a result of the expiry of the directors' terms of office, and therefore the vacancies on the board were not causal vacancies—however widely that term is defined.

Section 210(4) provides that the restriction does not apply to a resolution altering the company's articles. Consequently it does not apply where the articles are altered so as to name the company's directors therein.

Generally, a company in general meeting has an inherent power to appoint directors unless the power is expressly and exclusively delegated to others (usually, the board).1670  Unless contrary to the articles, this power can be exercised with the unanimous consent of the shareholders otherwise than at a general meeting.1671

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The articles of companies usually expressly provide for the appointment of directors by the general meeting. These provisions typically provide for the retirement of all the directors at the first annual general meeting, for the retirement of a proportion of the directors (usually-one third) at each subsequent annual general meeting, and for the places of the retiring directors to be filled by such general meetings.1672  If in terms of its articles the company in general meeting can appoint only persons recommended by the board, that recommendation must be given by a properly constituted board meeting, and not merely by a majority of the board who are present at the general meeting and assent to the appointment.1673

Section 69bis of the 1926 Act provided that where motions for the appointment by separate resolutions of more than the number of directors to be elected had been made and not withdrawn, all the resolutions had to be voted upon separately, and thereafter the result of the voting had to be determined in accordance with the number of votes cast in favour of each resolution. It was held that this meant that a candidate must be voted on as if his candidacy was a motion for his appointment and, as with ordinary motions, votes for and against had to be called for. If he attracted a plurality of 'against' votes, the motion for his appointment was defeated. If the opposite was the case, the motion was carried. When, and only when, more candidates were approved of than there were candidacies, the number of votes in favour of each candidate were to be taken into account, and those with the highest number of favourable votes filled the available vacancies.1674  No such provision is however contained in s 210 of the 1973 Act.

Articles usually provide also for the automatic re-election of retiring directors whose offices have not been filled.1675  Where the articles provide that the retiring director must offer himself for re-election before he can be deemed to be re-elected, it is enough for

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automatic re-election if the retiring director, by his words or by his conduct at or prior to the meeting in question, shows that he is prepared to continue in the office of director.1676

If, after the voting for directors has taken place, a successful candidate advises that he is withdrawing his candidacy, the candidate who received the next highest number of votes cannot be declared elected. Because the person seeking to withdraw was duly elected, if he does not wish to hold office he must retire and the company must then hold another election.1677

The general rule is that members may vote in their own interests even though they conflict with those of the company; 1678  and that the members are under no obligation to choose the most suitable persons for the position of director.1679  Thus a majority shareholder may appoint his friend or a person whom he might reasonably expect usually to vote in a certain way.1680  It does not make any difference if the directors appointed by a shareholder are employed by the shareholder and are allowed to carry out their duties as directors while in the shareholder's employment.1681  It is in the interests of a shareholder to see that directors are wise and that the actions of the company are not foolish; but this concern of the shareholder stems from self-interest, and not from duty.1682

Wherever the directors have an exclusive power to appoint directors but are unable to exercise it, the company in general meeting has the power to make such appointments.1683

If under the articles of a company the directors are to be appointed by the shareholders in general meeting, the directors of the company cannot bind their company by a contract with others entitling those others to appoint directors. Such an agreement is invalid, because it would deprive the members of their rights under the articles to appoint the directors.1684

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Appointment by directors and outsidersThe articles of a company can provide for the appointment of directors of the company by the directors, or by particular shareholders, or by debenture-holders, or even by complete outsiders. 1685

Clearly, where this power is vested in the directors, it is a fiduciary power, and it must therefore be exercised bona fide in the interests of the company and not for any improper or collateral purpose. But it would seem that an outsider empowered by the

articles to appoint a director is not under any obligation to choose as a director the most suitable person for the position. 1686

Wherever the directors are empowered to appoint directors for a limited period, eg until the next general meeting, they cannot, by also exercising a power vested in them to appoint one of their number to be managing director, appoint a person both to the office of director and, for a longer period, to the office of managing director, so as to give him a right to damages for breach of contract in the event of his failure to secure re-election. 1687

Unless the articles otherwise provide, 1688 where the company has by contract validly conferred upon outsiders the right to make such appointments, no form of co-operation on the part of the directors is necessary for the person so nominated to become a director of the company. 1689 If the company refuses to accept the appointment, the court will compel it to do so. 1690 But such outsiders cannot restrain the company from altering its articles so as to strike out the relevant provision and, if the company does so, it can no longer be compelled to accept the persons so nominated. The outsider's only remedy is to sue the company for damages for breach of contract. 1691

The directors are usually empowered by the articles to appoint additional directors up to the total number of directors fixed in the articles. 1692 Where the directors are so empowered, it is a question of construction of the articles (a) whether this power is to be exercised by all or by the majority of the directors 1693 and (b) whether this power is vested in them exclusively 1694 or concurrently with the general meeting. 1695 It would seem that the members in general meeting retain the power to make such appointments even where the directors are empowered to make them, unless the members' power to do so is expressly

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excluded. 1696 Where under the articles the directors have the power to appoint, either to fill a casual vacancy or as an additional director, a person holding the necessary share qualification, they do not have the power to appoint a person who is not registered as the holder of the prescribed number of shares; and it is not sufficient that he has acquired a right to registration, or that the articles provide for a period of grace within which to obtain the share qualification. 1697

Defects in appointment and validity of actsThe acts of a director of a company are valid notwithstanding any defects that may afterwards be discovered in his appointment or qualification. 1698

  

    1667   Final Report of the Company Law Amendment Enquiry Commission 1947-1948 UG NO 69-148 para 43. And see Aitchison v Dench 1964 (2) SA 515 (T) 516-517. In Howard v Mechtler (1999) 30 ACSR 435 443 SC(NSW) it was said that the provision exists for an important policy reason, namely, the purpose of saving members the embarrassment of having to elect a person who they may not want when they elect another person whom they do want.

    1668   (1985) 9 ACLR 897 899 SC(WA).    1669   1988 (4) SA 469 (T) 507.    1670   See Woolf v East Nigel Gold Mining Co Ltd (1905) 21 TLR 660; Barron v Potter [1914] 1 Ch 895; Blair

Open Hearth Furnace Co Ltd v Reigart (1913) 108 LT 665; Worcester Corsetry Ltd v Witting [1936] Ch 640 (CA); Integrated Medical Technologies Ltd v Macel Nominees Pty Ltd (1988) 13 ACLR 110 SC(NSW); and see Gohlke & Schneider v Westies Minerale (Edms) Bpk 1970 (2) SA 685 (A) 693; Link Agricultural Pty Ltd v Shanahan (1998) 28 ACSR 498 517 CA(Vic). On the company's (ie the general meeting's) inherent power to appoint directors, see also Re Western Mines Ltd & Shield Development Ltd (1975) 65 DLR (3d) 307 where the doctrine was recognised but not applied. And see Harman v Energy Research Group Australia Ltd (1985) 9 ACLR 897 898 SC(WA). See also Re Rural Chemical Industries Pty Ltd (1988) 9 ACLR 176 SC(NSW), where the court convened a general meeting to ratify the appointment of the company's directors, the articles of the company having, in error, excluded provisions relating to the appointment of directors. In Worcester Corsetry Ltd v Witting [1936] Ch 640 650 (CA), Lawrence LJ said: 'The company has an inherent power to nominate and appoint its own directors unless that is in any way restricted by the contract contained in the articles of association. Unless you can find that that inherent power has been handed over by the company to the directors, I think they retain that power as a natural result of their having the power to increase their board of directors.' In Re Western Mines Ltd & Shield Development Ltd supra, Worcester Corsetry Ltd v Witting supra was distinguished on the grounds that the articles of the company (unlike those of the company in the Worcester Corsetry Ltd v Witting case) had handed over to the board the 'inherent power' to increase the number of directors between annual meetings; that the power of the members to elect directors had been restricted to the annual general meeting; and that s 132(2) the British Columbia Companies Act 1973 c 18 severely limited the 'inherent powers' doctrine by providing that 'succeeding or additional directors shall be elected or appointed in accordance with the articles of association'. Consequently the members had no inherent power to elect directors between annual general meetings. In Integrated Medical Technologies Ltd v Macel

Nominees Pty Ltd supra the court was unable wholly to accept the approach in Re Western Mines Ltd & Shield Development Ltd supra, and it was pointed out that that case was decided on the basis of statutory provisions that severely limited the inherent powers doctrine.

    1671   Gohlke & Schneider v Westies Minerale (Edms) Bpk 1970 (2) SA 685 (A) 693; Harman v Energy Research Group Australia Ltd (1985) 9 ACLR 897 898 SC(WA); Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 702 SC(NSW);Transcash SWD (Pty) Ltd v Smith 1994 (2) SA 295 (C) 302. In Gohlke & Schneider v Westies Minerale (Edms) Bpk supra, where all the shareholders, by unanimous assent, appointed a director to the board without first altering the articles, which did not authorise the appointment, the court held that the appointment was effective and made no order directing the shareholders to amend the articles in line with the order made in Flegg v McCarthy & Flegg 1942 CPD 109. See R C Beuthin 'Appointment of Directors and Legal Effect of Articles' (1970) 87 SALJ 395; M J Oosthuizen 'Toestemming om as Direkteur Op to Tree' [1976] TSAR 71. In Flegg v McCarthy & Flegg supra the articles of a private company consisting of two shareholders provided that there should be two directors and appointed the two shareholders as directors. Subsequently, a third person become a shareholder in the company and the two shareholder-directors appointed him as a third director, and for several years reappointed him, without, however, altering the articles. Jones J held that: 'The fact, however, that [the third person's] appointment as a director was technically or strictly not regular under the articles of association cannot in my opinion invalidate his appointment from time to time or render acts bona fide done by him as such in relation to the affairs of the company invalid, particularly when it is borne in mind that the only two persons interested in the matter, viz the two other directors, not only acquiesced in his appointment, but actually made it originally and subsequently confirmed it and for several years thereafter reappointed him.' The court made an order directing the two original shareholders to vote in favour of a special resolution by which the articles were to be amended by making provision for the appointment of a third director.

    1672   See arts 66-69 of Table A and art 67 of Table B.    1673   Re East Norfolk Tramways Co (Barber's Case) (1877) 5 Ch 963 (CA).    1674   Schachat v Trans-Africa Credit & Saving Bank Ltd 1963 (4) SA 523 (C); Aitchison v Dench 1964 (2) SA 515

(T).    1675   See art 70 of Table A and art 68 of Table B. In Grundt v Great Boulder Proprietary Gold Mines Ltd [1948]

Ch 145; [1948] 1 All ER 21 (CA) it was held that, if the articles provide that a director retiring by rotation will be deemed to be re-elected if his place is not filled and it is not determined to reduce the number of directors in office, failure to fill the vacancy will result in his automatic re-election even though it is expressly resolved not to re-elect him or fill the vacancy. See Table A art 70 and Table B art 68, which provide that such a director shall not be deemed to have been re-elected if the company has expressly resolved not to fill the vacancy or if his re-election has been put to the meeting and negatived. And see Re Craig (1991) 5 ACSR 108 SC(Qld).

    1676   Petsch v Kennedy [1971] 1 NSWLR 494; Re Craig (1991) 5 ACSR 106 SC(Qld). Such a provision is not contained in either art 70 of Table A or art 68 of Table B.

    1677   See Hedges v NSW Harness Racing Club Ltd (1991) 5 ACSR 291 SC(NSW).    1678   North-West Transportation Co v Beatty (1887) 12 App Cas 589 593 (PC).    1679   Re HR Harmer Ltd [1958] 3 All ER 689 709 (CA); Santos Ltd v Pettingell (1979) 4 ACLR 110 122

SC(NSW); Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] AC 187 220-221; [1990] 3 All ER 404 422-423 (PC); John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A'Asia) Pty Ltd (1991) 6 ACSR 63 66 SC(NSW). But see Re Western Mines Ltd & Shield Development Ltd (1975) 65 DLR (3d) 307, where it was held that the power of increasing the number of directors, or of filling vacancies on the board of directors, is for the purpose of serving the needs of the company, namely, to have a more effective and efficient board; that the shareholders, like the directors, must use their power to achieve the objects for which their powers are given; and that the power to enlarge the board of directors (if it exists) must be used for legitimate purposes and not as an indirect means of gaining control of the board of directors. And seeTheseus Exploration NL v Mining & Associated Industries Ltd [1973] QdR 81 (injunction issued to prevent the members electing certain persons as directors where there was sufficient evidence that those persons intended to use the company's assets solely for the benefit of the majority shareholder).

    1680   Re HR Harmer Ltd [1959] 3 All ER 689 709; Fisheries Development Corporation of SA Ltd v Jorgensen 1980 (4) SA 156 (W) 163; John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A'Asia) Pty Ltd (1991) 6 ACSR 63 66 SC(NSW).

    1681   Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187 221; [1990] 3 All ER 404 423 (PC).

    1682   Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187 221; [1990] 3 All ER 404 423 (PC).

    1683   Barron v Potter [1914] 1 Ch 895 903; Entsch v Mr Crocodile Pty Ltd (1990) 3 ACSR 720 722-723 SC(Qld).    1684   Re London & Northern Insurance Corporation (Stace and Worth's Case) (1869) 4 Ch App 682; James v

Eve (1873) LR 6 HL 335; Gohlke & Schneider v Westies Minerale (Edms) Bpk 1970 (2) SA 685 (A) 695.    1685   British Murac Syndicate Ltd v Alperton Rubber Co Ltd [1915] 2 Ch 186; [1914-15] All ER Rep 346; Gohlke

& Schneider v Westies Minerale (Edms) Bpk 1970 (2) SA 685 (A). In the latter case it was doubted whether such an outsider may be empowered to nominate an absolute majority of the board.

    1686    See Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187 220-221; [1990] 3 All ER 404 422 (PC).

    1687   Bluett v Stutchbury's Ltd (1908) 24 TLR 469 (CA).    1688   See eg Plantations Trust Ltd v Bila (Sumatra) Rubber Lands Ltd (1916) 85 LJCh 801.    1689   British Murac Syndicate Ltd v Alperton Rubber Co Ltd [1915] 2 Ch 186 192; [1914-15] All ER Rep 346

349; Gohlke & Schneider v Westies Minerale (Edms) Bpk 1970 (2) SA 685 (A) 691.    1690   British Murac Syndicate Ltd v Alperton Rubber Co Ltd [1915] 2 Ch 186; [1914-15] All ER Rep 346; Gohlke

& Schneider v Westies Minerale (Edms) Bpk 1970 (2) SA 685 (A).    1691   Punt v Symons & Co Ltd [1903] 2 Ch 506. See also Cumbrian Newspapers Group Ltd v Cumberland and

Westorland Herald Newspaper and Printing Co Ltd [1987] 1 Ch 24; [1986] 2 All ER 816 831.

    1692   See art 73 of Table A art 73 and art 71 of Table B. Such a director usually then holds office until the next following general meeting and is then eligible for re-election, but is not taken into account in determining which directors are to retire by rotation at such meeting: see art 73 of Table A and art 71 of Table B.

    1693   Perrot and Perrot Ltd v Stephenson [1934] Ch 171.    1694   Blair Open Hearth Furnace Co Ltd v Reigart (1913) 108 LT 665.    1695   Worcester Corsetry Ltd v Witting [1936] Ch 640 (CA).    1696   In Worcester Corsetry Ltd v Witting [1936] Ch 640 648 (CA) it was held that the article empowering the

board to appoint additional directors was indicative of a temporary power vested in the directors which was to be reviewed and perhaps confirmed at the general meeting; but the article itself did not give any indication that the powers of the corporators in general meeting had been wholly taken from them and handed over to the directors. And see Integrated Medical Technologies Ltd v Macel Nominees Pty Ltd (1988) 13 ACLR 110 114 SC(NSW) where it was held that 'the allocation of particular functions in the articles, in some cases to a annual general meeting, in some case to a general meeting and in some cases to directors carries no implication of an intention to make an exclusive prescription of what the general meeting can do; for that clear language or unmistakable implication would be required'. And that '[m]erely to provide that the power to appoint additional directors is given to the directors . . . goes no distance . . . towards . . . a prescription of exclusivity'.

    1697   Spencer v Kennedy [1926] Ch 125; [1925] All ER Rep 135.    1698   s 214. A similar provision is frequently contained in the articles of companies. See notes on s 214.

211  Consent to act as director or officer(1) Any person who, before the issue of a certificate to commence business, is appointed as a director or

officer of a company having a share capital, shall —   (a)   before such certificate is issued, sign and lodge with the company his written consent to act as such a director

or such an officer, on a duly completed prescribed form containing the particulars prescribed by the Minister by regulation; and

   (b)   in the case of a director, either in the memorandum of the company subscribe for a number of shares not less than the number, if any, required to be held by a director thereof as qualification shares, or sign and lodge with the Registrar a contract in the prescribed form in writing to subscribe for or otherwise acquire such shares.

(2) For the purposes of this section 'qualification shares' means the qualification shares required to be held on appointment to the office of director or within a period determined by reference to the time of appointment.

(3) Any person who is appointed as a director or officer of a company at any time after it has become entitled to commence business, shall within twenty-eight days after the date of such appointment or within such further period as the Registrar, on good cause shown and on payment of the prescribed fee, may allow, lodge with the company his written consent to such appointment on the prescribed form referred to in subsection (1)(a), duly completed and signed by him: Provided that the provisions of this subsection shall not apply to the reappointment of a retiring director.

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(4) Failure to comply with the provisions of subsection (1) or (3) shall not affect the validity of an appointment.

(5) This section shall not apply in respect of any person deemed to be a director under section 208 (2).(6) Any person appointed as a director or officer of a company in the circumstances referred to in

subsection (1) or (3), who fails to comply with the applicable provisions of those subsections, shall be guilty of an offence.

(7) Any company which publishes, whether in non-electronic or electronic format, and every director or officer of the company who knowingly is a party to the publication of, the name of any person as a director of the company when such person is not a director or has not validly been appointed as director of the company, shall be guilty of an offence.

[Sub-s. (7) substituted by s. 23 of Act 35 of 2001.][S. 211 amended by s. 17 of Act 64 of 1977 and substituted by s. 13 (1) of Act 59 of 1978.]

NotesConsent to Act as Director or OfficerAs to the meaning of 'director', see s 1(1) and notes on s 208. Section 1 provides that in the Act, unless the context otherwise indicates, 'officer' in relation to a company includes any managing director, manager or secretary thereof. As to officers, see notes below.

Before the definition of 'officer' in s 1(1) was amended by s 2 of the Companies Amendment Act 37 of 1999, the definition excluded 'a secretary which is a body corporate'. Section 268D(1) now expressly provides that a 'body corporate or partnership may be appointed to hold the office of secretary of a public company'. And s 268E(1) provides that a 'person who accepts an appointment as secretary shall sign and lodge with the company the form prescribed in section 211 confirming such person's consent to act as secretary, or if a partnership or body corporate is appointed secretary, the written consent of the partners or the directors of such partnership or body corporate'.

Section 268E(2) provides that no person shall act as secretary and no appointment of secretary shall have legal force for the purposes of the Act or any other law unless, inter alia, the prescribed form of consent has been lodged with the company. This contradicts the provisions of s 211(4), which provides that failure to comply with the provisions of subsection (1) or (3) shall not affect the validity of an appointment.

As to the certificate to commence business, see s 172. The prescribed form for consent to act as a director or officer, containing the particulars prescribed by the Minister by regulation, is form CM27 of the Companies Administrative Regulations.1699  The prescribed form for the contract to subscribe for qualification shares (where a share qualification is required) is form CM28.1700

Regulation 35A(1) provides that any person who accepts appointment as secretary of a public company in terms of s 268B read with s 268E must lodge with the Registrar his

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consent to such appointment on form CM27A.1701  The person who accepts appointment as secretary of a public company in terms of s 268B is the first secretary. And s 268B read with s 269, deems such person to have been appointed by the company if he has been appointed by the majority of the subscribers to the memorandum (the subscribers are under a duty to make this appointment) and, when the memorandum and articles of the company are lodged with the Registrar for registration, a written consent by that person to his appointment as secretary of the company to be formed is lodged simultaneously with the Registrar. Section 268E, however, provides that a person who accepts an appointment as secretary must sign and lodge with the company the prescribed form referred to in s 211. Thus s 268B cannot be 'read with s 268E'. It would seem that the consent in CM27A is intended to be the consent that must be given by a secretary whenever appointed, ie the consent in terms of s 268B in the case of the secretary first appointed (to be lodged with Registrar) and the consent in terms of s 211 (to be lodged with the company).

As to the Registrar's power to extend the 28 day period, see s 177, which provides inter alia that when in terms of the Act anything is to be performed within a specified period of time the Registrar may in any case, on application to him before or after the expiry of that period, and on payment of the prescribed fee, extend the period as he may deem fit subject to the provisions of the Act. The form prescribed for an application to the Registrar for an extension of time is CM17 (suitably adapted, see reg 7(1) of the Administrative Regulations contained in Schedule 2).

As to a person who is, as a subscriber to the memorandum of a company, deemed to be a director of the company, see s 208(2).

The penalty in respect of the offence in s 211(6) is a fine for every day during which the contravention continues.1702  The court convicting may order the company to comply with the provision.1703

Section 216(4) provides that any written consent of any director or officer to act as such must be retained by the company, and the Registrar may from time to time by notice in writing require a company to transmit to him within 14 days after the date of receipt of such notice a certified copy of such consent.

OfficersStatutory definition of officerUnless the context otherwise indicates, for the purposes of the Companies Act the term 'officer' includes any managing director, manager or secretary.1704  As to managing directors and managers, see notes below. As to secretaries, see notes on s 268A.

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with rights and duties annexed to it. 1705 Although the meaning of the word 'officer' may depend on the context in which it is used, 1706 generally speaking an officer of a company is any person in a managing position in regard to the company; any person who in the affairs of the company exercises a supervisory control which reflects the general policy of the company for the time being or which is related to the general administration of the company. 1707 The judicial manager of a company is not an officer of the company; 1708 nor is the auditor of the company. 1709

When directors may hold other offices under the companyAlthough a director as such is not an employee or a servant, he may, in another capacity, be either an employee or a servant of the company. 1710 However, the articles of companies usually provide that the office of director shall be vacated if a director without the consent of the company in general meeting holds any other office of profit under the company except that of managing director or manager. 1711

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Managing director(1) OfficeA managing director 1712 is a director appointed to that position in terms of the articles by the board of directors, 1713 and to whom 1714 the board, under a power to do so in terms of the articles, delegates some or all of its powers of management. 1715

Although the managing director's powers are powers delegated to him by the board, he holds two distinct positions, that of a director and that of a manager. 1716 And, because the functions of a director and of a manager are not identical, he has two functions and two capacities. 1717 The office is therefore a composite one. 1718 Not all a managing director's actions in relation to the company's business are to be attributed to his directional powers and nothing separately ascribed to any other position he occupies, ie his functions as director are not supereminent in the sense that whatever he does must be considered simply as the exercise of his powers of a director. 1719

Qua manager, a managing director is a party to a contract of employment with theOS, 2002 ch8-p249

company.1720  But every director to whom any part of the management of the company has been delegated and with whom the company has entered into a contract of employment is not a managing director.1721  The term 'managing director' is applied to such a director only if the directors have delegated to him all or a substantial part of their powers of control of the affairs of the company.1722  Thus his relation to the company cannot be determined by the description applied to him, but falls to be decided in the light of the actual terms of his agreement with the company, 1723  and the company's articles.

Although the managing director's position as a director must be distinguished from his position as manager, and although the difference between a managing director's position and that of a manager who is not a director 'is that the managing director is also a director', 1724  the position of the managing director qua manager must nevertheless be distinguished from that of a mere manager. While for the purposes of the Companies Act both managing director and manager are officers of the company, 1725  the office of managing director 'is of a very special kind, and an agreement appointing a managing director cannot be treated as an ordinary service agreement as in the case of a mere manager'.1726  He is the direct and immediate representative of the board, fully recognised as such for legal purposes; and he cannot be appointed unless provision is made in the articles for such appointment.1727  A managing director, acting in that capacity, acts as the company itself, just as a board so acts; 1728  and ordinarily his knowledge is attributed to the company.1729  Hence, he cannot properly be described as the servant of the company.1730

(2) AppointmentUnless the articles empower the directors to appoint a managing director, it is not competent for them to make such an appointment.1731  The articles of companies do, however, usually empower the directors to appoint one or more of their number to the

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office of managing director for such term and for such remuneration, as they think fit.1732  A director may vote on the resolution of the board for his appointment as managing director if no salary or remuneration is attached to the appointment, for such a resolution is merely an appointment to an office followed by what is simply a delegation by the directors of their powers.1733  If the articles give the power of appointing a managing director to the board, the company in general meeting cannot make the appointment 1734  unless the directors are unable or unwilling to act in the matter.1735  The appointment of a managing director may be formal or otherwise and, where the power to appoint is vested in the board, the appointment and mandate may be inferred from the conduct of the directors.1736  Such an informal appointment would have to be intended, and would require 'not merely the silent acquiescence of the individual members of the board, but the communication by words or conduct of their respective consents to one another', and the consent of the director concerned to his appointment.1737

Where the articles allow for the appointment of more than one managing director, the appointment of one person as managing director does not, as such, give rise to the

inference that the company thereby conferred upon him the right to be its sole managing director for the period of his appointment.1738

(3) Powers, duties, rights and tenure of officeThe managing director is usually entrusted with the power to transact the whole of the affairs of the company and to do all acts and enter into all contracts necessary for that purpose.1739  There would seem to be no reason why powers cannot be delegated to a managing director, without a formal resolution, by the unanimous consent of the directors, and that such a delegation may be by way of implication, so that the managing director's actual authority can be said to be implied rather than express.1740  Where that is the case, his authority will be the authority usually delegated to managing directors, unless the company's articles limit the directors' power of delegation to something less than that usually conferred on such directors.1741  It has indeed been held that the mere fact

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of appointing a person to the office of managing director gives him certain powers. 1742 And, where empowered to manage the business of the company, a managing director has, unless the articles provide to the contrary or the directors have expressly excluded the power, an implied power to remunerate any person for services rendered, 1743 and to instruct an attorney to recover debts or to resist claims against the company where the transactions concerned occurred in the daily operation of the company's business. 1744 He will not, however, be regarded as having an implied power to instruct an attorney to oppose a winding-up application of any substance, for it would usually be expected that that would be a matter with which the board would be directly and immediately concerned. 1745 But there may be circumstances in which such a power will be implied, eg where it is established that, during the course of the transaction giving rise to the claim founding the statutory demand, he consistently, and with the knowledge of the board, represented the company. 1746 It has been held that a managing director has no implied power to sign promissory notes alone on behalf of the company 1747 or to make admissions on its behalf. 1748Because his powers are conferred on him to be exercised in connection with the company's business, a managing director acts beyond his authority if he purports to exercise such powers in connection with his own affairs, eg a managing director empowered to sign guarantees on behalf of the company has no authority to sign a guarantee on behalf of the company for the payment of his private debts. 1749

Where the articles do not restrict the power of the directors to delegate their powers to a managing director, anyone dealing with a managing director may assume that the directors have conferred on him all the powers usually conferred on a managing director. Therefore, if a managing director, acting within those ostensible powers, enters into a contract with a stranger who believes that the managing director is duly authorised, the contract will be binding on the company even if it turns out that the managing director had no actual authority to enter into the contract on behalf of the company. 1750

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The managing director's powers are usually delegated to him subject to the overriding authority of the board. 1751 Where the articles do not empower the directors to delegate their powers subject to their overriding authority (or where, although so empowered, they do not so delegate their powers), the managing director is not subject to the directors' overriding control, and may act notwithstanding that some or all of the directors disagree with what he does. And his authority continues unless and until, in accordance with the articles, or otherwise in an effective manner, his office is terminated or, in accordance with the powers of the company or of the board, action is taken to place restrictions upon what he may do. 1752 This is because the appointment of a managing director is the appointment of a person to an office from which he derives his authority; and when his office is provided for by the articles of association, he derives his authority from the articles of association and the fact that he has been appointed to the office created by them. 1753 Thus the concept of delegation of powers in terms of the articles of association of a company is a concept wholly distinct from the concept of delegation of powers under the ordinary law of agency.

Apart from the rights and duties which attach to him by virtue of his office as director, the rights, duties and tenure of office of a managing director are determined by the Act,

the articles of the company, and the terms of his contract of appointment. 1754 As an officer of the company for the purposes of the Companies Act, 1755 a managing director is subject to all duties imposed on officers of the company by the Act. And as the senior officer in charge of the affairs of the company, he is under a duty to see that the books of the company are properly kept and that entries in them, in respect of substantial matters, are correct.1756

It has been held that there is no implication in law that a person who acts as the managing director of a company is entitled to any payment for the services he renders on behalf of the company. 1757However, apart from any provision in the articles, the shareholders are entitled to remunerate a managing director of a going concern; and they may even do so by way of a bonus in consideration for services he has already rendered for the company. 1758 The articles of companies usually empower the directors to appoint the

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managing director at such remuneration as they think fit. 1759 Consequently, the managing director usually has a right to remuneration under his contract of appointment. 1760 A managing director whose contract is void because his appointment as director is found to have been defective, can recover on the basis of a quantum meruit. 1761

The fact that a managing director's contract is for a fixed period does not exclude the right of the company to decide from time to time what his powers and duties as manager shall be; but if his duties are too drastically curtailed, or if he is told to perform no duties at all, that may constitute a breach of contract for which an action for damages will lie. 1762 Where, however, a managing director's contract provided that he should perform such duties and exercise such powers in relation to the business of the company and its subsidiaries as might from time to time be assigned or vested in him by the directors, it was held that the directors were entitled to confine his duties to the management of one of the company's subsidiaries. 1763

The articles of companies usually provide that the directors may appoint a managing director for such term as they think fit. 1764 The articles of companies usually provide that a director while holding the office of managing director is not subject to retirement by rotation and is not to be taken into account in determining the rotation by retirement of its directors. 1765 A managing director who is not appointed for a fixed term is not entitled to hold office for as long as he remains a director. 1766

(4) Removal, dismissal and resignationWhere the directors, having the power to do so under the company's articles, enter into a contract appointing a managing director for a fixed period, the fact that the company's articles also empower them to revoke the managing director's appointment at will 1767 does

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not, as such, give them the right to do so contrary to the terms of the contract. 1768 Although the directors' exercise of their power to revoke the managing director's appointment will effectively remove him from office, 1769 it will, if he has committed no breach of the contract entitling the company to dismiss him, 1770 constitute a breach of contract and the company will be liable accordingly. 1771 Where, however, the managing director's contract does not provide for such a fixed period, it will be assumed, in the absence of anything in the contract to the contrary, that it was entered into on the terms of the company's articles; and therefore the company will not commit a breach of the contract if it exercises its power to dismiss him. 1772

Unless the articles otherwise provide, a managing director ceases to hold office if he ceases to hold office as director. 1773 Therefore, if the articles of a company provide that the directors shall retire at the next general meeting and make no special provision in regard to the managing director, its managing director will lose his office as managing director if not reappointed as a director, even if he was appointed for a fixed period. 1774 This will also be the case if he is removed from office as director by the members in general meeting, 1775 or, where so empowered by the articles, by the directors or any third

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person. 1776 But, again, where the managing director's service contract provides for his appointment for a fixed period and the company's articles at the time that the contract was entered into empowered its directors to make such a contract, the managing director, although effectively removed from office, will, in the absence of just cause for his removal, have an action for damages if he suffers damage as a result of the company's breach of the contract. 1777 This is because the company is not entitled deliberately to put an end to the state of affairs (ie the managing director's directorship) under which alone the contract can operate. 1778 Where the articles confer the power to remove directors upon a third party, the company cannot escape such liability if the third party exercises that power. 1779 Where directors wrongfully terminate the contract of a managing director, they do not incur personal liability. 1780 The removal of an executive director does not deprive him of his or her employment rights under the Labour Relations Act 66 of 1995. The parties to the contract of employment may not contract out of the protection of the Labour Relations Act against unfair dismissal. 1781

Where a managing director's contract is entered into on the terms of the articles, the continued existence of the company is a condition of his right to continued employment, and, therefore, he will have no right to damages for loss of office should the company be wound up. 1782 But if in terms of his contract he is appointed for a fixed period, he will be entitled to claim damages for breach of this agreement even if the company is wound up voluntarily and he voted for the adoption of that course. 1783

Where the articles provide that the office of director is to be vacated if a director gives notice that he resigns his office, a managing director who has been appointed for a fixed period cannot, before the expiration of that period, rightfully give such notice without just cause. If he does so, his office will be vacated; but the company will have a claim for damages. 1784

ManagersFor the purposes of the Companies Act, the term 'manager' includes, unless the context otherwise indicates, any person who is a principal executive officer of the company for

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the time being, by whatever name he may be designated and whether or not he is a director. 1785 A manager so defined is for the purposes of the Act an 'officer' of the company, 1786 and therefore the provisions of the Act referring to officers of the company apply to him.

The term 'manager' in its ordinary sense connotes, among other things, control over subordinates. 1787 A manager in this ordinary sense is a person who by virtue of his position is vested, either alone or in association with others in the same position vis-à-vis the company, with control and administration of the company's affairs and property, whether in whole or in part. 1788

A manager is an employee of the company. 1789 His position, tenure of office, and rights and duties are in the first place determined by the terms of his employment contract, which contract may be of a formal nature or otherwise. 1790 Thus it is a question of fact whether or not a person is a manager, ie whether he exercises the requisite degree of managerial control and administration of the company's affairs or property. 1791 A manager stands in a fiduciary relationship to the company, and is subject to the same fiduciary duties as do the directors of the company, 1792 although the extent of his duties will depend to some measure on the powers conferred on him. And he is, of course, subject to the duties imposed by the Act on officers of companies.

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    1699   Published in GN R1948 of 1973. See also reg 35.    1700   On s 211, see M J Oosthuizen 'Toestemming om as Direkteur Op te Tree' 1976 TSAR 247.    1701   This provision was inserted into the Companies Administrative Regulations 1973 GN No R1948 of 1973 as

amended, by GN R 762 of 18 June 1999.    1702   s 441(1)(q).    1703   s 441(2).    1704   s 1(1). This definition is an inclusive, not an exhaustive, one: Rennie v Holzman 1987 (4) SA 938 (C) 941-

942; 1989 (3) SA 706 (A) 709.    1705   per Lindley LJ in Re Western Counties Steam Bakeries & Milling Co [1897] 1 Ch 617 627 (CA); Corporate

Affairs Commission v Drysdale (1978) 141 CLR 236 242; (1978) 3 ACLR 760 764 (HC of A). In Harris v S (1976) 2 ACLR 51 60 SC(SA) Wells J said: 'The word "officer" is obviously derived from the word "office". The latter denotes a specific position of authority, power, and responsibility (on whom a formal name or title has usually

been conferred) to which certain functions are annexed, in and for the exercise and discharge of which the officer is accountable, to a greater or lesser degree, to a constituted and designated authority (or sometimes to more than one such authority). The degree of accountability (amounting in some cases to subservience) may vary enormously; the limits of control exercised over the officer may be prescribed by law, or fixed by contract, or other private instrument; accordingly, the officer may, in effect, be a servant with little independent authority and discretion; a senior officer or manager, with wide authority and discretion; or a director or governor, with supreme executive powers.'

    1706   In R v Scott (1990) 2 ACSR 470 475 CA(NSW) Gleeson CJ said: 'The word "officer" is not one of fixed or precise denotation. Its meaning and significance vary according to the context. Views as to the appropriateness of its application in a given case may change over time and may be influenced by changes in fashions of speech, including the use of what might once have been thought rather grandiloquent job descriptions.' In Re A Company [1980] 1 Ch 138 143; [1980] 1 All ER 284 286-287 (CA), Lord Denning MR, recognising that the meaning of the word 'officer' must always depend upon the context in which it is used (see R v Boal [1992] QB 591 587; [1992] 3 All ER 177 181 (CA)) said of the word 'officer' as it appeared in s 441(1) of the Companies Act 1948 (which empowered the court to appoint an inspector when there was a reasonable cause to believe that a person, while an officer of the company, had committed an offence in connection with the management of its affairs): 'The officer here referred to is a person in a managerial situation in regard to the company's affairs. I would not restrict these words too closely. The general object of the Act is to enable the important officers of the State to get at the books of the company when there has been a fraud or wrongdoing. It seems to me that whenever anyone in a superior position in a company encourages, directs or acquiesces in defrauding creditors, customers, shareholders or the like, then there is an offence committed by an officer of the company in connection with the company's affairs.' It would seem that where a person falling within the definition will be guilty of a criminal offence, the courts may give the word a narrower definition. A judicial manager is not an officer of the company: Rennie v Holzman 1987 (4) SA 938 (C) 941-942; 1989 (3) SA 706 (A) 709.

    1707   See Re A Company [1980] 1 Ch 138 143-144; [1980] 1 All ER 284 286-287 (CA), where it was said that this is what was meant by 'officer' as the word was used in s 441 of the English Companies Act of 1948 (the decision of the Court of Appeal was reversed by the House of Lords in Re Racal Communications Ltd [1981] AC 374; [1980] 2 All ER 634 (HL) on the ground that the Court of Appeal had no jurisdiction to entertain the appeal). In Lipschitz v Wolpert and Abrahams 1977 (2) SA 732 (A) 743 the following definition of 'officer' was accepted: 'a persons holding office and taking part in the management or direction of a society or institute especially one holding the office of president, treasurer or secretary; an officer-bearer'.

    1708   Rennie v Holzman 1987 (4) SA 938 (C) 941-942; 1989 (3) SA 706 (A) 709.    1709   Lipschitz v Wolpert and Abrahams 1977 (2) SA 732 (A). And an officer of the company is not qualified for

appointment as auditor of the company: s 275(1)(a).    1710   Moresby White v Rangeland Ltd 1952 (4) SA 285 (SR) 287, and see French Hairdressing Saloons v

National Employers Mutual General Insurance Association Ltd 1931 AD 60.    1711   See eg art 65(b) of Table A and art 66(b) of Table B.    1712   See D Marshall 'Quantum Meruit and the Managing Director' (1966) 29 LQR 608; M P Larkin 'Distinctions

and Differences: A Company Lawyer Looks at Executive Dismissals' (1986) 7 ILJ 248.    1713   See art 61 of Table A and art 62 of Table B, which empower the directors from time to time to appoint

'one or more of their body' to the office of 'managing director or manager' (the distinction here between 'managing director' and 'manager' is clearly merely one of nomenclature).

    1714   In terms of arts 61-62 of Table A and arts 62-63 of Table B, the appointment of a managing director and the delegation to him of powers are two distinct steps, and therefore, strictly speaking, the board can appoint one of their number to the office of managing director without delegating any powers to him. Cf SA Securities v Nicholas 1911 TPD 450 461, where it was said that the mere fact of appointing a person as managing director gives him prima facie certain powers. Although, no doubt, it is almost invariably the case that the appointment of a managing director carries with it at least certain implied powers, strictly speaking it does not necessarily do so.

    1715   See art 62 of Table A and art 63 of Table B.    1716   Anderson v James Sutherland (Peterhead) Ltd 1941 SC 203. It has however been said that a managing

director is only an ordinary director entrusted with some special powers: Re Newspaper Pty Syndicate Ltd, Hopkinson v Newspaper Pty Syndicate Ltd [1900] 2 Ch 349.

    1717   Anderson v James Sutherland (Peterhead) Ltd 1941 SC 203 217-218. Thus in Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 219 (CA) Greene MR said: 'A director may be an excellent manager and therefore well qualified to be a managing director; but he may turn out to be an undesirable member of the board in other respects. . . . The office of director is one thing; the office of managing director another.' And in Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 712; [1940] 2 All ER 445 451 (HL) Maugham LJ, referring to Greene MR's judgment, said that 'as the Master of the Rolls pointed out, the two positions, that of director and that of manager, involve different qualifications, duties and responsibilities'. In Walker v Standard Chartered Bank plc [1992] BCLC 535 (CA) a managing director was removed from office as managing director contrary to an agreement to retain him in that office. He accepted the repudiation and sued for damages. It was held that he no longer had any right under that agreement to remain a non-executive director.

    1718   Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 721; [1940] 2 All ER 445 457 (HL).    1719   Anderson v James Sutherland (Peterhead) Ltd 1941 SC 203 217-218.    1720   Anderson v James Sutherland (Peterhead) Ltd 1941 SC 203; Southern Foundries (1926) Ltd v

Shirlaw [1940] AC 701 721, [1940] 2 All ER 445 457 (HL). It has been held that a managing director is not, as such, a servant of the company: Re Newspaper Proprietary Syndicate Ltd, Hopkinson v Newspaper Proprietary Syndicate Ltd [1900] 2 Ch 349 351; Moresby White v Rangeland Ltd 1952 (4) SA 285 (SR); but see Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 722; [1940] 2 All ER 445 458 (HL) and Cooper v Garratt 1945 WLD 137 147.

    1721   Moresby White v Rangeland Ltd 1952 (4) SA 285 (SR) 287.    1722   Moresby White v Rangeland Ltd 1952 (4) SA 285 (SR) 286-287.    1723   Moresby White v Rangeland Ltd 1952 (4) SA 285 (SR) 287.    1724   per Lord Norman in Anderson v James Sutherland (Peterhead) Ltd 1941 SC 203 217.

    1725   s 1(1).    1726   per Greene MR in Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 218 (CA).    1727   Moresby White v Rangeland Ltd 1952 (4) SA 285 (SR) 287.    1728   Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705; [1914-15] All ER Rep 280

(HL); Moresby White v Rangeland Ltd 1952 (4) SA 285 (SR) 287; Tesco Supermarkets Ltd v Nattrass [1972] AC 153; [1971] All ER 127 (HL); El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 (CA); Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500; [1995] 3 All ER 918 (PC). On this doctrine, see notes on s 65.

    1729   Micro Mouldings (Pty) Ltd v American International Insurance Co Ltd 1979 (4) SA 771 (C).    1730   Moresby White v Rangeland Ltd 1952 (4) SA 285 (SR) 287. In Kerr v Walter 1933 SC 458 463-464 Lord

Flemming said: 'I quite accept the view that a director is an agent and not a servant of a company, and I think it follows that a managing director must be regarded not as a servant of the company but as an agent with managerial functions.'

    1731   Boschoek Proprietary Co Ltd v Fuke [1906] 1 Ch 148 159; Nelson v James Nelson & Sons Ltd [1914] 2 KB 770 779; [1914-1915] All ER 433 439 (CA); Moresby White v Rangeland Ltd 1952 (4) SA 285 (SR).

    1732   See arts 61 and 62 of Table A and arts 62 and 63 of Table B.    1733   Foster v Foster [1916] 1 Ch 532; [1916-1917] All ER Rep 856; Trek Tyres Ltd v Beukes 1957 (3) SA 306

(W). Where remuneration of any kind is attached to the office, the director may not, because of his interest in the matter, vote on such a resolution of the board, see note CONFLICT OF INTEREST AND DUTY in notes on s 208.

    1734   Thomas Logan Ltd v Davis (1911) 104 LT 914; (1911) 105 LT 419 (CA).    1735   Barron v Potter [1914] 1 Ch 895; Foster v Foster [1916] 1 Ch 532; [1916-1917] All ER Rep 856.    1736   See Robinson v Randfontein Estate GM Co Ltd 1921 AD 168 181; Dickson v Acrow Engineers (Pty)

Ltd 1954 (2) SA 63 (W) 69; Ex parte Bennett 1978 (2) SA 380 (W) 387.    1737   See Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 501; [1964] 1 All ER

630 643 (CA).    1738   Cooper v Garratt 1945 WLD 137.    1739   See art 61 of Table A and art 62 of Table B. And see SA Securities v Nicholas 1911 TPD 450 461.    1740   See Robinson v Randfontein Estates Gold Mining Co Ltd 1921 AD 168; Dickson v Acrow Engineers (Pty)

Ltd 1954 (2) SA 63 (W); Nece Pty Ltd v Ritek Incorporation (1997) 24 ACSR 38 42-43 (Fed C of A). In Wolpert v Uitzigt Properties (Pty) Ltd 1961 (2) 257 SA (W) 266 it was said that implied authority exists 'when the 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'. This passage was quoted with approval in Tucker's Land and Development Corporation (Pty) Ltd v Perpellief 1978 (2) SA 11 (T) 14. It is, of course, incorrect. Implied authority is actual authority. A person who acts within the ambit of authority impliedly conferred on him therefore does not 'exceed' his authority.

    1741   'Actual authority might, of course, be either express - eg, if the second defendant were specifically authorised to engage the plaintiffs - or it might be implied - eg, if the second defendant had been appointed to some office which carried with it authority to make such a contract on behalf of the defendant company', per Willmer LJ in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 1 All ER 630 635 (CA).

    1742   Acutt v Seta Prospecting and Development Co Ltd 1907 TS 799 819; SA Securities v Nicholas 1911 TPD 450 461.

    1743   Acutt v Seta Prospecting & Developing Co Ltd 1907 TS 799 819.    1744   Nece Pty Ltd v Ritek Incorporation (1997) 24 ACSR 38 43 (Fed C of A).    1745   Nece Pty Ltd v Ritek Incorporation (1997) 24 ACSR 38 43 (Fed C of A).    1746   Nece Pty Ltd v Ritek Incorporation (1997) 24 ACSR 38 43 (Fed C of A).    1747   Insurance Trust & Investment (Pty) Ltd v Mudaliar 1943 NPD 45; Simons v Gilbert Hamer & Co Ltd 1963

(1) SA 897 (N) 919.    1748   Simons v Gilbert Hamer & Co Ltd 1963 (1) SA 897 (N) 919.    1749   Paddon & Brock Ltd v Nathan 1906 TS 158; Harcourt v Eastman 1953 (2) SA 424 (N); Contemporary

Refrigeration (Pty) Ltd v Leites & Sonpoll Investments (Pty) Ltd 1967 (2) SA 388 (D). Cf South African Fabrics Ltd v Millman NO 1972 (4) SA 592 (A) 596, where the question whether such transactions are void or voidable was left open.

    1750   Biggerstaff v Rowatt's Wharf Ltd [1896] 2 Ch 93 (CA); SA Securities Ltd v Nicholas 1911 TPD 450 459-460; SAIF Co-operative Society v Webber 1922 TPD 49; Wolpert v Uitzigt Properties (Pty) Ltd 1961 (2) SA 257 (W) 266;Contemporary Refrigeration (Pty) Ltd v Leites & Sonpoll Investments (Pty) Ltd 1967 (2) SA 388 (D) 392; Tuckers Land & Development Corporation (Pty) Ltd v Perpellief 1978 (2) SA 11 (T) 15; Big Dutchman (South Africa) (Pty) Ltd v Barclays National Bank Ltd 1979 (3) SA 267 (W) 280. Company Unique Finance (Pty) Ltd and Another v Johannesburg Northern Metropolitan Local Council and Another 2011 (1) SA 440 (GSJ).

    1751   Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 218 (CA) per Greene MR. Management here means the management of the company's business or part of it; there is no delegation of the remaining powers of the board, eg the financial policy of the company, the dividends to be declared, and the issue of the new shares: ibid .

    1752   Metal Manufacturers Ltd v Lewis (1988) 13 ACLR 357 365-366 CA(NSW).    1753   Metal Manufacturers Ltd v Lewis (1988) 13 ACLR 357 365-366 CA(NSW). In this case Mahoney JA (at 366)

found it unnecessary to consider whether the authority which a managing director derives from his office 'is, in principle, part of the authority committed to the board of directors as such or whether his authority to do what a managing director may do drives, as it were, not from the board of directors but directly for the company'. He said that whatever be the position in that regard, a managing director's authority 'derives not from the authority or consent given by directors, but from the fact that he has been appointed to the office'. But, of course, a managing director's powers are conferred on him by way of a delegation of their powers by the directors, and that is something they are empowered to do only once they have appointed him to the office of managing director: see arts 61 and 62 of Table A and arts 62 and 63 of Table B.

    1754   Anderson v James Sutherland (Peterhead) Ltd 1941 SC 203; Moresby White v Rangeland Ltd 1952 (4) SA 285 (SR); Harold Holdsworth & Co (Wakefield) Ltd v Caddies Ltd [1955] All ER 725 (HL).

    1755   s 1(1).    1756   R v Milne and Erleigh (5) 1950 (4) SA 604 (W) 606.    1757   Phillips v Base Metals Exploration Syndicate Ltd 1911 TPD 403 406; and see Richmond Gate Property Co

Ltd [1964] 3 All ER 936.    1758   Goodman v Suburban Estates Ltd 1915 WLD 15.    1759   Articles 61 of Table A and 62 of Table B empower the directors to appoint a managing director at such

remuneration as they think fit and provide that such remuneration may be by way of salary or commission or participation in profits or partly in one way or partly in another. In the case of a company limited by guarantee, however, only a member may be given the right to participate in the divisible profits of the company: s 40(1). As to the calculation of remuneration by way of commission and participation in profits, see Edwards v Saunton Hotel Co Ltd [1943] 1 All ER 176. And see Re Spanish Prospecting Co Ltd [1911] 1 Ch 92; [1908-10] All ER Rep 573 (CA); Vulcan Motor & Engineering Co (1906) Ltd v Hampson [1921] KB 597 (CA); Stewart v Sashalite Ltd [1936] 2 All ER 1481.

    1760   Such a contract may rise by implication: see eg Re Richmond Gate Property Co Ltd [1964] 3 All ER 936.    1761   See Craven-Ellis v Canons Ltd [1936] 2 KB 403; [1936] 2 All ER 1066 (CA), where a managing director,

who had entered into a contract with the company providing for his remuneration but who failed to take up his qualification shares, was awarded remuneration on the basis of a quantum meruit. And see Guinness plc v Saunders [1990] 2 AC 663; [1990] 1 All ER 1990 652 (HL).

    1762   Cooper v Garratt 1945 WLD 137 147.    1763   Harold Holdsworth & Co (Wakefield) Ltd v Caddies Ltd [1955] All ER 725 (HL).    1764   See art 61 of Table A and art 62 of Table B.    1765   See art 61 of Table A and art 62 of Table B.    1766   Foster v Foster [1916] 1 Ch 532; [1916-1917] All ER Rep 856.    1767   Article 62 of Table A and art 62 of Table B provide that the directors may revoke the appointment of a

managing director or manager subject to the terms of any agreement entered into in any particular case. And see Foster v Foster[1916] 1 Ch 532; [1916-1917] All ER 856.

    1768   Nelson v James Nelson & Sons Ltd [1914] 2 KB 770 776; [1914-1915] All ER 433 437 (CA); Barlows Manunfacturing Co Ltd v R N Barrie (Pty) Ltd 1990 (4) SA 608 (C) 611; and see Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 722-723; [1940] 2 All ER 445 458-459 (HL). Where the directors are empowered by the articles to appoint a managing director for a fixed period, the existence of a provision in the articles conferring on the directors (ibid) or on the company (Shindler v Northern Raincoat Co Ltd [1960] 2 All ER 239) the power to revoke the appointment of the managing director at will, does not put it beyond the powers of the directors to appoint a manager under a contract which does not confer upon the company the right to terminate his appointment at will. See also Byron v Cape Sundays River Settlements Ltd 1923 EDL 117 125. And see art 61 of Table A and art 62 of Table B, which provide that the board may revoke the managing director's appointment 'subject to the terms of any agreement entered into in any particular case'. In Jackson v Invicta Plastics Ltd [1987] BCLC 329 it was held that in order to justify summary dismissal for incompetence of a recently appointed chief executive, the company would have to show that his continued employment would be quite impractical because of the harm he was likely to do the company.

    1769   Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 722; [1940] 2 All ER 445 458 (HL).    1770   See Boston Deep Sea Fishing & Ice Co v Ansell (1888) 39 ChD 339; [1886-90] All ER Rep 65

(CA); Farmers' Associated Dairies Ltd v Goldstein 1924 WLD 181; Barlows Manufacturing Co Ltd v R N Barrie (Pty) Ltd 1990 (4) SA 608 (C)612.

    1771   Nelson v James Nelson & Sons [1914] 2 KB 770; [1914-1915] All ER 433 (CA); Byron v Cape Sundays River Settlements Ltd 1923 EDL 117. As to the calculation of such damages, see Byron v Cape Sundays River Settlements Ltd supra140; Beach v Reed Corrugated Cases Ltd [1956] 2 All ER 652; Shindler v Northern Raincoat Co Ltd [1960] 2 All ER 239.

    1772   Read v Astoria Garage (Streatham) Ltd [1952] Ch 637; [1952] 2 All ER 292 (CA); and see Ross & Co v Coleman 1920 AD 408 418-419. Thus where the articles provide that the managing director's appointment shall determine ipso facto if he ceases to be a director, he may be dismissed without notice: ibid. See also Foster v Foster [1916] 1 Ch 532; [1916-17] All ER Rep 856. Where the contract of appointment is entered into on the terms of the articles, there will be no breach of contract if the company alters the relevant articles: cf Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656; [1900-3] All ER 746 (CA); Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701; [1940] 2 All ER 445 (HL).

    1773   Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 716-717 721; [1940] 2 All ER 445 454-455 457 (HL); Walker v Standard Chartered Bank plc [1992] BCLC 535 539-540 (CA). In Southern Foundries (1926) Ltd v Shirlaw supra (at 721; at 457) this was said to follow ex vi termini. The articles of companies nevertheless usually specifically provide for this consequence, see art 61 of Table A and art 62 of Table B.

    1774   Bluett v Stutchbury's (1908) 24 TLR 469 (CA).    1775   s 220(1) empowers the company to remove a director by ordinary resolution before the expiration of his

office, notwithstanding anything in its memorandum or articles or in any agreement between it and any director. This power does not derogate from any other power to remove a director which may otherwise exist: s 220(7).

    1776   Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701; [1940] 2 All ER 445 (HL). It makes no difference if the articles were altered after the director's appointment so as to include the particular power to remove him: ibid; and seeShuttleworth v Cox Brothers and Co (Maidenhead) Ltd [1927] 2 KB 9; [1926] All ER Rep 498 (CA). Furthermore, the managing director cannot restrain the company from so altering its articles: Baily v British Equitable Assurance Co [1904] 1 Ch 374 (CA); Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701; 1940 2 All ER 445 (HL).

    1777   s 220(7) provides that where a director is removed from office by the company under s 220(1) this does not deprive him of compensation or damages which may be payable in respect of any appointment terminating with his directorship; and see also Shindler v Northern Raincoat Co Ltd [1960] 2 All ER 239. As to the director's right to claim damages where removed by the directors under a power conferred on them by the articles,

see Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701; [1940] 2 All ER 445 (HL). And see Walker v Standard Chartered Bank plc [1992] BCLC 535 (CA).

    1778   Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701; [1940] 2 All ER 445 (HL); Shindler v Northern Raincoat Co Ltd [1960] 2 All ER 239; Walker v Standard Chartered Bank plc [1992] BCLC 535 539-540 (CA).

    1779   Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 727-728 743, [1940] 2 All ER 445 461-462 470-471 (HL); cf Bluett v Stutchbury's Ltd (1908) 24 TLR 469 (CA).

    1780   Phear & Quinton v Rodwell 1949 (3) SA 1183 (SR).    1781   P G Group (Pty) Ltd v Mbambo N O [2005]. BLLR 71 (LC); Chillibush v Johnston [2010] 6 BLLR 607 (LC).    1782   Re Farrer (TN) Ltd [1937] Ch 352; [1937] 2 All ER 505.    1783   Fowler v Commercial Timber Co Ltd [1930] 2 KB 1; [1930] All ER Rep 224 (CA).    1784   Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 722; [1940] 2 All ER 445 458 (HL).    1785   s 1(1).    1786   s 1(1). As an officer of the company, he is disqualified for appointment as auditor of the company: s

275(1)(a).    1787   L Suzman (Rand) Ltd v Yamoyani (2) 1972 (1) SA 109 (W) 113-114; and see also R v Schwartz 1931 TPD

142.    1788   R v Mall 1959 (4) SA 607 (N) 622-623; L Suzman (Rand) Ltd v Yamoyani (2) 1972 (1) SA 109 (W). In Re a

Company [1980] 1 Ch 138 144; [1980] 1 All ER 284 287 (CA), it was said that the expression 'manager' should not be too narrowly construed: 'It is not to be equated with a managing or other director or a general manager. . . [A]ny person who in the affairs of the company exercises a supervisory control which reflects the general policy of the company for the time being or which is related to the general administration of the company is in the sphere of management. He need not be a member of the board of directors. He need not be subject to specific instructions from the board.' Thus a manager need not necessarily be 'manager of the company', a phrase which Jenkins LJ used in Re B Johnson & Co (Buildings) Ltd [1955] Ch 634 661; [1955] 2 All ER 775 790 (CA) ('prima facie, according to the ordinary meaning of the words, connotes a person holding, whether de jure or de facto, a post in or with the company of a nature charging him with the duty of managing the affairs of the company for the company's benefit'). Where the person concerned will be guilty of a criminal offence or will suffer some incapacity if he is categorised as a manager, the courts have usually defined the term more narrowly. Thus in Gibson v Barton (1875) LR 10 QB 329 336 ('manager' for the purposes of s 27 of the Companies Act 1862) it was said that a manager in 'ordinary talk' is 'a person who has the management of the whole affairs of the company . . . a person intrusted with power to transact the whole of the affairs of the company'. Managers are those persons 'who are in a position of real authority, the decision-makers within the company who have both the power and the responsibility to decide corporate policy and strategy': R v Boal [1992] QB 591 876; [1992] 3 All ER 177 181 (CA) ('manager, secretary or similar officer' for the purposes of s 23 of the Fire Precaution Act 1971). See Registrar of Restrictive Trading Agreements v W H Smith & Son Ltd [1969] 3 All ER 1065 (CA) ('manager or officer' for the purposes of s 15(3) of the Restrictive Trade Practices Act 1956); Ex parte Bennett 1978 (2) SA 380 (W) 388 (disqualification as director); Woodhouse v Walsall Metropolitan Borough Council [1994] 1 BCLC 435 ('manager, secretary or similar officer' for purposes of s 3(1) of Control of Pollution Act 1974). And see Amalgamated Union of Building Trade Workers of SA v South African Operative Masons' Society 1957 (1) SA 440 (A) 448-449.

    1789   R v Mall 1959 (4) SA 607 (N) 623. Thus a manager is disqualified both as an officer and as an employee from appointment as auditor of the company: s 275(1)(a).

    1790   R v Mall 1959 (4) SA 607 (N) 623. It may be inferred from the acquiescence of the directors in a course of dealing of the company: Robinson v Randfontein Estates GM Co Ltd 1921 AD 168 181; Dickson v Acrow Engineers (Pty) Ltd 1954 (2) SA 63 (W) 69; Ex parte Bennett 1978 (2) SA 380 (W) 387.

    1791   L Suzman (Rand) Ltd v Yamoyani (2) 1972 (1) SA 109 (W) 115.    1792   See Canadian Aero Service Ltd v O'Malley (1974) 40 DLR 3d 371 381 (SC of Can); Sibex Construction (SA)

Ltd v Injectaseal CC 1988 (2) SA 54 (T) 66.

212  Filling of vacancy where director disqualified or removed(1) If the articles of a company provide for the filling of casual vacancies in respect of directors, any such

vacancy created by the disqualification of any person from being a director of the company or by the removal of a director under this Act, may, subject to the provisions of such articles, and if in the case of any such removal, the vacancy is not filled at the meeting at which he is removed, be filled as a casual vacancy.

(2) A person appointed as a director under subsection (1) in the place of a director removed or disqualified under this Act shall be treated, for the purpose of determining the time at which he or any other director is to retire, as if he had become director on the day on which the person in whose place he is appointed was last appointed a director.

NotesAs to disqualification of a person from being a director, see ss 213, 218 and 219. As to removal from office under the Act, see s 220

A casual vacancy is a vacancy which occurs on the board of directors otherwise than by expiry of a director's term of office. 1793 Unless the articles exclusively restrict the power to others, a company in general meeting has an inherent power to fill such vacancies. 1794 Where there is no such restriction and the articles empower only the directors to fill vacancies caused, for example, by retirement or removal, the company in general meeting retains its inherent power to fill vacancies caused by other eventualities, for example, resignation, death, incapacity or disqualification. 1795

The articles usually provide that, unless the shareholders otherwise determine in general meeting, any casual vacancy on the board may be filled by the directors; and that a director so appointed is subject to retirement on the day he would have retired had he been appointed when the director in whose stead he is appointed was last elected. 1796 Where the articles contain these or similar provisions and the vacancy is not filled by the

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board or by the members at the general meeting at which the vacating director retired, the board retains the power to fill it. 1797 An express power to fill casual vacancies may be given to the directors on such terms as to exclude any such power on the part of the members. 1798 Where the articles provided that two directors would form a quorum, it was held that the sole surviving director had the power to fill a casual vacancy under an article empowering the directors to fill such vacancies. 1799

Subsection (2) merely provides that a person appointed as a director under sub-s (1) 'shall be treated, for the purpose of determining the time at which he or any other director is to retire, as if he had become director on the day on which the person in whose place he is appointed was last appointed a director'. It does not deem him to have been appointed as a director on the day on which the person in whose place he is appointed was last appointed a director. 1800

  

    1793   See Munster v Cammell Co (1882) 21 ChD 183 187. Cf Rentekor (Pty) Ltd v Rheeder and Berman 1988 (4) SA 469 (T) 507, where Kriegler J held that this is not an exhaustive definition. He preferred the definition of a casual vacancy as 'any vacancy other than one caused by effluxion of time or a director retiring by rotation', which he considered to be a wider definition. He said: 'The adjective "casual" ordinarily denotes something subject to or produced by chance. . . . In the context of an article [empowering the director to appoint any person to be a director to fill a casual vacancy] the word is used to distinguish between the type of vacancy which predictably and routinely occurs and is filled at the annual general meeting and all those cases where that does not come to pass.' From this, he concluded that where a resolution of the members at an annual general meeting purporting to appoint directors is invalid because it purported to appoint a number of directors en bloc (and which therefore transgressed the provisions of s 210), the board can fill the vacancies under their power to fill casual vacancies. The learned judge would seem to have thought that the vacancies in question were caused by the invalid en bloc resolution. But those resolutions merely purported to fill vacancies caused, it would seem, by the annual retirement (in terms of the articles) of a proportion of the directors. Therefore, they were not causal vacancies. See also CyberScene Ltd v i-Kiosk Internet and Information (Pty) Ltd 2000 (3) SA 806 (C) 814, where a vacancy caused by reason of the fact that the person, because disqualified, was not validly appointed a director, was treated as casual vacancy for the purposes of s 212.

    1794   Munster v Cammell Co (1882) 21 ChD 183 ; Worcester Corsetry Ltd v Witting [1936] Ch 640 (CA); Gohlke & Schneider v Westies Minerale (Edms) Bpk 1970 (2) SA 685 (A) 693.

    1795   Gohlke & Schneider v Westies Minerale (Edms) Bpk 1970 (2) SA 685 (A) 693; Link Agricultural Pty Ltd v Shanahan (1998) 28 ACSR 498 517 CA(Vic); Australian Securities and Investment Commission v Hallmark Gold NL (1999) 30 ACSR 688 693 (Fed C of A). Further as to the power of the general meeting to appoint directors, see notes on s 210.

    1796   See art 72 of Table A and art 70 of Table B.    1797   Munster v Cammel Co (1882) 21 ChD 183 187.    1798   Blair Open Hearth Furnace Co Ltd v Reigart (1913) 108 LT 665.    1799   Gorfil v Marendaz 1965 (1) SA 686 (T). And see Channel Collieries Trust Ltd v Dover, St Margaret's and

Martin Mill Light Railway Co [1914] 1 Ch 568; [1914] 2 Ch 506; [1914-15] All ER Rep 265 (CA); Macson Development Co Ltd v Gordon (1959) 19 DLR (2d) 465; APT Group Services Pty Ltd v Craig Ferguson and Judith Margaret Curphey (1991) 6 ACSR 231 SC(Vic).

    1800   Cf CyberScene Ltd v i-Kiosk Internet and Information (Pty) Ltd 2000 (3) SA 806 (C) 814.

213  Qualification shares of directors(1) (a) Without prejudice to the restrictions imposed by section 211, any director of a company who is by its

articles required to hold a specified number of qualification shares, and who does not hold such qualification shares shall vacate his office if he does not obtain such qualification shares within two months, or such shorter period as may be provided in the articles of the company, from the date of his appointment, and shall not be capable of being reappointed until he has obtained such qualification shares.

(b) For the purposes of any provision in the articles of a company requiring a director to hold a specified number of shares as qualification shares, the bearer of a share warrant shall not be deemed to be the holder of the shares specified in the warrant.

(2) Any person who accepts an appointment or acts as a director of a company contrary to any provision of subsection (1), shall be guilty of an offence.

Notes

A director is required to hold shares in the company if, but only if, he is required to do so by the articles of the company. 1801 A provision that a person who holds at least a certain number of shares shall be eligible as a director does not impose a duty of obtaining a qualification upon a person appointed by the articles. 1802

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In this context, 'to hold' shares means to be the registered holder.1803  Thus a director may hold the necessary shares as trustee, 1804  and this remains true even where the articles require the director to hold the shares 'in his own right'.1805  The inclusion of a person's name as one of the joint holders of a parcel of shares will not of itself prevent those shares from being a sufficient qualification.1806

As to the date of a director's appointment, where the result of a poll is declared on a day following the meeting, the election meeting is treated as continuing until the result of the poll is obtained; consequently, the appointment of the director takes effect from the date on which the result of the poll is ascertained or declared and the two months period runs from that date.1807

The bearer of a share warrant 1808  cannot be registered as a member of the company unless in terms of the articles he is deemed to be one; but even when so deemed, his bearer share warrants cannot be treated as qualification shares.1809

A person who is, in terms of s 213(2), guilty of the offence of accepting an appointment or acting as a director contrary to any of the provisions of s 213, is punishable by a fine for every day during which the contravention continues.1810

Where articles provide that the holding of a share qualification is a condition precedent to becoming a director, an appointment of a person not already holding such shares is invalid, 1811  and a company cannot ratify the appointment without first altering its

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articles.1812  The usual provision is, however, in the form 'the shareholding qualification of a director shall be the holding' of so many shares.1813  These words do not render the holding of such shares a condition precedent to an appointment.1814  It has been held that unless the articles authorise a director to do so, a director may not act as such before he has acquired his share qualifications, and that this is so even where the articles provide for a period within which a director must obtain his qualification shares.1815

Where the articles do not prescribe that a director must obtain his qualification shares from the company, he may obtain them from a third party; 1816  and he is under no obligation to take the shares from the company unless he has contracted, expressly or impliedly, with the company to do so.1817  However, s 211(1)(b) provides that any person who, before the issue of a certificate to commence business, is appointed as a director of a company having a share capital, must either subscribe in the memorandum of the company for a number of shares not less than the number, if any, required to be held by a director thereof as qualification shares, or sign and lodge with the Registrar a contract in the prescribed form in writing to subscribe for or otherwise acquire such shares. Failure to do so does not affect the validity of his appointment, 1818  but it does constitute an offence.1819

No such duty to enter into a contract with the company for his qualification shares is imposed upon a director appointed after the issue of the certificate to commence business. Because such a director is under no obligation to obtain his qualification shares from the company and, because vacation of office is the prescribed consequence of failure to obtain such shares, 1820  it would seem that a contract to obtain such shares from the company cannot be implied from the mere fact that such a director has consented to act, and did so act, as a director of the company.1821  A possible exception to this is where the

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articles of the company contain a provision declaring that, if a director has not otherwise acquired his qualification shares within the specified period, he shall be deemed to have agreed to take them from the company, and the director has neither otherwise acquired those shares 1822  nor resigned within the period allowed for acquiring them.1823  A director may also be estopped from denying that he has agreed to acquire the shares from the company where shares sufficient to qualify him are registered in his name and he continues to act as a director without otherwise acquiring his share qualification.1824

Shares acquired from a third party after the director has become liable to take them from the company will not relieve him of that liability.1825

A director may pay for his qualification shares in money or by any honest mode of payment in money's worth.1826  A director may receive his qualification shares as a gift.1827  But it is a breach of duty for a director to accept his qualification shares as a gift from a promoter of the company.1828  Such a gift is nothing less than a bribe.1829  It makes no difference whether the director received the shares before or after allotment, so long as there is any matter open between the company and the donor of the shares in regard to which the director might be called upon to act in the interests of the company. This rule is applicable even if the contract under which the promoter obtains the shares is one that has already been signed on behalf of the company, or is one under which the company has no discretion whether or not to accept the property which the company purchased from the promoters.1830  The director's liability to the company is to pay the real market value of the shares at the time of the improper allotment, and not the highest market value or the shares' nominal value.1831

If the number of qualification shares required to be held by a director is increased after a director has acquired his qualification shares, the director does not vacate his office if he fails to acquire the additional shares.1832  But if he continues to act as such, he will be deemed to have contracted to acquire, within a reasonable time, the additional shares from either the company or a third party.1833

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    1801   Re British Provident Life & Guarantee Association (De Ruvigne's Case) (1877) 5 ChD 306 323 326 (CA). The articles may impose further disqualifications: s 218(3).

    1802   See Re Llanharry Haematite Iron Ore Co Ltd (Stock's Case) (1864) De GJ & SM 426 434; 46 ER 983 987, applied in Re Anglo-Moravian Hungarian Junction Railways Co (Dent's Case, Forbe's Case) (1873) 8 Ch App 768.

    1803   Spencer v Kennedy [1926] Ch 125; [1925] All ER Rep 135.    1804   Pulbrook v Richmond Consolidated Mining Co (1879) 9 ChD 610; Bainbridge v Smith (1889) 41 ChD 462

(CA); Dowjee Co Ltd v Waja 1929 TPD 66; Sutton v English & Colonial Produce Co [1902] 2 Ch 502 506; Santos Ltd v Pettingell(1978) 4 ACLR 110 SC(NSW); Venture Acceptance Corporation Ltd Kirton (1984) 9 ACLR 390 402-403 SC(NSW), on appeal (1986) 10 ACLR 347 352 SC(NSW)).

    1805   In Bainbridge v Smith (1889) 41 ChD 462 (CA) the articles required a director to hold shares 'in his own right'. Lindley LJ held (at 474-475): 'The words in question have acquired . . . a conventional meaning which I for one am not prepared at present to disturb. I think that the conventional meaning is this, that a person "holding shares in his own right" means holding in his own right as distinguished from holding in the right of somebody else. I do not think the test is beneficial interest, the test is being on or not being on the register as a member, ie with power to vote, and with those rights which are incidental to full membership. It means that a person shall hold shares in such a way that the company can safely deal with him in respect of his shares whatever his interest may be in the shares.' In Sutton v English & Colonial Produce Co [1902] 2 Ch 502 506, Buckley J said: 'Negatively, then, the holder in his own right need not be beneficial owner. It remains to say what affirmatively, he must be. That, I think, is answered by Lindley LJ in Bainbridge v Smith [supra]. He must be a person who holds shares in such a way that the company can safely deal with him in respect of his shares, whatever his interests may be in the shares. Holding in a representative character will not do. Holding as trustee without beneficial ownership will do, but the holder must so hold as the company can safely deal with him as owner.'

    1806   Re Glory Paper Mills Co (Dunster's Case) [1894] 3 Ch 473 (CA); Grundy v Briggs [1910] Ch 444.    1807   Holmes v Lord Keyes [1959] Ch 199; [1958] 2 All ER 129 (CA).    1808   See s 101.    1809   s 103(4).    1810   s 441(1)(p). As to obtaining relief from such liability under s 248, see Re Gilt Edge Safety Glass Ltd [1940]

Ch 495; [1940] 2 All ER 237.    1811   Re East Norfolk Tramways Co (Barber's Case) (1877) 5 ChD 963 (CA); Re Percy & Kelly Nickel, Cobalt &

Chrome Iron Mining Co (Jenner's Case) (1877) 7 ChD 132 (CA) (where the articles provided that no person would be 'qualified to be a director' who did not hold the necessary shares); Channel Collieries Trust Ltd v Dover St Margaret's & Martin Mill Light Railway Co [1914] 2 Ch 506; [1914-15] All ER Rep 265 (CA); Meyer v Meyer Sons And Co Ltd 1926 CPD 109. InRe Llanharry Haematite Iron Ore Company Ltd (Stock's Case) (1864) De G J & S 426 434, 46 ER 983 987 the articles of association provided that 'no person shall be eligible as a director unless he shall hold in his own right 50 shares at the least'. It was held that this article did not apply to directors who were nominated by the directors. Turner LJ said: 'I think that the word "eligible" applies to persons to be elected and not to persons who, by the articles of association themselves, had been placed in the position of directors.' This was followed in Re Anglo-Moravian Hungarian Junction Railways Co (Dent's Case, Forbe's Case) (1873) 8 Ch App 768 774-775, where Lord Selbourne L C said: 'The word "eligible" must means capable of being elected at some future election.' See also Meyer v Meyer Sons and Co Ltd 1926 CPD 109 117.

    1812   Boschoek Proprietary Co Ltd v Fuke [1906] 1 Ch 148.    1813   See art 56 of Table A and art 57 of Table B.    1814   Carbonic Gas Co Ltd v Ziman 1938 TPD 102; Mockford v Gordon and Abe Gordon Pty Ltd 1949 (3) SA

1173 (W).    1815   Carbonic Gas Co Ltd v Ziman 1938 TPD 102, followed in Mockford v Gordon and Abe Gordon (Pty)

Ltd 1949 (3) SA 1173 (W); and in this regard see also Lombard v SA Vroue-Federasie Transvaal 1968 (3) SA

473. But cf Re Portuguese Consolidated Copper Mines Ltd [1891] 3 Ch 28 (CA); Re International Cable Co Ltd (1892) 66 LT 253. Section 213(2) makes the acceptance of appointment or acting as a director an offence if the share qualification required by the articles is not obtained within two months or such shorter period provided by the articles. This suggests that the position is, rather, that where the articles provide for such a period within which a director must obtain his qualification shares, a director may act as such before he has acquired those shares, unless the articles otherwise provide.

    1816   Re Metropolitan Public Carriage & Repository Co (Brown's Case) (1873) 9 Ch App 102; Re Percy & Kelly Nickel, Cobalt & Chrome Iron Mining Co (Hamley's Case) (1887) LR 5 ChD 705.

    1817   Re Wheal Buller Consols (1888) 38 ChD 42 (CA); Re Anglo-Austrian Printing & Publishing Union (Isaac's Case) [1892] 2 Ch 158 (CA), where it was held that although the director never did apply for the allotment, his signing of the memorandum and articles meant that he had agreed to take from the company his required qualification. Accordingly he was liable in respect of the stated number of shares.

    1818   s 211(4).    1819   s 211(6).    1820   s 213(1)(a).    1821   Before the position was regulated by statute (ie by s 213(1)(a)), there were numerous cases to the effect

that, except where the holding of shares was made a condition precedent for holding office, when a person accepted appointment and acted as a director knowing that the holding of a certain number of shares was a necessary qualification, he impliedly agreed with the company that he would, within a reasonable time, obtain the requisite shares; and the company might, when the reasonable time had expired, put him on the register in respect of this number of shares, with the result that he become a member and liable as such: see Re Metropolitan Public Carriage & Repository Co (Brown's Case) (1873) LR 9 Ch App 102; Re Portuguese Consolidated Copper Mines Ltd [1891] 3 Ch 28 (CA); Re R Bolton & Co (Salisbury-Jones and Dale's Case) [1894] 3 Ch 356 (CA); Molineaux v London, Birmingham & Manchester Insurance Co Ltd [1902] 2 KB 589; [1900-3] All ER Rep 618 (CA). See Re National Safety Council of Australia Victoria Division (1992) 10 ACSR 101 116 SC(Vic).

    1822   See Anglo-Austrian Printing & Publishing Union (Isaac's case) [1892] 2 Ch 158 (CA). In such a case it would seem that it is sufficient that he accepted office even though he never acted as a director: Re Hercynia Copper Co [1894] 2 Ch 403 (CA).

    1823   Re Bolton and Co (Salisbury-Jones and Dale's Case) [1894] 3 Ch 356 (CA).    1824   Re Portuguese Consolidated Copper Mines Ltd [1891] 3 Ch 28 (CA).    1825   Re Portuguese Consolidated Copper Mines Ltd [1891] 3 Ch 28 (CA); Salton v New Beeston Cycle

Co [1899] 1 Ch 775.    1826   Re Anglo-Moravian Hungarian Junctions Railway Co (Dent's Case, Forbe's Case) (1873) 8 Ch App 768.    1827   Re Metropolitan Public Carriage & Repository Co (Brown's Case) (1873) 9 Ch App 102.    1828   Re Canadian Oil Works Corporation (Hey's Case) (1875) 10 Ch App 593; Eden v Riddesdale Railway Lamp

& Lighting Co Ltd (1889) 23 QBD 368 (CA); Balmoral Diamond Syndicate Ltd v Liddle, Smith, Leeb, Harger and Schuller 1907 TH 89. Where directors accepted qualification shares from a person who was a vendor to the company and with whom it would be their duty to deal as trustees, it was held that, although it was a breach of trust so to accept shares, the directors could not be placed on the list of contributories as holders of unpaid shares: Re Western of Canada Oil, Lands & Works Co (Carling, Hespeler and Walsh's Case) (1875) 1 ChD 115 (CA).

    1829   Balmoral Diamond Syndicate Ltd v Liddle, Smith, Leeb, Harger and Schuller 1907 TH 89 104.    1830   Balmoral Diamond Syndicate Ltd v Liddle, Smith, Leeb, Harger and Schuller 1907 TH 89 105-106.    1831   Balmoral Diamond Syndicate Ltd v Liddle, Smith, Leeb, Harger and Schuller 1907 TH 89 108-109.    1832   Molineaux v London, Birmingham & Manchester Insurance Co Ltd [1902] 2 KB 589; [1900-3] All ER Rep

618 (CA).    1833   Molineaux v London, Birmingham & Manchester Insurance Co Ltd [1902] 2 KB 589; [1900-3] All ER Rep

618 (CA). In Re La Mancha Irrigation & Land Co (Lord Claud-Hamilton's Case) (1873) 8 Ch App 548 it was held that a resolution to the effect that the 'future qualification of a director shall be 100 shares' meant the qualification of future directors shall be 100 shares.

214  Defect in appointment of director and validity of actsThe acts of a director of a company shall be valid notwithstanding any defect that may afterwards be discovered in his appointment or qualification.

NotesIn addition to the protection afforded by the common law (as to which, see notes on s 36), s 214 protects persons dealing with companies in the case of certain irregularities.

Similar provisions are frequently also contained in the articles of companies.1834  Whether these articles can have the effect of validating such transactions as against third parties would seem to be doubtful, for third parties, although fixed with notice of the contents of the company's articles association, are not bound by them. The wording of these articles is, usually, in certain respects different from that of the section. In particular, they purport 1835  to validate the acts of a director or directors who 'were disqualified', while the section validates the acts of a director whose qualification was defective. It has, however, been held that the words 'qualification' and 'disqualification', as they appear in the section and in such articles, are not limited to share qualification but include also disqualification from office for any other reason.1836

The primary purpose of s 214 is the protection of innocent persons who in good faith deal with directors believing them to be properly appointed and qualified.1837  It may,

however, be invoked by the company as against a person seeking to relying on the invalidity of the act.1838

The section is concerned with the validity of the acts done, and not the status of the person concerned. It provides no basis for regarding a person as a director, or for his acts to be treated as if they were the acts of a director. In other words, the provision cannot repair or validate the defective appointment itself; it can only repair or validate the acts of directors not properly appointed.1839

It has been held that the section applies only where there has been an appointment in which there is a defect; and that it therefore does not apply where there has been no appointment at all, or where the term of office of a director has expired but he

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nevertheless continues to act as a director.1840  It has also been held to be implicit in the section (and in such articles) that the persons who purported to make the appointment must have had power to make it, because it is not apt to speak of a defect in the appointment if there is no power to appoint at all. Hence a purported appointment by persons lacking power to make such an appointment (eg a general meeting not properly convened or at which there was no quorum) confers no protection.1841

Although the proposition that the section applies only where there has been an appointment in which there is a defect has been accepted as correct in a number of cases, its correctness has been questioned,1842  and the better view would seem to be that the provision includes not only a formal appointment that turns out to be defective, but also a de facto appointment. So construed, it includes the case where a person, without any formal appointment, acts as a director (or after the expiry of his term of office, continues

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to act as a director) with the acquiescence of the other directors or the shareholders, it being thought that he had been formally appointed (or that his term of office had not expired).

A person relying on the section must have acted in good faith without knowledge of the defect; 1843  and the section does not assist a person put on inquiry but who does not inquire.1844  The words 'notwithstanding any defect that may afterwards be discovered' do not mean merely 'notwithstanding that the facts which show the defect were afterwards made known', but notwithstanding the defect itself - the defect arising from the facts - was afterwards discovered.1845  Thus, if there is good faith, the mere fact that a person had notice of the existence of the facts which led to the disability does not prevent him from relying on the section if he was not aware of the legal conclusions relating to those facts.1846

The acts of the director must have been completed before the defect was discovered.1847  Thus where an action at law is bona fide commenced under the authority of a director whose appointment is defective, the action may not be continued to a finish under the authority of that director once the defect in his appointment has become known.1848

The provision is not limited to dealings between the company and outsiders, but applies also to dealings between the company and persons who are inside the company.1849  Thus it has been applied where defectively appointed or defectively qualified directors have elected a director, 1850  or allotted qualification shares to themselves.1851

Section 268E(3) provides that the provisions of s 214 shall apply mutatis mutandis to the appointment of a secretary. See notes on s 268.

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Register of Directors and Officers (ss 215-217)  

    1834   See art 83 of Table A and art 82 of Table B.    1835   See s 65(2) and notes thereon.    1836   British Asbestos Co Ltd v Boyd [1903] 2 Ch 439 445; [1900-3] All ER Rep 323 325. And see CyberScene

Ltd v i-Kiosk Internet and Information (Pty) Ltd 2000 (3) SA 806 (C).    1837   Marrok Plase (Pty) Ltd v Advance Seed Co (Pty) Ltd 1975 (3) SA 403 (A) 412. On the question whether a

third party, who has bona fide dealt with a director whose appointments is invalid because the requirements of s 211 have not been complied with, is protected under s 214, see M J Oosthuizen 'Toestemming om as Direkteur Op te Tree' [1976] TSAR 247.

    1838   See CyberScene Ltd v i-Kiosk Internet and Information (Pty) Ltd 2000 (3) SA 806 (C) 814.    1839   Morris v Kanssen [1946] AC 459 468; [1946] 1 All ER 586 588 (HL). In Kanssen v Rialto (West End)

Ltd [1944] Ch 346 361; [1944] 1 All ER 751 758 (CA) Greene MR said: 'The board that purported to appoint him as a director was in law incompetent, and it is clear that, where such a board in ignorance of the defect in its appointment or qualifications purports to appoint an additional director, the section does not operate to make him a director, however much it may validate acts done by him in the belief that he has been validly appointed. If it were otherwise, he could claim to be a director and to act validly as such after the discovery of the defect, a result which cannot be extracted from the section.' And see Corporate Affairs Commission v Drysdale (1978) 3 ACLR 760 769 (HC of A); Re Lo-Line Electric Motors Ltd [1988] Ch 477; [1988] 2 All ER 692; Re New Cedos Engineering Co Ltd [1994] 1 BCLC 797 811-812.

    1840   Morris v Kanssen [1946] AC 459 471; [1946] 1 All ER 586 590 (HL), where Lord Simons held (in regard to s 143 of the English Companies Act 1929, which was substantially the same as our s 214): 'There is, as it appears to me, a vital distinction between (a) an appointment in which there is a defect or, in other words, a defective appointment, and (b) no appointment at all. In the first case it is implied that some act is done which purports to be an appointment but is by reason of some defect inadequate for the purpose; in the second case there is not a defect, there is no act at all. The section does not say that the acts of a person acting as director shall be valid notwithstanding that it is afterwards discovered that he was not appointed a director. Even if it did, it might well be contended that at least a purported appointment was postulated. But it does not do so, and it would, I think be doing violence to plain language to construe the section as covering a case in which there has been no genuine attempt to appoint at all. These observations apply equally where the term of office of a director has expired, but he nevertheless continues to act as a director, and where the office has been from the outset usurped without the colour of authority.' The point, Lord Simon said (at 472; at 590), 'may be summed up by saying that the section and the article, being designed as machinery to avoid questions being raised as to the validity of transactions where there has been a slip in the appointment of a director, cannot be utilized for the purpose of ignoring the substantive provisions relating to such appointment.' See Gorfil v Marendanz 1965 (1) SA 686 (T); Advanced Seed Co (Edms) Bpk v Marrok Plase (Edms) Bpk 1974 (4) SA 127 (NC) 132; Re Lo-Line Electric Motors Ltd [1988] Ch 477; [1988] 2 All ER 692; James North (Zimbabwe) (Pvt) Ltd v Mattinson 1990 (2) SA 228 (ZHC) 238. See also Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1 (HC of A); Albert Gardens (Manly) Pty Ltd v Mercantile Credits Ltd (1973) 131 CLR 60 (HC of A); Corporate Affairs Commission v Drysdale (1978) 3 ACLR 760 (HC of A); Re Northwestern Autoservices Ltd [1980] 2 NZLR 302 CA(NZ); Bay Marine Pty Ltd v Clayton Properties Pty Ltd (1984) 9 ACLR 780 SC(NSW); Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 702 SC(NSW); Re New Cedos Engineering Co Ltd [1994] 1 BCLC 797 812. In James North (Zimbabwe) (Pvt) Ltd v Mattinson supra it was held that the section had no application where a director had resigned but had attended a meeting of directors in the mistaken belief that he was serving out a period of notice.

    1841   Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1 34-35 53 (HC of A); Albert Gardens (Manly) Pty Ltd v Mercantile Credit Ltd (1973 131 CLR 60 65 (HC of A); Re Northwestern Autoservices Ltd [1980] 2 NZLR 302 CA(NZ). See however the judgment of Cooke J in Re Northwestern Autoservices Ltd supra 308 where he said: 'If one stands back from the authorities and textbooks and looks simply at the language of the section, it appears well capable of covering the case of an appointment made and acted on in fact and in good faith but not having an undiscovered defect making it void in law, in that the meeting was either not properly convened or lacked a quorum or was an unauthorised one-man meeting.'

    1842   See the obiter dictum of Trollip JA in Marrok Plase (Pty) Ltd v Advance Seed Co (Pty) Ltd 1975 (3) SA 403 (A) 412: 'I entertain some doubt about whether [ Morris v Kanssen [1946] AC 459; [1946] 1 All ER 586 (HL)] does not place an unduly restrictive interpretation on the section in question. It seems to confine its operation to cases in which a formal appointment has been made which turns out to be defective. But, as the section was enacted primarily for the protection of innocent persons who in good faith deal with the directors believing they have been properly appointed, I have some difficulty in understanding why "appointment" in the section cannot be construed to include a de facto appointment too. If it is so construed, it would include the case where a person, without any formal appointment, acts as a director or after the expiry of his term of office, continues to act as a director, with the acquiescence of the other directors or the shareholders. And if the lack of any formal appointment in such cases is due to bona fide inadvertence, is that not, par excellence, one of the very kind of defects comprehended by the section? I would have thought so.'

    1843   British Asbestos Co Ltd v Boyd [1903] 2 Ch 439 444; [1900-3] All ER Rep 323 325; Channel Collieries Trust Ltd v Dover, St Margaret's & Martin Mill Light Railway Co [1914] 2 Ch 506 511; [1914-15] All ER Rep 265 267-268 (CA); Morris v Kanssen [1946] AC 459; [1946] 1 All ER 586 (HL); Re New Cedos Engineering Co Ltd [1994] 1 BCLC 797 812.

    1844   Morris v Kanssen [1946] AC 459; [1946] 1 All ER 586 (HL); Re New Cedos Engineering Co Ltd [1994] 1 BCLC 797 812.

    1845   British Asbestos Co Ltd v Boyd [1903] 2 Ch 439 444; [1900-1903] All ER Rep 323 325; Channel Collieries Trust Ltd v Dover, St Margaret's & Martin Mill Light Railway Co [1914] 2 Ch 506 511; [1914-15] All ER Rep 267 (CA); Dey v Goldfields Building Finance & Trust Corporation Ltd 1927 WLD 180 195.

    1846   Channel Collieries Trust Ltd v Dover, St Margaret's & Martin Mill Light Railway Co [1914] 2 Ch 506 511-512; [1914-15] All ER Rep 265 267-268 (CA); Dey v Goldfields Building, Finance and Trust Corp Ltd 1927 WLD 180 196. And seeCyberScene Ltd v i-Kiosk Internet and Information (Pty) Ltd 2000 (3) SA 806 (C), where it would seem that the director did not know that he was disqualified in terms of s 218 from holding the office of director.

    1847   Dowjee Co Ltd v Waja 1929 TPD 66 79; Carbonic Gas Company Ltd v Ziman 1938 TPD 102 106; Trek Tyres Ltd v Beukes 1957 (3) SA 306 (W) 310.

    1848   Dowjee Co Ltd v Waja 1929 TPD 66 79; Carbonic Gas Company Ltd v Ziman 1938 TPD 102 106. And see CyberScene Ltd v i-Kiosk Internet and Information (Pty) Ltd 2000 (3) SA 806 (C).

    1849   Dawson v African Consolidated Land & Trading Co [1898] 1 Ch 6; [1895-99] All ER Rep 544 (CA); Channel Collieries Trust Ltd v Dover, St Margaret's & Martin Mill Light Railway Co [1914] 2 Ch 506 511; [1914-15] All ER Rep 265 267 (CA); Dey v Goldfields Building Finance & Trust Corporation Ltd 1927 WLD 180.

    1850   British Asbestos Co Ltd v Boyd [1903] 2 Ch 439; [1900-3] All ER Rep 323.

    1851   Channel Collieries Trust Ltd v Dover, St Margaret's & Martin Mill Light Railway Co [1914] 2 Ch 506; [1914-15] All ER Rep 265 (CA).

215  Register of directors and officers(1) Every company shall keep in one of the official languages of the Republic a register of directors and

officers of the company and secretaries thereof which are bodies corporate and cause to be entered therein —   (a)   in respect of every director or officer —

     (i)   his full forenames and surname and any former forenames and surname, his identity number or, if he has no such number, his date of birth, his nationality if not South African, his occupation, his residential, business and postal addresses and the date of his appointment; and

    (ii)   the name and registration number of every other company of which such director is a director;[Sub-para. (ii) substituted by s. 5 of Act 82 of 1992.]

[Para. (a) substituted by s. 14 (1) (a) of Act 59 of 1978.]   (b)   in respect of every officer or secretary which is a body corporate, its name, its registration number, the address

of its registered office and the date of its appointment; and   (c)   any changes occurring from time to time in the particulars referred to in paragraphs (a) and (b) and the dates

and nature of such changes.[Para. (c) substituted by s. 14 (1) (c) of Act 59 of 1978.]

[Sub-s. (1) substituted by s. 7 of Act 18 of 1990.](2) There shall in addition be entered in the said register the name and date of appointment of the auditor

of the company and, where subsection 274(3) applies, also of the individual contemplated in that subsection, and, in each case, the date and particulars of any change of such name and date of appointment.

[Sub-s. (2) substituted by s. 20 of Act 24 of 2006.](3) For the purposes of subsection (1) (a) 'former forenames and surname' does not include —

   (a)   in the case of a person adopted as a child, any forename and surname borne by him before his adoption; or   (b)   any forename or surname previously borne by any person which was changed or disused before he attained the

age of eighteen years or has been changed or disused for a period of not less than 10 years; or   (c)   in the case of a married or divorced woman or a widow, any forename or surname borne by her before her

marriage.(4) The provisions of section 110 as to the place where the register of members of a company shall be kept

and notice thereof to the Registrar and of section 113 as to the inspection of and copies of or extracts from that register, shall applymutatis mutandis to the register to be kept under this section.

(5) Any company which fails to comply with any provisions of subsection (1), (2) or (4), shall be guilty of an offence.

NotesAs to who is a 'director', see s 1(1) and notes on s 208. As to who is an 'officer', see s

1(1) and notes on s 211. The auditor is not an officer of the company. 1852 Section 1RS 5, 2008 ch8-p266

provides that in the Act, unless the context otherwise indicates, "'officer" in relation to a company includes any managing director, manager or secretary thereof'. 1853 Section 268D(1) provides that a body corporate or partnership may be appointed to hold the office of secretary of a public company. While s 215(1)(b) provides for the information to be given by a secretary which is a body corporate, s 215 does not provide for the information to be given when the secretary is a partnership.

Section 268E(2) provides that no person shall act as secretary and no appointment of secretary shall have legal force for the purposes of the Act or any other law unless, inter alia, the company has complied with the provisions of s 215.

As to the duty of a person to furnish particulars to the company, see s 216. Section 276(3) requires the auditor to give notice on the prescribed form (CM29 of Schedule 2 of the Administrative Regulations) to the company, within 14 days after the occurrence of the change, of any change in his particulars which are in terms of s 215(2) to be entered in the register referred to in s 215.

In terms of s 110 the register must be kept at the company's registered office, unless kept at an office of the company in the Republic where the work of making it up is done, in which case the company must notify the Registrar in the prescribed for (CM21 of Schedule 2 of the Administrative Regulations) of the place where the register is kept and of any change in that place. Regulation 4 of the Regulations for the Retention and Preservation of Company Records 1854 provides that the register must be kept for 15 years (which period runs from the date of the last entry), unless it is reproduced on microfilm and the reproduction is duly certified in terms of reg 2(2), in which case it may be destroyed after three years from the date of the reproduction.

The penalty for the offence in s 215(5) is a fine and an additional fine for every day during which the contravention continues. 1855

  

    1852   Baker v McHardy 1957 (4) SA 541 (N); Cornell & Millman NNO v Wolpert & Abrahams 1976 (2) SA 563 (D); Lipschitz NO v Wolpert and Abrahams 1977 (2) SA 732 (A).

    1853   Until amended by s 2 of the Companies Amendment Act 37 of 1999, s 1(1) excluded a secretary that was a body corporate from the definition of an 'officer'. This, presumably, is why s 215 refers both to officers and secretaries. As to the secretary, see notes on s 268A.

    1854   GN R2592 of 25 November 1983.    1855   s 441(1)(n).

216  Duties of directors and others and of company in respect of register

(1) Any person in respect of whom the particulars referred to in section 215 are in terms of that section to be entered in the register mentioned in that section, shall furnish such particulars in writing to the company concerned —

   (a)   in the case of a person appointed as a director or officer of the company, within twenty-eight days after the date of his appointment; and

   (b)   in the case of a change in such particulars, but excluding any change contemplated in section 215 (2) and a change by way of the vacation of his office by the person concerned, within fourteen days after the date of the occurrence of the change,

[Para. (b) substituted by s. 15 (a) of Act 83 of 1981.]and such particulars or any change therein shall upon receipt thereof, and if any director or officer has vacated his office, a statement that such vacation of office has occurred shall forthwith, be entered in such register by the company.

[Sub-s. (1) amended by s. 15(a) of Act 83 of 1981.]OS, 2002 ch8-p267

(2) A company shall within fourteen days after receipt of any particulars referred to in section 215(1)(a)(i) and (b) or of notice of any change in the particulars referred to in the said section 215(1)(a)(i) or (b) or after any director or officer or a secretary which is a body corporate has vacated his office, lodge a return with the Registrar in the prescribed form reflecting the contents of such register after such particulars or such change therein or a statement that such vacation of office has occurred, have been entered in the register: Provided that any entry of such a vacation of office previously advised to the Registrar, shall not be reflected in such return.

[Sub-s. (2) amended by s. 15(b) of Act 83 of 1981 and substituted by s. 8 of Act 18 of 1990.](3) In respect of any of the matters referred to in section 211 (1) the return referred to in subsection (2)

shall contain a statement, signed by a director, a secretary who is a body corporate or an officer of the company, that -

   (a)   the consent, referred to in section 211, of the director or officer in respect of whom particulars are reflected in such return, has been obtained on a duly completed and signed prescribed form; and

   (b)   any person appointed as director or officer of the company, is not disqualified under section 218 or 219.[Sub-s. (3) amended by s. 10 of Act 70 of 1984 and substituted by s. 23 of Act 132 of 1993.]

(4) Any written consent referred to in section 211 shall be retained by the company and the Registrar may from time to time by notice in writing require a company to transmit to him within fourteen days after the date of the receipt of such notice, a certified copy of the consent of any director or officer of the company to act as such.

(5) Any person who or company or external company which fails to comply with any provision of this section shall be guilty of an offence.

[S. 216 amended by s. 18 of Act 64 of 1977 and substituted by s. 15(1) of Act 59 of 1978.]

NotesIn the case of a person appointed as a director or officer of the company other than a secretary, the particulars must be lodged in form CM27 of the Companies Administrative Regulations.1856  It would seem that in the case of a secretary, however, the particulars must be lodged in form CM27A; but the position is unclear, for in terms of reg 35A(1) of the Companies Administrative Regulations that form must be lodged by the secretary with the Registrar.1857  See notes on s 211.

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Before the definition of 'officer' was amended by s 2 of the Companies Amendment Act 37 of 1999, 'officer' did not include a secretary which was a body corporate.1858  Hence the references in s 216(2) and (3) to both an 'officer' and 'a secretary which is a body corporate'.

Section s 268D(1) expressly provides that a body corporate or partnership may be appointed to hold the office of secretary of a public company. Presumably the duties imposed by s 216(1) must be understood as also imposed on such a partnership.

However, s 215 makes no provision for the particulars to be entered in the register in regard to a partnership that is a secretary.

The return that must be lodged by the company with the Registrar in terms of s 216(2) must be lodge in form CM29. Any company which has failed within the time prescribed to lodge the return with the Registrar may thereafter lodge it subject to the payment to the Registrar of the prescribed additional fee.1859  Regulation 35A(2) of the Companies Administrative Regulations provides that when during any financial year the secretary of a public company resigns or is removed from office, the company must lodge with the Registrar form CM27A stating the date of resignation or removal.1860

Regulation 28A(1)(b) of Companies Administrative Regulations provides that the Registrar may from time to time by written notice sent to a company or an officer of the company at the registered office or postal address of the company, require the company or the officer to lodge with him, within a period stated in the notice (which may not be less than 30 days) a copy of the form on which these particulars must be furnished to him, reflecting at the time of lodging the contents of the register of directors and officers.1861

Section 215(2) imposes on every company the duty to enter in the register the particulars of the auditor and any changes in them. As to the auditor's obligation to notify the company of any such changes, see s 276(3) read with s 215(2).

Section 268E(2) provides that no person shall act as secretary and no appointment of secretary shall have legal force for the purposes of the Act or any other law unless, inter alia, the company has complied with the provisions of ss 215 and 216.

The penalty for the offence in s 216(5) is a fine for every day during which the contravention continues.1862  The court on convicting may order compliance with the relevant provisions within such period as it may fix.1863

  

    1856   GN R1948 of 19 October 1973.    1857   Regulation 35A was inserted by GN R 762 of 18 June 1999.    1858   Section 1 provided that in the Act, unless the context otherwise indicates, ' "officer" in relation to a

company includes any managing director, manager or secretary thereof but excludes a secretary which is a body corporate'.

    1859   s 178.    1860   Regulation 35A was inserted by GN R 762 of 18 June 1999.    1861   A company or officer who fails to comply with such notice is guilty of an offence and is liable on

conviction to a fine of R100: reg 28A(3).    1862   s 441(1)(q).    1863   s 441(2).

217  . . .[S. 217 repealed by s. 16 (1) of Act 59 of 1978.]

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Disqualifications of Directors (ss 218-220)

218  Disqualifications of directors(1) Any of the following persons shall be disqualified from being appointed or acting as a director of a

company:   (a)   A body corporate;   (b)   a minor or any other person under legal disability;

[Para. (b) substituted by s. 17(1) of Act 59 of 1978 and by s. 24 of Act 132 of 1993.]   (c)   any person who is the subject of any order under this Act or the repealed Act disqualifying him from being a

director;   (d)   save under authority of the Court—

     (i)   an unrehabilitated insolvent;    (ii)   any person removed from an office of trust on account of misconduct;   (iii)   any person who has at any time been convicted (whether in the Republic or elsewhere) of theft, fraud, forgery or

uttering a forged document, perjury, an offence under the Prevention of Corruption Act, 1958 (Act 6 of 1958), the Corruption Act, 1992 (Act 94 of 1992), Part 1 to 4, or section 17, 20 or 21 (in so far as it relates to the aforementioned offences) of Chapter 2 of the Prevention and Combating of Corrupt Activities Act, 2004, or any offence involving dishonesty or in connection with the promotion, formation or management of a company, and

has been sentenced therefor to imprisonment without the option of a fine or to a fine exceeding one hundred rand;

[Sub-para. (iii) substituted by s. 36(1) of Act 12 of 2004.]   (iv)   any person who has, in terms of an Act of Parliament, been removed from office for not being a fit and proper

person to serve as a director or in the management or in any other position of trust of the body in question due to theft, fraud, forgery, uttering a forged document, corruption, whether in terms of the common law or not, or any other act involving dishonesty.

[Sub-para. (iv) added by s. 3(c) of Act 20 of 2004.][Sub-s. (1) amended by s. 3(b) of Act 20 of 2004.]

(1A) (a) (i) The Registrar of the Court shall, upon—   (aa)   the issue of a sequestration order;   (bb)   the issue of an order for the removal of a person from an office of trust on account of misconduct; or   (cc)   a conviction for an offence referred to in subsection (1)(d)(iii),

send a copy of the relevant order or particulars of the conviction, as the case may be, to the Registrar.(ii) The Registrar shall notify each company which has as a director the person to whom the order or

conviction relates, of the order or conviction.(iii) A company notified in terms of subparagraph (ii) shall, within a period of 60 days from

notification, inform its shareholders in writing of such notification.(b) The Registrar shall establish and maintain a register of the orders and convictions contemplated in

paragraph (a) and such register shall be open to inspection mutatis mutandis as if it were a register contemplated in section 113.

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(c) (i) If a person's name has been entered on the register contemplated in paragraph (b) because that person was declared insolvent, the Registrar shall remove that person's name from the register as soon as he or she is rehabilitated.

(ii) The Registrar shall remove a person's name from the register where a court has granted authority as contemplated in subsection (1)(d).

[Sub-s. (1A) inserted by s. 3(d) of Act 20 of 2004.](2) Any person disqualified from being appointed or acting as a director of a company and who purports to

act as a director or directly or indirectly takes part in or is concerned in the management of any company, or any director or officer of the company in question who knew or who could reasonably be expected to know of the disqualification—

   (a)   shall be guilty of an offence;   (b)   shall be liable, jointly and severally, for all debts incurred by the company for the period during which such

person knew or could reasonably be expected to know of the disqualification.[Sub-s. (2) substituted by s. 3(e) of Act 20 of 2004.]

(3) Nothing in this section shall be construed as preventing a company from providing in its articles for any further disqualifications for the appointment of or the retention of office by any person as a director of such company.

[S. 218 amended by s. 3(a) of Act 20 of 2004.]

NotesGeneralSection 218(1) imposes a disqualification on certain persons from being appointed or acting as a director of a company, or, except for a body corporate, from being concerned or taking part, directly or indirectly, in the management of a company. The section imposes an absolute disqualification on certain persons; and a qualified disqualification on others, in the sense that they are disqualified 'save under authority of the Court'.

Section 218(2) imposes criminal and civil liability on (1) any person disqualified from being appointed or acting as a director of a company and who purports to act as a director or directly or indirectly takes part in or is concerned in the management of any company and (2) any director or officer of the company in question who knew or who could reasonably be expected to know of the disqualification. Such persons are guilty of an offence. As far as civil liability is concerned, it is submitted that what was intended was that the persons referred to in (1) should be personally liable for the debts of the company during the period of their default and that those referred to in (2) should be jointly and severally liable with those referred to in (2) for the debts of the company incurred in the period during which those referred to in (2) knew or could reasonably be expected to know of the disqualification. This, however, is not what the subsection says. What it says is that either the persons referred to in (1) or the persons referred to in (2) shall be jointly or severally liable for the debts incurred in the period during which those referred to in (2) knew or could reasonably be expected to know of the disqualification. This, of course, makes no sense. How can there be joint and several liability of one or the other and why should those referred to in (1) only be liable for the debts incurred by the

RS 3, 2006 ch8-p270-1

company in the period during which those referred to in (2) knew or could reasonably be expected to know of the disqualification? Section 218(3) provides that the provisions of s 218 do not prevent a company from providing in its articles for any further

disqualifications for the appointment of or the retention of office by any person as a director of the company, and indeed further disqualifications are provided for in art 65 of Table A and art 66 of Table B.

Section 219(1A) requires the Registrar of the Court to send a copy of a sequestration order, order for the removal of a person or particulars of a conviction as envisaged by s 218(1)(d)(i)-(iii), to the Registrar of Companies. No time period is stipulated for such delivery. The provision requires delivery 'upon' the issue of the order or conviction so presumably delivery is required as soon as is reasonably possible after the order or conviction is made. In terms of s 218(1A)(ii) the Registrar of Companies must notify each company which has as a director the person to whom the order or conviction relates, of the order or conviction and the company so notified must within 60 days of notification, inform its shareholders in writing of such notification. The Registrar of Companies is required to establish and maintain a register of the orders and convictions referred to in s 218(1A)(a) and such register shall be open to inspection mutatis mutandis as if it were a register contemplated in s 113 (s 218(1A)). Where a person's name has been entered on the register because that person was declared insolvent, the Registrar must remove that person's name as soon as he or she is rehabilitated (s 218(1A)(c)(ii)). Section 218(1A)(c)(ii) requires that the Registrar must also remove a person's name from the register where a court has granted authority as contemplated in s 218(1)(d). It is to be noted, however, that the names of persons contemplated in s 218(1)(d)(iv) are not entered in the register unless they fall into the category of persons removed 'from the office of trust on account of misconduct' (s 218(1A)(i)(bb)). This is clear from a reading of s 218(1A)(c)(ii) with s 218(1A)(a)and (b). In fact s 218(1A) as a whole appears to have no application whatsoever to persons contemplated in s 218(1)(d) which is anomalous and probably due to an oversight.Absolute disqualificationThe persons disqualified absolutely from being appointed or acting as a director of a company are (a) a body corporate; (b) a minor or any other person under legal disability; and (c) any person who is the subject of any order under the Act or the repealed Act disqualifying him from being a director. The disqualification of a body corporate cannot be circumvented by the appointment to the office of director of a partnership in which a body corporate is a partner, because a partnership is not a legal entity capable of being appointed and holding office as a director (although of course partners, if otherwise eligible for the appointment as directors and who are natural persons, could each be individually appointed).1864  It has been doubted whether emancipation would have the effect of removing the disqualification of a minor.1865  The court is empowered under s 219 to disqualify a person from holding the office of director.

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Qualified disqualification(1) DisqualificationThe persons disqualified from being appointed or acting as a director of a company save under the authority of the court are: (a) an unrehabilitated insolvent; (b) any person removed from an office of trust on account of misconduct; and (c) any person who has at any time been convicted (whether in the Republic or elsewhere) of the offences specified in s 218(d)(iii). This provision 'is not punitive'. Rather, '[i]t is designed to protect the public and to prevent the corporate structure from being used to the financial detriment of investors, shareholders, creditors and persons dealing with the company. In its operation it is calculated to act as a safeguard against the corporate structure being used . . . in a manner which is contrary to proper commercial standards'.1866

As to an offence involving dishonesty, 'dishonesty' means a lack of probity, a disposition to deceive, defraud, or steal; it involves an element of fraud, and is used to describe an act where there has been some intent to deceive or cheat.1867  An 'offence involving dishonesty' is an offence of which dishonesty is an element or ingredient, in the case of a common law offence in terms of its definition, and in the case of a statutory offence in terms of the statute which created it.1868  As to an offence in connection with the 'management of a company', it has been held that a company's articles of association determine the persons by whom the management of the company is conducted; and 'management of a company' means the management of the whole of the

company, ie the overall management of the company; and an 'offence connected with the management of

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a company' is one committed by a manager of a company in the course of his management of the company and which relates to his management of the company. 1869 This may, however, be too narrow an interpretation, see notes on s 218(2) below.

When a person is disqualified by reason of his having been convicted for an offence specified in s 218(d)(iii), his disqualification is not suspended by noting an appeal against the conviction. 1870 A sentence of imprisonment of six months or more which is fully suspended constitutes imprisonment for at least six months within the intention of the section. 1871 The word 'option' in the phrase 'without the option of a fine' must be understood in its ordinary sense as 'the act or instance of choosing; the power or liberty to choose'; thus free choice is the essential of the concept, and a sentence consisting of both a sentence of imprisonment for six months or more and a fine is not a sentence with the option of a fine. 1872

(2) Court's discretionWhere the court is empowered to authorise disqualified persons to be appointed and act as directors, the court has an unfettered judicial discretion to grant such authority. 1873 The exercise of this discretion is a far-roving inquiry in the fields of law and morality. 1874 Accordingly, it is undesirable for the court to attempt to specify in advance all the factors to be taken into account or the particular weight to be given to anyone of them. 1875 In exercising its discretion the court will take into account that the object of these disqualifications is not punishment, but the protection of the interests of the shareholders, of those who deal with companies, and of the public in the clean administration of companies. 1876 The principle is that there must be no danger to these interests. 1877

Where the applicant is disqualified by reason of his having committed an offence, the factors which the court may take into account in the exercise of its discretion include the following:

RS 6, 2009 ch8-p272

First, the applicant's general character and conduct up to and after the offence. 1878 Because directors are clothed with very great powers and occupy a position of trust, the courts will subject applicants to a very strict test of honesty and trustworthiness. 1879 Misleading or attempting to mislead the court hearing the application will usually destroy an applicant's chances. 1880 But although honesty and trustworthiness are the most important considerations, they are not the only considerations. 1881 The question is whether in all the circumstances the applicant has satisfied the court that he has rehabilitated himself and measures up to the high standards required of directors. 1882 The balance of probability must be heavily against the repetition of the offence. 1883 In addition, the court will also consider the possibility of future dishonest conduct which will probably never amount to one of the disqualifying offences. 1884

Secondly, the court will consider the nature of the applicant's offence, 1885 the circumstances under which it was committed, 1886 the fact that premeditation and planning were involved, 1887 the nature of the applicant's involvement, 1888 the degree or quantum of repetitive breach, 1889 whether it was a first offence, 1890 the punishment imposed, 1891 and the length of time since the offence was committed. 1892

OS, 2002 ch8-p273

Thirdly, relevant are the attitude of the shareholders and prominent associates, 1893  the number of persons interested in the company or companies in which the applicant wishes to become involved, 1894  the structure of those companies and the nature of their business, 1895  the interests of shareholders, creditors and employees, 1896  and the risk to them or to the public.1897

Matters which have been taken in favour of the applicant are his honesty and competency, 1898  hardship resulting to him, his personal and family business interests; 1899  and his appreciation that future breaches could result in fresh proceedings for his disqualification by the court.1900

Where the applicant is disqualified by reason of the fact that he is an unrehabilitated insolvent, the question is whether in the circumstances there are exceptional circumstances which make the applicant a fit and proper person to be appointed a director despite the fact that he is an unrehabilitated insolvent.1901  The disqualification of unrehabilitated insolvents from being directors and from taking part in the management of companies is not intended to punish them, but to protect the public from imprudent action which could cause the public to suffer financial loss.1902  Thus relevant to the inquiry are the circumstances giving rise to applicant's sequestration 1903  and other business failures; 1904  and therefore a full statement and explanation of those facts must be placed before the court.1905

In the exercise of its discretion, the court may grant the applicant authority to become a director of a particular company or a general authority to be a director of any

OS, 2002 ch8-p274

company.1906  An applicant will, however, have to make out a much stronger case for the grant to him of such a general authority.1907  In many cases it will be proper to allow a person to become a director of a particular company with which he has long been associated or in which he has a particular interest, yet not proper to give him a general authority.1908

The court is empowered only to authorise such a disqualified person to become a director. Thus our courts have held that they do not have the power to authorise such a person merely to take part in or be concerned in the management of a company without becoming a director of it.1909

Section 218(2)Section 218(2) provides that any person disqualified from being a director or acting as a director of a company and who purports to act as a director, or directly or indirectly takes part in or is concerned in the management of any company, is guilty of an offence. The penalty is a fine or imprisonment not exceeding two years, or both the fine and imprisonment.1910  The prohibition is limited to participation in the management of the company. Thus in Re Farrari Furniture Co Pty Ltd1911  Street J said: 'A prohibition against taking part in the management of a company does not import any prohibition against taking part in business activities. But it denies to a person thus prohibited that statutory advantage that flows from participating in the market place under the shield of statutory limited liability. It is easy to take for granted the right of every citizen by the simple procedure of incorporating a company to avail himself of this shield of limited liability.' Although the prohibition should be widely constructed, it must be borne in mind that 'take part' and 'be concerned in' are directed to the 'management' of the company and not to taking part or being concerned in the 'business' of the company, it not being intended to deny a person in the prescribed categories the right to earn a living.1912

A director must necessarily, directly or indirectly, take part in or be concerned in the management of a company.1913  The prohibition is not however limited to persons carrying on all the functions of a director under the guise of some other position in the company; 1914  and even participation to a minor extent in the management of a company is to be indirectly, if not directly, concerned in that management.1915  It has however been held that participation in the management of a company is participation in the management of whole of the affairs of the corporation, viz the overall management of the company.1916  But

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it would seem that something less is sufficient, 1917 that is to say, a person takes part in or is concerned in the management of a company, not only where he is involved in policy and decision making related to the affairs of the company as a whole, but also when involved policy and decision-making related to 'a substantial part' of its affairs 1918 if 'the formation of those policies or the making of those decisions has some significant bearing on the financial standing of the [company] or the conduct of its affairs'. 1919 It has been held that it is not necessary that the person makes decisions at the highest level; nor is it necessary that his decisions will not be subject to obtaining the approval of some higher officer. 1920

In R v Goodman, 1921 it was held that the chairman of a company, who had used his knowledge of the affairs of the company to commit the offence of insider trading had committed an offence '. . . in connection with the . . . management . . . of a company'

within the scope and ambit of s 2(1) of the Company Directors Disqualification Act, 1986. So too, in R v Creggy, 1922 a solicitor who was also a director of a company was found to have committed an offence in connection with the management of a company by sheltering the criminal proceeds of fraud through the vehicle of the company. There was a sufficient factual connection between the offence committed by the defendant and the financial management of the company. Although both these cases were decided under

RS 6, 2009 ch8-p276

the Company Directors Disqualification Act, 1986, they would, due to the similarity in wording, be relevant to s 218(2) of the Companies Act of 1973.

The view has been expressed that, generally, the use by a shareholder of his vote in general meeting on matters of management would not amount to taking part in management within the meaning of the section, but that 'it is possible that in a particular case a majority shareholder can so use his voting power, or the threat of the exercise of his voting power, on questions of management that he would be in breach of [the section]'. 1923 In one case it has been held that the mere fact that a company owned 42% of the shares of another company, and had three nominees on its board, was not sufficient to make it a person who 'took part in the management of the company'. 1924

In S v Nixon1925 Milne J said: 'The disqualification of bodies corporate as directors was only inserted by the amending Act 46 of 1952 and it is conceivable that the effect of [the prohibition of participation in the management of companies by disqualified persons] was not present to the mind of the Legislature. I am inclined to doubt however, whether the control which a holding company exercises over the composition of the board of directors of a subsidiary company constitutes participation in the management of the company (at any rate where that control is exercised in a normal and otherwise lawful manner).'

It has been held that the absence of statutory provisions for invalidating acts performed by a person disqualified as a director, coupled with the fact that s 218(2) read with s 441(1)(d) imposes a criminal sanction, indicates that it was not the legislature's intention that s 218(2) should, of itself, invalidate acts performed (in contravention of the subsection) by a disqualified person or, where he purported to perform those acts in his capacity as a director, render s 214 inoperative. 1926

  

    1864Commercial Management Ltd v Registrar of Companies [1987] 1 NZLR 744 747 CA(NZ).    1865Ex parte Velkes 1963 (3) SA 584 (C).    1866per Bowen CJ in Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203 205 SC(NSW); and see Australian

Securities Commission v Knippe (1996) 20 ACSR 679 685 (Fed C of A).    1867Ex parte Bennett 1978 (2) SA 380 (W) 383-384; NUSCA v Da Ponte 1994 (3) SA 251 (BGD) 258-261.    1868Ex parte Bennett 1978 (2) SA 380 (W) 384; NUSCA v Da Ponte 1994 (3) SA 251 (BGD) 258-259. In NUSCA v

Da Ponte supra it was held that the offence of illicit diamond buying is an offence involving dishonesty, being akin to receiving stolen property. In Ex parte Bennett supra it was held that the offences created by Regulation Notice 1038 of the Regulation of Monopolistic Conditions Act of 1955 were not offences involving dishonesty, the conduct prohibited being malum prohibitum and not malum in se. In Childs v Australian Securities Commission (1996) 20 ACSR 196 197 SC(WA) Parker J said: 'On ordinary use of language, stealing, an element of robbery, is dishonest, so it is an offence involving dishonesty. Stealing . . . also involves the taking of property fraudulently, so that is an offence involving fraud.'

    1869   Ex parte Bennett 1978 (2) SA 380 (W) 387-389.    1870   Von Steen v Von Steen 1984 (2) SA 203 (T).    1871   Marpo Trawling (Pty) Ltd v Cencelli 1992 (1) SA 407 (C) (a decision in regard to s 47(1)(b)(iii) of the Close

Corporations Act 69 of 1984, the provisions of which in this regard are identical to those in s 218(1)(d)(iii) of the CompaniesAct 61 of 1973).

    1872   Marpo Trawling (Pty) Ltd v Cencelli 1992 (1) SA 407 (C).    1873   Ex parte Harrod 1954 (4) SA 28 (SR) 30; Ex parte Schreuder 1964 (3) SA 84 (O) 85; Ex parte K 1971 (4)

SA 289 (D) 291; Ex parte Tayob 1990 (3) SA 715 (T) 717. A court of appeal will only interfere if it is satisfied that the discretion was not exercised properly: Ex parte Tayob supra at 717.

    1874   Ex parte R 1966 (1) SA 84 (SR) 87; Ex parte Schreuder 1974 (2) SA 358 (O); NUSCA v Da Ponte 1994 (3) SA 251 (BGD) 256.

    1875   Ex parte Schreuder 1974 (2) SA 358 (O); Ex parte Barron 1977 (3) SA 1099 (C) 1100.    1876   Ex parte Erleigh 1950 2 PH E14 (W); Ex parte Harrod 1954 (4) SA 28 (SR) 30; Ex parte K 1971 (4) SA 289

(E); Ex parte Schreuder 1974 (2) SA 358 (O) 361; Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203 205 SC(NSW); Ex parte Bennett 1978 (2) SA 380 (W) 383; Re Minimix Industries Ltd (1982) 1 ACLC 511 SC(NSW); Von Steen v Von Steen 1984 (2) SA 203 (T) 207-208; NUSCA v Da Ponte 1994 (3) SA 251 (BDG) 256 262-263.

    1877   Ex parte Harrod 1954 (4) SA 28 (SR) 30; Ex parte R 1966 (1) SA 84 (SR) 87 ('the question must be whether in all the circumstances the applicant has satisfied the court that he has rehabilitated himself in the sense that he is worthy of trust in carrying out the functions which he is seeking permission to undertake'); Ex parte Schreuder 1974 2 SA 358 (O) 361; Re Maelor Jones Pty Ltd (1975) 1 ACLR 4 SC(SA) ('the whole purpose of

the section is to see that people are not put in a position where their money is at risk'); NUSCA v Da Ponte 1994 (3) SA 251 (BGD) 263 ('could the court with complete confidence accept that an applicant is a fit and proper person to be granted authority to be appointed or to act as a director of a company').

    1878   Ex parte Schreuder 1964 (3) SA 84 (O) 86. And see Re Maelor Jones Pty Ltd (1975) 1 ACLR 4 SC(SA); Re Marsden (1981) 5 ACLR 694 SC(SA); Zuker v Commission for Corporate Affairs [1981] VR 72; Chew v NCSC (No 2) (1985) 9 ACLR 527 SC(WA); Commission for Corporate Affairs (WA) v Ekamper (1987) 12 ACLR 519 SC(WA); NUSCA v Da Ponte 1994 (3) SA 251 (BGD) 263.

    1879   Ex parte Erleigh 1950 2 PH E14 (W); Ex parte Schreuder 1964 (3) SA 84 (O) 86; Ex parte K 1971 (4) SA 289 (D); Ex parte Schreuder 1974 (2) SA 358 (O) 361.

    1880   See Re Maelor Jones Pty Ltd (1975) 1 ACLR 4 SC(SA); Re Macquarie Investments Pty Ltd (1975) 1 ACLR 40 SC(NSW); Zim Metal Products Pty Ltd (1977) ACLR 553 SC(Vic). The applicant must deal fully with everything of relevance emerging from the record in the criminal case: Ex parte Tayob 1990 (3) SA 715 (T) 723.

    1881   Ex parte Schreuder 1974 (2) SA 358 (O) 362.    1882   Ex parte R 1966 (1) SA 84 (SR); Ex parte K 1971 (4) SA 289 (D) 291; Ex parte Schreuder 1974 (2) SA 358

(O) 361; NUSCA v Da Ponte 1994 (3) SA 251 (BGD) 262. The fundamental question is whether the defect of character no longer exists, and this part of the enquiry turns on whether the person concerned properly and correctly appreciates the defect of character or attitude involved: Ex parte Tayob 1989 (2) SA 282 (T) 287; 1990 (3) SA 715 (T) 720.

    1883   Ex parte R 1966 (1) SA 84 (SR); Ex parte Schreuder 1974 (2) SA 358 (O) 361.    1884   Ex parte Schreuder 1974 (2) SA 358 (O) 362; Ex parte Tayob 1990 (3) SA 715 (T) 723.    1885   Ex parte Barron 1977 (3) SA 1099 (C) 1100; Commission for Corporate Affairs (WA) v Ekamper (1987) 12

ACLR 519 SC(WA); Ex parte Tayob 1989 (2) SA 282 (T) 288; 1990 (3) SA 715 (T); NUSCA v Da Ponte 1994 (3) SA 251 (BGD)262.

    1886   Ex parte Schreuder 1964 (3) SA 84 (O) 86.    1887   Re Farrari Furniture Co Pty Ltd [1972] 2 NSWLR 790 792.    1888   Zim Metal Products Pty Ltd (1977) ACLR 553 SC(Vic).    1889   Commission for Corporate Affairs (WA) v Ekamper (1987) 12 ACLR 519 SC(WA).    1890   Ex parte Barron 1977 (3) SA 1099 (C) 1100; NUSCA v Da Ponte 1994 (3) SA 251 (BGD) 262.    1891   Ex parte Barron 1977 (3) SA 1099 (C) 1100; Ex parte Tayob 1990 (3) SA 715 (T) 721.    1892   Ex parte Leal 1962 (4) SA 271 (D); Ex parte Schreuder 1964 (3) SA 84 (O) 86 (the more serious the

offence, the longer the period should be); Ex parte Tayob 1989 (2) SA 282 (T) 288; 1990 (3) SA 715 (T) 722; NUSCA v Da Ponte 1994 (3) SA 251 (BGD) 262. But see Re Marsden (1981) 5 ACLR 694 SC(SA), where it was said that the time lapse since conviction is not a 'relevant consideration'. In Ex parte Tayob 1990 (3) SA 715 (T) 722 it was said that the 'thread that runs through the decided cases . . . is that sufficient time should ordinarily have elapsed after the conviction to show that a recurrence is most unlikely'. The more serious the offence the longer the time that should have passes before the court's authorisation is sought. Although the passing of years does not per se provide evidence of reform, it is a useful guide. But there 'may be cases in which the misdeed is so aberrant and the circumstances giving rise to it so unusual that it could be said that a repetition is inconceivable. In such a case no period of time would be required to effect reform because, strictly speaking, no reform is necessary'.

    1893   Ex parte Harrod 1954 (4) SA 28 (SR) 31; Ex parte Schreuder 1964 (3) SA 84 (O) 86; Ex parte Barron 1977 (3) SA 1099 (C) 1100; NUSCA v Da Ponte 1994 (3) SA 251 (BGD) 262.

    1894   Ex parte Barron 1977 (3) SA 1099 (C) 1100.    1895   Commission for Corporate Affairs (WA) v Ekamper (1987) 12 ACLR 519 SC(WA). Cf Zuker v Commission

for Corporate Affairs [1981] VR 72, where it was it said that the size of the annual turnover will seldom on its own afford a reason for refusing leave under the section. It has been said that if it is a public company the chances of more people being affected by an unscrupulous or dishonest director are greater than in the case of a private company: NUSCA v Da Ponte 1994 (3) SA 251 (BGD) 262.

    1896   Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203 SC(NSW); Re Wallace (1983) 8 ACLR 311 SC(WA); Zim Metal Products Pty Ltd (1977) ACLR 553 SC(Vic); Commission for Corporate Affairs (WA) v Ekamper (1987) 12 ACLR 519 SC(WA); NUSCA v Da Ponte 1994 3 SA 251 (BGD) 262. In Re C & J Hazell Holdings Pty Ltd and Related Companies (1991) 4 ACSR 703 SC(Tas) it was held that, although not decisive, there was substance in the contention that if the applicant was not permitted to act as a director the group would suffer detriment and the security of its employees would be weakened.

    1897   Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203 SC(NSW); Re Marsden (1981) 5 ACLR 694 SC(SA); Chew v NCSC (1985) 9 ACLR 527 SC(WA); Alford v Commission for Corporate Affairs (1984) 9 ACLR 183 SC(Qld);Commission for Corporate Affairs (WA) v Ekamper (1987) 12 ACLR 519 SC(WA); NUSCA v Da Ponte 1994 (3) SA 251 (BGD) 262.

    1898   Re Arctic Engineering Ltd (No 2) [1986] 2 All ER 346; Commission for Corporate Affairs (WA) v Ekamper (1987) 12 ACLR 519 SC(WA).

    1899   Chew v NCSC (1985) 9 ACLR 527 SC(WA); Commission for Corporate Affairs (WA) v Ekamper (1987) 12 ACLR 519 SC(WA).

    1900   Chew v NCSC (1985) 9 ACLR 527 SC(WA); Re Wallace (1983) 8 ACLR 311 SC(WA); Commission for Corporate Affairs (WA) v Ekamper (1987) 12 ACLR 519 SC(WA).

    1901   Ex parte Dworsky 1970 (2) SA 293 (T) 295.    1902   Re Altim Pty Ltd [1968] 2 NSWLR 762; Poyser v Corporate Affairs Commission (1985) 9 ACLR 651 655-

656 SC(Vic); Commissioner of Corporate Affairs (Vic) v Bracht (1989) 14 ACLR 725 732 SC(Vic).    1903   Ex parte Dworsky 1970 (2) SA 293 (T) 295.    1904   See Re Altim Pty Ltd [1968] 2 NSWLR 762, where it was held that the applicant's long history of business

failures in the building industry demonstrated an incompetence from which the community should be protected.

    1905   Ex parte Dworsky 1970 (2) SA 293 (T) 295.    1906   Ex parte K 1971 (4) SA 289 (D) 292; NUSCA v Da Ponte 1994 (3) SA 251 (BGD) 263.    1907   Ex parte K 1971 (4) SA 289 (D) 292.    1908   Ex parte K 1971 (4) SA 289 (D) 292.

    1909   Ex parte Hemphill 1967 (3) SA 101 (D) 103; Ex parte Nixon 1971 (4) SA 495 (N) 499. Cf Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203 SC(NSW); Re Zim Metal Products Pty Ltd (1977) ACLR 553 SC(Vic), where leave was granted to the applicant to take part in the management of companies but not to be a director.

    1910   s 441(1)(d).    1911   [1972] 2 NSWLR 790 792.    1912   per Ormiston J in Commissioner of Corporate Affairs (Vic) v Bracht (1989) 14 ACLR 725 732 SC(Vic).    1913   Ex parte Jacobson 1944 OPD 112 116; Ex parte Hemphill 1967 (3) SA 101 (D) 103.    1914   S v Nixon 1971 (4) SA 495 (N).    1915   S v Nixon 1971 (4) SA 495 (N) 498.    1916   Ex parte Jacobson 1994 OPD 112; Ex parte Bennett 1978 (2) SA 380 (W) 389; Marpo Trawling (Pty) Ltd v

Cencelli 1992 (1) SA 407 (C) (a decision in regard to s 47(1)(b)(iii) of the Close Corporations Act 69 of 1984).    1917   See Re Campbell [1984] BCLC 83 (CA) where was held that the word 'management' is very wide word

deliberately widely cast.    1918   In Australia in regard to a provision (see eg s 556 of the Companies (Qld) Code) which attached personal

liability for a debt incurred (inter alia) when there were reasonable grounds that the company would not be able to pay all its debts when they became due, on any person who was a director of the company or who 'took part in the management of the company', it was held that this expression was limited to persons whose management role in the company may be likened to that of a director and meant that the person must have some decision-making role in the company: Holpitt Pty Ltd v Swaab (1992) 105 ALR 421 (FC of A); Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (1994) 122 ALR 531 (FC of A); Standard Chartered Bank of Australia Ltd v Antico (1995) 18 ACSR 1 66-67 SC(NSW).

    1919   In Commissioner of Corporate Affairs (Vic) v Bracht (1989) 14 ACLR 725 733-734 SC(Vic) Ormiston J said: 'While it is easy to exclude from the concept of management those activities of a corporation which consist in the carrying out of day-to-day routine functions in accordance with predetermined policies, whether they be clerical or involve the ordering or supply of goods or services on its behalf, it is harder to fix on those elements which are critical to management. I cannot be confined to those matters performed by the board of directors or a managing director, for those are already the subject of the prohibition against acting as a director. The lower levels of administration comprehended by management must have some decision-making powers, but it cannot be thought that every branch or division manager has the relevant powers of management'. (See Byrnes v Australian Securities and Investment Commission (2000) 34 ACSR 320 336 (AAT).) Ormiston J concluded: 'It may be difficult to draw the line in particular cases, but in my opinion the concept of "management" for the present purposes comprehends activities which involve policy and decision-making, related to the business affairs as a whole or a substantial part of that corporation, to the extent that the consequences of the formation of those policies or the making of those decisions has some significant bearing on the financial standing of the corporation or the conduct of its affairs.'

    1920   In Cullen v Corporate Affairs Commission (NSW) (1988) 14 ACLR 789 SC(NSW), where it was held that the words 'concerned in the management' must have a broad operation, it was accepted that the lowest level of administration comprehended by management must have some decision-making powers and that it cannot be thought that every branch or division manager has relevant powers of management. The court concluded (at 794) that: '[O]ne looks to see somebody making decisions as to the direction of the corporation though one does not necessarily look for someone who is making decisions at the highest level, nor is it necessarily so that the manager's decision will not be subject to obtaining the approval of some higher officer. However, even though a person may be described as a manager if that person is merely carrying out the policy of the corporation in charge of a branch or division of the business and not making decisions as to its direction then probably that person is not taking a management role in the corporation'. And see Byrnes v Australian Securities and Investment Commission (2000) 34 ACSR 320 336 (AAT)

    1921   [1993] 2 ALL ER 789.    1922   [2008] 3 ALL ER 41 (CA).    1923   Per Bowen CJ in Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203 207 SC(NSW).    1924   Standard Chartered Bank of Australia Ltd v Antico (1995) 18 ACSR 1 66 SC(NSW), where the company

concerned did not take part in the management of the company for the purposes of s 556 of the Companies (Qld) Code.

    1925   1971 (4) SA 495 (N) 478.    1926   CyberScene Ltd v i-Kiosk Internet and Information (Pty) Ltd 2000 (3) SA 806 (C) 813.

219  Disqualification of directors, officers and others by the Court(1) The Court may make an order directing that, for such period as may be specified in the order, a person,

director or officer shall not without the leave of the Court be a director of or in any way, whether directly or indirectly, be concerned or take part in the management of any company when —

   (a)   such person, director or officer, has been convicted of an offence in connection with the promotion, formation or management of a company; or

   (b)   the Court has made an order for the winding-up of a company and the Master has made a report under this Act stating that in his opinion a fraud has been committed —

     (i)   by such person in connection with the promotion or formation of the company; or    (ii)   by any director or officer of the company in relation to the company since its formation; or

   (c)   in the course of the winding-up or judicial management of a company it appears that any such person —RS 6, 2009 ch8-p276-1

     (i)   has been guilty of an offence referred to in section 424, whether or not he has been convicted of that offence; or    (ii)   has otherwise been guilty while an officer of the company of any fraud in relation to the company or of any

breach of his duty to the company; or   (d)   a declaration has been made in respect of any person under section 424 (1).

(2) (a) An order under subsection (1) may be made —     (i)   by the Court having jurisdiction to wind up the company affected by the act or omission in respect of which the

order is sought, on application by the Master, or, in the case of a company being wound up or under judicial management, by the Director of Public Prosecutions in terms of section 401, or by the liquidator or the judicial manager or by any person who is a creditor or is or has been a member of such company; or

[Sub-para. (i) amended by s. 5(a) of Act 20 of 2004.]RS 2, 2005 ch8-p277

    (ii)   in the case of an order in the circumstances set out in paragraph (a) of that subsection, also summarily by the Court convicting the person concerned,and any leave required under that subsection may be granted by the Court having jurisdiction to wind up the company in relation to which such leave is sought.

(b) The applicant for any such order shall give not less than ten days' notice of his intention to apply for the order, to the person against whom the order is sought and such person may attend the hearing of the application and give evidence and call witnesses to give evidence on his behalf.

(3) Where an order under subsection (1) has been made, the person to whom the order relates shall give not less than ten days' notice to the Master, the Director of Public Prosecutions, the liquidator or the person who was the judicial manager of the company concerned, of any application he intends making for leave of the Court referred to in subsection (1), who shall draw the attention of the Court to any matter which may appear to them to be relevant, may give evidence and call witnesses.

[Sub-s. (3) amended by s. 5(a) of Act 20 of 2004.](4) (a) For the purposes of subsection (1)(b)(ii) the reference therein to an officer of a company shall be

construed as including a reference to any person in accordance with whose directions or instructions the directors of the company have been accustomed to act.

(b) An order may be made under the said subsection (1)(b)(ii) whether or not criminal proceedings have been instituted in respect of any matter on which the order is based.

(4A) (a) The Registrar of the Court which made an order under subsection (1) shall, within seven days after the making of the order, transmit a copy of the order to the Registrar, who must notify each company which has as a director the person to whom the order relates, of the order.

(b) A company notified in terms of paragraph (a) shall, within a period of 60 days from notification, inform its shareholders in writing of such notification.

(c) The Registrar shall establish and maintain a register of the orders made under paragraph (a) and the names of the persons to whom the orders relate, and such register shall be open to inspection mutatis mutandis as if it were a register contemplated in section 113.

(d) The Registrar shall remove a person's name from the register—     (i)   if an appeal against an order contemplated in subsection (1) is successful; or    (ii)   where a court has granted leave as contemplated in subsection (1).

[Sub-s. (4A) inserted by s. 4(a) of Act 20 of 2004.](5) Any person who contravenes any order made under subsection (1) or any director or officer of the

company in question who knew or who could reasonably be expected to know of the contravention—   (a)   shall be guilty of an offence;

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   (b)   shall be liable, jointly and severally, for all debts incurred by the company for the period during which such person knew or could reasonably be expected to know of the contravention.

[Sub-s. (5) substituted by s. 4(b) of Act 20 of 2004.]

NotesSection 219(1) confers a discretion on the court to make such a disqualification order and to determined the period for which it is to operate. It would seem that the factors taken into account by the court when exercising its discretion under s 218(1)(d) will be relevant here, such as the nature of the offence or wrongdoing, but that the crucial and overriding consideration will be, as it is under s 218(1)(d), the protection of investors, shareholders, creditors of and persons dealing with companies, and the public generally.1927  That is to say, the overriding consideration is the prevention 'of persons who have previously misconducted themselves in relation to companies, or have otherwise shown themselves as unfit to be concerned in the management of a company, from being so concerned', 1928  in order to ensure that the corporate structure is not used 'in a manner which is contrary to proper commercial standards'.1929

The words 'be a director of or in any way, whether directly or indirectly, be concerned or take part in the management of any company' are not free from ambiguity. But it would seem that 'any company' means, not a particular company or companies, but all companies; and therefore the court has no discretion to make an order in respect of certain companies.1930  And, since s 219(1) provides that the order must direct that such person may 'not without the leave of the Court be a director of or in any way, whether directly or indirectly, be concerned or take part in the management of any company', it would seem that the court has no discretion to disqualify the person concerned from acting as a director but nevertheless permit him to be concerned or take part in the management of companies; or to grant him leave to be a director of, or be concerned or take part in the management of, a particular company or companies.

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As to the meaning of 'director', see s 1(1) and notes on s 208. As to the meaning of 'officer', see s 1(1) and notes on s 211. Section 219(4) provides that for the purposes of s 219(1)(b)(ii) 'an officer of the company' is to be construed as including a reference to any person in accordance with whose directions or instructions the directors of the company have been accustomed to act. Section 1(2) provides that a person is not to be deemed to be a person in accordance with whose directions or instructions the directors of a company are accustomed to act by reason only that the directors of the company act on advice given by him in a professional capacity.

Section 219(1)(c) refers to 'any such person', which presumably means 'any person, director or officer'. Section 219(1)(c)(ii), which is wider in ambit than any of the other provisions (not only fraud, but also 'or any breach of his duty to the company') applies where any such person has been guilty of fraud or any breach of his duty to the company 'while an officer of the company'. Although the other provisions distinguish between a 'director' and an 'officer', it would seem obvious that 'officer of the company' in s 219(1)(c)(ii) must include a director.

Section 219(1)(b) refers to a 'a report under this Act' made by the Master 'stating that in his opinion a fraud has been committed'. Section 185ter(1)(b) of the Companies Act 46 of 1926 provided 'and the Master has made a further report under this Act stating that in his opinion a fraud has been committed'. The Van Wyk de Vries Commission 1931  said that there were no 'further reports by the Master' under the 1926 Act. It recommended 1932  that the words 'the Master has made a further report under this Act stating that in his opinion' be repealed and superseded by the words 'it appears'.

Section 400 requires the liquidator to report to the Master any contraventions of the Act or 'other offences', and the Master is required to transmit a copy of this report, but the Master himself is not required to make any report. However, reg 5 of the Regulations for the Winding-Up and Judicial Management of Companies 1933  provides that when in the course of an enquiry or examination of a witness under the Act before a commissioner or other person it appears that any person may have committed an offence, the commissioner or person must, when forwarding to the Master the record of the enquiry or examination, make mention in writing of the facts in the evidence which appear to him to constitute such offence, and the Master must then submit the record to the Attorney-General. It would seem that reg 5 does not apply where the Master himself presides over the meeting. Nevertheless, it would appear to be assumed that where the Master does preside he ought, in such circumstances, to submit the record to the Attorney-General. Where the Master presides over a meeting of creditors, s 67(1) of the Insolvency Act 24 of 1936 applies by virtue of s 416(1) of the Companies Act. Section 67(1) of the Insolvency Act provides that, if it appears from any statement made at an interrogation at a meeting of creditors that there are reasonable grounds for suspecting that any person has committed any offence, the Master must transmit the statement, or a certified copy of it, and all necessary documents to the Attorney-General in whose area of jurisdiction the interrogation was held or the offence is suspected to have been committed, to enable him to determine whether any criminal proceedings should be instituted in the matter.

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Section 206(1)(c)(i) empowers the court to make a disqualification order when in the course of the winding-up or judicial management of a company it appears that any such person has been guilty of an offence referred to in s 424, whether or not he has been convicted of that offence. Section 216(1)(d) empowers the court to make such an order when a declaration has been made in respect of any person under section 424(1). The logic of this distinction is far from clear. Section 206(1)(c)(i) applies only in the course of winding-up or judicial management. Then, the court may make a disqualification if it 'appears' that any such person is guilty of the offence. It is unclear whether 'appears' imports a less onerous test than that of 'beyond reasonable doubt'. Section 216(1)(d) applies whether or not the company is being wound up or is under judicial management. But a declaration must have been made, and the court can make a declaration only on the application of the Master, the liquidator, the judicial manager, any creditor or member or contributory of the company. The evidentiary test for such a declaration is, however, merely a balance of probabilities.1934 

Section 219(4A) requires the Registrar of the Court which has made a disqualification order to transmit a copy of the order to the Registrar of Companies. The latter must notify each company which has as a director the person to whom the order relates, of the order.

The Registrar of Companies must establish and maintain a register of the disqualification orders and the names of the persons to whom the orders relate and such register shall be open to inspection mutatis mutandis as if it were a register contemplated in s 113. A person's name must be removed from the register if an appeal against the disqualification order is successful or where the court has granted leave as contemplated in s 219(1).

Section 219(5) imposes criminal and civil liability on (1) any person disqualified from being a director or who in any way directly or indirectly takes part in or is concerned in the management of any company and (2) any director or officer of the company in question who knew or who could reasonably be expected to know of the disqualification. Such persons are guilty of an offence. As far as civil liability is concerned, it is submitted that what was intended was that the persons referred to in (1) above should be personally liable for the debts of the company during the period of their default and that those referred to in (2) should be jointly and severally liable with those referred to in (2) for the debts of the company incurred in the period during which those referred to in (2) knew or could reasonably be expected to know of the disqualification. This, however, is not what the subsection says. What it says is that either the persons referred to in (1) or the persons referred to in (2) shall be jointly or severally liable for the debts incurred in the period during which those referred to in (2) knew or could reasonably be expected to know of the disqualification. This, of course, makes no sense. How can there be joint and several liability of one or the other and why should those referred to in (1) only be liable for the debts incurred by the company in the period during which those referred to in (2) knew or could reasonably be expected to know of the disqualification?

Section 219(5) provides that a person who contravenes any such order is guilty of an offence, the penalty for which is a fine or imprisonment not exceeding two years, or both the fine and imprisonment.1935 

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In England, under the Company Directors Disqualification Act of 1986 (ss 6 and 8) the court is empowered, in certain circumstances, to disqualify a person from being a director (without the leave of the court) and in any way, whether directly or indirectly, being concerned or taking part in the management of a company, whose conduct as a director 'makes him unfit to be concerned in the management of a company'. A considerable number of cases concerning these provisions, for the most part at first instance, have been reported. 1936

  

    1927   In Re Gold Coast Holdings Pty Ltd (2000) 35 ACSR 107 111-112 SC(WA) Anderson J, considering the court's powers under s 230 of Australian the Corporations Law, said: 'The factors to be considered in which govern the court's power of disqualification are the character of the offender, the nature of the breaches, structure of the company and nature of its business, interests of shareholders, creditors and employees, risks to others from continuation of offenders as company directors, honesty and competence of the offender, hardship to the offender and his personal and commercial interests, and the offender's appreciation that future breaches could result in future proceedings: Commission of Corporate Affairs (WA) v Ekamper (1987) 12 ACLR 519 522 SC(WA); Australian Securities Commission v Roussi (1999) 32 ACSR (Fed C of A). The purpose of the order . . . is protective not punitive: Re Minimix Industries Ltd (1982) 1 ACLC 511 512; Re Marsden (1981) 5 ACLR 694 699 SC(WA). The interest to be protected include those of the public who may unwittingly deal with companies run by people who are not suitable to be involved in the management of companies and the public interest generally in the transparency and accountability of companies and the suitability of directors to hold office: Commission of Corporate Affairs (WA) v Ekamper at 525.'

    1928   per Blacombe LJ in Secretary of State for Trade and Industry v Langride [1991] Ch 402 413-414; [1991] 3 All ER 591 597-598 (as to the purposes and scope of the English Company Directors Disqualification Act of 1986).

    1929   per Bowen CJ in Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203 205 SC(NSW).    1930   Section 185 ter (1) of the Companies Act 46 of 1926 referred to 'the company'. The Van Wyk de Vries

Commission (Commission of Enquiry into the Companies Act Main Report RP 45/1970 para 44.08) suggested that there had been an error when s 188 of the English Companies Act was taken over, for that section spoke of 'any' company. The Commission recommended (recommendation 83(a)) that the reference to the disqualification in respect of 'the company' be superseded by a reference to 'any company'.

    1931   Commission of Enquiry into the Companies Act Main Report RP 45/1970 para 44.08.    1932   recommendation 83(b).

    1933   Promulgated under GN R2490 of 28 December 1973.    1934   See notes on s 424.    1935   s 441(1)(d).    1936   See eg Re Lo-Line Electirc Motors Ltd [1988] Ch 477; [1988] 2 All ER 692; Re Bath Glass Ltd [1988] BCLC

329; Re Cladrose Ltd [1990] BCLC 204; Re Keypak Homecare Ltd [1990] BCLC 440; Re Sammuel Sherman [1991] 1 WLR 1070; Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164; [1991] 3 All ER 578 (CA); Secretary of State for Trade and Industry v Langridge [1991] Ch 402; [1991] 3 All ER 591 (CA); Re City Investments Centre Ltd [1992] BCLC 956; Re Austinsuite Furniture Ltd [1992] BCLC 1047; Re Cargo Agency Ltd [1992] BCLC 686; Re Godwin Warren Control Systems plc [1993] BCLC 80; Re GSAR Realisations Ltd [1993] BCLC 409; Re New Generation Engineers Ltd [1993] BCLC 435;Re Linvale Ltd [1993] BCLC 654; Re A & C Group Services Ltd [1993] BCLC 1297; Re Polly Peck International plc (No 2) [1994] 1 BCLC 574; Re Firedart Ltd [1994] 2 BCLC 340; Re Rex Williams Leisure plc [1994] Ch 350; [1994] 4 All ER 27 (CA); Re Manion Trading Ltd [1995] 4 All ER 14 (CA); Re Barings plc (No 5) [1999] 1 BCLC 433; [2000] 1 BCLC 523 (CA).

220  Removal of directors and procedures in regard thereto(1) (a) A company may, notwithstanding anything in its memorandum or articles or in any agreement

between it and any director, by resolution remove a director before the expiration of his period of office.(b) The provisions of paragraph (a) shall not be construed as authorizing the removal of a director of a

private company who was holding office for life on the thirteenth day of June, 1949.(2) Special notice shall be lodged with the company of any proposed resolution to remove a director under

this section or to appoint any person in the stead of a director so removed at the meeting at which he is removed, and, on receipt of notice of such a proposed resolution, the company shall forthwith deliver a copy thereof to the director concerned who shall, whether or not he is a member of the company, be entitled to be heard on the proposed resolution at the meeting.

(3) Where notice is given of a proposed resolution to remove a director under this section, and the director concerned makes representations with respect thereto not exceeding a reasonable length in writing to the company and requests their notification to members of the company, the company shall, unless the representations are received by it too late for it to do so—

   (a)   in any notice of the resolution given to members of the company, state that such representations have been made; and

   (b)   send a copy of the representations to every member of the company to whom notice of the meeting is sent, whether such notice is sent before or after receipt of the representations by the company.

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(4) If a copy of such representations is not sent as aforesaid because it was received too late or because of the company's default, the director concerned may (without prejudice to his right to be heard orally) require that the representations be read at the meeting.

(5) No copy of such representations shall be sent out and the representations need not be read out at any meeting if, on the application of the company or of any

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other person who claims to be aggrieved, the Court is satisfied that the rights conferred by this section are being abused to secure needless publicity for defamatory matter.

(6) The Court may order the company's or the said other person's costs on an application under subsection (5) to be paid in whole or in part by the director concerned, notwithstanding that he is not a party to the application.

(7) Nothing in this section shall be construed as depriving a person removed thereunder of compensation or damages which may be payable to him in respect of the termination of his appointment as director or of any appointment terminating with that of director or as derogating from any power to remove a director which may exist apart from this section.

NotesRemoval from office under s 220The provisions of s 220 were first introduced in 1952 as s 69ter of the Companies Act 46 of 1926 '[i]n pursuance of the policy of giving shareholders a greater voice in the administration of the company'. Before their introduction, if the articles provided that a director was to hold office for a period, or even for life, and did not empower the members to remove him, the members had no power to remove him before the expiration of his office. 1937

Thus, while there is no doctrine of the common law which enables the members to remove a director where the articles provide that he shall hold office for a period and do not empower the members to remove him, 1938 s 220 provides that a company may by ordinary resolution 1939  remove a director before the expiration of his office, notwithstanding anything in its memorandum or articles or in any agreement between it and him. 1940

The word 'director' can be read as including the plural 'directors', so that one resolution can remove all the directors simultaneously. 1941  It has been held that the section

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is designed exclusively for the removal of persons who are at the material time directors of the company, and that it therefore does not apply where the company disputes that the person in question is a director (it was pointed out that the assertion that the persons in question had resigned as directors and the proposal to remove them from the office of directors involved an obvious inconsistency). 1942 But the better view would seem to be that there is no reason why shareholders in general meeting should not pass a resolution dismissing a person as a director on the assumption that he is one. 1943

Since this provision authorises only the disregard of the company's articles or agreements between the company and a director, it does not authorise the disregard by members in general meeting of a contract that they, in their private or individual capacities, have entered into binding themselves to retain a person in office. 1944 Therefore, notwithstanding the existence of this provision, a person to whom the members have so bound themselves can restrain them from voting for his removal. Furthermore, the provision, because it does no more than make an ordinary resolution sufficient to remove a director, does not fetter the right of a private company 1945 to issue shares with voting rights loaded or weighted disproportionately to the number of shares held. 1946 Therefore, if by the articles of a private company shares held by a director sought to be removed carry additional voting rights, he may use those rights to defeat a resolution for his removal. 1947 And this holds true even where the director's shares carry the additional voting rights only when a resolution for his removal is voted on, ie even where the additional voting rights do not apply generally in respect of every occasion when a resolution is proposed at a general meeting. 1948What is more, where the articles of a company, whether a public or private company, contain a provision that the general meeting shall not have a quorum unless the holder of a particular class of shares or his proxy is present, a member holding shares of that class can, by not attending the meeting at which a resolution for his removal from office as director is to be voted on, effectively prevent the company from

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passing the resolution.1949  But provisions in the articles of a company, whether a private or public company, which give a director, independently of his voting rights in general meeting, a right to prevent an otherwise valid resolution from having any force or effect, or which entitle members to be directors, are invalid in so far as they conflict with the right of the members to remove a director by ordinary resolution.1950

The special notice requirement in s 220(2) means that, although a director may be removed from office by ordinary resolution, the general rule requiring a minimum of 14 days' notice of an ordinary resolution does not apply. Instead, the person intending to move the resolution has to give not less than 28 day's notice to the company, and the company has to give not less than 21 days' notice to its members.1951  In addition, the director has the protection afforded him by the provisions of s 220(2).

Although s 220 appears to assume a meeting requisitioned by members rather than having application to a meeting called by the directors, 'it would not be purposeful to hold that it [is] not a procedure available to directors.1952

A director is not entitled to an interdict to interfere with the company's statutory right to remove him from the board on the ground that, if he were removed, he would be entitled to a winding-up order on the just and equitable ground.1953  And the court will not interdict a company from acting on a resolution for a director's removal on the ground of irregularities in regard to the resolution where such irregularities caused the director no prejudice and could be cured by going through the proper process.1954

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Removal at common law and in terms of articlesSection 220(7) provides inter alia that nothing in s 220 empowering a company by ordinary resolution to remove a director before the expiration of his office is to be construed as derogating from any other power to remove a director which may exist.

At common law a director can be removed by ordinary resolution where the company's articles are silent in regard to both the power to remove directors and the director's term of office.1955

The articles of a company may empower its members, its directors, 1956  or even a third party, 1957  to remove a director from office.1958  An exercise of such a power will

always effectively remove a director from office, ie even if it constitutes a breach of contract on the part of the company.1959  And, because a company cannot be precluded from altering its articles, a company may always alter its articles so as to include such a power or an additional ground for disqualifying a director.1960

Where the articles of a company set up such a procedure for removal of directors which is different from s 220, those who convene the meeting at which removal resolutions are to be put, have, in effect, the right of election whether to proceed under the company's articles or under s 220. Thus, where the articles empower the members to remove directors, the members have a choice of procedure, and the company's board of

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directors does not have the right to pre-empt this choice. Where the members proceed under the articles, they subject themselves to the requirements of the articles, and the requirements of s 220 have no application (and where they proceed under s 220, the requirements of the articles are irrelevant). 1961 Thus, where a director is to be removed in terms of a provision in the articles, he is not entitled to the special notice 1962 that must be given to him when the statutory power to remove him is to be exercised, for the section of the Act conferring that power 1963 has no relevance whatever in regard to the exercise of a power under the articles. 1964

Unless the articles so provide, it is not necessary that the power to remove be exercised only on reasonable, good or sufficient cause. 1965 The cause for removal is, however, relevant where the company has contracted with the director that he shall hold office for a certain period and the director alleges that his removal from office constituted a breach of that contract by the company. Because the shareholder's right to vote is a proprietary right, he can ordinarily exercise his vote in any way he pleases, and therefore a resolution by the general meeting removing a director from office cannot be impeached on the ground that it was not passed bona fide in the interests of the company. But where the directors have the power to remove, they must exercise that power in the best interests of the company and not for an improper or ulterior reasons. 1966

Removed director's rightsSection 220(7) provides inter alia that nothing in s 220 empowering a company by ordinary resolution to remove a director before the expiration of his office is to be construed as depriving a person removed thereunder of compensation or damages 1967 which may be payable to him in respect of the termination of his appointment as director or of any appointment terminating with that of director. In other words, where the director's removal from office constitutes a breach of contract on the part of the company, or where the company has contracted to compensate him in the event of his removal from office, the fact that he was removed from office under the statutory power does not affect his right to claim damages or compensation from the company. The position is the same in the case of a director removed from office under a provision in the company's articles, ie his removal does not, as such, deprive him of any claim for

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damages that he might have for termination of his office or of any appointment terminating with that of director (eg that of managing director). 1968

Thus, a director who has been removed from office has an action for damages against the company if, but and only if: (a) he has a contract 1969 with the company binding it to compensate him or not to terminate his office (or any appointment terminating with the termination of his office as director) despite the existence in its articles of the power to do so 1970 or, where no such power already exists, despite any subsequent alteration of the articles; 1971 and (b) he has not committed a breach of that contract which entitles the company to cancel it. 1972 Therefore, in the absence of an agreement to the contrary, he has no action even where he did contract with the company, if that contract was no more than a contract in terms of the company's articles, ie if it was a contract that he would hold office on the terms provided for in the company's articles governing the office of director. This is because the company's power to remove him (whether that power existed in the articles when the contract was entered into or was subsequently introduced) formed part of his contract with the company. Hence his removal is in terms of that contract, and not in breach of it. 1973 For example, where a director so contracted

with company and its articles provided that he should hold office for life, it was held that he had no action for damages when the company subsequently altered its articles so as to make him subject to re-election and, in terms of those amended articles, he subsequently ceased to be a director. 1974

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In SA Post Office v Mampeule, 1975 the court was faced with the validity of a typical clause in a contract of employment that the removal from office, as director, of the chief executive officer of the company would result in the automatic termination of his appointment as chief executive officer.

In this case, the respondent was, in terms of a five-year fixed term contract, appointed as a director and chief executive officer of the applicant, the South African Post Office Ltd, which was a state owned entity. As is common practice, the contract explicitly provided that membership of the board of directors was a prerequisite for the appointment of a chief executive officer. The contract provided further that the appointment of the chief executive officer may be terminated by the incapacity or misconduct of the chief executive officer or by operational requirements.

About two and a half years after the respondent's appointment as chief executive officer of the applicant, its board of directors approved a motion by the Minister of Communication, on behalf of the sole shareholder, to remove the respondent from office as director of the applicant. The reason for the motion was simply that as a result of the respondent's conduct, the applicant had lost its trust and confidence in him.

The respondent's removal from office as director was followed by the termination of his appointment as chief executive officer. The respondent referred the dispute to the Labour Court on the ground that his dismissal was unfair. The court ruled that the 'automatic termination' clause of the contract had conflicted with the respondent's right not to be unfairly dismissed, with the result that the clause in question was void. The automatic termination of the respondent's employment as chief executive officer had limited his rights under the Labour Relations Act 66 of 1995. The respondent had a right not to be unfairly removed from office as chief executive officer - a right that could not be contracted out by the parties. The automatic termination clause had been superseded by the right not to be unfairly dismissed. The court a quorefrained, however, from deciding the constitutional validity of the automatic termination clause.

On appeal, it was held, upholding the decision of the court a quo, that a managing director or chief executive officer holds two positions, and acts in two different capacities. He is a director and an employee of the company, and so, incidentally is a full-time executive director of a company, which the court made no mention of. As an employee, his contractual relationship with the company was found to fall within the ambit of the Labour Relations Act. As such, the respondent had enjoyed a right not to be unfairly removed.

It is disappointing to find in the judgment of the Labour Appeal Court, a rather superficial, shallow and indifferent analysis of the underpinning corporate law principles relating to the right of shareholders to remove a director before the expiration of the period of his office. Section 220(7) of the Companies Act of 1973 balances the interests of the parties by preserving the director's right to claim damages where his removal from office is in breach of his contract with the company.

In the case of a 'quasi-partnership' or 'domestic' company, the courts may, where it is just and equitable to do so, order the winding-up of the company on the just and equitable

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ground 1976  on the application of a member who has been removed from office as director. A member of such a company who has been removed from office as director ought, also, to be able to obtain relief under s 252.1977

A company may not make any payment or grant any benefit or advantage to any director or past director of the company or its subsidiary or holding company, or a subsidiary of its holding company, by way of compensation for loss of office, unless that payment is made in compliance with the provisions of s 227. No such disclosure or approval is, however, required in respect of any bona fide payment made or benefit or advantage granted by way of damages for breach of contract (see s 227(6)).Vacation of office

A director who becomes disqualified from holding office under the Companies Act ceases to hold office on becoming so disqualified.1978  A director who is required by the articles to hold a share qualification vacates his office if he does not obtain such qualification within two months or within such shorter period as may be provided in the articles.1979  On the making of a compulsory winding-up order the directors of the company cease to hold office.1980  In the case of a voluntary winding-up, however, the directors do not cease to hold office. The position is, rather, that as from the commencement of the winding-up all the powers of the directors cease except in so far as their continuance is sanctioned by the liquidator or the creditors (in a creditors' voluntary winding-up) or by the company in general meeting (in the case of a members' voluntary winding-up).1981  It would seem that in the case of a judicial management the directors, although deprived of their powers of management, do not cease to hold office.1982

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In addition, the articles 1983  of companies usually provide that the office of director shall be vacated if the director —

(a)   ceases to be a director 1984  or becomes prohibited from being a director by virtue of any provision of the Act; 1985  or

(b)   without the consent of the company in general meeting holds any other office of profit under the company except that of managing director or manager; 1986  or

(c)   resigns his office by notice in writing to the company and the Registrar; or(d)   for more than six months is absent without permission of the directors from meetings of

directors held during that period; 1987  or(e)   is directly or indirectly interested in any contract or proposed contract with the company

and fails to declare his interest and the nature thereof in the manner required by the Act.1988

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Upon the happening of such specified event the office is ipso facto vacated.1989  If the cause of vacation is the doing or suffering of some act, the outgoing director may, however, be re-elected, 1990  unless the cause of the vacation is a continuing one.1991  Where a person has vacated office under a provision in the articles and the cause of that vacation is a continuing one, he cannot be validly re-elected a director of that company until that cause has ceased to exist.1992

Where the articles provide that a director's office is to be vacated if all the other directors request him to resign, the other directors must exercise this power bona fide in the interests of the company and not for an ulterior purpose; but even if their purpose is improper, their request will effectively terminate the director's appointment.1993

Retirement from officeThe articles of companies usually provide that all directors shall retire from office at the first annual general meeting, and that at the annual general meeting in every subsequent year one-third of the directors for the time being (or if their number is not three or a multiple of three, the nearest to one third) shall retire.1994  Where there are only two directors subject to such a provision, neither of them is bound to retire.1995  It is also usually

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provided in the articles of companies that the directors to retire in every year shall be those who have been longest in office since their last election, 1996  but as between persons who have become directors on the same day, those to retire shall, unless they otherwise agree among themselves, be determined by lot.1997  The articles may provide that a director whose term of office has come to an end shall continue in office until his place has been filled.1998  The general rule however is that a director 'on his appointment does not ordinarily step into an office which is perpetual unless terminated by some act, but into an office the holding of which is limited by the terms of the articles', and therefore, in the absence of an express provision to the contrary, he vacates his office when his term office of is completed even if no meeting is held at which his position could be filled.1999

ResignationSubject to any provision to the contrary in the company's articles and in any contract between the director and the company, a director is entitled to relinquish his office at any time he pleases by proper notice to the company, and such resignation is not

dependent upon any acceptance of the company.2000  Consequently, once having given proper notice of

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his resignation, a director is not entitled to withdraw it unilaterally, and may do so only with the consent of those entitled to appoint a new director. 2001 The articles usually provide that a director vacates his office if he resigns his office by notice in writing to the company and the Registrar. 2002 Where the articles thus provide for a written notice of resignation to the company, a verbal notice of resignation to the company in general meeting will nevertheless be equally effective. 2003 Where the articles require written notice to the company or the board of directors, oral notice of resignation becomes effective only upon acceptance by the company. 2004 Where the articles provide that a director vacates his office if he resigns his office by notice to the company, or they make no provision for the director's resignation, a director who has contracted to serve the company for a fixed period can effectively resign before the termination of that period, but he will be liable to the company in damages for any loss which it suffers as a result of his premature termination of his services. 2005 If the articles provide that a director's office will be vacated only when (and not merely that its vacation will be suspended until) his resignation is accepted by the company, his resignation is not effective until it has been so accepted. 2006 Consequently, he will remain a director until such acceptance, and he may withdraw his resignation at any time before it has been accepted. 2007 Despite the entitlement a director

RS 5, 2008 ch8-p292

has to resign at any time, it may result in contempt of court. In Minister of Water Affairs & Forestry v Stilfontein Gold Mining Co Ltd and Others  2008 a gold mining company hadfailed to comply with an order of the High Court in which the company had been compelled to comply with certain directives issued by the Minister of Water Affairs and Forestry in terms of the provisions of s 19(3), read with s 19(1), of the National Water Act 36 of 1998. The directives were aimed at the prevention of water pollution. The case involved an application by the Minister for an order declaring the company and its directors to be in contempt for failing to comply with the court's order. The ex-directors resisted the application on, inter alia, the ground that neither they nor the company were in wilful contempt. More specifically, they contended that they had resigned as directors of the company. It appeared from the evidence that they had resigned their positions shortly after having abandoned an application for the winding-up of the company and on legal advice that if they continued in office, the company's non-compliance with the court order might render them party to reckless trading or force them to manage the company on the basis that it did not comply with court orders.

The court found that the respondents were in contempt - they were guilty of a wilful and mala fide refusal or failure to comply with the court order. Salient aspects of Hussain J's judgment were:

•      The company had sufficient funds to comply with the interim payment sought in the directives.

•      There was no risk that the directors would be subject to accusations of reckless trading simply because they complied with an order of court. Indeed, if there were any recklessness, it was in the directors' mass resignation, thereby leaving the first respondent, a listed company, 'completely rudderless'. The timing of the resignations was rushed in order to meet the hearing date of the application. One did not expect, within the corporate environment, that the entire board of a public company would suddenly resign. There should, at the very least, have been some form of notification. At the very least, the directors ought to have called a special general meeting of the company to inform the members of their decision to resign. At least, then, the members in a meeting would have been given an opportunity to decide the future fate of the company. Investors and shareholders do not expect or foresee that all of the directors of a public company will suddenly resign with no notice. This must have had a negative impact on the stock exchange.

•      At all material times the directors were under a duty to act bona fide in the interests of the company. This is the fundamental duty which qualifies the exercise of any powers which the directors in fact have. The 'interests' in this context, are only those of the company itself as a corporate entity and those of its members as a body. The court was

not persuaded that the directors in the case acted in good faith upon reasonable grounds for their decision to resign. All that the directors achieved was merely to incapacitate themselves from discharging their duties towards the company and its members. This was unacceptable and the directors could not be allowed to merely walk away because it was convenient for them to do so. They accepted appointments as directors of a listed company and they thereby accepted the duties and obligations that go with it.

RS 7, 2010 ch8-p292-1

•      The conduct of the directors flew in the face of everything recommended in the code of corporate practices and conduct recommended by the King Committee. 2009 They acted irresponsibly in merely abandoning the company, a listed company of which they were the directors.The court stressed the characteristic of good corporate governance, namely, social responsibility, which was stated by the King Committee as follows:'A well-managed company will be aware of, and respond to, social issues, placing a high priority on ethical standards. A good corporate citizen is increasingly seen as one that is non-discriminatory, non-exploitative, and responsible with regard to environmental and human rights issues. A company is likely to experience indirect economic benefits, such as improved productivity and corporate reputation, by taking those factors into consideration.'By resigning as they did, the court said that the directors were simply walking away from their environmental obligations.

The situation that arose in this case is perhaps analogous to the situation where a director 'deliberately contrary to the interests of the company . . . does not attend [a] meeting, or leaves it, or simply does not vote'. 2010 In such circumstances the director would be in breach of the duty to act bona fide in the interests of the company. 2011 A director who promotes a cause amongst his fellow directors may, in the circumstances, breach this duty even if he refrains from voting when the matter is put to the directors. In Darvall v North Sydney Brick & Tile Co Ltd 2012 Kirby P rejected the argument that a director, because he left the meeting at the stage when the transaction was to be voted on, was not to be counted in determining the bona fides of the directors:'He only left after that agreement was signified and then after reading out his proposal to make the bid — I do not believe that he can escape involvement in the by then formal ratification of the agreements which followed by the simple expedient of leaving the room.'

Hussain J's judgment raises interesting issues:•      How far does a director's liberty to resign extend? And in circumstances where the

director's fiduciary duties require the director not to resign, how long is he/she required to remain in office before resigning? A careful balancing act will be required to give effect, on the one hand, to a director's duty to act bona fide in the interest of the company, and on the other, to a person's basic constitutional right to resign.

•      Another question that the judgment raises is the role that corporate governance practices can play in resolving legal issues. The King Code and King's other recommendations on corporate governance do not have legal binding force. (It is not clear from Hussain J's judgment to what extent he placed reliance on these suggested principles in arriving at his decision in the case — perhaps his dicta are to be seen asobiter.)

RS 7, 2010 ch8-p292-2

In conclusion it is to be noted that in relation to the fact that all the directors had resigned at once, Hussain J said: 'I do not believe it was ever conceived that such a set of circumstances would materialise.'2013 This is odd. Such a situation is no different to one in which, for example, all the directors are killed at the same time in an accident, which is quite conceivable. Also, s 182 clearly conceives of such situations by giving the power to convene a general meeting of a company '[w]here all the directors of the company have become incapacitated or have ceased to be directors . . .'

Where directors resign in order to put 'stooge' directors in their place and then continue to control the company, their resignation is a sham and will de jure be disregarded. 2014Termination of a directorship by mutual consent is, of course, possible. 2015 Thus it has been held:  2016 'Like the membership of a co-operative society . . . the relationship between a director and a company is essentially contractual and I can see no reason why that relationship cannot be terminated by mutual consent. Unless, of course, such an agreement is specifically excluded by the articles of the company. However, the mere fact that the articles do not specifically provide for termination by agreement does not mean that this has been excluded.'

Restrictions on Directors, their Powers and Certain Acts (ss 221-228)

  

    1937   See Report of the Committee on Company Law Amendment Cmd 6659 (1945) para 130 (the Cohen Committee) and Final Report of the Company Law Amendment Enquiry Commission 1947-1948 UG No 69-1948 para 125-126 (the Millin Commission). On the removal of the director from office, see: R C Beuthin 'A Director Firmly in the Saddle' (1969) 86 SALJ 481; D Prentice 'Removal of Directors from Office' (1969 32 MLR 695); Anon '"Weighted" or "Loaded" Votes in Private Companies' (1977) SA Company LJ D5-20; M J Oosthuizen 'Swerdlow v Cohen & Others 1977 (1) SA 178 (W)' 1977 TSAR 165; Bernard J Cartoon 'The Removal of Company Directors' [1980] JBL 17; D A Preis 'Prevention of the Statutory Removal of Directors' (1983) 5 MBL 111; J Birds 'Excluding a Director from Office' (1985) 6 Company Lawyer 37; M P Larkin 'Distinctions and Differences: A Company Lawyer Looks at Executive Dismissals' (1986) 7 ILJ 248; M J Oosthuizen 'Onreëlmatige Vergaderingsprosedure en Ontslag van Direkteure: James North (Zimbabwe) (Pvt) Ltd v Mattinson 1990 (2) SA 228 (ZHC)' 1991 TSAR 301.

    1938   Imperial Hydropathic Hotel Co, Blackpool v Hampson (1882) 23 ChD 1 7.    1939   Swerdlow v Cohen 1977 (3) SA 1050 (T) 1053.    1940   s 220(1)(a). This does not apply in the case of a director of a private company who was to hold office for

life on 13 June 1949: s 220(1)(b).    1941   Taylor v McNamara [1974] 1 NSWLR 164; Claremont Petroleum NL v Indosuez Nominees Pty Ltd (1986)

10 ACLC 520 SC(Qld). And see Re Holmes Life Funds of Australia Ltd [1971] 1 NSWLR 860.    1942   Currie v Cowdenbeath Football Club Ltd [1992] BCLC 1029 CS(OH).    1943   Browne v Panga Pty Ltd (1995) 17 ACSR 75 SC(WA).    1944   Stewart v Schwab 1956 (4) SA 791 (T); Desai v Greyridge Investments (Pty) Ltd 1974 (1) SA 509

(A) 518; Swerdlow v Cohen 1977 (3) SA 1050 (T) 1057; Amoils v Fuel Transport (Pty) Ltd 1978 (4) SA 343 (W) 347 (where the court rejected the argument that 'company' in s 220(1)(a) refers to shareholders in general meeting and that that section therefore empowers the shareholders to remove a director notwithstanding a shareholders' agreement to the contrary);Barlows Manufacturing Co Ltd v R N Barrie (Pty) Ltd 1990 (4) SA 608 (C) 611-612. It makes no difference that the company is also a party to the agreement if the agreement between the shareholders inter se is severable from the agreement with the company and is enforceable between the shareholders inter se: Amoils v Fuel Transport (Pty) Ltd 1978 (4) SA 343 (W) 347. (It may be noted that the correctness of the conclusion in Stewart v Schwab supra that a shareholders' agreement precluding removal of a director is valid and enforceable was challenged in Desai v Greyridge Investments (Pty) Ltd supra 518, but the court found it unnecessary to rule on the question).

    1945   A public company cannot issue such loaded or weighted shares: s 195(1); but a private company (save in the exceptional circumstances provided for in s 194(1)) is prevented only from issuing shares with no voting rights attached: s 193(1); see Swerdlow v Cohen 1977 (1) SA 178 (W) 184.

    1946   Bushell v Faith [1970] AC 1099; [1970] 1 All ER 53 (HL); Swerdlow v Cohen 1977 (1) SA 178 (W).    1947   Bushell v Faith [1970] AC 1099; [1970] 1 All ER 53 (HL); Swerdlow v Cohen 1977 (1) SA 178 (W); James

North (Zimbabwe) Pvt Ltd v Mattinson 1990 (2) SA 228 (ZHC) 239-242. See also Swerdlow v Cohen 1977 (3) SA 1050 (T) 1057, where the correctness of the decision in Bushell v Faith was assumed.

    1948   Bushell v Faith [1970] AC 1099; [1970] 1 All ER 53 (HL); and see Swerdlow v Cohen 1977 (3) SA 1050 (T) (where the correctness of the decision in Bushell v Faith was assumed); James North (Zimbabwe) Pvt Ltd v Mattinson 1990 (2) SA 228 (ZHC) 239-242. But see Swerdlow v Cohen 1977 (1) SA 178 (W) and the dissenting speech of Lord Morris in Bushell v Faith supra.

    1949   Harman v BML Group plc [1994] 2 BCLC 674 678 (CA), where Dillon LJ, pointing out that it is not uncommon in private companies for steps to be taken to prevent a minority holding from being overridden by the majority shareholders by entrenching voting rights on particular questions (referring here to Bushell v Faith [1970] AC 1099; [1970] 1 All ER 53 (HL), said: 'Here we have, in the shareholders' agreement signed by all the shareholders attaching rights to the shares—which must have the same effect as if the rights had been set out as class rights in the articles—the provision that [the person in question] is entitled to remain in office as a director of the company for so long as he . . . owns the B shares. Then there is the quorum provision that a shareholder's meeting shall not have a quorum unless a B shareholder or proxy is present. That is essential to entrench [the person in question's] right to remain a director. With nothing else to protect it that would be overridden by an ordinary resolution. The provision as to quorum is not just the mere chance that that is how the number of shares are held. It is a special provision to secure the directorship. . . I do not see why it is not equally entrenched as a provision which enables [him] to preserve in office any people who are his allies for the time being on the board.'

    1950   Swerdlow v Cohen 1977 (1) SA 178 (W); 1977 (3) SA 1050 (T).    1951   As to special notice, see s 186(3).    1952   Dick v Comvergent Telecommunications Ltd (2000) 34 ACSR 86 90 SC(NSW), where it was held that

instructions by a managing director to the secretary to convene a general meeting to consider a resolution for the removal of certain directors, could not amount to notice under s 203D(2) of the Australian Corporations Law, for the meeting called was not a meeting called after notice of intention to move the resolution had been given to the company.

    1953   Bentley-Stevens v Jones [1974] 2 All ER 653. And see Pennell, Sutton and Moraybell Securities Ltd v Venida Investments Ltd (unreported July 25, 1974), noted by Susan J Burridge 'Wrongful Rights Issues' (1981) 44 MLR 40, where the court refused to grant an injunction interfering with the defendant company's statutory right to remove a director from office.

    1954   Bentley-Stevens v Jones [1974] 2 All ER 653, where the director did not receive the required notice of meeting of the board that convened the general meeting in question, and it was held that an interlocutory injunction would not be granted to him since the irregularity could be cured by giving a valid notice. And see James North (Zimbabwe) Pvt Ltd v Mattinson 1990 (2) SA 228 (ZHC).

    1955   Appel v Sher 1950 (2) SA 224 (W) 229, where it was held that, the articles being silent as to the term of office of the directors, the company 'can appoint a director and then, when it pleases, remove that director'. See howeverImperial Hydropathic Hotel Co, Blackpool v Hampson (1882) 23 ChD 1 10, where Cotton LJ found it

unnecessary to express any opinion whether a company has any inherent power to remove directors where the articles do not provide for the duration of their office of director; and see Transcash SWD (Pty) Ltd v Smith 1994 (2) SA 295 (C), where it would seem to have been accepted that in the absence of a contrary provision in the articles, a director can be removed only by the special procedure laid down in s 220.

    1956   See eg Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9; [1926] All ER Rep 498 (CA); Bersel Manufacturing Co Ltd v Berry [1968] 2 All ER 552 (HL).

    1957   See Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701; [1940] 2 All ER 445 (HL).    1958   Section 220(7) provides that nothing in s 220 shall be construed as derogating from any power to remove

a director which may exist apart of that section. In Delfante v Delta Electrical Industries Ltd 1992 (2) SA 221 (C) it was held that a provision in an agreement entered into by all the company's shareholders purporting to entitle certain of them to appoint and remove a director, had the effect of nullifying a provision in the articles of the company in terms of which a director's office would be ipso facto terminated if he were given notice requiring him to resign by shareholders holding 50% of the voting rights of all the members. However, while it is undoubted that the shareholders of a company can bind themselves to one another not to exercise a power that they have under the company's articles, such an agreement cannot have the effect of altering the articles: see notes on s 199.

    1959   Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701; [1940] 2 All ER 445 (HL); De Villiers v Jacobsal Saltworks (Michaelis & De Villiers) (Pty) Ltd 1959 (3) SA 873 (O) 874; and see Ross & Co v Coleman 1920 AD 408 418. It has been said that this is because a company cannot be precluded from acting on its articles: Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 740-741; [1940] 2 All ER 445 469 (HL), per Lord Porter. But there is no reason in principle why a company cannot bind itself not to exercise powers conferred on it by its articles, and indeed companies frequently do so. It has also been suggested that this rule is simply the (now qualified) rule that a contract of personal service will not be enforced specifically: Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 723; [1940] 2 All ER 445 458-459 (HL), per Lord Wright. But the better view would seem to be that the nature of the office of a director is such that courts will not compel a company to have a director it does not want, and that the appropriate remedy is always in damages. See however Barlows Manufacturing Co Ltd v R N Barrie (Pty) Ltd 1990 (4) SA 608 (C) 611, where the court would seem to have been of the opinion that, where a managing director has a contract with the company entitling him to remain in office for a certain period, the company can effectively remove him from office only if it has not given up the right to revoke the service agreement on good cause.

    1960   Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701; [1940] 2 All ER 445 (HL); De Villiers v Jacobsal Saltworks (Michaelis & De Villiers) (Pty) Ltd 1959 (3) SA 873 (O) 874; and see Ross & Co v Coleman 1920 AD 408 418.

    1961   Re Holmes Life Funds of Australia Ltd [1971] 1 NSWLR 860; Browne v Panga Pty Ltd 1995 17 ACSR 75 85-86 SC(WA); Shanahan v Pivot Pty Ltd (1998) 26 ACSR 740 748 SC(Vic); Link Agricultural Pty Ltd v Shanahan (1998) 28 ACSR 498 516-517 SC(Vic); Howard v Mechtler (1999) 30 ACSR 434 437-438 SC(NSW); Dick v Comvergent Telecommunications Ltd (2000) 34 ACSR 86 SC(NSW).

    1962   ie the special notice required by s 220(2) when the power to remove under s 220(1) is to be exercised.    1963   ie s 220.    1964   Re Holmes Life Funds of Australia Ltd [1971] 1 NSWLR 860 (where it was held that, since the articles did

not provide for notice, the director could be removed without notice); Browne v Panga Pty Ltd (1995) 17 ACSR 75 85-86 SC(WA).

    1965   Inderwick v Snell (1875) 2 Mac & G 216 221-223; 42 ER 83 85-86.    1966   Lee v Chou Wen Hsien [1984] 1 WLR 1202; [1985] BCLC 45 (PC); on directors' duties in regard to the

exercise of their powers, see note DUTY TO EXERCISE POWERS FOR PROPER PURPOSE in notes on s 208.    1967   As to damages, see Beach v Reed Corrugated Cases Ltd [1956] 2 All ER 652 659; Shindler v Northern

Raincoat Co Ltd [1960] 2 All ER 239; Bold v Brough, Nicholson & Hall Ltd [1963] 3 All ER 849; Yetton v Eastwoods Froy Ltd [1966] 3 All ER 353. In Bold v Brough, Nicholson & Hall Ltd supra the damages awarded to the wrongfully dismissed director covered: (1) loss of salary and commission; (2) diminution in pension and loss of life insurance cover under the defendant company's staff pension and assurance scheme; (3) the amount of premiums payable under the defendant company's discretionary pension and life assurance scheme which the company had undertaken to pay on behalf of the director.

    1968   'The articles may give them the power to dismiss, but the power to dismiss is to be distinguished from the right to dismiss', per Lord Wright in Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 722; [1940] 2 All ER 445 458 (HL).

    1969   The articles of association of a company do not themselves create a contract between the company and a director in his capacity such: De Villiers v Jacobsal Saltworks (Michaelis & De Villiers) (Pty) Ltd 1959 (3) SA 873 (O) 874 877. But where no express contract has been entered into, a contract in terms of the articles will ordinarily be implied: see eg Ross & Co v Coleman 1920 AD 408 418.

    1970   Nelson v James Nelson & Sons Ltd [1914] 2 KB 770; [1914-1915] All ER Rep 433 (CA).    1971   Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701; [1940] 2 All ER 445 (HL); De Villiers v Jacobsal

Saltworks (Michaelis & De Villiers) (Pty) Ltd [1959] 3 SA 873 (O). A company cannot by altering its articles justify a breach of contact: ibid.

    1972   See eg Farmers' Associated Dairies v Goldstein 1924 WLD 181.    1973   Read v Astoria Garage (Streatham) Ltd [1952] Ch 637; [1952] 2 All ER 292 (CA). Such a contract is a

contract made upon the terms of an alterable article, the alteration of which by the company in terms of its statutory powers can afford no valid ground of complaint by either of the contracting parties: Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9; [1926] All ER Rep 498 (CA); De Villiers v Jacobsal Saltworks (Michaelis & De Villiers) (Pty) Ltd 1959 (3) SA 873 (O) 874 880. The principle here was stated thus by Innes CJ in Ross & Co v Coleman 1920 AD 408 418-419 (a case concerning the director's right to remuneration): 'The machinery for alteration was there, operative to the knowledge of the parties in respect of the entire matter of directors' remuneration. Was there anything in their agreement which prohibited any change during the plaintiff's period of service? Express prohibition there was none, and I can see no sufficient ground for implying a prohibition. When an article has been duly amended, the future operation of that article upon existing rights cannot be excluded unless the intention of the contracting parties to preserve such rights intact is beyond

doubt. . . . A director is entitled to such benefits as the articles may specify; the articles are subject to amendment; and any agreement as between the company and the director, that those benefits shall remain undiminished under all circumstances, must very clearly appear, if it is to be given effect to. The general rule, as pointed out by Lindley MR [in Allen v Gold Reefs of West Africa [1900] 1 Ch 656 673] is that existing rights founded or dependent upon alterable articles are limited as to their duration by the duration of the articles which confer them.'

    1974   De Villiers v Jacobsal Saltworks (Michaelis & De Villiers) (Pty) Ltd 1959 (3) SA 873 (O).    1975   (2010) 31 ILJ 2051 (LAC).    1976   s 344(h).    1977   There was authority for the proposition that s 111 bis of the Companies Act 46 of 1946 could not be

invoked in these circumstances, because it was concerned only with prejudice to a member qua member. The test in s 252 is however not identical to the test contained in s 111 bis of the 1926 Act, and it would seem to be reasonably certain that a member-director of such a company who is removed from office can now obtain relief under s 252. See notes on s 252.

    1978   s 218 and s 219.    1979   s 213(1)(a).    1980   Our courts have taken the view that, on the grant of a winding-up order, including a provisional winding-

up order, the directors of the company at the commencement of the winding-up cease to be such functionally, officially and nominally, their powers and duties terminate, and they are deprived of all control of the company's property: Attorney-General v Blumenthal 1961 (4) SA 313 (T) 314-315; S v Cope 1970 (3) SA 605 (T) 608; Volkskas Bpk v Darrenwood Electrical (Pty) Ltd 1973 (2) SA 386 (T) 389-390; Secretary for Customs & Excise v Millman 1975 (3) SA 544 (A) 552. See however Re Country Traders Distributors Ltd and The Companies Act [1974] 2 NSWLR 135 138; Austral Brick Co Pty Ltd v Falgat Construction Pty Ltd (1990) 2 ACSR 766 SC(NSW). Although our courts have held that a director's office is terminated on the making of a winding-up order, they have nevertheless accepted that where a provisional winding-up order has been made, the directors have a residual power (without the co-operation of the provisional liquidator, if any) to cause the company to take the necessary steps to oppose the grant of a final winding-up order (and to anticipate the return day for that purpose) and to appeal against the grant of such order. See notes on s 348.

    1981   s 353(2).    1982   Section 428(2) provides that a provisional judicial management order must contain (inter alia) directions

that the company shall be under the management of a provisional judicial manager 'and that any other person vested with the management of the company's affairs shall from the date of the making of the order be divested thereof'; and under s 443, on the making of a final judicial management order, the judicial manager must 'take over from the provisional judicial manager and assume the management of the company'. In Alpha Bank Bpk v Registrateur van Banke 1996 (1) SA 330 (A) 352 the court rejected the argument that, while the management of the company is transferred to the judicial manager (s 443(a) (b) (f) and (g)), control of the company remains in the board and, hence, the directors retain certain residual powers (in particular, the power to issue unissued shares). It was held that, while the shareholders 'control' the company, the board of 'manages' it; and therefore when the management of a company is transferred to the judicial manager its board is left with no residual powers.

    1983   See art 65 of Table A and art 66 of Table B.    1984   As to expiry of term of office, see below.    1985   See art 65(a) of Table A and art 66(a) of Table B.    1986   See art 65(b) of Table A and art 66(b) of Table B.    1987   See art 65(d) of Table A and art 66(d) of Table B. When no meetings of the directors are held during the

specified period, the directors do not vacate their offices: The South African Bank v Faure (1887) 5 SC 54. Where the article provides that a director shall vacate office, not if he 'is absent', but if he 'absents himself', this means 'if he voluntarily absents himself' and therefore absence through illness does not result in vacation of office: Re London and Northern Bank (Mack's Claim) [1900] WN 114; Re London Northern Bank (McConnell's Claim) [1901] 1 Ch 728.

    1988   See art 65(e) of Table A and art 66(e) of Table B. For the provisions of the Act in regard to such disclosure, see ss 234-241 and notes thereon. Unless the articles otherwise provide, the fact of holding shares in another company contracting with the company is a sufficient interest to create disqualification: Dimes v Proprietors of Grand Junction Canal Co (1852) 3 HLC 759; Todd v Robinson (1884) 14 QBD 739 (CA); Turnbull v West Riding Athletic Club Leads Ltd(1894) 70 TL 92. In Star Steam Laundry Company v Dukas (1913) 108 LT 367 the article provided that the office of director was vacated 'if he is concerned in or participated in the profits of any contract with the company'. Farwell LJ held that it was enough that the director had been concerned in the contract, although there had been no profit. In Nel v De Necker 1948 (1) SA 884 (W) the company's articles provided that the office of director 'shall be vacated . . . if he is concerned or participated in the profits of any contract with the company unless such concern or participation in the profits of any such contract be made with the unanimous knowledge and consent of his co-directors'. Ramsbottom J distinguished the decision in Star Steam Laundry Company v Dukas supra. The articles in that case, he said, did not read 'if he is concerned in', but meant, rather 'if he is concerned in the profits or if he participated in the profits'. The learned judge said (at 890) that, had the company adopted an article that the office of a director shall be vacated if the director 'is directly or indirectly interested in any contract with the company or participates in the profits of any contract with the company', it would have been sufficient to show that the applicant was interested in a contract with the company.

    1989   Re Bodega Co Ltd [1904] 1 Ch 276; [1900-3] All ER Rep 770; James North (Zimbabwe) Pvt Ltd v Mattinson 1990 (2) SA 228 (ZHC) 237 (where it was held that the director had automatically vacated office from the date of his letter of resignation, and there was no question that his resignation had to be accepted before it could take effect). It is not necessary that the board should resolve that he has vacated his office - indeed, in the words of Ramsbottom J in Nel v De Necker 1948 (1) SA 884 (W) 887, such a resolution is irrelevant 'since a director who did the prescribed act would cease to be a director even though the board were to resolve that he should not vacate his office'. In Re Bodega Co Ltd [1904] 1 Ch 276; [1900-1903] All ER Rep 770 Farwell J said: 'In my opinion it is quite plain on the words of the article that he ipso facto or automatically, vacates his office

on the act being done: there is no distinction between this and the other events mentioned in the articles, eg bankruptcy, and in none of them is there any locus poentitentiae for him, or any means by which the directors can condone the offence or the act which causes the vacation. The office is vacated automatically, and if his co-directors wish him still to act, he has to be re-elected in the usual way; or the casual vacancy has to be filled up under the article to that effect. The directors having nothing whatever to do with the vacation of the office by an event over which they have no control, and with which they have nothing to do except to satisfy themselves that the fact has happened, if the fact be put in issue.'

    1990   Re Bodega Co Ltd [1904] 1 Ch 276; [1900-1903] All ER Rep 770.    1991   Re Bodega Co Ltd [1904] 1 Ch 276; [1900-1903] All ER Rep 770; Haupt v De Villiers (1883) 2 SC

392; Ebden v Arderne (1884) 2 SC 411. In Re Bodega Co Ltd supra Jessel MR said (at 284-285; at 773-774): 'I do not understand the article to mean that, if a man be concerned in a contract not disclosed, and he thereby vacates his office, he cannot be elected in a subsequent year. To my mind it is not a continuing disqualification unless the work to be done under the contract is a continuing work. If the work to be done under the contract ought to be reviewed by the director concerned in the contract, and the discretion which the company is entitled to expect from that director is still to be exercised after the next election, then, and then only, the re-election would be avoided by the continuing contract. But when, as here, it is a contract made once and for all for a particular purchase, and the matter comes to an end in the current year, then I think, it only applies to the particular holding of the directorship for the current year.'

    1992   Haupt v De Villiers (1883) 2 SC 392; Ebden v Arderne (1884) 2 SC 411; Re The Bodega Co Ltd [1904] 1 Ch 276; [1900-3] All ER Rep 770. As to vacation of office under provisions in the articles, see art 65 of Table A art 65 and art 66 of Table B.

    1993   Lee v Chou Wen Hsien [1984] 1 WLR 1202; [1985] BCLC 45 (PC).    1994   See art 66 of Table A. Article 67 of Table B, however, provides inter alia that the company in general

meeting may from time to time determine the terms of office and the manner of retirement. In Mills v Durban Roodeport Mining Syndicate Ltd 1925 WLD 108 it was held that even where the company's articles contain an article in this form the directors may tacitly agree that all of them should retire.

    1995   In Re David Moseley & Sons Ltd [1939] Ch 719; [1939] 2 All ER 791 a company provided by its articles of association that at every annual general meeting one-third of the directors, or, if their number was not a multiple of three, then the nearest number to, but not exceeding, one-third, should retire from office, the director or directors who had been longest in office to be the ones to retire. The number of directors of the company was reduced to two. It was held that neither of them was bound to retire from office. Simonds J held (at 723, at 794): 'The article, in my judgment, does not provide for the retirement of a director unless one of two conditions is satisfied: either there must be a number which is one-third of the directors, or there must be a number which is nearest to but does not exceed one-third. Here it is clear that neither of those conditions is satisfied. There are two directors, and, therefore, you cannot find a number which is one-third. There are two directors, and, therefore, you cannot find a number which is nearest to, but does not exceed, one-third. Accordingly, although it may be that the general intention of this particular article is not satisfied, the answer is that the articles will have to be altered to give effect to what may well be the intention of the company'.

    1996   See Kraus v JG Lloyd Pty Ltd [1965] VR 232 233-234.    1997   See art 67 of Table A. See Parsons v Langemann 1948 (4) SA 258 (C). 'By lot' means depending on

chance, and where the word 'ballot' is used instead it means by lot unless there is an indication to the contrary: Eyre v Milton Property Ltd [1936] Ch 244 (CA).

    1998   In Grundt v Great Boulder Proprietary Gold Mines Ltd [1948] Ch 145; [1948] 1 All ER 21 (CA) the articles of the company provided that: 'If at any general meeting at which an election of directors ought to take place the place of any director retiring by rotation is not filled up, he shall, if willing, continue in office until the next ordinary meeting in the next year, and so on from year to year until his place is filled up, unless it shall be determined at any such meeting on due notice to reduce the number of directors in office.' At an annual general meeting a director retired by rotation but a resolution for his re-election was lost on a show of hands. There was no resolution to reduce the number of directors in office. It was held that the director continued in office in terms of the company's articles. Grundt v Great Boulder Proprietary Gold Mines Ltd supra was followed in: Re QCT Resources Ltd 1992 1 QdR 417; Re Morris (1994) 15 ACSR 490 SC(Qld) (it is irrelevant that the articles also contain a provision empowering the members by ordinary resolution to remove a director before the expiration of his term of office); Jones v Money Mining NL (1995) 17 ACSR 531 SC(WA) (such an article applies to a case of inadvertence - a case where by sheer oversight, the meeting fails to fill up the place of the retiring director). Where the directors retiring at the meeting are immediately re-elected or, not being re-elected because there is no resolution to fill the office, they remain directors, there is no vacation of the office at all: Walker v Kenns Ltd [1937] 1 All ER 566 (CA).

    1999   per Sargant J in Re Consolidated Nickel Mines Ltd [1914] 1 Ch 883 888; Re New Cedos Engineering Co Ltd [1994] 1 BCLC 797. In Re Consolidated Nickel Mines Ltd supra the company's articles provided that at the ordinary general meeting to be held in 1906 all the directors should 'retire from office'. No general meeting was held or called in 1906 or 1907, but the directors continued to act as such. It was held that the directors vacated office on December 31, 1906 (being the last day on which a general meeting for that year could have been held). The duty of the directors was to call a meeting in 1906 and 1907, and they could not take advantage of their own default in that respect and say that they still remained directors. See also Morris v Kanssen [1946] AC 459; [1946] 1 All ER 586 (HL); Cane v Jones [1981] 1 All ER 533; Re Zinotty Properties Ltd [1984] 3 All ER 754 763; Club Flotilla (Pacific Palms) Ltd v Isherwood (1988) 12 ACLR 387 SC(NSW).

    2000   Re Bodega Co Ltd [1904] 1 Ch 274; [1900-3] All ER Rep 770; Glossop v Glossop [1907] 2 Ch 370; Marks v Commonwealth (1965) 111 CLR 549 571 (HC of A); Rosebank Television & Appliance Co (Pty) Ltd v Orbit Sales Corporation (Pty) Ltd 1969 (1) SA 300 (T) 302; James North (Zimbabwe) Pvt Ltd v Mattinson 1990 (2) SA 228 (ZHC) 237; On the Street Pty Ltd v Cott (1990) 3 ACSR 54 61 SC(NSW); Re Elgindata Ltd [1991] BCLC 959 976.

    2001   Sales Corporation (Pty) Ltd 1969 (1) SA 300 (T) 302; James North (Zimbabwe) Pvt Ltd v Mattinson 1990 (2) SA 228 (ZHC) 237; On the Street Pty Ltd v Cott (1990) 3 ACSR 54 61 SC(NSW); Re Elgindata Ltd [1991] BCLC 959 976.InGlossop v Glossop [1907] 2 Ch 370 374-375 Neville J said: 'I have no doubt that a director is entitled to relinquish his office at any time he pleases by proper notice to the company, and that his resignation depends upon his notice and is not dependent upon any acceptance by the company, because I do not think

they are in a position to refuse acceptance. Consequently, it appears to me that a director, once having given in the proper quarter notice of his resignation of his office, is not entitled to withdraw that notice, but, if it is withdrawn, it must be by the consent of the company properly exercised by their managers, who are the directors of the company. But, of course, that is always dependent upon any contract between the parties, and that has to be ascertained from the articles of association.'

    2002   See art 65(c) of Table A and art 66(c) of Table B. In Symington v Pretoria-Oos Privaat Hospitaal Bedryfs (Pty) Ltd 2005 (5) SA 550 (SCA) at para 18 it was held that the relationship between a director and his company is essentially a contractual one which can be terminated at any time by mutual consent, unless this is excluded by the articles of the company. Article 66(c) of Table B of Schedule 1 of the Act states that the office of a director shall be vacated if the director resigns his office by written notice to the company and the Registrar. The Court held that article 66(c) (if applicable) does not preclude an effective resignation by a director by agreement with the company; article 66(c) applies only to unilateral resignations and has no effect on vacation of office by agreement.

    2003   Latchford Premier Cinema Ltd v Ennion [1931] 2 Ch 409; 1931 All ER Rep 55. Where the articles provide that a certain length of notice (eg six months) be given within a certain specified period (eg within 12 months of a takeover), they do not require that the resignation be effective within the latter specified period, and, consequently, if notice of resignation is given within that period any consequential rights of the director will be preserved even though the notice does not expire until after the end of the period: Taupo Totara Timber Co Ltd v Rowe [1978] AC 537; [1977] 3 All ER 123 (PC).

    2004   See Harding & Others v Standard Bank of South Africa Ltd 2004 (6) SA 464 (C) 4691. In this case the director agreed to resign his office and the resignation was accepted by the sole remaining director. The court accepted this as a valid resignation.

    2005   Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 722; [1940] 2 All ER 445 458 (HL). However, where a company causes a director to resign by demoting him or reducing his salary in breach of his contract, this is equivalent to wrongful dismissal. In Yetton v Eastwoods Froy Ltd [1966] 3 All ER 353, the court held that refusal by the plaintiff, who had been dismissed as managing director, to accept reappointment at the existing salary as an assistant managing director, was, in view of the reduction in status, not unreasonable, and that the plaintiff was accordingly entitled to damages. Cf Holdsworth & Co Ltd (Wakefield) Ltd v Caddies [1955] 1 All ER 725 (HL).

    2006   Glossop v Glossop [1907] 2 Ch 370.    2007   Glossop v Glossop [1907] 2 Ch 370. See also Municipal Freehold Land Ltd Co v Pollington (1890) 59 LJ Ch

734.    2008   2006 (5) SA 333 (W).    2009   The Court referred to the King Report at 22, para 2.1.1. F H I Cassim 'Company Law' (2006) Annual

Survey of South African Law at 511.    2010   See notes on s 208.    2011   See Permanent Building Society v McGee (1993) 11 ACLR 260 289-290 SC (WA); on appeal, sub nom

Permanent Building Society v Wheeler (1994) 14 ACSR 109 160 SC (WA); Fitzsimmons v The Queen (1997) 23 ACSR 355 358 SC (WA); Duke Group Ltd v Pilmer (1991) 31 ACSR 213 240-241 SC (WA); Darvall v North Sydney Brick & Tile Co Ltd (1989) 15 ACLR 230 250 CA (NSW).

    2012   (1989) 15 ACLR 230 250 CA (NSW).    2013   At 350D.    2014   S v De Jager 1965 (2) SA 616 (A) 622-623.    2015   See Symington & Others v Pretoria-Oos Privaat Hospitaal Bedryfs (Pty) Ltd 2005 (5) SA 550 (SCA).    2016   Ibid at 560E-F.

221  Restriction of power of directors to issue share capital(1) Notwithstanding anything contained in its memorandum or articles, the directors of a company shall not

have the power to allot or issue shares of the company without the prior approval of the company in general meeting.

(2) Any such approval may be in the form of a general authority to the directors, whether conditional or unconditional, to allot or issue any shares in their discretion, or in the form of a specific authority in respect of any particular allotment or issue of shares.

(3) If any such approval is given in the form of a general authority to the directors, it shall be valid only until the next annual general meeting of the company but it may be varied or revoked by any general meeting of the company prior to such annual general meeting.

(4) Any director of a company who knowingly takes part in the allotment or issue of any shares in contravention of subsection (1), shall be liable to compensate the company for any loss, damages or costs which the company may have sustained or incurred thereby, but no proceedings to recover any such loss, damages or costs shall be commenced after the expiration of two years from the date of the allotment or issue.

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NotesRestriction on power to issue sharesThe provisions of s 221 were introduced on the recommendation of the Van Wyk de Vries Commission. 2017 The Commission found that there was 'a strong body of opinion to the effect that directors should not have unlimited powers, whether derived from the articles or a resolution by the company in meeting, to issue shares'. It pointed out that 'the issue

by the company of further shares is a matter which directly affects the interests of each holder of shares in that company and is in this respect distinguishable from ordinary managerial acts by the directors performed in carrying on the business of the company'. Thus, there 'seems to be justification for imposing a curb on unlimited powers of directors in this respect'. It would, however, 'be cumbersome, and inconvenient to require the consent of shareholders to each an every issue of shares by the company'. The Commission said that the only limitation of the powers of directors that it had in mind 'is in respect of the general authority placing the reserve share capital at the discretion of the directors for an indefinite period of time'. Such general authority should be valid only to the next annual general meeting unless revoked by an earlier meeting of members.

The Commission said that, 'in practice, if it is desired to maintain such general authority, the annual general meeting would merely pass the necessary resolution which would then be valid until the next annual general meeting'. And that, indeed, is now the

RS 8, 2011 ch8-p293

almost invariable practice. It is questionable whether this annual ritual does in fact impose any meaningful limitation on the directors' power to issue shares. One possible limitation may be where the directors intend to make a particular issue. Then, it would seem, they will act in breach of duty, and indeed in bad faith, if they do not disclose that intention to the general meeting and, instead, merely seek a general authority to allot or issue any shares at their discretion.

The Directors' PowersGeneralUnlike the members in general meeting, the directors have no inherent powers, ie they have only such powers as are conferred on them by the Act and the articles of association. 2018 In fact, the Act does not confer powers on the directors. Rather, it restricts the powers that can be conferred on the directors by the company's memorandum and articles. For example, ss 221, and 228 provide that 'notwithstanding anything contained in its memorandum or articles, the directors of a company shall not have the power . . . .' And s 222 provides that 'no provision in any memorandum or in any resolution of the company authorising the directors . . . shall authorise . . .' Thus, subject to those provisions of the Companies Act that require certain powers to be exercised by the members in general meeting, the articles of association determine the division of powers between the board of directors and the general meeting, 2019 and hence determine that powers of the directors. Thus where the Act empowers the company to do something, the question whether the general meeting or the directors are to exercise the power is to be determined by the particular company's articles of association. 2020

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All powers so conferred on the directors are conferred upon them collectively as a board, to be exercised by a majority vote or unanimous decision. 2021 Where the articles of association speak of 'the directors' being vested with a power or authority to discharge a certain function, or to perform certain actions, the reference to 'the directors' is a reference to the board of directors acting as such. 2022 Thus directors have, as such, no power to act individually as agents for the company, unless specifically empowered to do so by the articles or the board of directors. 2023

The articles of virtually all companies charge the directors with the management of 'the business' of the company and, for that purpose, authorise the directors to exercise all the powers of the company other than those required by the Act or the articles to be exercised by the company in general meeting. In addition, certain particular powers are usually specifically conferred on the directors. The articles usually also empower the directors to delegate their powers to committees of the board and to a managing director.(1) Power to manage company's businessAlthough the Companies Act does not require that the directors be empowered to manage the business of the company, the articles of companies almost invariably confer that power upon the directors, usually in the form contained in art 59 of Table A (art 60 of Table B). That article provides that 'the business' of the company shall be managed by the directors and that they 'may exercise all such powers of the company as are not by

the Act, or by these articles, required to be exercised by the company in general meeting'. This does not mean that the directors may exercise all the powers of the company other than those required by the Act or the articles to be exercised by the company in general meeting. It means, rather, that the directors (and the directors alone) may exercise all the company's powers in regard to the management of the company's business, except those that the Act or the articles require to be exercised by the company in general meeting. In other words, the provision that the directors 'may exercise all such powers of the company as are not by the Act, or by these articles, required to be exercised

RS 8, 2011 ch8-p295

by the company in general meeting' does not enlarge or augment the directors' powers. All it does is to facilitate or provide an aid for their effective exercise of their power to manage the company's business. 2024

The authorised business of the company is its main object together with all objects ancillary to that main object that have not been expressly excluded in the company's memorandum. 2025 Thus the directors are empowered to do whatever is reasonably incidental to the carrying on of the business of the company. 2026 This power includes the power to initiate, conduct and defend legal proceedings. 2027 Inherent in the power to manage the business of the company is the power to stop the company's trading activities or other operations. 2028 But the bringing of an application for the winding-up of a company 2029 is not a matter falling within the scope of the management of the company's business, for the object of winding-up is not the working of the company's business but the

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destruction of the company. 2030 It has, however, been suggested that an article that empowers the directors to manage the "affairs' of the company is wide enough to include the power to bring such an application. 2031

Unless the articles otherwise provide, powers conferred by the articles on the directors to manage the company's business are conferred on them exclusively, and therefore the members in general meeting can neither exercise those powers concurrently with the directors nor control the directors in their exercise of those powers. 2032 However, the general power to manage the business of the company conferred by art 59 of Table A (and art 60 of Table B) is conferred on the directors subject to such regulations of the general meeting as are not inconsistent with any of the provisions of the Act or with any of the other provisions of the articles. In Ben-Tovim v Ben-Tovim2033 the court stated:'The pendulum of the division of powers between the general meeting and the board of directors has through the years swung from the general meeting as the supreme organ to prominence of the articles of association. There are indications, at least in other jurisdictions, that the pendulum is beginning to swing back again . . .. Whatever swings of the pendulum and differences of emphasis there might have been, it has been generally accepted that if for some reason the directors cannot or will not exercise powers vested in them, the general meeting may do so.'

RS 8, 2011 ch8-p296-1

(2) Other specific powers conferred by the articlesTypically, the articles of companies contain an article empowering the directors to exercise all the powers of the company to borrow money and to mortgage or bind its undertaking and property or any part thereof, and to issue debentures, debenture stock and other securities whether outright or as security for any debt, liability or obligation of

RS 8, 2011 ch8-p297

the company or of any third party. 2034 Such an article, however, usually provides that (apart from temporary loans obtained from the company's bank in the ordinary course of business) the directors may not without the prior sanction of the company in general meeting borrow in excess of a certain amount, usually one-half of the amount of the company's issued share capital plus the amount of its share premium account. 2035

The articles of companies usually also confer certain other specific powers on the directors, eg powering them to fill vacancies on the board, 2036 to appoint a managing director, 2037 to pay interim dividends,2038 and to create reserves. 2039 Directors are sometimes also empowered to refuse transfers of shares. 2040

Delegation of directors' powers(1) General

Unless authorised by the articles to do so, directors cannot delegate their powers. 2041 The articles of companies usually authorise the directors to delegate their powers to a managing director or manager, 2042to a committee of directors, 2043 and to a foreign committee. 2044 Such a delegation may take place impliedly, the facts from which such a delegation will be inferred being the course of dealing within the company. 2045 But

RS 8, 2011 ch8-p298

implied delegation always requires the both consent of the individual members of the board and the communication by words or conduct of those consents to one another, and, where not themselves directors, to the persons to whom the powers are being delegated. 2046

Where the directors delegate their powers, the persons to whom the powers are delegated derive their powers, not from the directors, but from the company's articles that provide for the delegation; hence those persons are not mere agents of the company, but exercise the company's powers, and consequently constitute an organ or organs of the company. 2047

The directors' power to delegate is a fiduciary power that must be exercised bona fide in the interests of the company and not for an unauthorised or collateral purpose. 2048 Furthermore, the directors can never delegate their powers so as to divest themselves of all responsibility; they must continue to exercise proper supervision. 2049

Thus, even where the articles empower the directors to delegate all their powers to any person, the directors have no power to enter into a contract on behalf of the company entitling another party in certain circumstances to appoint a person to manage the business of the company and giving him the sole right of dismissal of such manager. This is because the directors cannot divest themselves of their fiduciary duties to their company; they must retain ultimate control, and cannot divest themselves of the power of dismissal. 2050 It would seem that this power and duty of ultimate control must remain vested in the board, because the power to revoke a delegation of powers is not itself a power that can be delegated. 2051 It is to be noted that directors have the power to make 'discretionary decisions' and 'non-discretionary decisions'. 2052 The former power may not be delegated in the absence of authorisation to do so. The latter power, also referred to as the power to make 'purely mechanical decisions' 2053 may be delegated.

OS, 2002 ch8-p299

(2) Committees of directorsThe articles of companies usually empower the directors to delegate their powers to a committee consisting of such member or members of their body as they thinks fit, 2054  and to form foreign committees with such powers and duties as the directors may from time to time determine.2055  Because the power to delegate is a fiduciary power, the directors may not make use of their power to delegate powers to a committee for the purpose of excluding one of their number from participation in the management of the company.2056  Where the directors have properly delegated their powers to a committee of directors, in the absence of provisions regulating these matters, all acts of the committee must be done in the presence of all the members of the committee; the committee must act by a majority; and its members have no power to add to their number or to fill a vacancy.2057  The directors 2058  or the company may ratify an act done by a committee beyond its powers.2059

(3) Delegation of powers to managing director and division of powers between board and managing directorUnder the normal articles, the directors are empowered to appoint one or more of their number to the office of managing director for such period and on such terms as they think fit.2060  The articles then usually empower the directors to delegate from time to time to the managing director such of the powers and authorities vested in them as they think fit, and to confer such powers and authorities for such time and to be exercised for such objects and purposes and upon such terms and conditions and with such restrictions as the directors think expedient. Usually, such powers and authorities may be conferred either collaterally or to the exclusion of, and in substitution for, all or any of the powers and authorities of the directors; and the directors may from time to time revoke or vary all or any of such powers and authorities.2061  Thus, where a company's articles contain such provisions, its directors may not only delegate their powers to a managing

director, but, subject to their power to re-invest themselves with those powers, may also, when doing so, actually divest themselves of their power to manage the company's business in favour of the managing director.2062

OS, 2002 ch8-p300

When delegating powers to a managing director under such an article, the board delegates its power to manage the business of the company. There is no delegation of the remaining powers of the board. Such important powers, for example, as the financial policy of the company, the dividends to be declared, and the issue of new shares are all reserved to the board.2063

  

    2017   Commission of Enquiry into the Companies Act Main Report RP 45/1970 para 44.40 and recommendation 101.

    2018   Re Emmadart Ltd [1979] 1 Ch 540; [1979] 1 All ER 559 and Ex parte Russlyn Construction (Pty) Ltd 1987 (1) SA 33 (D) (no power to bring application for winding-up of company unless conferred upon them by articles); Re Smith, Knight & Co (Weston's Case) (1868) LR 4 Ch App 20 and Re National Provincial Marine Insurance Company (Gilbert's Case) (1870) 5 Ch App 559 565 (no inherent power to refuse a proper and valid transfer, if a proper and valid transfer is submitted to them). And see Woolworths Ltd v Kelly (1991) 4 ACSR 431 450-451 CA(NSW), where Mahoney JA said: 'But the company, as a corporate body, can exercise its power only in ways provided by the law in that regard. The primary or, at least, the residual organ for exercising the powers of the company is the shareholders in general meeting. . . . However the articles of association may vest in, eg, the board of directors such powers over the affairs of the company as the relevant company legislation does not proscribe.'

    2019   See K A Aickin 'Division of Powers between Directors and General Meeing as a Matter of Law and as a Matter of Fact and Policy' (1967) 5 MULR 448; K W Wedderburn 'Going the Whole Hogg v Cramphorn?' (1968) 31 MLR 690; Colin Jack Cohen 'The Distribution of Powers in a Company as a Matter of Law' (1973) 90 SALJ 262.

    2020   See eg Smith v Duke of Manchester (1883) 24 ChD 611 615; Re Standard Bank of Australia (1898) 24 VLR 304; Re Galway & Salthill Tramways Co [1918] 1 IR 62; Re Birmacely Products Pty Ltd [1943] ALR 276; Re Woulfe & Son Pty Ltd [1972] QWN 50; Re Emmadart Ltd [1979] 1 Ch 540; [1979] 1 All ER 559; Ex parte Russlyn Construction (Pty) Ltd 1987 (1) SA 33 (D); Ex parte Screen Media Ltd 1991 (3) SA 462 (W). But see Ex parte Tangent Sheeting (Pty) Ltd 1993 (3) SA 488 (W), where it has held that it is not necessary for the directors to obtain authorisation by the general meeting in order to bring an application for the winding-up of the company. Section 346(1)(a) provides that an application for the winding-up of a company may be made inter alia by 'the company' itself; and the court (at 489) held that question whether or not the directors are empowered to bring such an application on behalf of the company is to determined upon a proper construction of the meaning of 'the company' in s 346(1)(a). This, however, is to ignore the principle that where the Act simply empowers 'the company' to do something, the question who within the company has the power to act on behalf of the company in the matter is to be determined by the company's articles (which allocate the powers of the company to either its board or its general meeting). A company's board of directors has no powers simply by reason of the fact that it is an organ of the company. On the contrary, it is an organ of the company only because, and only to the extent that, it is empowered to act on behalf of the company by the company's articles.

    2021   Re Haycraft Gold Reduction & Mining Co [1900] 2 Ch 230; Trek Tyres Ltd v Beukes 1957 (3) SA 306 (W); Burstein v Yale 1958 (1) SA 768 (W); Northside Developments Pty Ltd v Registrar-General (1990) 2 ACSR 161 201 (HC of A);Brick & Pipe Industries v Occidental Life Nominees Pty Ltd (1990) 3 ACSR 649 672 SC(Vic). It is not sufficient to procure the separate authority of a sufficient number of directors to constitute a quorum: Re Haycraft Gold Reduction & Mining Co supra, where Cozens-Hardy J did not agree with the view of Bacon V-C in Re Bonelli's Telegraph Co (Collie's Claim) (1871) LR 12 Eq 246 that an agreement signed by four directors at different dates and not as a board was a contract binding on the company.

    2022   R v Byrnes (1995) 183 CLR 501 516; (1995) 17 ACSR 551 562 (HC of A); (1996) 20 ACSR 260 264-265 SC(SA).

    2023   See African Claim and Land Co Ltd v W J Langermann 1905 TS 494 504; Robinson v Randfontein Estates Gold Mining Co Ltd 1921 AD 168 217; Wolpert v Uitzicht Properties (Pty) Ltd 1961 (2) SA 257 (W) 267 268; Rosebank Television & Appliance Co (Pty) Ltd v Orbit Sales Corporation (Pty) Ltd 1969 (1) SA 300 (T) 303; Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 (HC of A); Pyramid Building Society v Scorpion Hotels Pty Ltd (1996) 20 ACSR 214 (Vic).

    2024   That part of the article which gives the directors all the powers of the company subject to the exception must be read along with the opening words giving powers of management, and is merely in aid of the proper and effective exercise of such powers: Re Galway & Salthill Tramways Co [1918] 1 IR 62 65; Re Emmadart Ltd [1979] 1 Ch 540; [1979] 1 All ER 599 604; Ex parte Russlyn Construction (Pty) Ltd 1987 (1) SA 33 (D) 37. Cf Campbell v Rofe [1933] AC 91; (1932) 48 CLR 258 (PC), where the company's articles (art 117) provided that "the management of the business of the company shall be vested in the directors who in addition the powers and authorities by these present or otherwise expressly conferred upon them may exercise all such powers and do all such acts and things as may be exercised or done by the company and are not hereby or by statute directed or required to be exercised or done by the company in general meeting'. The High Court of Australia ((1931) 45 CLR 82) held that this article was concerned only with the management of the business of the company and not with the relations of the members of the company inter se, and hence did not empower the directors to issue preference shares. The Privy Council held that the directors did have that power under another article (art 10), but added that, "if their Lordships had taken a different view as to art 10, they would have been prepared to hold that art 117 clearly delegated to the directors power to do everything that the company could do except where the authority of a general meeting of the company is expressly prescribed' (including power to issue preference shares). In Strong v J Brough & Son (Stratfield) Pty Ltd (1991) 5 ACSR 296

298 SC(NSW) Young J accepted this as a "guide as to how one construes this sort of article'. He held that an article providing that the business of the company is to be managed by the directors and entitling them to exercise all such powers of the company as are not required by the articles or by law to be exercised by the company in general meeting, is to be construed broadly. And that it empowers the directors to sell the business of the company (cf s 228 of our 1973 Act). But the learned judge in fact reasoned (at 302) that the sale of the particular business that the company in question (the memorandum of which contained no objects clause, the insertion of such a clause being optional in Australia, see s 177(2) of the Corporations Law) happened to be carrying on fell within the power to manage its business. This was because "the evidence in the instant case is not strong enough to demonstrate that the business of the company . . . was, in the mind of the corporators, the only business which would be carried out, or, indeed, the principal business that would be carried out by them'. In other words, the power to manage the business of the company was not merely a power to manage the particular business that the company happens to be carrying on.

    2025   The main object of a company is the main object stated in its memorandum: s 33(1). But if the main business actually carried on at any time by the company falls within an object ancillary to the main object stated in the company's memorandum, such main business is deemed to be the main object of the company: s 33(2).

    2026   Hutton v West Cork Railway Co (1883) 23 Ch 654 (CA); Re Lee, Behrens & Co Ltd [1932] 2 Ch 46; [1932] All ER Rep 889; Parke v Daily News Ltd [1962] Ch 927; [1962] 2 All ER 929.

    2027   Paramount Acceptance Co Ltd v Souster [1981] 2 NZLR 38 43; and see John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113; [1935] All ER Rep 456 (CA); Macson Development Co Ltd v Gordon (1959) 19 DLR (2d) 465 471; Kraus v JG Lloyd Pty Ltd [1965] VR 232; Breckland Group Holdings Ltd v London & Suffolk Ltd [1989] BCLC 100; Louw v WP Koöperasie Bpk 1991 (3) SA 593 (A) 602-603; Engling v Bosielo 1994 (2) SA 388 (BGD) 393. The power to authorise an attorney to institute proceedings on behalf of the company is something that is ordinarily within the powers of those who have authority to manage the business or affairs of the company: John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 134 142-143; Omega Estates Pty Ltd v Ganke (1962) [1963] NSWR 1416; Glover v Willert (1996) 20 ACSR 182 185 SC(Qld).

    2028   Ex parte Russlyn Construction (Pty) Ltd 1987 (1) SA 33 (D) 37.    2029   ie in terms of s 346(1)(a), which empowers the company to bring an application for its winding-up up by

the court.    2030   Smith v Duke of Manchester (1883) 24 ChD 611 615; Re Standard Bank of Australia (1898) 24 VLR

304; Re Galway & Salthill Tramways Co [1918] 1 IR 62; Re Birmacely Products Pty Ltd 1943 ALR 276; Re Woulfe & Son Pty Ltd [1972] QWN 50; Re Emmadart Ltd [1979] 1 Ch 540; [1979] 1 All ER 559; Ex parte Russlyn Construction (Pty) Ltd 1987 (1) SA 33 (D); Ex parte Screen Media Ltd 1991 (3) SA 462 (W). But see Ex parte East London Cafe (Pty) Ltd 1931 EDC 111; Ex parte Voorligter Drukkery Beperk 1922 EDL 315; Ex parte Edenvale Wholesalers and General Suppliers(Pty) Ltd 1959 (2) SA 477 (W); Ex parte Umtentweni Motels (Pty) Ltd 1968 (1) SA 144 (D). The Australian courts would seem to take the view that an article concerning the management of the business of the company does empower to directors to bring such a winding-up application: see eg Re Inkerman Grazing Co Pty Ltd (1972) 1 ACLR 102 106 SC(NSW); Spicer v Mytrent Pty Ltd (1984) 8 ACLR 711 SC(NSW). In Ex parte Tangent Sheeting (Pty) Ltd 1993 (3) SA 488 (W) the decisions in Ex parte Russlyn Construction (Pty) Ltd supra and Ex parte Screen Media Ltd supra were not followed and the decision in Ex parte Edenvale Wholesalers and General Suppliers(Pty) Ltd supra was held to be correct, ie an application by a company for its own winding-up may be brought on the authority of a resolution of its directors. (See also Graaf-Reinet Rollermeule (Edms) Bpk 2000 (4) SA 670 (E).) However, in Ex parte Tangent Sheeting (Pty) Ltd the court, ignoring the principle that the division of powers within a company is determined by its articles, assumed question was to be decided on an interpretation of what is meant by "the company' in s 346(1)(a). See further general note above and notes on s 346.

    2031   Ex parte Russlyn Construction (Pty) Ltd 1987 (1) SA 33 (D) 36-37. Cf Re Galway & Salthill Tramways Co [1918] 1 IR 62.

    2032   See Automatic Self-Cleansing Filter Syndicate v Cuninghame [1906] 2 Ch 34 (CA); Gramophone and Type Writer Ltd v Stanley [1908] 2 KB 89; [1908-10] All ER Rep 833 (CA); Salmon v Quin & Axtens Ltd [1909] 1 Ch 311 (CA), affdsub nom Quin & Axtens Ltd v Salmon [1909] AC 442 (HL); John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113; [1935] All ER Rep 456 (CA); Scott v Scott [1943] 1 All ER 582; Wessels & Smith v Vanugo Construction (Pty) Ltd 1964 (1) SA 635 (O); Re Argentum Reductions (UK) Ltd [1975] 1 All ER 608; Alexander Ward and Co v Samyang Navigation Co [1975] 2 All ER 424 (HL); Turner v Berner [1978] 1 NSWLR 66 71; Commissioner of Taxation of the Commonwealth of Australia v Commonwealth Aluminum Corporation Ltd (1980) 143 CLR 646 660-661 (HC of A); Van Tonder v Pienaar 1982 (2) SA 336 (SE) 341; National Roads and Motorists' Association v Parker (1986) 6 NSWLR 517; (1986) 11 ACLR 1 SC(NSW); Breckland Group Holdings Ltd v London & Suffolk Properties Ltd [1989] BCLC 100; James North (Zimbabwe) (Pvt) Ltd v Mattinson 1990 (2) SA 228 (ZHC) 236-237; Poliwka v Heven Holdings Pty Ltd (1992) 8 ACSR 747 SC(WA). And see eg Teck Corporation v Millar (1973) 33 DLR (3d) 288 307; Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 837; [1974] 1 All ER 1126 1135-1136 (PC); Fraser v NRMA Holdings Ltd (1995) 15 ACSR 590 607-608 (FC of A);Glover v Willert (1996) 20 ACSR 182 SC(Qld).

    2033   2001 (3) SA 1074 (C) at 1085J-1086A.    2034   See art 60 of Table A and art 61 of Table B.    2035   Table A art 60 table B art 61. In Irvine v Union Bank of Australia (1877) 2 App Cas 366 (PC) 380 the court

found it unnecessary to consider what the lender's rights would be if the sum advanced was less that half the paid up capital but, if added to the amounts previously borrowed by the company, would exceed that amount. In principle, it would seem that the lender will be protected by the rule in Turquand's case (as to which, see notes on s 36), unless the sum being advanced is such as to put him on inquiry.

    2036   See arts 72 and 78 Table A and arts 70 and 77 Table B .    2037   See arts 61-62 of Table A and arts 62-63 of Table B.    2038   See art 85 of Table A and art 84 of Table B.    2039   See art 87 of Table A and art 86 of Table B.    2040   Re Smith, Knight & Co (Weston's Case) (1868) LR 4 Ch App 20; Re National Provincial Marine Insurance

Company (Gilbert's Case) (1870) 5 Ch App 559 565, where it was held that there is no inherent power in the

directors, apart from the provisions of the articles, to refuse a proper and valid transfer, if that proper and valid transfer is submitted to them.

    2041   Re Leeds Banking Co (Howard's Case) (1866) 1 Ch App 561. In Louw v WP Koöperasie Bpk 1991 (3) SA 593 (A) the court appears to have taken the view that there is no such principle. That case, however, concerned an instruction given to a manager by the board of a co-operative society to institute sequestration proceedings against a debtor of the society. The court rejected the argument that, because the board had no power to delegate, it was not competent to give those instructions. But both the argument, and the reasoning of the court when rejecting it, would appear to be misconceived. The board does not delegate its powers when it instructs a servant of the company to institute legal proceedings on behalf of the company. On the contrary, it exercises its powers. Thus it is that, while articles of companies do not usually empower a managing director to delegate his powers, this cannot possibly mean that the managing director does not have the power to instruct servants of the company to carry out particular tasks and to authorise them to bind the company in transactions in connection with those tasks. See Tesco Supermarkets Ltd v Nattrass [1972] AC 153; [1971] 2 All ER 127 (HL), where it was held that the company had not delegated to the manager of one of its stores its duty (under the Trade Descriptions Act 1968) of taking precautions and exercising diligence. Lord Reid said (at 135): 'I have said that a board of directors can delegate part of their functions of management so as to make their delegate an embodiment of the company within the sphere of delegation. But here the board never delegated any part of their functions. They set up a chain of command through regional and district supervisors, but they remained in control. The shop managers had to obey their general directions and also to take orders from their superiors.' And see also Lord Morris's speech at 140.

    2042   See art 62 of Table A and art 63 of Table B.    2043   See art 80 of Table A and art 79 of Table B, which authorise the directors to delegate their powers to

committees consisting of such member or members of their body as they think fit.    2044   See art 64 of Table A and art 65 of Table B art 65, which authorise the directors to appoint persons

resident in a foreign country to be a foreign committee.    2045   Robinson v Randfontein Estates Gold Mining Co Ltd 1921 AD 168 181; Dickson v Acrow Engineers (Pty)

Ltd 1954 (2) SA 63 (W) 64-65; Rosebank Television and Appliance Co (Pty) Ltd v Orbit Sales Corp (Pty) Ltd 1969 (1) SA 300 (T)303; Tuckers Land and Development Corp (Pty) Ltd v Perpellief 1978 (2) SA 11 (T) 15.

    2046   See Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 501; [1964] 1 All ER 630 643 (CA).

    2047   Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705; [1914-15] All ER Rep 280 (HL); Moresby White v Rangeland Ltd 1952 (4) SA 285 (SR) 287; Tesco Supermarkets Ltd v Nattrass [1972] AC 153; [1971] All ER 127 (HL); El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 (CA); Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 3 All ER 918 (PC). On this doctrine, see notes on s 65.

    2048   Robinson v Imroth 1917 WLD 159 173.    2049   Horn v Henry Faulder & Co Ltd (1908) 99 LT 524; Re City Equitable Fire Insurance Co Ltd [1925] 1 Ch

407; Tesco Supermarkets Ltd v Nattrass [1972] AC 153 171; [1971] 2 All ER 127 132 (HL) (the board may delegate 'some part of their functions of management'); Barlows Manufacturing Co Ltd v R N Barrie (Pty) Ltd 1990 (4) SA 608 (C); Re Westmid Packing Service Ltd [1998] 2 BCLC 646 653; [1998] 2 All ER 124 130 (CA); Re Barings plc (No 5) [1999] 1 BCLC 433 487.

    2050   Barlows Manufacturing Co Ltd v R N Barrie (Pty) Ltd 1990 (4) SA 608 (C) 610-611. In this case the company's articles contained two provisions concerning the directors' power to delegate. Since, in terms of the first of these the directors retained the power to revoke the delegation, and in terms of the second the directors were not empowered to delegate to the exclusion of and in substitution for their powers, the directors in fact did not have the power to enter into such a contract (see at 613). Nevertheless, the court's statement of general principle is a powerful one: and it would seem to follow from this principle that any article that purports to empower the directors to divest themselves of ultimate control is invalid. The court stated that while a director may delegate some or all of his powers, he may not abdicate. The board must retain ultimate control.

    2051   In Huth v Clarke (1890) 25 QB 391 395; [1886-90] All ER Rep 542 544 Wills J said: 'Delegation, as the word is generally used, does not imply a parting with powers by the person who grants the delegation, but points rather to the conferring of an authority to do things which otherwise that person would have to do himself.' Thus, the concept entails the retention of the power to revoke. Articles 62 of Table A and 63 of Table B both expressly provide that the directors may from time to revoke all or any of the powers or authorities that they have delegated. But even if these articles did not so provide, the retention of the power to revoke would be implied; for otherwise the directors would be empowered to part with their powers and so, in effect, cease to be directors.

    2052   See Nelson Mandela Metropolitan Municipality v Greyvenouw CC 2004 (2) SA 81 (SE) paras 47–51.    2053   Ibid.    2054   See art 80 of Table A and art 79 of Table B, which provide that any such committee must, in the exercise

of the powers delegated to it, conform to the rules that may be imposed on it by the directors.    2055   See art 64 of Table A and art 65 of Table B, which empower the directors to appoint foreign committees

with such powers and duties as the directors may from time to time determine.    2056   Robinson v Imroth 1917 WLD 159 173.    2057   Re Liverpool Household Stores Association Ltd (1890) 59 LJ Ch 616.    2058   Bolton Partners v Lambert (1889) 41 Ch 295 (CA).    2059   In Welgedacht Exploration Co Ltd v Transvaal and Delagoa Bay Investment Co Ltd 1909 TH 90 105-106 it

was said that where the articles provide that a committee may have the full powers of the directors, an outsider dealing with a properly appointed committee may assume that it has all the powers which it purports to exercise. But this is almost certainly not correct. The rule that an outsider dealing with a company may assume that an organ of the company has all the powers that it could have under the company's articles applies when, and only when, those powers are in fact usually conferred on such organs. This holds true in the case of a managing director, but it is very doubtful whether it also holds true in the case of a committee of directors, for directors of companies do not usually delegate all their powers to such committees. See further notes on s 36.

    2060   See art 61 of Table A and art 62 of Table B. As to the office of managing director, see notes on s 211.    2061   See art 62 of Table A and art 63 of Table B.

    2062   See Metal Manufacturers Ltd v Lewis (1988) 13 ACLR 357 365-366 CA(NSW).    2063   Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 218 (CA); affd Southern Foundries (1926) Ltd v

Shirlaw [1940] AC 701; [1940] 2 All ER 445 (HL).

222  Restriction on issue of shares and debentures to directors(1) No provision in any memorandum or articles or in any resolution of a company authorizing the directors

to allot or issue any shares or debentures convertible into shares of the company at the discretion of the directors, shall authorize the allotment or issue of any such shares or debentures to any director of the company or his nominee, or to any body corporate which is or the directors of which are accustomed to act in accordance with the directions or instructions of such director or nominee, or at a general meeting of which such director or his nominee is entitled to exercise or control the exercise of one-fifth or more of the voting power, or to any subsidiary of such body corporate unless —

   (a)   the particular allotment or issue has prior to the allotment or issue been specifically approved by the company in general meeting; or

   (b)   such shares or debentures are allotted or issued under a contract underwriting such shares or debentures; or   (c)   such shares or debentures are allotted or issued in proportion to existing holdings, on the same terms and

conditions as have been offered to all the members or debenture-holders of the company or to all the holders of the shares or such debentures of the class or classes being allotted or issued; or

   (d)   such shares or debentures are allotted or issued on the same terms and conditions as have been offered to members of the public.

[Sub-s. (1) amended by s. 19 of Act 64 of 1977.](2) (a) Any director of a company who contravenes or permits the contravention of this section, shall be

guilty of an offence and shall be further liable to compensate the company for any loss, damages or costs which the company may have sustained or incurred thereby.

(b) No proceedings to recover any such loss, damages or costs shall be commenced after the expiration of two years from the date of the allotment or issue.

NotesThe predecessor of s 222 was s 70dec of the Companies Act 46 of 1926, which was introduced in 1952 on the recommendation of the Millin Commission.2064  The Commission observed that it was common to have an article empowering the directors to issue unissued shares to such persons and on such terms and conditions as they may determine. The Commission accepted that an opportunity may arise to dispose of shares

OS, 2002 ch8-p301

to the advantage of the company which may be lost if time has to be taken to convene a general meeting to consider the matter, eg an offer enabling the company to acquire property or rights against the issue of shares. But the Commission said that it had 'heard a good deal of evidence to show that the power is not seldom abused by directors who do not scruple to issue shares to themselves or to their friends on terms not offered to the general body of shareholders'. The Commission said that, as the law then stood, there was nothing to prevent directors making an allotment to themselves and their friends, and to do so without offering the shares at a premium, even though the shares stood much above par market, provided only that the company required the new capital and the shares were not issued merely to obtain additional voting power. 'This state of affairs, the Commission said, was 'regarded by the general body of shareholders as a serious grievance; and we think with justice'.

The Van Wyk de Vries Commission recommended that the section should be amended by incorporating in it a provision making an allotment in contravention of the section voidable at the instance of the company or a shareholder within 18 months of the date of the allotment, and making a director who knowingly contravened the section guilty of an offence.2065  The first of these recommendations was not adopted. Instead the provisions in sub-s (2) were added, imposing civil liability. The provision in sub-s (1)(a) permitting such an allotment or issue with the prior approval of the company in general meeting, was also added, thus largely destroying the effectiveness of a once salutary provision.

It would seem that 'the directors' in the phrase 'at the discretion of the directors' in sub-s (1) is a reference to the board of directors. This would seem to leave outside the prohibition debentures convertible into shares of the company at the option of the director to whom they are issued, although that can hardly have been the intention of the legislature.

For the purposes of the Act, a person is not deemed to be a person in accordance with whose directions or instructions the directors of a company are accustomed to act by

reason only that the directors of the company act on advice given by him in a professional capacity.2066

Since an allotment or issue of shares or debentures in contravention of the section is done without authority, it would seem that such an allotment or issue is void.

Because sub-s (1)(a) makes prior approval of the particular allotment or issue a necessary condition, it would seem that the general meeting cannot ratify; or at least, if ratification is possible, contravention of the section remains an offence under sub-s (2)(a) and damages can still be claimed under sub-s (2).

A company which has made an allotment or issue in contravention of these provisions should apply to the court for an order directing it to rectify its records.2067

The penalty for the offence in s 222(2)(a) is a fine or imprisonment not exceeding one year or both the fine and the imprisonment.2068

OS, 2002 ch8-p302

  

    2064   Final Report of the Company Law Amendment Enquiry Commission 1947-1948 UG No 69-1948 para 155-156.

    2065   Commission of Enquiry into the Companies Act Main Report RP 45/1970 para 44.42 and recommendation 102.

    2066   s 1(2).    2067   Ex parte Keir & Cawder (South Africa) Ltd 1968 (2) SA 207 (T).    2068   s 441(1)(e).

223  Share option plans where director interestedAfter the commencement of this Act no option or right given directly or indirectly to any director or future director of a company in terms of any scheme or plan, to subscribe for any shares of that company or to take up any debentures convertible into shares of that company on any basis other than that laid down in section 222(1)(c), shall be valid unless authorized in terms of a special resolution of that company: Provided that —

   (a)   the term 'future director' shall not include a person who becomes a director of the company after the lapse of six months from the date upon which such option or right is acquired by such person; and

   (b)   no such option or right shall be invalid in terms of this section if such director or future director of the company holds salaried employment or office in the company and is given such option or right in his capacity as an employee.

NotesThis provision was introduced on the recommendation of the Van Wyk de Vries Commission. The Commission considered that '[d]irectors should not under any scheme or plan providing an option to take up shares in their company be placed in a more favourable position than the members of the company'.2069  The basis laid down s 222(1)(c) is that the option or right be given 'on the same terms and conditions' as they are given 'to all the members or debenture-holders of the company or to all the holders of the shares or such debentures of the class or classes' to which they are being given. The prohibition is largely neutralised by the exclusion in s 223(b) of options and rights given to a director or future director who holds salaried employment or office in the company and is given such option or right in his capacity as an employee.

Presumably, a person who has a right to subscribe has essentially the same rights as a person who has exercised an option to subscribe. Strictly speaking, neither an option nor a right to subscribe will entitle a person to be allotted shares. No doubt that right will arise from the 'scheme or plan'.

The prohibition was introduced together with a provision (contained in s 224) prohibiting a director from dealing in options to buy or sell his company's shares, which provision was repealed without explanation by s 6 of Act 78 of 1989, presumably on the theory that it is sufficient merely to prohibit of insider trading.  

    2069   Commission of Enquiry into the Companies Act Supplementary Report and Draft Bill RP 31/1972 vol 2 p 206.

224  . . .[S. 224 amended by s. 20 of Act 64 of 1977 and repealed by s. 6 of Act 78 of 1989.]

225  Prohibition of tax free payments to directors(1) No company shall pay to any of its directors (whether in his capacity as a director or otherwise) any

remuneration free of any taxation in respect of his income, or otherwise calculated by reference to or varying with the amount of such taxation,

OS, 2002 ch8-p303

or with the rate of taxation on incomes, except under a contract which was in force on the thirteenth day of June, 1949, and which provides expressly, and not merely by reference to the articles of the company, for payment of remuneration as aforesaid.

(2) Any provision contained in the articles of a company, or in any contract other than such a contract as aforesaid, or in any resolution of a company or of its directors, providing for the payment to a director by way of remuneration of any amount to be determined in a manner prohibited by subsection (1), shall be construed as if it provided for the payment of that amount without reference to such manner of determination thereof.

NotesThis provision as introduced in 1952 as s 70 sept of the Companies Act 46 of 1926 on the recommendation of the Millin Commission.2070  The Commission noted that in England the Cohen Committee 2071  had expressed the view that the payment to directors of fees or salaries free of income tax should be prohibited on public policy grounds, because it created a class of persons immune from any increase in taxation. The Millin Commission, however, considered that 'a more direct objection from the point of view of company law, [is] that the shareholders cannot tell what in fact the company is paying for the services of a director who gets a contract on these terms'.  

    2070   Final Report of the Company Law Amendment Enquiry 1947-1948 UG No 69-1948 para 134.    2071   Report of the Committee on Company Law Amendment Cmd 6659 (1945) para 88.

226  Prohibition of loans to, or security in connection with transactions by, directors and managers

(1) No company shall directly or indirectly make a loan to —   (a)   any director or manager of —

     (i)   the company; or    (ii)   its holding company; or   (iii)   any other company which is a subsidiary of its holding company; or

   (b)   any other company or other body corporate controlled by one or more directors or managers of the company or of its holding company or of any company which is a subsidiary of its holding company;or provide any security to any person in connection with an obligation of such director, manager, company or other body corporate.

(1A) For the purpose of subsection (1) —   (a)   'loan' includes —

     (i)   a loan of money, shares, debentures or any other property; and    (ii)   any credit extended by a company, where the debt concerned is not payable or being paid in accordance with

normal business practice in respect of the payment of debts of the same kind; and   (b)   one or more directors or managers of a company contemplated in subsection (1)(b) shall be deemed to control

another company or body corporate only if —OS, 2002 ch8-p304

     (i)   such director or manager or his nominee is a member or such directors or managers or their nominees are members of such other company or body corporate and the composition of its board of directors is controlled by such director, manager or nominee or such directors, managers or nominees, and such composition shall be deemed to be so controlled if such director or manager or his nominee or such directors or managers or their nominees may, by the exercise of some power and without the consent or concurrence of any other person, appoint or remove the majority of the directors concerned, and such director, manager or nominee or such directors, managers or nominees shall be deemed to have power to appoint a director where a person cannot be appointed as a director without his or their consent or concurrence; or

    (ii)   more than one-half of the equity share capital of that other company or body corporate or, if that other body corporate is a corporation as defined in section 1 of the Close Corporations Act, 1984 (Act 69 of 1984), more than 50 per cent of the interest in such corporation is held by such director, manager or nominee or such directors, managers, or nominees; and

[Sub-para. (ii) substituted by s. 5 of Act 29 of 1985.][Para. (b) amended by s. 21(1)(a) of Act 64 of 1977.]

   (c)   'security' includes a guarantee.(1B) The provisions of subsection (1) and of paragraph (b) of subsection (1A) shall not be construed as

prohibiting a company from making a loan to, or providing security to any person in connection with an obligation of, its holding company or subsidiary or a subsidiary of such holding company;

[Sub-s. (1B) inserted by s. 21(1)(b) of Act 64 of 1977.](2) The provisions of subsection (1) shall not apply —

   (a)   in respect of —     (i)   the making of a loan by a company to its own director or manager;    (ii)   the provision of security by a company in connection with an obligation of its own director or manager;   (iii)   the making of a loan by a company to any other company or other body corporate controlled by one or more of

the directors or managers of the first-mentioned company; or[Sub-para. (iii) inserted by s. 21(1)(c) of Act 64 of 1977.]

   (iv)   the provision of security by a company in connection with an obligation of any other company or other body corporate controlled by one or more of the directors or managers of the first-mentioned company,

[Sub-para. (iv) inserted by s. 21(1)(c) of Act 64 of 1977.]with the prior consent of all the members of the company or in terms of a special resolution relating to a specific transaction: Provided that in respect of any such loan made or security provided at any time before the date of commencement of the Companies Amendment Act, 1992, such consent shall be deemed to have been given if the transaction concerned has subsequently, whether before or after that date, been ratified by all the members of the company; or

[Para. (a) amended by s. 6 of Act 82 of 1992.]RS 8, 2011 ch8-p305

   (b)   subject to the provisions of subsection (3), in respect of anything done to provide any director or manager with funds to meet expenditure incurred or to be incurred by him for the purposes of the company concerned or for the purpose of enabling him properly to perform his duties as director or manager of that company; or

   (c)   in respect of anything done bona fide in the ordinary course of the business of a company actually and regularly carrying on the business of the making of loans or the provision of security; or

   (d)   to the provision of money or making of loans by a company for the purposes contemplated in section 38(2)(b) and (c); or

   (e)   to the making of a loan or the provision of security with the approval of the company in general meeting for housing for its director or manager; or

   (f)   in respect of —     (i)   the making of a loan by a company to a director or manager of its subsidiary; or    (ii)   the provision of security by a company to another person in connection with an obligation of a director or

manager of its subsidiary;provided such director or manager is not also a director or manager of such company itself.

[Para. (f) amended by s. 21(1)(d) of Act 64 of 1977.](3) No loan shall be made or security provided by virtue of the provisions of subsection (2)(b), except —

   (a)   with the prior approval of the company given at a general meeting at which the amount of the loan or the extent of the security and the purposes thereof are disclosed; or

   (b)   on condition that, if the approval of the company is not given as aforesaid at or before the next annual general meeting of the company, the loan shall be repaid or the liability under the security shall be discharged, within six months from the conclusion of that annual general meeting.

(4) Any director or officer of a company who authorizes, permits or is a party to the making of any loan or the provision of any security contrary to the provisions of this section, shall —

   (a)   be liable to indemnify the company and any other person who had no actual knowledge of the contravention, against any loss directly resulting from the invalidity of such loan or security; and

   (b)   be guilty of an offence.(5) For the purposes of subsection (4) 'director or officer of a company' includes, where the company is a

subsidiary, any director or officer of its holding company.[S. 226 substituted by s. 19 of Act 111 of 1976.]

NotesGeneralIn England, in 1945, the Cohen Committee took the view that it is undesirable that directors should borrow from their companies: 'If the director can offer good security, it is no hardship to him to borrow from other sources. If he cannot offer good security, it is

RS 8, 2011 ch8-p306

undesirable that he should obtain from the company credit which he would not be able to obtain elsewhere.' The Committee recommended that, subject to certain exceptions, 'it should be made illegal for any loan to be made by a company or by any of its subsidiary companies or by any other person under guarantee from or on security provided by the company or by any of its subsidiary companies to any director of the company'. 2072 Our Millin Commission took the same view, 2073 and in 1952 s 70 oct was inserted in the 1926 Companies Act. In England, the Jenkins Committee recommended that the provision should be strengthened, by extending it to prohibit loans by a company to another company in which one or more of the directors of the lending company hold singly or collectively, and whether directly or indirectly, a controlling interest. 2074

Our Van Wyk de Vries Commission considered that, while the loopholes in the section should be eliminated where possible, further extension of the prohibition was not justified. It did, however, recommend (inter alia) that, to strengthen the provision, the loans should be prohibited whether made 'directly or indirectly'. 2075 As enacted, s 226 contained certain further innovations. In particular, it extended the prohibition to directors and officers of any company controlled by one or more of the directors of the company. This made little sense, and in 1976 a prohibition for loans to companies controlled by the company's directors or managers was substituted. 2076 The possible conflicts between this prohibition and the provisions of s 37 (intergroup transactions) were met by the insertion of s 226(1B). 2077

Purpose and interpretationThe purpose of the prohibition is twofold. First, its purpose is to prevent the directors or managers of a company from acting in their own interests and against the interests of shareholders by burdening the company with obligations, not for its benefit, but for their own benefit or for the benefit of another company controlled by them. 2078 Secondly, where the company has a holding company, the section prevents abuse of control by preventing

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the directors and managers of that holding company from using their control of the company to benefit themselves or the directors and managers of other subsidiaries of the holding company.

The prohibition is not unqualified. In certain identified circumstances such use of the company's assets is permitted, 'presumably on the basis that in the excepted circumstances there are sufficient safeguards to establish a likelihood that the use of the company's assets for the benefit of its directors or managers or of companies controlled by them, will also be for the benefit of the company and not at its expense'.2079 What is more, even the specific transactions that are considered to be prima facie unlawful are subject to a list of exceptions. Thus, while the broad purpose or purposes of the section are clear, namely, the prevention of misuse by directors of their position to advantage themselves, there is no single unqualified purpose that can be used as a touchstone for the interpretation of the section. Both the extent of what is prohibited and the extent of what is permitted must be determined; and the legislature's purpose is relevant to both elements. In particular, because the prohibition constitutes only part of the legislature's whole purpose, the section is not to be interpreted, a priori, only in the light of the legislature's intention to impose a prohibition. And there is even less warrant for taking the intention to impose that prohibition as justifying a departure from the literal meaning of words that indicate that the legislature has placed emphasis on the other aspect of its intention, namely, the creation of exceptions. 2080

Disqualified personsThe disqualified persons are any director or manager 2081 of the company, or of its holding company, or of any other company which is a subsidiary of its holding company 2082 (s 226(1)(a)). In addition, in order to prevent circumvention of the prohibition, s 226(1)(b) disqualifies any other company or body corporate controlled by one or more of such directors or managers. The theory is that loans to, and the provision of security for, such a company is in economic effect a loan to, or the provision of security for, the director or manager concerned.

Section 226(1A)(b) contains and exhaustive definition of 'control' for the purposes of s 226. 2083 It provides that directors or managers of a company are deemed to control another company or body corporate only if: (i) they or their nominees hold more than one-half of its equity share capital or, if the other body corporate is a close corporation, 2084 more than 50 per cent of the interest in such corporation (s 226(1A)(b)(ii)); or (ii) they are members 2085 of it and can control the composition of its board (s 226(1A)(b)(i)).

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The word 'holds' is not defined in the Act. But, since the section refers to shares held by directors or managers 'or their nominees', it would seem that shares are held for the purposes of this provision by the person who is the registered member in respect of them. The meaning of holding 'more than one-half' of a company's equity share capital as these words appeared in the s 1(3)(a)(i)(bb) of the former definition of 'subsidiary

company' was considered by Goldstone J in Sage Holdings Ltd v Unisec Group Ltd. 2086 He held that, if the share capital of the company has both ordinary and preference shares and the one class consists of par value shares and the other of no par value shares, then: 'If one has regard to the generally accepted meaning of "capital" in this context, ie the funds invested in the company, and to the provisions of the Act in relation to the issue of shares, the logical and practical conclusion appears to be that one must have regard to the share capital account in the case of shares with a par value and to the stated capital account in the case of no par value shares. In each case that will represent the value of the full issue price or other consideration for such shares paid to and received by the company. In the case of shares with and shares without a par value, the amount in question will be readily ascertainable from the books of account of the company and will not fluctuate from day to day.'

The definition of 'equity share capital' is to be found in s 1(1) of the Act which provides that 'equity share capital and equity shares, in relation to a company, means its issued share capital and shares, excluding any part thereof which, neither as respects dividends nor as respects capital, carries any right to participate beyond a specified amount on distribution'. 'Equity share capital' is, then, a kind of 'issued share capital'. The phrase 'issued share capital' is not defined in the Act. As to when a share is 'issued', see notes on s 92.

Section 226(1A)(b)(i) provides that disqualified directors or managers (or their nominees) are deemed (this deeming provision is exhaustive) 2087 to control the composition of the board of another company or body corporate if they 'may, by the exercise of some power and without the consent or concurrence of any other person, appoint 2088 or remove the majority of the directors concerned'. Before the present definition of a 'subsidiary company' was inserted (by Companies Amendment Act 82 of 1992), a company was defined as a 'subsidiary' of another company when, inter alia, that other company was a member of it and controlled the composition of its board of directors, and the composition of a company's board of directors was deemed to be controlled by another company if that other company 'may, by the exercise of some power, without the consent or concurrence of any other person, appoint or remove the majority of the directors'. In The Unisec Group Ltd v Sage Holdings Ltd2089 Coetzee J held

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that the word 'some' in the phrase 'exercise of some power' made it possible to travel outside the articles in search of the source of the power, eg voting trusts. He said 2090 that 'control' and 'some power to appoint' were not to be construed restrictively, and hence: (a) the source of the power was not limited to that contained in the articles and could arise extraneously, from contracts or any other relationship which makes it legally exercisable; and (b) it was not necessary that it should be a power immediately exercisable, ie without any intermediate step which has first to be taken. However, while 'some power to appoint' was not to be limited to an actual one-step power excluding a potential power, this was 'not be taken as a suggestion that any potentiality, however remote, would always be one to which the section applies'. Each case would 'depend on its own facts' and 'the quality and extent of the power' would always 'have to be carefully examined' in order to decide whether it is one, which by its exercise, enabled one company to appoint the majority of the directors of another. Although he found it unnecessary to speculate on the degree of remoteness, he did suggest an example: a non-negotiable option to acquire 51% of the share capital of a company for some unrealistic number of millions of rands by a company of modest means — or one hedged in with so many conditions precedent of such a nature that it is rendered wholly impractical in a commercial sense. The point about the remoteness of the power is, he said, 'that it may be one which, upon analysis of it and examination of the facts, cannot be regarded with any degree of conviction as "some power" which only has to be exercised to lead with little further ado to the appointment of the majority of the directors'. Thus not every option held by a company to buy more than 50% of another company's shares would have turned the holder into a holding company of the latter.

Directors or managers are deemed (this deeming provision is not exhaustive) 2091 to have the power to appoint a director where a person cannot be appointed as a director without their consent or concurrence. 2092

Loans

(1) Meaning of 'loan''Loan' means a loan in the ordinary sense of contracts of mutuum or commodatum. 2093 Section 226(1A) provides that, for the purpose of the prohibition, 'loan' includes a loan of money, shares, debentures or any other property, and 'any credit extended by a company where the debt concerned is not payable or being paid in accordance with normal business practice in respect of the payment of debts of the same kind'. 2094 Because the statutory prohibition cannot in any event be evaded by means of a simulated transaction, this inclusion within the definition of 'loan' for the purposes of s 226 of any

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such credit extended by a company is not designed to forestall the evasion of the prohibition by certain simulated transactions that are in reality loans by the company. 2095

(2) Directly or indirectlySection 226(1) prohibits the making of a loan 'directly or indirectly' to a disqualified person. The idea of a loan 'directly' made by a company contemplates a contract of loan between two persons, one of whom (the lender) contracts to lend and does lend a fungible or non-fungible thing to another (the borrower) for the purpose, in the case of a fungible, of consumption (mutuum), and in the case of a non-fungible, for use (commodatum). 2096 Where the loan is the extension of credit as defined in the provision, the idea of a 'direct' extension of such credit envisages a creditor company and a debtor, and the direct extension of credit by the former to the latter on the terms contemplated by the provision. 2097 The common law concept of a loan encompasses the situation where the loan is made indirectly to the borrower, eg where the lender pays the money borrowed to the borrower's creditor. Thus the words 'directly or indirectly' merely emphasise that the prohibition applies whether the loan is constituted by a payment made by the lender directly to the borrower (ie where the lender advances money to the borrower directly), or indirectly upon the borrower's becoming obliged to repay to the lender a sum of money which has become a loan from the lender to the borrower in any number of possible indirect ways (eg where the lender makes a payment directly to a creditor of the intended borrower and thereby simultaneously makes a loan to the borrower indirectly). 2098 Hence the words 'directly or indirectly' do not extend the disqualification beyond the immediate parties to the contract of loan. 2099 They are tautologous, for if omitted, the prohibition would in any event apply to all loans, whether made directly or indirectly, to disqualified borrowers. 2100

Therefore, the prohibited indirect ways do not encompass a transaction which does not result in a contract of a loan between a lender company and a borrower who is disqualified in relation to such lender company. Consequently, it does not encompasses a loan made to someone linked to a disqualified borrower (eg his wife or a close relation) with the intention that the disqualified borrower will indirectly benefit from the loan. Nor does it encompass a loan made to a disqualified person through an intermediary or conduit where the intermediary or conduit receives the money by way of a loan from the

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company and then lends it to a disqualified person.2101  For instance, the prohibition does not extend to a transaction in which a subsidiary company makes a loan to its holding company 2102  which enables the holding company, in turn, to make a further loan to a borrower who, though not disqualified from obtaining the loan from the holding company, is disqualified from obtaining it from the subsidiary.2103  In other words, a transaction (other than one for the granting of security) is not prohibited, unless it is shown to be a contract of loan between a company and a borrower disqualified in terms of the section.2104

It is unclear whether this interpretation of 'indirectly' is what the Van Wyk de Vries Commission had in mind. The Commission said: 'It has been said that the prohibition is circumvented in practice by making loans to the wives or children or other relatives of the director, and it has been suggested that the section should extend to loans to such wives or children or to any other relative within the first degree of consanguinity. After consideration we have decided that it would not be desirable to extend the section in this way. As we see it, it would still be an easy matter to circumvent that prohibition. However, we agree with the proposal that the section should include the phrase "directly

or indirectly" which would appear to strengthen the position and we are accordingly making a recommendation to that effect'.2105  And it went on to say that, '[i]f our recommendation to extend the prohibition to "indirect" loans is accepted, the evasions complained about will be subject to stricter control. Despite the imprecision of the term "indirect" we believe that its inclusion will strengthen the section'.2106

Security granted 'in connection with any obligation'The provision of security (which includes a guarantee, s 226(1A)(c)) is prohibited if it is granted in 'connection with any obligation' (ie not only an obligation arising from a contract of loan) of a disqualified person (s 226(1)). The words 'in connection with' in the prohibition of the provision of security do not mean that the prohibition extends to a

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provision of security that has only a remote connection with the obligation in question.2107  Where a third party lent money to a company and the company furnished security for the loan, it being contemplated in the loan agreement that the borrowing company would lend some of the money borrowed to a company controlled by one of its directors, it was held that the contemplated loans were so far removed from the indebtedness for which the security was furnished that it could not be said that the security was furnished by the company in connection with the loans made by it to the controlled company.2108

Intergroup loansSection 226(1B) provides that the prohibitions do not prohibit a company from directly or indirectly making a loan to, or providing security for its holding company or subsidiary or a subsidiary of its holding company. Such intergroup transactions are governed by s 37.2109  Section 37 does not prohibit such transactions, but requires full disclose and imposes liability on the directors or officers of the subsidiary making the loan (or granting the security) to compensate their company if the loan (or grant of the security) is unfair or unreasonable. The significance of s 226(1B) is that such intergroup transactions do not fall within the prohibition even where the holding company is controlled by one or more of its, or its subsidiary's, directors or managers.When prohibitions do not applySection 226(2) specifies the situations in which the prohibition in 226(1) does not apply.(1) Prior consentSection 226(2)(a) provides that the prohibitions do not apply in respect of the making of a loan to, or the provision of security for the company's own director or manager 2110  or a company or body corporate controlled by one or more of its directors or managers, 2111  with the prior consent 2112  of all the members of the company or in terms of a special resolution relating to the specific transaction. The word 'prior' was inserted by s 6 of the Companies Amendment Act 1992. The reason for this amendment was the decision in Neugarten v Standard Bank of South Africa Ltd2113  where the Appellate Division held that when consent is required in terms of s 226(2), the lack of it before or at the time the loan was made (or the security was provided) is fatal to the validity of the transactions,

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reversing the decision of Goldblatt J in Standard Bank of SA Ltd v Neugarten 2114 to the effect that shareholder consent at any stage is sufficient to comply with s 226(2). 2115 Where there is only one member in a company, a literal construction of s 226(2)(a) renders an absurd result, and accordingly the requirement of 'prior consent' must be disregarded. 2116

(2) Prior or subsequent approvalSection 226(2)(b) read with s 226(3) provides that the prohibitions do not apply in respect of anything done to provide a director or manager with funds to meet expenditure incurred or to be incurred by him for the purpose of the company or for the purpose of enabling him properly to perform his duties as a director or manager, 2117 if done with the prior approval of the company in general meeting as specified in s 226(3)(a), or on the condition that such approval is subsequently given at the next annual general meeting or the loan is repaid (or the liability under the security is discharged) as specified in s 226(3)(b).

Section 226(2)(e) provides that the prohibitions do no apply to the making of a loan or the provision of security with the approval of the company in general meeting for housing for its director or manager.(3) Absolute exclusionsSection 226(2)(c) provides that the prohibitions do not apply in respect of anything done bona fide in the ordinary course of the business of a company actually and regularly carrying on the business of making loans or the provision of security. Section 70oct of the 1926 Act merely referred here to 'a company whose ordinary business' included the lending of money or the giving of guarantees in connection with loans made by other persons. This gave rise to uncertainty, because it was thought this might include a company whose memorandum contained an object entitling it to carry on such business. The Van Wyk de Vries Commission therefore recommended that the phrase should be 'which is actually carrying on the business of the lending of money or the giving of guarantees as part of its ordinary business'. 2118

Section 226(2)(d) provides that the prohibitions do not apply to the provision of money or the making of loans by a company for the purposes contemplated in s 38(2)(b) and (c). Section 38(2)(b) permits a company to give money for the subscription for or purchase of its shares or the shares of its holding company by trustees to be held by or for the benefit of employees of the company, including any director holding a salaried employment or office in the company; and s 38(2)(c) permits a company to make loans to persons, other than directors, bona fide in the employment of the company with a view

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to enabling those persons to purchase or subscribe for shares of the company or of its holding company to be held by themselves as owners.

Section 226(2)(f)(i)-(ii) provide that the prohibitions do not apply in respect of the making of a loan to, or the provision of security for, a director or manager of the company's subsidiary, provided that he is not also a director or manager of the company itself. The theory is that such 'downward' loans do not entail the same likelihood of abuse, for such director or manager has no say in the matter and is hence in a position no different from any other third party. The exception is necessary because, although s 226(1) does not prohibit loans and the granting of security to a director or manager of the company's subsidiary, s 226(1)(c)(iii) prohibits the making of loans to (and the granting of security) to any director or manager of any company which is a subsidiary of the company's holding company; and therefore, where the company has a holding company, its subsidiary company is also a subsidiary company of its holding company. 2119 However, although loans to a director of such a lending company's subsidiary are excluded from the prohibition, loans to a company controlled by such a director are not excluded. 2120 It would seem that this was an oversight.Loans by third parties to be used to make loans to disqualified personsWhere money is lent by a third party to the company, and it is a term of that contract of loan that the company will lend the money thus borrowed by it to another company controlled by one of its directors, the loan is not a contravention of the section unless it is established that the third party knew that the borrowing company intended to lend the money it borrowed in contravention of the section, 2121 ie that it would lend the money without the consent of all its members or without a special resolution. This is because there is a presumption that parties to a contract intend to act lawfully; and where a contract may be performed in two ways, one lawfully and the other unlawfully, the contract is void only if it is proved that the intention was to perform it in an illegal way. 2122 In other words, the third party is entitled to assume that the borrower company will carry out the terms of the agreement in a lawful manner, ie by obtaining the necessary consent or special resolution. And therefore, in the absence of an allegation that he knew that the borrowing company intended to enter into and carry out the agreement in an unlawful manner, he cannot be precluded from claiming payment from the borrowing company of amounts advanced to it in terms of the agreement. 2123

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Permissible transactions not affected by other prohibitory provisions in sectionSince the prohibitory clauses in s 226(1) do not apply to a loan by a company to (or the provision of security in connection with an obligation of) its own director with the consent

of the company, 2124 if such a loan (or the grant of such security) is duly authorised, the transaction is not affected by any of the other prohibitory clauses. And therefore it is not forbidden, merely because the director who received the loan (or in respect of whom security was provided) happened also to be a director of the lending company's holding company, or a director of another subsidiary of its holding company. 2125

By parity of reasoning, a loan is not prohibited (and does not have to be made with the consent of all the members or in terms of a special resolution) if made to a person who is not a director (or a manager) of the lending company, but who is a director (or manager) of both its holding company and of its (ie the lending company's) subsidiary. 2126 This is because, although a loan to a director of the lending company's holding is prohibited, a loan to a director of the lending company's subsidiary is expressly permitted. 2127 221-228)ConsequencesA loan granted or security provided in contravention of this provision is void. 2128

Since the section was enacted to protect companies and their shareholders and creditors from misapplication of the company's funds, it would seem to be implicit in the section that the company has an unqualified right to recover the amount of a loan made by it in contravention of the section from the director or manager or controlled company concerned. Furthermore, and for the same reason, it would seem that an infringement of the section ought not to brand with the consequences of illegality all transactions which are related to the loan or the giving of security, at least in those cases where to brand such a transaction with illegality would work to the detriment of the company, eg a guarantee given by a third party to the company to secure repayment of a prohibited loan. 2129

Any director or officer of a company or of its holding company 2130 who authorises, permits or is a party to the making of any loan or the provision of any security contrary to these prohibitions is liable to indemnify the company and any other person who had no actual knowledge of the contravention, against any loss directly resulting from the

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invalidity of the loan or security. 2131 Such director or officer is entitled to claim indemnification or contribution from his or her fellow directors of the proportional amount that he or she is obliged to pay to the company in terms of s 226(4). 2132 A member can initiate proceedings under s 266 for enforcement of the company's right to be indemnified. The court may in terms of s 248 relieve the director or officer from liability to the company. Although a registered special resolution is probably a public document to which the doctrine of constructive notice applies, a third party's right to be indemnified is protected by the requirement in s 226(4)(a) to the effect that he is entitled to be indemnified if he has 'no actual knowledge of the contravention'.

Where more than one director or manager is party to a contravention of s 226, although each is liable in full in terms of s 226(4)(a) for the loss suffered, the one who has paid has a right of recourse against each of the others. 2133 The right of recourse is founded on the general principle that in the cases of solidarity co-debtorship, more frequently referred to as joint and several liability, if one of the debtors pays the full amount of the debt, h/she has, in the absence of an agreement to the contrary, a right of recourse against the other debtors, but only for their respective proportionate shares. 2134

Such director or officer is also guilty of an offence. 2135Mens rea must be proved. 2136 Proof of culpa is sufficient to establish mens rea, 2137 and thus a director or manager is guilty of the offence if he authorises, permits or becomes a party to the making of a loan (or the provision of security) contrary to the provisions of the section through a negligent failure on his part to take reasonable steps to acquaint himself with the relevant provisions. 2138

In addition to liability under s 226, the directors or officers concerned may, in the circumstances, also incur liability to their company on the ground of breach of their fiduciary duties or their duty of care and skill; and, in the circumstances, a minority shareholder may have a remedy under s 252.Annual financial statementsSection 295(1) requires details to be given in the annual financial statements of any loans or security granted by virtue of the provisions of s 226(2)(a), (b) and (e), ie loans

and security which may be granted subject to the approval of the company's members. 2139

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    2072   Report of the Committee on Company Law Amendment Cmd 6659 (1945) para 94.    2073   Final Report of the Company Law Amendment Enquiry Commission 1947-1948 UG No 69-1948 paras 135-

136.    2074   paras 98 and 99(c).    2075   Commission of Enquiry into the Companies Act Main Report RP 45/1970 paras 44.37 and 44.38.    2076   s 19 of Act No 111 of 1976.    2077   s 21(1)(b) of Act 64 of 1977.    2078   Standard Bank of SA Ltd v Neugarten 1987 (3) SA 695 (W) 705; Standard Bank of SA Ltd v

Neugarten 1988 (1) SA 652 (W) 658; Neugarten v Standard Bank of South Africa Ltd 1989 (1) SA 797 (A) 802; S v Pouroulis 1993 (4) SA 575 (W) 588-589; Bevary Investments (Edms) Bpk v Boland Bank Bpk 1993 (3) SA 597 (A) 625; Kirsten v Bankorp Ltd 1993 (4) SA 649 (C) 662; Corumo Holdings Ltd v C Itoh Ltd (1990) 3 ACSR 438 447 SC(NSW), referring to Neugarten v Standard Bank of South Africa Ltd supra.On s 226, see S J Naudé Memorandum to the Standing Advisory Committee on s 226 of the Companies Act 20 November 1974; Selwyn Faber 'The Prohibition of Loans to Directors and Managers' (1978) South African Chartered Accountant347; M J Oosthuizen 'Sekerheidstelling in Stryd met Artikel 226 van die Maatskappywet — Enkele Aspekte — Standard Bank of SA Ltd v Neugarten 1987 3 SA 695 (W)' 1988 TSAR 133; M J Oosthuizen 'Toestemming Ingevolge Artikel 226 van die Maatskappywet — Standard Bank of SA Ltd v Neugarten 1988 1 SA 652 (W)' [1988] TSAR 303; Stephanie M Luiz 'Security by a Company — Ex Post Facto Approval' (1989) 18 Businessman's Law 229; Richard Jooste 'Loans to Company Directors: The Requirement of Consent' (1990) 20 Businessman's Law 71.

    2079   per Stegmann J in S v Pouroulis 1993 (4) SA 575 (W) 589.    2080   Bevary Investments (Edms) Bpk v Boland Bank Bpk 1993 (3) SA 597 (A) 623-624.    2081   As originally enacted, s 226(1) referred to 'officer'. 'Manager' was substituted for 'officer' by s 19 of Act

111 of 1976. As to the meaning of 'manager', see s 1(1) and notes on s 211. There is nothing in the definition of manager in s 1(1) that would exclude a company or body corporate holding the position of a manager.

    2082   As to meaning of holding company and subsidiary company, see s 1(3)-(5) and notes thereon.    2083   S v Pouroulis 1993 (4) SA 575 (W) 602-604.    2084   as defined in s 1 of the Close Corporation Act 69 of 1984.    2085   As to who is a member of a company, see ss 103 and 91A and notes thereon.    2086   1982 (1) SA 337 (W) 352-353.    2087   In Sage Holdings Ltd v The Unisec Group 1982 (1) SA 337 (W) Goldstone J held that the (for all relevant

purposes) identical deeming provision in s 1(3)(a)(i)(aa) of the (now repealed) definition of 'subsidiary company' was exhaustive (ie one company controlled the composition of the board of another company for the purposes of that definition only if it could, by the exercise of some power, without the consent or concurrence of any other person, appoint or remove the majority of the directors of that other company).

    2088   In The Unisec Group Ltd v Sage Holdings Ltd 1986 (3) SA 253 (T) 270-271 Coetzee J held that the word 'appoint' in the (for all relevant purposes) identical provision in s 1(3)(b) of the (now repealed) definition of 'subsidiary company' was used in the sense in which it is 'generally employed in company law jargon to describe the filling of the office of director, however that is accomplished, which more often than not follows upon voting at a members' meeting'.

    2089   1986 (3) SA 259 (T) 269-270.    2090   1986 (3) SA 259 (T) 274-275.    2091   See Sage Holdings Ltd v Unisec Group Ltd 1982 (1) SA 337 (W) 353 where Goldstone J concluded that the

(for all relevant purposes) the identical deeming provision in s 1(3)(b) of the (now repealed) definition of 'subsidiary company' was not intended to curtail the phrase 'by the exercise of some power', but to extend it. On appeal, Coetzee J accepted that this as correct: Unisec Group Ltd v Sage Holdings Ltd 1986 (3) SA 253 (T) 271.

    2092   Section 226(1A)(b)(i).    2093   S v Pouroulis 1993 (4) SA 575 (W) 589.    2094   Section 226(1A)(a)(ii).    2095   S v Pouroulis 1993 (4) SA 575 (W) 590-591.    2096   S v Pouroulis 1993 (4) SA 575 (W) 589.    2097   S v Pouroulis 1993 (4) SA 575 (W) 590.    2098   In Kirsten v Bankorp Ltd 1993 (4) SA 649 (C) 660 the following from Stegmann J's judgment in S v

Pouroulis 1993 (4) SA 575 (W) 601 judgment was quoted with approval: 'The words ''directly or indirectly'' merely emphasise that the prohibition applies whether the loan is constituted by payment made by the lender directly to the borrower or indirectly upon the borrower's becoming obliged to repay to the lender a sum of money which has become a loan from the lender to the borrower in any number of possible indirect ways. The prohibited indirect ways do not encompass any transaction which does not result in a contract of loan between a lender company and a borrower who is disqualified in relation to such lender company.'

    2099   S v Pouroulis 1993 (4) SA 575 (W) 590-595. See also Kirsten v Bankorp Ltd 1993 4 SA 649 (C) 660-661.    2100   S v Pouroulis 1993 (4) SA 575 (W) 590-595. See also Kirsten v Bankorp Ltd 1993 (4) SA 649 (C) 660-661.

This is because, if the word 'indirectly' is to be compelled to yield some additional meaning, then the prohibition would have to be taken to extend to transactions falling outside the concept of loans as known to the common law: S v Pouroulis 1993 (4) SA 575 (W) 594-595. See also Kirsten v Bankorp Ltd 1993 (4) SA 649 (C) 660-661.

    2101   S v Pouroulis 1993 (4) SA 575 (W) 591-602, in which case (at 599-600) the position under s 37 was distinguished on the ground that s 37, although also containing the words 'directly or indirectly', contains in addition the words 'whether through the instrumentality of its subsidiary or otherwise' and, furthermore,

contemplates an enquiry into the source of the funds employed in the loan ('any funds of . . . employed . . . in a loan'), while s 226 'contains no equivalent words to justify any enquiry other than to identify the lender and the borrower in a contract of loan, and to determine whether the borrower belongs to a class which is disqualified from the borrowing from the lender' (per Stegmann J at 600).

    2102   a loan which, by virtue of s 226(1B) is not subject to the prohibition contained in s 226(1)(b).    2103   S v Pouroulis 1993 (4) SA 575 (W) 596-598. In this case it was said that where a subsidiary makes a loan

to its holding company (which holding company is not itself a subsidiary of another company) with the intention of putting the holding company in a position to make a loan, and the holding company then makes a loan to a company (X Co) controlled by a director of the subsidiary, the holding company has contravened s 226(1)(b), but the subsidiary has not contravened that provision by 'indirectly' making a loan to X Co. While this example is flawed (clearly, the loan by the holding company to X Co is not a contravention of the section, for s 226 does not prohibit a holding company which is not itself a subsidiary from making loans to a director of its subsidiary or to a company controlled by such a director), the question whether the 'indirect' loan by the subsidiary is a contravention of the section remains. And the court held that it is not contravention of the section.

    2104   S v Pouroulis 1993 (4) SA 575 (W) 601; Kirsten v Bankorp Ltd 1993 (4) SA 649 (C) 660.    2105   Commission of Enquiry into the Companies Act Main Report RP 45/1975 para 44.37.    2106   Commission of Enquiry into the Companies Act Main Report RP 45/1975 para 44.38.    2107   Kirsten v Bankorp Ltd 1993 (4) SA 649 (C) 662, where the court referred to the following statement of

Miller JA in Lipshitz v UDC Bank Ltd 1979 (1) SA 789 (A) 804: '[I]t is probably seldom that the words ["in connection with"] are used in legislation in their wide, literal sense. An act only remotely associated with an event may be said, literally, to have been an act in connection with such event, but unless the subject-matter of the legislation and the context of the particular provision clearly indicate otherwise, it would not ordinarily be accepted that even the most remote connection was intended to be visited with sanctions or penal consequences.'

    2108   Kirsten v Bankorp Ltd 1993 (4) SA 649 (C) 662-663.    2109   S J Naud, 'Loans or Security by Subsidiaries: The New Section 37 and Abuse of Control' (1979) 1 MBL 8.    2110   s 226(2)(a)(i)-(ii).    2111   s 226(2)(a)(iii)-(iv).    2112   But in respect of any such loan made or security provided at any time before the date of the

commencement of the Companies Act, 1992, such consent is deemed to have been given if the transaction concerned has subsequently, whether before or after that date, been ratified by all the members of the company: s 226(2)(a) as amended by s 6 of the Companies Amendment Act 1992.

    2113   1989 (1) SA 797 (A).    2114   1988 (1) SA 652 (W).    2115   In effect, this proviso reverses the decision of the Appellate Division in regard to loans made (or security

provided) before the commencement of the Companies Act 1992.    2116   See Hanekom v Builders Market Klerksdorp (Pty) Ltd & Others 2006 (1) SA 423 (T). The case dealt with s

52 of the Close Corporation Act 69 of 1984 which provides, inter alia, that a loan or provision of security by a close corporation to or on behalf of members of the close corporation or to companies or close corporations controlled by one or more of them, is prohibited unless given with the express previously obtained consent in writing of the other members of the corporation. The issue in the case was whether this requirement was satisfied in the case of a sole member when he signs a suretyship. The court answered in the affirmative. This decision was confirmed in Hanekom v Builders Market Klerksdorp (Pty) Ltd 2007 (3) SA 89 (SCA).

    2117   Section 226(2)(b).    2118   Commission of Enquiry into the Companies Act Main Report RP 45/1970 para 44.37(c).    2119   Section 1(3)(a)(ii) provides that a company shall be deemed to be a subsidiary of another company if it is

a subsidiary of any company which is a subsidiary of that other company.    2120   This is because, in terms of s 226(1)(b), a company is not permitted to make a loan to a company

controlled by directors or managers of a company which is a subsidiary of the lending company's holding company. It is not clear why loans to such a company or body corporate are not excluded from the prohibition, while (in terms of s 266(2)(f)) loans to the director or manager himself are excluded.

    2121   Kirsten v Bankorp Ltd 1993 (4) SA 649 (C) 662.    2122   Kirsten v Bankorp Ltd 1993 (4) SA 649 (C) 661.    2123   Kirsten v Bankorp Ltd 1993 (4) SA 649 (C) 662. It was also held (at 663) that, just as a loan is capable of

being made in a lawful or unlawful manner, so, too, can security be furnished in a lawful or unlawful manner. Thus where a loan is made by a third party to a disqualified person, and security for that loan is to be furnished to the lender by the company (vis-à-vis that person is disqualified), the lender may assume that the company is not giving the security unlawfully, ie it may assume that the necessary authorisation of the company's members will be obtained before it grants the security. What, however, was meant by this is unclear. Clearly, the security will be valid if, and only if, the necessary consents of the members are obtained, or the special resolution is passed, before it is granted: Neugarten v Standard Bank of South Africa Ltd 1989 (1) SA 797 (A).

    2124   which s 226(2)(a)(i)-(ii) permits.    2125   Bevary Investments (Edms) Bpk v Boland Bank Bpk 1993 (3) SA 597 (A). Cf the dissenting judgment of

Botha JA, with whom Nicholas AJA agreed.    2126   Unless, perhaps, the loan or security is expressly granted to the such person in his capacity as (or

because he is) a director of the holding company.    2127   s 226(f), which like s 226(2)(a), concerns loans to which s 226(1) 'does not apply'.    2128   Neugarten v Standard Bank of South Africa Ltd 1989 (1) SA 797 (A).    2129   See Corumo Holdings Ltd v C Itoh Ltd (1990) 3 ACSR 438 SC(NSW). In this case Rogers C J pointed out (at

451) that where a third party gives security to a company for a loan made by it to one of its directors, 'it hardly protects a company from having its assets misused to disable it from recovering its money by enforcing the guarantee it had obtained'. The learned judge referred here to the decision of the High Court of Malaysia in Che Wan Development SDN BHD v Cooperative Central Bank BHD (1989) 2 ACSR 61, the effect of which, he said, was that while 'the lender could look to the director for recovery of the moneys it lent, the only security it had to make its loan recoverable was unenforceable'. However, in Che Wan Development SDN BHD v Cooperative

Central Bank BHD supra the company did not make the loan; rather, it guaranteed a loan made to one of its directors by a third party, and the court held that the guarantee was void.

    2130   s 226(5).    2131   s 226(4)(a).    2132   Shell Auto (Pty) Ltd v Laggar and Others 2005 (1) SA 162 (D). The Court said that there was no judicial

authority on the scope and the effect of s 226(4)(a) but, after referring to English law and general common-law principles in South African law, ruled that the right to a contribution between concurrent wrongdoers is recognised in South African law.

    2133   See Shell Auto Care (Pty) Ltd v Laggar and Others 2005 (1) SA 162 (D) which involved an exception to a claim under s 226(4)(a).

    2134   Ibid at 166H.    2135   s 226(4)(b). He is liable to a fine or to imprisonment for a period not exceeding one year, or to both the

fine and imprisonment: s 441(1)(e). See S v Shaik and Others [2005] 3 All SA 211 (D) where the defendant was charged in the alternative with a contravention of s 226(4)(b), in that he had caused the companies under his control to make certain loans to Mr Jacob Zuma. The alternative charge was that the defendant had contravened s 424 of the Companies Act.

    2136   S v Pouroulis 1993 (4) SA 575 (W) 604.    2137   S v Pouroulis 1993 (4) SA 575 (W) 604.    2138   S v Pouroulis 1993 (4) SA 575 (W) 604.    2139   Loans in terms of s 226(2)(a) require the consent of all the members or a special resolution relating to

the specific consent, and loans in terms of s 226(2)(b) and (e) merely require the consent of the company in general meeting.

227  Payments to directors for loss of office or in connection with arrangements and take-over schemes

(1) No company shall make any payment or grant any benefit or advantage to any director or past director of the company or of its subsidiary company or holding company or of any subsidiary of its holding company—

   (a)   by way of compensation for loss of office or as consideration for or in connection with his retirement from office;   (b)   by way of compensation, consideration or for any other reason, for loss or retention of office or otherwise, in

connection with any scheme referred to in section 313; or   (c)   by way of such compensation, consideration or other reason in connection with any scheme or transaction

which constitutes an affected transaction as contemplated in Chapter XVA (hereinafter in this section referred to as a take-over offer or take-over scheme),

[Para. (c) substituted by s. 17 of Act 37 of 1999.]unless full particulars with respect to the proposed payment (including the amount thereof), benefit or advantage have been disclosed to the members of the company and the making of the payment or the grant of the benefit or advantage has been approved by special resolution of the company.

[Sub-s. (1) amended by s. 7 of Act 82 of 1992.](2) Any payment made or benefit or advantage granted contrary to the provisions of subsection (1) shall —

   (a)   in the case of paragraphs (a) and (b) of that subsection, be deemed to have been received by the director or past director concerned in trust for the company; and

   (b)   in the case of paragraph (c) of that subsection, be deemed to have been received by the director or past director concerned in trust for any persons who have sold their shares as a result of the take-over offer concerned.

(3) If in connection with any take-over scheme the price to be paid to a director or past director for any shares of the company held by him is in excess of the price offered to other holders of such shares in terms of the take-over scheme or any benefit or advantage is granted to such director or past director, the excess or the money value of the benefit or advantage, as the case may be, shall for the purposes of this section, be deemed to have been a payment made contrary to the provisions of subsection (1)(c).

(4) A director's expenses of distributing any sum among persons entitled thereto by virtue of subsection (2)(b) shall be borne by him and shall not be retained out of that sum.

(5) Where in proceedings for the recovery of any payment, benefit or advantage deemed to have been received in trust, it is shown that —

   (a)   the payment was made or the benefit or advantage was granted in pursuance of any arrangement entered into as part of an agreement in respect of any scheme or take-over scheme, or within one year before or two years after that agreement or the take-over offer; and

   (b)   the company, or the transferee company under any scheme or the offeror in respect of any take-over scheme was privy to that arrangement,

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the payment, benefit or advantage shall be deemed, except in so far as the contrary is shown, to be one to which this section applies.

(6) The provisions of this section shall not apply with reference to any bona fide payment made or benefit or advantage granted by way of damages for breach of contract or by way of a pension, including any superannuation allowance, gratuity or similar payment in respect of past services.

(7) Nothing in this section shall be taken to prejudice the operation of any rule of law requiring disclosure to be made with respect to any such payments, benefits or advantages as are mentioned in this section or with respect to any other payments, benefits or advantages made or granted or to be made or granted to the directors or past directors of a company.

NotesGeneralA provision governing these payments to directors was first introduced as s 150 of the English Companies Act 1929 2140 and, in 1939, as s 70 quat of our Companies Act 46 of 1926. 2141 As originally enacted, s 70quat dealt with 'payment' (ie by any person) to directors by way of compensation for loss of office: (1) when the company sold the whole or any part of its undertaking or property (the director was deemed to be holding the payment in trust for the company unless the payment was fully disclosed to and authorised by the company in general meeting); and (2) when an offer was made to the general body of shareholders to take over all or any of the shares in the company (the director committed an offence and was deemed to have received the payment in trust for the shareholders who had sold their shares as the result of the offer, unless the payment was fully disclosed in the notice of the offer made for the shares). Excess consideration paid a director for his shares was deemed to be have been made to him by way of compensation for loss of office or consideration for his retirement.

Both in England and in South Africa the provision underwent a number of amendments. First, it was made unlawful for a company to make any payment to a director as consideration for, or in connection with, his loss of or retirement from office without disclosure of the particulars to, and the approval of, the general meeting. If such disclosure was not made and such approval not obtained, the director was deemed to hold the amount in trust for the company (in England, this prohibition was then extended to any such payments made to a director of the company's subsidiary or holding company). Secondly, approval by the shareholders concerned was made necessary for payments to a director made in connection with the transfer of all or any of the company's shares to a person (as a result of an offer made to the general body of

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shareholders). Finally, in England a special resolution was required for the approval of the general meeting, and a corresponding majority was required in the case of a transfer of shares. 2142

The Van Wyk de Vries Commission 2143 considered that payment for loss of office and consideration for a retirement from office should be paid to directors only if sanctioned by a special resolution. It also recommended that the section prohibit the making of such payment to past directors, that is to say, persons who had ceased to be directors and who were, after resignation, compensated for loss of office or given a consideration in connection with their retirement; and prohibit a company from making such payments to directors or past directors of its holding, subsidiary or associated company. 2144 These suggested amendments were incorporated in the Act. However, the provisions of s 227 as enacted 2145 contained a number of departures from s 70 quat which were not recommended by the Commission. One such amendment was the exclusion of the duty (which was backed by criminal liability) on a director to secure disclosure of payments. 2146

Section 227(1)(c) prohibited a company from making any such payment etc by way of compensation, consideration or other reason in connection with any 'take-over scheme referred to in section 314'. In 1989 ss 314-321 the Companies Act were repealed, 2147 and Chapter XVA was added to the Act, which chapter includes, in s 440A(1), a definition of an 'affected transaction'. 2148 This raised difficulties in connection with s 227(1)(c) which continued to refer to 'any take-over scheme referred to in section 314'. In 1999 s 227(1)(c) was at last amended to take into account this change.

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Prohibition of payments to directors for loss of officeSection 227(1) requires disclosure of full particulars with respect to the proposed payment (including the amount), benefit or advantage to the members of the company and approval by special resolution of the company of the making of the payment or the grant of the benefit or advantage. It has been held that this disclosure must be to all the members, and that approval must be obtained before the payment is made.2149 It has also been held that a payment or grant made by directors in contravention of the section is ultra vires their powers and the directors responsible are liable in respect of it on the grounds of misapplication of the company's funds, 2150 unless they ought to be excused. 2151

It has been pointed out 2152 that the terminology used in s 227(a), (b) and (c) is confusing. It is impossible to establish from s 227(1)(c) whether the words 'such compensation' refer to compensation for loss of office or retirement as described in s 277(1)(a), or compensation etc for loss or retention of office as described in s 277(1)(b). Presumably, they refer to both, ie loss of office or retirement or retention of office.

In Peens & Swart v MKTV Beleggings Beherend BK & Another2153 the question arose as to whether certain resignation packages were regulated by s 227(1)(a). Peens and Swart were employees of MKTV Tobacco (Pty) Ltd with Peens employed as the managing director and Swart as the product development director. They were also directors of the company. In January 2001, a board resolution was passed approving the application by Peens and Swart for voluntary resignation packages which would be offered to them in writing. MKTV offered each of them a package and both signed an extract from the minutes of the meeting accepting the resolution of the board. The packages were to be paid provided they resigned and returned all company property and it was common cause that this had been done. Peens and Swart, according to the evidence, received no honorarium for their work as directors but they received salaries and benefits in terms of their service contracts with MKTV. The resignation packages were worked out according to a formula that applied to all salaried personnel whether or not they were directors. In terms of the articles of MKTV the services of persons in their capacity as managing and executive directors could not be unilaterally terminated without exposing MKTV to a claim for damages. MKTV subsequently refused to pay the agreed packages and Peens and Swart brought an action against it for payment thereof.

The issue in the case was whether the packages fell within the ambit of s 227(1) of the Act and more specifically whether the payments to Peens and Swart were compensation 'in connection with' their resignation as directors.

The court (Smit J) relied heavily on the Australian case of Lincoln Mills (Aust) Ltd v Gough. 2154 In this case Gough was both a director and employee of a company and his employment contract provided that he would be entitled to receive a lump-sum payment if he resigned after the company had been taken over. After such a takeover, Gough resigned from his employment with the company and was paid the lump sum. It was subsequently argued that the payment was unlawful because it had not been disclosed

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and had not received the required approval as required by the Companies Act (Victoria). 2155 The issue was whether the payment was 'compensation for loss of office as a director or as consideration for or in connection with his retirement from such office'. Gough contended that the payment was made in relation to the termination of his office as an employee and not as compensation for his loss of office or retirement from office as a director. The court decided that Gough held two offices in the company and that the true character of the payment and the intention of the parties was that the payment was for the loss of his office as an employee of the company and not as a director of it and that the payment was made in terms of an express agreement.

MKTV asserted that the court in the Lincoln Mills case had not given proper consideration to whether the payment was 'in connection with' loss of or retirement from office as a director, but Smit J disagreed with this assertion, holding that the court had considered the provision in its entirety and had concluded that the payment was not 'in connection with' loss of or retirement from office as a director.

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Smit J also referred in his judgment to The Taupo Totara Timber Co Ltd v Rowe.  2156  The issue in this case was whether a lump-sum payment was unlawful in terms of s 191 of the New Zealand Act, which made it unlawful for a company to make any payment to any director by way of compensation for loss of office, or as consideration for or in connection with retirement from office, unless the proposed payment was disclosed to the members and approved by the company in general meeting.

The Privy Council adopted the approach in Lincoln Mills despite its recognition that the wording of the sections was different in that there was no clear indication in the section with which the Privy Council was dealing that the payments covered were payments made to a person 'as director'. The Privy Council pointed out that the respondent, as well as being a director, was also an employee who had a service contract with the company and that on the happening of certain events, such as the company being taken over, he

would be contractually entitled to a sum of money (which was not fixed by the agreement) on his resignation or dismissal. Bearing in mind that there was no obligation to seek the approval of the agreement itself by the company in general meeting, the Privy Council considered whether it was necessary for the general meeting to consent to the payment of the sum. It held that there was no such obligation as the section 'as a whole' and the words 'proposed payment' and 'proposal' pointed to a prohibition of uncovenanted payments as contrasted with payments which the company is legally obliged to make.

Having looked at Lincoln Mills and Taupo Totara Timber, Smit J considered the facts before him. He held that no compensation was ever paid to Peens and Swart in their capacity as directors. He pointed out that the payment that the company had agreed to make was calculated according to a formula that was applicable to salaried personnel and that the specific offer made to and accepted by Peens and Swart was headed 'Kennisgewing aan alle salarispersoneel bo die ouderdom van 50' and that in the body of the offer reference was made to 'personeel' and 'werknemers' and that there was no indication that the resignation package was also being paid for vacating the office of director.

Having dismissed other minor arguments and after looking at the real nature of the payment and taking into account the nature and the circumstances of the payment, Smit J concluded that the payment to Peens was owing as a result of the termination of his service relationship as the managing director of MKTV, and that the payment to S was owing as a result of the termination of his service relationship as product development director, and thus s 227 was not applicable.

As has been pointed out:  2157'[t]he approach followed by the court in the case under discussion makes it unnecessary to get shareholder approval for payments made to a person in their capacity as an executive or employee of the company for loss of or retirement from that position, even though that person may also retire from or lose their office of director of the company at the same time. The desirability of excluding from the application of the section payments made to directors in their capacity as executive employees of the company is debatable . . .

The decision in the Peens case also raises the question of the meaning of the exemption provided for in s 227(6), which states that the provisions do not apply to any bona fide

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payment made, or benefit or advantage granted, as damages for breach of contract or by way of a pension which includes any superannuation allowance, gratuity or similar payment in respect of past services. If the prohibition in s 227(1) does not apply to payments to directors for loss of their position as executives or employees, then clearly the exemption in s 227(6) would also have no application in that context. It would seem that the exemption would only apply to payments of damages that a director is entitled to in his capacity as a director where, for example, he agreed to serve as a non-executive director for a specific period for a specified amount per year . . .'Section 227(1)(b) refers to payments, benefits or advantages made or granted to a director 'in connection with any scheme referred to in section 313'. Section 313 contains provisions for facilitating reconstructions and amalgamations. A scheme referred to in s 313 is 'a scheme for the reconstruction of any company or companies or the amalgamation of any two or more companies', which is effected by a compromise or arrangement under s 311, and under which 'the whole or any part of the undertaking or the property of any company concerned in the scheme . . . is to be transferred to another company'. Compromises or arrangement which do not involve a scheme which complies with that description, thus fall outside the scope of s 227(1)(b).  2158  Previously, such compromises and arrangements also fell outside the scope of s 227(1)(c), which applied only in the case of a takeover scheme referred to in s 314 (and not to schemes of arrangement under ss 311 to 313). Consequently, payments, benefits or advantages made or granted to a director in connection with comprises or arrangements which did not involve schemes for reconstruction or amalgamations and the transfer of the undertaking or property of any company to another company, were not prohibited in terms of s 277, except insofar as they fell within the ambit of s 227(1)(a). However, the definition of 'affected transaction' includes 'any transaction (including a transaction which forms part of a series of transactions) or scheme, whatever form it may take'. Thus takeovers affected by a scheme of arrangement under s 311 fall squarely within the ambit of s 227(1)(c). Indeed, so too do all takeovers, however effected, eg takeovers

affected by the redemption of preference shares. (However, so too, depending on the circumstances, may a 'scheme referred to in section 313' as provided for in s 226(1)(b).)

Section 70quat of the 1926 Act covered the situation where 'the whole or any part of the undertaking or property of a company' was transferred.  2159  As originally enacted, s 277 made no mention of payments made to a director in connection with such a transfer - unless that transfer was effected under 'any scheme referred to in section 313', when s 277(1)(b) would apply.  2160  This remained the position until 1999. However, payments to directors made in connection with the disposal of the whole or substantially the whole of the undertaking of the company, or the whole or the greater part of its assets, are now covered by s 227(1)(c). This is because s 14(a) of Act 35 of 1998 amended the definition of 'affected transaction' in s 440A so as to include 'a disposal as contemplated in section 228'.

A 'take-over scheme' (as originally referred to in s 227(1)(c)) as defined in s 314 did not include 'any offer made in the course of or in connection with any individual

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negotiation with any shareholder for the acquisition of any such shares'. The definition of 'affected transaction' in s 440A(1) contains no such limitation.

The substitution in s 227(1)(c) of 'affected transaction' for 'any take-over scheme referred to in section 314' has however resulted in certain anomalies.

First, s 227(2)(b) provides that in the case of s 227(1)(c) any payment made or benefit or advantage granted shall 'be deemed to have been received by the director or past director concerned in trust for any persons who have sold their shares as a result of the take-over offer concerned'. In 'affected transactions' accomplished by means of schemes of arrangement under s 311 there may be no sale of shares, eg where the shares in question are redeemed. This, of course, is also the case where a takeover is accomplished by means of a share exchange. What is more, in the case of 'a disposal as contemplated in section 228', not only will there be no acquisition of shares, but also the payment or benefit or advantage received ought to be deemed to be received in trust for the company (that was the position under s 70quat(1)bisof the 1926 Companies Act), ie the payments should be governed by s 226(2)(a) and not 226(2)(b).

Secondly, s 227(3) refers only to sales of shares ('the price to be paid to a director . . . for any shares . . . is in excess of the price offered to other holders of such shares'). Thus, although s 227(1)(c)provides that 'an affected transaction as contemplated in Chapter XVA' is 'hereinafter in this section referred to as a take-over offer or take-over scheme', it would seem that s 227(3) does not cover excess payments made in connection with a share redemption.Payments deemed to have been received in trust for any persons who have sold their sharesSection 227(2)(b) as enacted to deal with the problem met with in Regal (Hastings) Ltd v Gulliver  2161  of providing for restoration to those truly prejudiced, and not to the company, thus giving what has been thought to be an undeserved reduction of price to the bidder. To this extent, therefore, it recognises an exception to the general rule that directors are not trustees for individual shareholders. They become trustee for the shareholders. But not for all. Only for those who have sold. It has been argued that persons who have retained their shares have just as much claim to participate in the distribution of the improper payment as the persons who have sold their shares. All persons who were shareholders at the date of the takeover should be beneficiaries, with one exception, viz, a shareholder who was a party to such an improper payment.  2162

As noted above, s 227(2)(b) ought to have been redrafted. In the case of takeover accomplished by means of a scheme of arrangement involving a redemption of shares, the benefit or advantage will have to be held in trust for the shareholders whose shares have been redeemed. And in the case of 'a disposal as contemplated in section 228' the benefit or advantage received ought to be held in trust for the company.Payments to directors by outsidersAn unsatisfactory feature of s 227 is that, unlike s 70quat of the 1926 Act, payments to directors by third parties, ie persons other than the company, in connection with a

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takeover are dealt with only by implication in s 227(3).  2163  Section 227(3) is, in essence, s 70quat(5) of the 1926. That subsection deemed such an excess payment 'to

have been a payment made to [the director] by way of compensation for loss of office or as consideration for or in connection with his retirement from office'. However, if s 227(3) is to be interpreted as covering payments by third parties - and it would make little sense if it were not so interpreted - it must be understood as also deeming payments by such persons to be payments 'by the company'. This is because such payments are 'deemed to have been payments made contrary to the provisions of subsection (1)(c)'; and s 227(1)(c) provides that 'no company' shall make the payment etc to which it refers without the required disclosure and approval.

As pointed out above, a further difficulty here is that s 277(3) appears to refer only to excess payments made in connection with the purchase of the director's shares.Excluded payments, benefits and advantagesSection 227(6) provides that none of these provisions applies with reference to any bona fide payment made or benefit or advantage granted by way of damages for breach of contract or by way of a pension, including any superannuation allowance, gratuity or similar payment in respect of past services.  2164  It has been held that the provisions apply only to payments which the company is not legally obliged to make ('unconnvented payments as contrasted with payments which the company is legally obliged to make'), and only to such payments made to a director in connection with his loss of office as director.  2165

Nothing to be taken to prejudice the operation of any rule of law requiring disclosure to be madeSection 227(7) provides that nothing in s 227 is to be taken to prejudice the operation of any rule of law requiring disclosure to be made with respect to any payments, benefits or advantages as are there mentioned, or with respect to any other payments, benefits or advantage made or granted or to be made or granted to the directors or past directors of a company. Unless, after full disclosure, he obtains the consent of the company to retain them, a director is accountable to his company for all profits made by him by use of or by reason of his office.  2166

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    2140   But not on any recommendation of the Greene Committee (Company Law Amendment Committee Cmd 2657 (1925-26)).

    2141   It was introduced on the recommendation of the Lansdown Commission (Report of the Company Law Commission 1935-1936 UG No 45 1936). The Commission said (para 133): 'There should . . . be a provision, on the lines of section 150 of the British Companies Act, 1929, prohibiting payments to directors on retirement from office, save under authority of the shareholders in general meeting'.

    2142   See Report of the Committee on Company Law Amendment Cmd 6659 (1945) para 92 (Cohen Committee), which recommended amendments embodied in s 191, 192 and 193 of the 1948 Act; Final Report of the Company Law Amendment Enquiry Commission 1947-1948 UG No 69-1948 paras 137-138 (Millin Committee), which said that the section 'seeks to deal with the possibilities of evil in the payment to directors of compensation for loss of office' and that '[i]t is obvious that payments made on such conditions to directors, unless fully disclosed and authorised, may well be regarded in the same light as a secret commission given to an agent'; Report of the Company Law Committee Cmnd 1749 (1962) para 93 (Jenkins Committee).

    2143   Commission of Enquiry into the Companies Act Main Report RP 45/1970 para 44.36.    2144   The Commission originally intended to deal with payments to directors for loss of office under the

provisions of the Act dealing with arrangements, amalgamations and reconstructions (Main Report para 44.36). Apart from the few suggested amendments to s 70 quat of the Act contained in recommendation 99, the Main Report consequently had little to say on the subject. In the Supplementary Report (Commission of Enquiry into the Companies Act Supplementary Report and Draft Bill RP 31/1972 para 86.09), however, the Commission stated that s 70 quat would, except for the already recommended amendments, remain as it stood and that it had proved impractical to deal with the topic under the chapters of the Draft Companies Bill on arrangements and takeovers.

    2145   On s 227, see S W L de Villiers 'Payment to Directors for Loss of Office etc - A Critical Glance at s 227 of the Draft Companies Bill' (1970) CILSA 339; Bernard J Cartoon 'Compensatory Payments to Directors for Loss of Office' 1978TSAR 155; S M Luiz 'Payments to directors as compensationfor loss of office' (2005) 17 (1) SA Merc LJ 115.

    2146   Contained in s 70quat(3) of the 1926 Act. S W L de Villiers considered that this was to be welcomed as the offence with its penalty in no way added to the efficacy of the section: 'Payment to Directors for Loss of Office etc - A Critical Glance at s 227 of the Draft Companies Bill' (1970) CILSA 339 345.

    2147   s 6 of Act 78 of 1989.    2148   The concept of 'affected transaction' is far wider than that of 'take-over scheme' referred to in the now

repealed 314. A 'take-over scheme' as defined in s 314 was solely concerned with a take-over accomplished by the 'acquisition of shares'. Section 314 defined a 'take-over scheme' as a scheme involving the making of an offer by the offeror for acquiring shares of the offeree company which together with any shares of that company already held by the offeror at the time of the making of the offer, would have the effect of (a) vesting the control of the offeree company directly or indirectly in the offeror; or (b) the offeror acquiring all the shares

(or all the shares of a particular class) of the offeree company. However, it did not include 'any offer made in the course of or in connection with any individual negotiation with any shareholder for the acquisition of any such shares'.

    2149   Re Duomatic Ltd [1969] 2 Ch 365 374; [1969] 1 All ER 161 169.    2150   Re Duomatic Ltd [1969] 2 Ch 365 374; [1969] 1 All ER 161 169.    2151   As to when directors may be excused, see s 248 and notes thereon.    2152   S W L de Villiers 'Payment to Directors for Loss of Office etc - A Critical Glance at s 227 of the Draft

Companies Bill' (1970) CILSA 339 345.    2153   [2003] 3 All SA 426 (T).    2154   [1964] VR 193 (SC, Vict).    2155   Section 129(1)(a) of Act 6839 of 1929.    2156   [1978] AC 337 (PC), a decision on appeal from the Court of Appeal of New Zealand.    2157   See S M Luiz 'Payments to Directors as Compensation for Loss of Office' (2005) 17 SA Merc LJ 115 at 120.    2158   S W L De Villiers 'Payment to Directors for Loss of Office etc - A Critical Glance at s 227 of the Draft

Companies Bill' (1970) CILSA 339.    2159   s 70quat(1)bis of Act 46 of 1926.    2160   S W L de Villiers 'Payment to Directors for Loss of Office etc - A Critical Glance at s 227 of the Draft

Companies Bill' (1970) CILSA 339 342 pointed out that this was a substantial departure from the principles established in s 70quatand one for which no explanation was offered by the Commission.

    2161   [1967] 2 AC 134n; [1942] 1 All ER 378 (HL).    2162   S W L de Villiers 'Payment to Directors for Loss of Office etc - A Critical Glance at s 227 of the Draft

Companies Bill' (1970) CILSA 339 345-346.    2163   S W L de Villiers 'Payment to Directors for Loss of Office etc - A Critical Glance at s 227 of the Draft

Companies Bill' (1970) CILSA 339 343-344.    2164   See the comment made regarding s 227(6) made by S M Luiz 'Payments to Directors as Compensation

for Loss of Office' (2005) 17 SA Merc LJ 115 at 120, referred to above under the heading Prohibition of payments to directors for loss of office.

    2165   Lincoln Mills (Aust) Ltd v Gough [1964] VR 193; Taupo Totara Timber Co Ltd v Rowe [1978] AC 537 545-546; [1977] 3 All ER 123 127-128 (PC). In Taupo Totara Timber supra the managing director's contract, in which he was described as the 'employee', provided that in the event of the company being taken over by the acquisition of its share capital he would be entitled 'at any time within a period of twelve months after the date of the acquisition of capital to resign his office upon giving to the company not less than three months' notice in writing of his desire to do so'. In the event of his resignation pursuant to that right, he was to be entitled to receive from the company a lump sum payment equivalent to five times his gross annual salary. The company was taken over by another company and the managing director resigned. It was held that payment under this contract was not governed by the corresponding provisions in s 191 of the New Zealand Companies Act 1955. On Taupo Totara Timber, see Ralph Instone 'Compensating Ex-directors' (1978) 12 New LJ 54.

    2166   See notes on SECRET OR INCIDENTAL PROFITS in note on FIDUCIARY DUTIES in notes on s 208.

228  Disposal of undertaking or greater part of assets of company(1) Notwithstanding anything contained in it's memorandum or articles, the directors of a company shall not

have the power, save by a special resolution of its members, to dispose of—   (a)   the whole or the greater part of the undertaking of the company; or   (b)   the whole or the greater part of the assets of the company.

(2) If in relation to the consolidated financial statements of a holding company, a disposal by any of its subsidiaries would constitute a disposal by the holding company in terms of subsection (1)(a) or (b), such disposal requires a special resolution of the shareholders of the holding company.

(3) A special resolution of a company shall not be effective in approving a disposal described in subsection (1) or (2) unless it authorizes or ratifies in terms the [sic] specific transaction.

(4) An undertaking or assets of a company, and the part to be disposed of, shall be calculated for purposes of subsections (1) and (2) according to the fair value of the undertaking or assets as described in financial reporting standards.

(5) Subsections (1) to (4) shall not apply to a disposal between a wholly owned subsidiary and its holding company, or between two wholly owned subsidiaries of the same holding company.

[S. 228 amended by s. 10 of Act 35 of 1998 and substituted by s. 21 of Act 24 of 2006.]

Notes  2167

The provision in s 228(1) and (2) was first introduced as s 70 dec (2) in the 1926 Act on the recommendation of the Millin Commission 2168 by s 39 of Act 46 of 1952. The Commission said 2169 that the provision 'is to prevent directors from disposing of the whole or the greater portion of the assets of the company without the consent of the company in general meeting to the specific transaction proposed'. It pointed out that this was 'a provision upon which the Johannesburg Stock Exchange had for many years insisted as a necessary article for companies seeking a quotation'. 2170 Substantial amendments were made to s 228 in 2007. 2171 One of the motivations for the change 2172 was that s 228 was being used more and more for the purpose of effecting a takeover, as an

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alternative to s 440K of the Act which has more stringent requirements. 2173 This has resulted in s 228 now requiring a special resolution to authorise a s 228 disposal. Previously an ordinary resolution was sufficient. It is to be noted that the definition of 'affected transaction' in s 440A includes 'a disposal as contemplated in s 228'. 2174

It has been held that 'dispose' means permanently depriving the company of its rights to the ownership of the assets involved, and the prohibition therefore applies, not to the conclusion of an agreement of disposal, but to implementation of the agreement. The judge said that, if it had been intended to relate to the agreement itself, he would have 'difficulty in understanding how such an agreement could be regarded as void if it is capable of ratification'. 2175 But of course an unauthorised contract is not binding and is, in that sense at least, void; and a binding contract needs no ratification. What is more, this reasoning, if it had any force, would apply equally to disposals made in implementation of the agreement. Merely to prevent the implementation of an otherwise binding agreement would be to allow the purchaser an action for damages against the company, leaving the shareholders with little option but to ratify.

Thus, it would seem certain that 'disposal' here means a transaction of disposal. 2176 That is to say, the directors cannot without the authority of a special resolution enter into a binding agreement to make a s 228 disposal. If, however, they purport to do so, the general meeting may, by special resolution, ratify that agreement.

It is not clear whether art 59 of Table A (art 60 of Table B) does in fact empower the directors to make a s 228 disposal. This is because it can be, and has been, interpreted merely to empower the directors to manage 'the business of the company'. So interpreted, it would not include the power to dispose of the company's business. If this is correct, s 228 applies only when the memorandum or articles contain a provision actually empowering the directors to dispose of the company's business etc.

Subsection (3) provides that no resolution of the company approving any such disposal shall have effect unless it authorises or ratifies in terms the specific transaction.

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In Ally and Others NNO v Courtesy Wholesalers (Pty) Ltd2177 it was held that 'specific' includes 'capable of being exactly named or indicated'. On this interpretation, the court took the view that an agreement entered into by all the shareholders concerned to abide by the decision of a third party as to what assets, if any, of the companies concerned were to be disposed of was sufficiently specific. However, even if it is accepted that the doctrine of unanimous assent applied, ie if all agree no formal resolution of the general meeting is necessary, it is difficult to accept that an agreement to abide by the decision of a third party as to what assets, if any, are to be disposed can be said to authorise 'in terms the specific transaction'. 2178

The test applied to determine whether the assets disposed of constitute the greater part of the company's assets or undertaking is the test of value and value means 'fair value of the undertaking or assets as described in financial reporting'. 2179

This restriction on the directors' powers does not prevent them from granting a right of pre-emption in respect of the company's assets, and the grantee will be able to prevent the company from disposing of its assets to a third person in breach of his right. He will not, however, be able to compel the company to dispose of its assets to him without the sanction of the shareholders. 2180 A pledge of shares in securitatem debiti is not, so long as the revisionary rights lasts, a disposal of such shares in terms of the section. 2181

In Standard Bank of South Africa Ltd v Hunkydory Investments 188 (Pty) Ltd and Others (No 2), 2182 the plaintiff bank sought summary judgment against the defendant based on four mortgage bonds passed by it. The defendant contended that the mortgage bonds were not binding on it as the mortgage bonds constituted a disposition as contemplated in s 228 of the Companies Act and the prescribed members' resolution approving the disposition, as required by s 228, had not been passed. The mortgage bond had been passed before the amendment of s 228 by s 21 of the Corporate Laws Amendment Act of 2006 to require a special resolution. The decision of the court was that to 'dispose' of an asset within the meaning of s 228 means the act of transferring ownership (per Grobler v Trustee Estate De Beer). 2183 A transaction under which a debtor agrees to the hypothecation of his property is not one that 'disposes' of the property to the creditor or to anyone else (at para 12). To construe s 228 as applying to

mortgages is to extend its operation beyond what was the intention of the legislature. The court proclaimed (para 19) that the intention of the legislature was to restrain disposals by directors in the narrower (and ordinary) sense

RS 8, 2011 ch8-p326-2

(para 19). Section 228 is directed as a disposal in the form of a transfer of ownership rather than a transaction which exposes the company's assets to the risk of a forced disposal because of borrowing (para 21).

The view adopted in this case is in accordance with the judgment of the court in Alexander and another NNO v Standard Merchant Bank Ltd. 2184 The fact that the word 'disposition' is used in its extended sense in s 1 of the Insolvency Act 24 of 1936 or in ss 340 and 341 of the Companies Act made no impression on the court as s 228 applied in a very different context.

The court will not inquire into the commercial wisdom of a particular transaction. If it is established that such a disposal of its assets by a company will be unfairly prejudicial, unjust or inequitable to the minority, the appropriate remedy is not for the court to interdict the holding of the general meeting and thereby the approval of the shareholders, but to order 2185 the purchase of the minority's shares either by the majority or by the company. 2186

Where the approval required by s 228 has not been obtained and the third party to whom the disposal has been made is unaware of the lack thereof, can the third party enforce the transaction on the basis of the rule in Royal British Bank v Turquand? 2187

This question arose in Levy & Others v Zalrut Investments (Pty) Ltd2188 where, in an obiter dictum, Van Zyl J supported the view that the Turquand rule could apply. He said: 2189There is likewise no indication that the public interest or public policy played any part in the intention of the Legislature when it enacted the said s 228. A third party involved in a transaction relating to the said disposal will hence undoubtedly be able to enforce such transaction, provided he is not aware thereof that the company in general meeting has in fact not approved of the transaction. This is in accordance with the rule in the well-known case of Royal British Bank v Turquand.The judgment of Van Zyl J in Levy and Others v Zalrut Investments (Pty) Ltd led to numerous academic writings. In a note on the case 2190 P E Brooks raised the question as to whether the application of the rule in the context of s 228 is reconcilable with the conclusion reached by Van Zyl that the section 'is clearly directed at protecting the interests of shareholders'. After all, a decision to enforce a contract concluded without the approval of or ratification by any shareholders in general meeting can hardly be said to be in the interests of those shareholders who did not approve it. This was followed by an article 2191 by M von Willich which contains a valuable summary of the law in England, Canada, France, the Netherlands and Germany and highlights the fact that only Canada has a statutory provision similar to our s 228. She also sketches the background to the introduction of s 228 in the statute. Section 70dec(2) of the Companies Act 46 of 1926 contained provisions almost identical to s 228 and a note by B Wunsh, 2192 written prior to his elevation to the Bench, expresses the following view:

RS 9, 2012 ch8-p326-2A

'The approval of a general meeting of a company required by s 70dec(2) is an "act of internal management" and the case of directors disposing of the undertaking of a company without such approval is indistinguishable from the position in Turquand's case, save that the limitations on the directors' powers are derived from the statute.'His view was, therefore, that an innocent party contracting with a company would be entitled to invoke the provisions of the rule notwithstanding s 228. A similar view was expressed by M J Oosthuizen in a note2193 on Novick and Another v Comair Holdings Ltd and Others. 2194 Von Willich concludes her article by returning to the cardinal issue to which regard must be had when interpreting statues, namely the intention of the Legislature. She points out that transactions which are forbidden by statute are prima facie considered to be void (in accordance with the maxim quid fit contra legem est ipso iure nullum) but accepts that the intention of the Legislature could also be that, although the transaction may be forbidden, it is not necessarily visited with voidness. In this connection, she refers to the interpretation given to s 141 of the Companies Act, namely that an offer of shares to the public for purchase without being accompanied by a written statement containing certain prescribed information will not be void. Since the

contravention of s 141 is also an offence, she argues that contravention of s 228, which is not an offence, should also not be regarded as being void. In attempting to establish the intention of the Legislature, she submits that, since the Turquand rule had become firmly established in our law, the Legislature would have made it clear that an innocent third party would not be entitled to rely on the rule had that been the intention of the Legislature. She concludes by submitting that, in weighing the interests of the innocent third party against those of the shareholders, the interests of the former should prevail since the wronged shareholders would be entitled to claim damages from the errant organ or agent of the company for breach of fiduciary duty. In her view s 228 should be repealed. In Stand 242 Hendrik Potgieter Road Ruimsig (Pty) Ltd and Another v Göbel NO and Others, 2195Farren v Sun Service SA Photo Trip Management (Pty) Ltd was approved and the dictum in Levy v Zalrut Investment (Pty) Ltd (at 487B) overruled.

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In Farren v Sun Service SA Photo Trip Management (Pty) Ltd2196 Cleaver J — after reviewing Van Zyl J's judgment in Levy & Others v Zalrut and the literature as set out above 2197 — decided that theTurquand rule could not apply in a situation where the approval of the shareholders had not been obtained as required by s 228.

Cleaver J said that the issue'is not so much whether a transaction entered into in contravention of s 228 is void or voidable. It is clearly unlawful in the sense that it is concluded in contravention of the section; it also has no legal effect, but that can be cured by subsequent ratification by the shareholders in general meeting'. 2198

He said that if the objective was to protect the shareholders'then surely that intention should be given effect to, for otherwise "admitting the application of the Turquand rule may resolve the dilemma, but will nullify the efficacy of s 228 and will defeat the object of the Legislature" '. 2199

The view that there should be no difference whether the internal requirement in question was in the articles or in a statute was rejected as being too simplistic: 2200' "For reasons which the Legislature considered sound," Cleaver J said, "it was decided that the provisions in question should be embodied in a statute, thus giving them far more weight." ' 2201

In an article 2202 subsequent to the one referred to above, Wunsh submitted that the following factors reinforced his view that the Turquand rule was applicable in the s 228 situation:

•      The absence of a penalty.•      The ratio of the Turquand rule and the general application of the presumption omnia

praesumuntur rite ac solemniter esse acta as a rule of substantive law.•      That there are no considerations of policy or public interest involved.

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Cleaver J disagreed with Wunsh. He said that'the absence of a prescribed penalty in the event of a statutory contravention is often taken to be an indication that no public interests are involved, but to my mind that fact does not tip the scales in favour of theTurquand rule in the circumstances under discussion'. 2203

He also rejected Wunsh's view on the application of the omnia presumption on the basis that it disregarded the intention of the legislature. 2204 Also rejected was the view that the rule should apply since there were no public interests involved. In this regard Cleaver J pointed out that the Turquand rule was not relied on in Neugarten & Others v Standard Bank of South Africa2205 in which the court held that s 226(1) and (2) were introduced solely for the protection and benefit of the members of a company. The section prohibits a company directly or indirectly from making certain loans or providing security to or for a director or manager of itself or of its holding company or of another subsidiary of the holding company without the consent of all the members or the passing of a special resolution. Wunsh seeks to distinguish the judgment from the situation when it is attempted to invoke the Turquand rule so as to override s 228 for the following reasons:

•      s 226(4) of the Act makes the errant director or officer guilty of an offence;•      without the prescribed consent or special resolution the transaction is ultra vires the

company;•      the mischief aimed at is far more serious than that at which s 228 aims;•      the validating formality is the written consent of all the members which can easily be

called for and produced; or a special resolution which is registered and, as such, is a public document.

Cleaver J held that'[w]hatever value the points put forward by Wunsh may have, they are not, in my view, a sufficient indication that it was the intention of the Legislature to permit the Turquand rule to prevail over the provisions of the section'.In this regard he considered that the following passage from the judgment of E M Grosskopf JA — who delivered the majority judgment in Bevray Investments (Edms) Bpk v Boland Bank Bpk en Andere2206 — to be particularly instructive:'Die reël dat die Wetgewer se bedoeling in eerste instansie in die letterlike betekenis van sy woorde gesoek word is so geyk, en die redes daarvoor so klaarblyklik, dat dit skaars beklemtoning verg. Die Wetgewer bepaal wat veroorloof word en wat verbied word. Die onderdaan kan alleen die Wetgewer se wil vasstel uit die woorde wat gebruik word. In 'n geval soos die onderhawige, as 'n direkteur of 'n maatskappy-sekretaris of 'n ouditeur wil weet of 'n bepaalde lening 'n oortreding van art 226 is, behoort hy die antwoord te kan vind in die woorde van die Wet, en, indien hulle duidelik is, behoort dit nie vir hom nodig te wees om te bespiegel of the Wetgewer nie miskien iets anders bedoel het nie, of om rond te krap

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in die wetgewende geskiedenis van die bepaling nie. Daar word gevolglik dikwels beklemtoon dat dit net in uitsonderlike gevalle is waar afgewyk mag word van die letterlike betekenis van die woorde van wetsbepalings — "(s)legs 'n duidelike en onbetwyfelbare bepaalde bedoeling van die Wetgewer, en nie 'n bloot veronderstelde bedoeling nie, kan 'n afwyking van die gewone betekenis van woorde regverdig . . ." (perBotha AR in Du Plessis v Joubert 1968 (1) SA 585 (A) op 595A). Sien ook S v Tieties (supra op 464A): ". . . a court . . . may only do so where this is necessary to give effect to what can with certainty be said to be the true intention of the Legislature" en op 464E "provided it can be indisputably established that the Legislature intended something different from the ordinary meaning conveyed by the words used . . ." 'Cleaver J concluded by saying that in his view it could not be established indisputably that the legislature intended something different from the ordinary meaning conveyed by the words. 2207 In his view the legislature intended the provisions of s 228 to prevail. 2208 Cleaver J also held that there is clearly no room for the application of estoppel. He referred 2209 to The Law of South Africa where the general principle is stated:'Estoppel is not allowed to operate in circumstances where it would have a result which is not permitted by law. A defence of estoppel will therefore not be upheld if its effect would be to render enforceable that what the law, be it the common law or statute law, has in the public interest declared to be illegal or invalid.'

The reason for the introduction of s 228(3) 2210 was the misuse relating to the fact that the Securities Regulation Code on Takeovers and Mergers applies only to public companies and private companies that have more than ten beneficial shareholders. Therefore a s 228 disposal which takes place in relation to a wholly-owned subsidiary does not technically fall within the jurisdiction of the Securities Regulation Panel (SRP) no matter how significant the disposal is in terms of value in relation to the group and thus the interest of the minority shareholders in the holding company as a whole. The effect of this is that minority shareholders in the holding company do not enjoy the protection of the SRP in these cases. To cure this defect, the new s 228(2) provides that if, in relation to the consolidated financial statements of a holding company, a disposal by any of its subsidiaries would constitute a disposal by the holding company (in the sense that it constitutes the disposal of the whole or the greater part of the undertaking or assets of the company), such a disposal requires a special resolution by the members of the holding company.

However, as Yeats says, 2211 it is doubtful whether the amendment has achieved its stated objective as regards protection of minority shareholders by the SRP where a s 228 disposal takes place in a company group context. She says:'The involvement of the SRP at the subsidiary level requires two things: that an "affected transaction" as defined in s 440A of the Companies Act (which specifically includes a disposal as contemplated in s 228) will take place and that the entity or entities involved are subject to the jurisdiction of the SRP by virtue of their nature and the number of shareholders. The amendments in the Bill do not, it seems, put paid to the argument that the subsidiary (and

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thus the transaction) is not subject to SRP jurisdiction or approval where the subsidiary is a private company with less than ten beneficial shareholders, because it does not fall under the SRP's jurisdiction. The amendment does, in these circumstances, give the shareholders of the holding company the additional protection that a special resolution is required at the holding company level if the effect of the disposal in the subsidiary in relation to the consolidated financial

statements of the holding company is that it constitutes the disposal of the whole or the greater part of the undertaking or assets of the company. The question that arises is whether this actually means that the disposal is a s 228 disposal at the level of a holding company also. I would argue that this is not the case. There is only one disposal, and that disposal is taking place at the subsidiary level; the fact that the legislature has introduced a group valuation mechanism of the disposal by having regard to the consolidated financial statements and attached legal consequences (namely the special resolution requirement) does not, legally speaking, make it a second s 228 disposal within the group context. If this is so, it means that the minority shareholders of the group company (which may now meet the SRP's jurisdictional requirement of a private company having more than ten beneficial shareholders) still do not enjoy the protection of the SRP because no "affected transaction" (ie no s 228 disposal) has taken place in that company.' 2212

Amending s 228 also presented the legislature with an ideal opportunity to put paid to the problems arising out of the interaction between the protection provided to shareholders by the section and the Turquandrule. Does the Turquand rule apply to an internal requirement laid down by statute? 2213 This question came to the fore in Levy & others v Zalrut Investments (Pty) Ltd2214 and in Farren v Sun Service SA Photo Trip Management (Pty) Ltd. 2215 In the Levy case the defendant company had granted to the plaintiffs an option to purchase property. The defendant ultimately refused to grant transfer and, in an action instituted by the plaintiffs to compel it to do so, pleaded that the granting of the option amounted to a disposal of the whole or substantially the whole of the defendant's undertaking, alternatively, of the whole or the greater part of its assets as contemplated by s 228, and that the requisite consent of the majority of the shareholders had not been obtained. The plaintiffs replicated, alleging that the defendant, on the facts, was estopped from relying on the absence of the approval. The defendant applied for the striking out of, alternatively excepted to, this replication on the basis that it did not found an estoppel. Examining the question whether unanimous consent of the members of the company to the granting of the option was sufficient to avoid the provisions of s 228, the Court held that the intention of the legislature in enacting the provision was to limit the powers of the directors; that it was clearly designed for the benefit of shareholders; and that the unanimous consent had the same effect and validity as the approval of such transactions by a general meeting. 2216 The Court held further that there was no question that the disposal was in fact intra vires the company and could not be considered illegal, void and unenforceable.2217 Accordingly the plaintiffs were entitled to raise estoppel in the circumstances.

RS 6, 2009 ch8-p326-7

Farren is controversial and has been criticised by various academic writers. However, it has been pointed out that the issue may not be that important, in the context of s 228 anyway, because of'the fact that the amended s 228 now requires a special resolution by the company to effect a transaction which will qualify as a s 228 disposal. By way of explanation, in circumstances where the special resolution is passed prior to the entering into of the agreement regulating the s 228 disposal, a copy of that special resolution must in terms of s 200(3) of the Companies Act be embodied in or annexed to every copy of the articles issued after the registration of the resolution. Section 9 of the Act provides that any person may, on payment of the prescribed fee, inspect the documents lodged under the Act with the Registrar of Companies. It appears, then, that this public access to a special resolution authorizing a disposal in terms of s 228 will, in terms of the doctrine of constructive notice, mean that a prospective purchaser will be deemed to have knowledge of the special resolution where it has been passed; but of course this would then present no problem, as the disposal will have been properly authorized. If, however, there is no special resolution on file, the question arises whether the third party would be deemed to have knowledge of this fact (in terms of the doctrine of constructive notice) and, if so, whether this would mean that he is no longer bona fide and that the possible application of the Turquand rule therefore falls away altogether. One could possibly argue not, because the Bill permits a company to ratify a disposal as provided in s 228(2) and thus it may, in due course, pass a ratifying resolution; but the further question which then arises is whether the absence of a resolution at the time of the transaction places some obligation on a bona fide third party to make enquiries from the company in this regard, failing which he will no longer be regarded as bona fide.' 2218

Section 228(3) provides that the requirements contained in s 228 are in addition to any other requirements, including the limitation of voting rights, relating to such transactions that may be imposed by the Securities Regulation Panel in terms of s 440C or in terms of any other law. The requirements of the Securities Regulation Code on Take-overs and

Mergers (the Code) in regard to information to be given to the offeree company and its shareholders will apply mutatis mutandis. More significant, rule 29(d) of the Code provides that, where the directors of a company will require the authority of a general meeting of shareholders of the company pursuant to the provisions of s 228 in order to enter into an affected transaction, the Panel has 'the right in its sole and absolute discretion, to direct that any shareholder, whose vote may as a result of any direct or indirect conflict of interest result in an inequity to any other shareholder, shall not vote or cause its votes to be exercised in whole or in part at the said meeting or any adjournment thereof'.

This is an inroad on the common law rule entitling shareholders to vote on matters in which they have an interest conflicting with the interests of the company, or with the interests of other shareholders. Presumably, a conflicting interest in the context of s 228 will usually be an interest in the offeror, ie in the purchasing company. Of course, where the price is unfair, the minority shareholder has his remedies at common law and under the Act. But the Panel can intervene to ensure that a price is not simply foisted on the minority shareholders by an interested majority. Such intervention, however, could in itself result in considerable unfairness, and even in an unjustified inroad on property rights. Everything turns on the question whether the offer price is fair. But, it would

RS 6, 2009 ch8-p326-8

seem, the Panel is not permitted to judge that question; for s 440(C)(2) provides that '[i]t shall not be the function of the panel to judge the commercial advantages and disadvantages of affected transactions'. It may be noted that before the amendment to s 228 in 2006, 2219 s 228 referred to a disposal of 'the whole or substantially the whole of the undertaking of the company'. 2220 It is now 'the whole or the greater part of the undertaking'. This change came about because there had been 'a certain liberal interpretation of the term "substantially the whole" in relation to the disposal of a business undertaking, in order to avoid the application of section 228(1).' 2221 The purpose of the change was 'to apply the more objective test already used in respect of assets, namely, "the greater part", also to the disposal of a business undertaking.' 2222

Section 228(5) was introduced by the Corporate Laws Amendment Act 24 of 2006. 2223 It had no counterpart in the old s 228. The motivation for the introduction of s 228(5) was as follows:'8.7 Certain legal opinions hold that a disposal by a wholly owned subsidiary does not fall within the jurisdiction of the SRP, no matter how material it is in relation to the consolidated balance sheet of the holding company. This is because the Securities Regulation Code applies only to public companies and private companies of which shareholder capital exceeds R5 million and which have more than ten beneficial shareholders. (A wholly owned subsidiary only has one beneficial shareholder.)8.8 The objective to protect minority shareholders in the holding company is thus defeated in such circumstances. The new section seeks to remedy the current anomaly.' 2224

Interests of and Dealings by Directors and Others in Shares of Company (ss 229-233)  

    2167   On s 228, see Basil Wunch 'Disposing of the Undertaking or Assets of a Company' (1971) 88 SALJ 351; D S Ribbens 'Disposal of the Undertaking or the Whole or Greater Part of Assets of a Company' (1976) 39 THRHR 162; Lionel Hodes 'Disposal of Assets — s 228' (1978) South African Company LJ F-6; P E J Brooks 'Section 228 of the Companies Act Levy v Zalrut Investments (Pty) Ltd ' (1987) 50 THRHR 226; Michele von Willich 'Die Uitwerking van a 228 van die Maatskappywet 61 of 1973' (1988) 10 MBL 7.

    2168   Final Report of the Company Law Amendment Enquiry Commission 1947-1948 UG No 69-1948.    2169   Final Report of the Company Law Amendment Enquiry Commission 1947-1948 UG No 69-1948 para 156.    2170   Section 228 has been equated to the ultra vires doctrine as a trap for the unwary third party (see the Van

Wyk de Vries Commission of Enquiry into the Companies Act RP 45/1970 of 15 April 1970 44.40 at 83). This has been criticised in 2004 Annual Survey of South African Law 505.

    2171   By the Corporate Laws Amendment Act 24 of 2006, which came into force on 14 December 2007.    2172   See Memorandum on the Objects of the Corporate Laws Amendment Bill, 2006 34-35.    2173   According to the Memorandum (supra), for the year ended February 2003, the Securities Regulation

Panel authorised 27 transactions in terms of s 228 and 33 in terms of s 440K. For the year ended February 2004, 17 transactions were authorised in terms of s 228 and 16 in terms of s 440K.

    2174   See s 440A(1)(c). Prior to the 2007 amendment to s 228, s 228(3) provided:'(3) The requirements contained in this section in respect of transactions falling within the provisions of subsection (1), shall be in addition to any other requirements, including the limitation of voting rights, relating to such transactions that may be imposed by the Securities Regulation Panel in terms of section 440C or in terms of any other law.'   The memorandum on the objects of the Companies Amendment Bill 1998 explained this amendment as follows: 

'A company may by ordinary resolution dispose of the whole or substantially the whole of its undertaking or the whole or the greater part of its assets. This leaves the door wide open to abuse in those cases where control (50 plus of shareholding) as well as the voting power is vested in a single shareholder or a small group of shareholders working in concert. The majority shareholders merely outvote the minorities and very often buy the undertaking or assets themselves at a price determined by them. In these cases there are [sic] no minority protection. In the case of share transactions where control of the company changes hands, the Securities Regulation Panel affords the necessary protection to minorities by applying its rules and the Code on Take-over and Mergers'.   This is nonsense, of course. Company law does, and always has, protected minorities from this kind of oppression. Nevertheless, it is perhaps arguable that additional protection is needed. See John Jarvis 'The Protection of Minority Shareholders' (1993) 1 Juta's Business Law 92.

    2175   Ally and Others NNO v Courtesy Wholesalers (Pty) Ltd 1996 (3) SA 134 (N) 145.    2176   See D S Ribbens 'Disposal of the Undertaking or the Whole or Greater Part of Assets of a Company'

(1976) 39 THRHR 162.    2177   1996 (3) SA 134 (N) 145-147.    2178   It is to be noted that the doctrine of unanimous assent has no application to special resolutions, in other

words, the unanimous assent to a resolution is not sufficient to pass a special resolution. See Notes on s 199 under the heading Principle of unanimous assent.

    2179   Section 228(4). So value is not the price which they would fetch in a bona fide sale between a willing buyer and a willing seller, both of whom are reasonably well informed about the transaction and neither of whom is under extraordinary pressure to buy or sell. This is how value was determined for the purposes of s 228 before it was amended (Novick v Comair Holdings 1979 (2) SA 116 (W) 145).

    2180   Linder v National Bakery (Pty) Ltd 1961 (1) SA 372 (O).    2181   Alexander v Standard Merchant Bank Ltd 1978 (4) SA 730 (W).    2182   2010 (1) SA 634 (WCC).    2183   1915 AD 265 at 274.    2184   1978 (4) SA 730 (W).    2185   Under s 252.    2186   Investors Mutual Funds Ltd v Empisal (South Africa) Ltd 1979 (3) SA 170 (W).    2187   6 E&B 327; 119 ER 886.    2188   1986 (4) SA 479 (W).    2189   At 487B-D.    2190   (1987) 50 THRHR at 226.    2191   Michele von Willich 'Die Uitwerking van artikel 228 van die Maatskappywet 61 van 1973 op

die Turquand reël' (1998) Modern Business Law 7.    2192   (1971) 88 SALJ at 351.    2193   1979 TSAR at 169.    2194   1979 (2) SA 116 (W).    2195   2011 (5) SA 1 (SCA).    2196   2004 (2) SA 146 (C). See also FPW Engineering Solution (Pty) Ltd v Technikor Pretoria [2004] 1 All SA 204

(T); Mathebula t/a Nxolwane Bottle Store v University of the North [1998] 3 All SA 477 (T).    2197   At 153-155.    2198   At 155B.    2199   At 155C. He quoted here from Hodes 'Disposal of Assets — s 228' 1978 The South African Company Law

Journal F-6, F-13.    2200   At 155E-F.    2201   At 155E-F. In this regard Cleaver J referred to Lindner v National Bakery (Pty) Ltd and Another 1961 (1)

SA 372 (O) in which the court expressed itself as follows in regard to s 70dec(2) of the previous Act:'On the other hand it is difficult to escape the argument that where the Legislature, in order to achieve its object that the directors shall not sell without the consent of the shareholders, has laid down in clear terms the procedure to be followed when a company seeks to sell its undertaking or the greater part of its assets, that procedure must be followed, even though the consequences of giving effect to the prescribed procedure may be such as to justify the surmise that Parliament did not appreciate the full effect of its pronouncement. See R v Bennett and Co (Pty) Ltd and Another 1941 TPD 194 at 200.' (At 380A-B.)

    2202   1992 TSAR at 545.    2203   At 156B.    2204   At 156B.    2205   1989 (1) SA 797 (A).    2206   1993 (3) SA 597 (A) at 622 in fine 623D.    2207   At 157D.    2208   At 157D.    2209   At 157G-H.    2210   See JL Yeats 'The Drafters' Dilemma: Some Comments on the Corporate Laws Amendment Bill'

(2006) SALJ 601.    2211   At 610.    2212   Yeats, at 611.    2213   See the Notes on s 36 under the heading '(g) Is the Turquand rule applicable to a statutory internal

requirement?'    2214   1986 (4) SA 479 (W).    2215   2004 (2) SA 146 (C).    2216   At 485F.    2217   At 486-487.    2218   Yeats, supra, 613.    2219   See above.    2220   Section 228(1).

    2221   Memorandum on the Objects of the Corporate Laws Amendment Bill, 2006, page 35.    2222   Ibid.    2223   See above.    2224   Memorandum on the Objects of the Corporate Laws Amendment Bill, 2006, page 36.

229  . . .[S. 229 amended by s. 22 of Act 64 of 1977 and repealed by s. 6 of Act 78 of 1989.]

230 to 233 inclusive  . . .[Ss. 230 to 233 inclusive repealed by s. 6 of Act 78 of 1989.]

RS 5, 2008 ch8-p326-9

Interests of Directors and Officers in Contracts (ss 234-241)

234  Duty of director or officer to disclose interest in contracts(1) A director of a company who is in any way, whether directly or indirectly, materially interested in a

contract or proposed contract referred to in subsection (2), which has been or is to be entered into by the company or who so becomes interested in any such contract after it has been entered into, shall declare his interest and full particulars thereof as provided in this Act.

(2) The provisions of subsection (1) shall apply to any contract or proposed contract which is of significance in relation to a company's business and which is entered into or to be entered into—

   (a)   in pursuance of a resolution taken or to be taken at a meeting of directors of a company; orRS 8, 2011 ch8-p327

   (b)   by a director or officer of the company who either alone or together with others has been authorized by the directors of the company to enter into such contract or any contract of a similar nature.

(3) (a) For the purposes of subsection (1) a general notice in writing given to the directors of a company by a director thereof to the effect that he is a member of a specified company or firm and is to be regarded as interested in any contract which may after the date of the notice and before the date of its expiry be made with that company or firm, shall be deemed to be a sufficient declaration of interest in relation to any contract or proposed contract so made or to be made, if —

     (i)   the nature and extent of the interest of the said director in such company or firm is indicated in the said notice; and

    (ii)   at the time the question of confirming or entering into the contract in question is first considered or at the time such director becomes interested in a contract after it has been entered into, the extent of his interest in such company or firm is not greater than is stated in the notice.

(b) A general notice under paragraph (a) may from time to time be amended and shall not be effective beyond the end of the financial year of the company but may from time to time be renewed.

(3A) For the purposes of subsection (3) 'firm' means a corporation as defined in section 1 of the Close Corporations Act, 1984 (Act 69 of 1984), or any other body corporate, association, syndicate, partnership or trust that has as its object the acquisition of gain.

[Sub-s. (3A) inserted by s. 11 of Act 35 of 1998.](4) Any director or officer of a company who fails to comply with any provision of this section, shall be guilty

of an offence.(5) Nothing in this section shall be taken to prejudice the operation of any rule of law restricting directors of

a company from having any interest in contracts with the company.

NotesGeneralAt common law, a director's fiduciary duties require him to disclose his interest in a proposed company contract to the members in general meeting. The general meeting may then permit the board of directors to enter into the contract. It may also permit the interested director to be counted in the quorum and may even permit the him to vote on the matter. If the interested director does not disclose his interest and the directors enter into the contract, the contract is voidable at the instance of the company as against the interested director and, where the other party to the contract is a third party, against the third party if the third party had knowledge of the director's breach of duty. This consequence follows even where the interested director did not vote on the matter or attend the meeting of the board. 2225

RS 8, 2011 ch8-p328

However, at common law the company may, in its articles of association, alter this duty. For example, it may permit disclosure to the board of directors rather than to the general meeting; and it may even permit the interested director to vote on the contract. 2226 Because of the inconvenience involved in making disclosure to the general meeting, the articles of companies usually contain some such provision. 2227Section s 149 of the English Companies Act 1929 introduced the statutory requirement of disclosure in order to ensure that at least the prescribed disclosure is made, ie regardless of the extent to which the company's articles relieved the directors of the company of their common law duties. The section rendered a director who failed to comply with its provisions liable to a fine. It expressly left untouched the common law by providing that nothing in the section was to be taken to prejudice the operation of any rule of law restricting directors of the company from having any interest in contract with the company (the corresponding provisions in our Act are ss 245(5) and 237(4)). This remains the position under s 317 of the English Companies Act 1985.

In 1939 a similar provision was inserted as s 70 quin in our 1926 Companies Act, on the recommendation of the Lansdown Commission. 2228 The Commission said 2229 that instances had been brought to its notice in which memoranda or articles of association contained provisions expressly permitting any director to be interested in a contract with a company otherwise than as a member of the company, and purporting expressly to relieve such director of any obligation to disclose any such interest or to account for same in any way to the company and disentitling any member of the company from impugning the conduct of any such director in that regard. The Committee recognised that it would not be practical to prohibit a director absolutely from having any interest in a contract or proposed contract with his company. But it considered that there should be an explicit provision forbidding any such freedom from disclosure as the memoranda and articles, to which it had referred, had purported to convey. It considered that, as in England, the disclosure of the interest should be made to a meeting of directors, but that, in addition, where any contract was to be brought up at a meeting of the company for authorisation or confirmation, the notice convening the meeting should include information as to the extent and nature of the interest of any director in the contract. 2230

Generally, ss 234-241 show the importance that the legislature attaches to the principle that a company should be protected against a director who has a conflict of interest and duty. 2231 Their object is to ensure that the interest of any director in any actual

RS 9, 2012 ch8-p329

or proposed contract is made an item of business at a meeting of the directors. 2232 But because a breach of these provisions carries with it penal consequences, they must not be read in a sense which lays down more strict or onerous requirements than are necessarily imposed by the language. 2233

Overview of ss 234-241Section 234(1) requires that a director who is in any way, whether directly or indirectly, materially interested in a contract or proposed contract referred to in s 234(2), 'shall declare his interest and full particulars thereof as provided in this Act'. This provision, then, applies to all directors regardless of whether or not they act (or acted) on behalf of the company in connection with the contract. Section 234(3)(a) provides for a manner of disclosure where the director is a member of a specified company or firm and is to be regarded as interested in any contract to be made with that company or firm. All other declarations of interest must be made in the manner and at the time prescribed in s 235.

Section 234(3A) provides that for the purposes sub-s (3) 'firm' means a corporation as defined in s 1 of the Close Corporations Act 69 of 1984, or any other body corporate, association, syndicate, partnership or trust that has as its object the acquisition of gain. As to the meaning of 'body corporate' see notes on s 337. As to a body corporate, association, syndicate, partnership or trust that 'has for its object the acquisition of gain' see notes on s 30.

Section 236 provides that, notwithstanding that the articles permit resolutions of the directors to take the form of written resolutions signed by each director, any such resolution concerning a contract referred to in s 234 is invalid unless the provisions of ss 234 and 235 are complied with.

Section 237(1) provides that an officer who is materially interested in any proposed contract which he has been authorised by the board to enter into on behalf of the company must (as must a director who is so authorised) declare his interest in terms of s 235; and that such a director or officer must make that disclosure before entering into the contract. And s 237(2) provides for disclosure by such officer who becomes interested in such a contract after he has entered into it on behalf of the company (such disclosure by a director is covered by the disclosure requirements of s 234).

Section 238 requires full particulars of director's material interest in a contract to be contained in the notice convening a general meeting of the company where the contract in question is to be placed before the general meeting for its confirmation or authorisation.

Section 239 provides for the minuting of declarations of interest. Section 240 imposes a duty on the company to keep a register of declared interests in contracts, and s 241 imposes a duty on the company's auditor to satisfy himself that that register is being kept as required by s 240.

Failure to comply with the declaration of interest provisions is an offence. The offences in ss 234(4) and 237(4) are punishable by a fine or imprisonment for a period not exceeding one year, or both such fine and such imprisonment. 2234

RS 9, 2012 ch8-p330

Sections 234(5) and 237(4) both provide that nothing in ss 234 and 237 respectively is to be taken to prejudice the operation of any rule of law restricting directors (s 234) or an officer (s 237) of a company from having an interest in contracts with the company.

In S v Gardener and Another 2011 (4) SA 79 (SCA), two chief executive officers of a company had failed to disclose their financial interests, contrary to the requirements of s 234. Failure to comply with the section constituted a criminal offence. They were convicted of criminal fraud, on the basis that by deliberately withholding information that is material to the company with intent to deceive the board of directors of the company they had caused prejujdice to the company. They had also secured substantial financial benefits for themselves from their deliberate failure to disclose their interests.Operation of rules of law restricting directors from having interest in contracts not prejudicedSection 234(5) provides that nothing in s 234 is to be taken to prejudice the operation of any rule of law restricting directors from having any interest in contracts with the company. Thus compliance with these statutory provisions has no validating effect; and therefore, notwithstanding compliance with the provisions, in the absence of an exclusion clause in the articles, 2235 the common law rules as to voidability apply.2236 What is more, non-compliance with the provisions does not as such render the contract void or voidable at the instance of the company. 2237 Again, the question whether the contract is

RS 9, 2012 ch8-p330-1

voidable at the instance of the company depends upon the common law rules as to voidability or any exclusion clause in the company's articles. 2238 Thus where disclosure is

OS, 2002 ch8-p331

made to the general meeting (as is required at common law), 2239  the contract will not be void, even though there has been no statutory disclosure. So, too, where (what would be unusual) 2240  an article makes exclusion of the general equitable principle independent of the statutory requirements of disclosure to the board, the contract will not be voidable if the articles is observed, despite failure to make the statutory disclosure.  

    2225   See note CONFLICT OF INTEREST AND DUTY in note on FIDUCIARY DUTIES under s 208.    2226   Where the articles permit a director to have an interest subject to the directors' approval, he cannot vote

as a director on a resolution to approve the contract unless the articles permit him to do so. See Gundelfinger v African Textile Manufacturers Ltd 1939 AD 314 323; Trek Tyres Ltd v Beukes 1957 (3) SA 306 (W) 310; Ben-Tovim v Ben-Tovim 2001 (3) SA 1074 (C) 1089.

    2227   See art 76 of Table A and art 74 of Table B.    2228   Report of the Company Law Commission 19325-1936 UG No 45 1936.    2229   Report of the Company Law Commission 19325-1936 UG No 45 1936 para 137.

    2230   In 1952 (s 48 of Act 46 of 1952) a recast and strengthened s 70 quin was substituted for the section as originally enacted. The present provisions in ss 234-241 where enacted on the recommendation of the Van Wyk de Vries Commission (Commission of Enquiry into the Companies Act Main Report RP 45/1970 para 44.29-44.35).

    2231   Per Lord Templeman in Guinness plc v Saunders [1990] 2 AC 663 694; [1990] 1 All ER 652 662 (HL); Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald [1995] 3 All ER 811 817. On the statutory duty of disclosure, see: S J Naudé 'Kontraksluiting tussen Direkteur en Maatskappy' (1970) 33 THRHR 142; M J Oosthuizen 'Novick and Another Ltd v Comair Holdings Ltd' 1979 TSAR 169; Gerard McCormack 'The Guinness Saga: In Tom We Trust' (1991) 12 Company Lawyer 90; Richard Nolan 'Disclosure of Directors' Interests' (1995) 16 Company Lawyer 216.

    2232   Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald [1995] 3 All ER 811 817.    2233   Novick v Comair Holdings Ltd 1979 (2) SA 116 (W) 139.    2234   s 441(1)(e).    2235   Article 76 of Table A and art 74 of Table B provide that subject to the provisions of ss 234-241 (ie all the

provisions relating to statutory disclosure) a director may not vote in respect of any contract with the company in which he is interested and, if he does so vote, his vote is not to be counted.

    2236   As to the common law rules, see notes on s 208.    2237   Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549; [1967] 2 All ER 14; affd [1968] 1 QB 549; [1967] 3 All

ER 98 (CA). In the Court of Appeal ([1968] 1 QB 549 594; [1967] 3 All ER 98 109 (CA)) Lord Pearson said: 'It is not contended that [the section] in itself affects the contract. The section merely creates a statutory duty of disclosure and imposes a fine for non-compliance.' See also the judgment of Lord Wilberforce (at 589; at 106). In Guinness plc v Saunders [1990] 2 Ch 663 694; [1990] 1 All ER 652 662 (HL) Lord Templeman said in an obiter dictum that: 'In Hely-Hutchinson v Brayhead Ltd the Court of Appeal held that [the section] renders the contract voidable by a company if the director does not declare his interest.' But that is not what the Court of Appeal held in Hely-Hutchinson v Brayhead Ltd supra: see Woolworths Ltd v Kelly (1991) 4 ACSR 432 440-441 CA(NSW). In Guinness plc v Saunders supra Lord Goff held that of itself the section merely has criminal consequences. Referring to Hely-Hutchinson v Brayhead, he said (at 697; at 664): 'It gradually became clear that counsel's criticisms of the decision of the courts below [see Guinness v Saunders [1988] 2 All ER 940 (CA)] were well founded, and that (quite apart from very serious difficulties arising on the construction of [the section]) they were inconsistent with Hely-Hutchinson v Brayhead, a decision of an exceptional Court of Appeal consisting of Lord Denning MR, Lord Wilberforce and Lord Pearson. The decision in that case proceeded on the basis that the statutory duty of disclosure (then embodied in s 199 of the Companies Act 1948) did not of itself affect the validity of the contract. The section had however to be read with the provisions in the articles of association, imposing a duty of disclosure on directors of the company. If a director enters into, or is interested in, a contract with the company, but fails to declare his interest, the effect is that, under the ordinary principles of law and equity, the contract may be voidable at the instance of the company, and in certain cases a director may be called on to account for profits made from the transaction.' In Lee Panavision Ltd v Lee Lighting Ltd [1992] BCLC 22 (CA) the Court of Appeal referred to the divergent views, but declined to express an opinion of the matter. And see also Runciman v Walter Runciman plc [1992] BCLC 1084; MacPherson v European Strategic Bureau Ltd [1999] 2 BCLC 203 216-219. However, in Cowan de Groot Properties Ltd v Eagle Trust plc [1992] 4 All ER 700 762 Knox J held: 'It is in my judgment clear on the authority of Hely-Hutchinson v Brayhead Ltd as approved by Lord Goff in Guinness plc v Saunders that the statutory duty of disclosure under s 317 of the Companies Act 1985 or under its predecessor s 199 of the Companies Act 1948, does not affect the validity of a contract. That however leaves the ordinary principles of law and equity which, unless excluded by the relevant articles of association, have the result that, if the director enters into or is interested in a contract, the contract may be voidable at the instance of the company.'

    2238   Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549; [1967] 2 All ER 14; affd [1968] 1 QB 549; [1967] 3 All ER 98 (CA); Guinness plc v Saunders [1990] 2 Ch 663; [1990] 1 All ER 652 (HL).

    2239   See notes Self-Dealing and Disclosure of Interest in note CONFLICT OF INTEREST AND DUTY in notes on s 208.

    2240   See art 76 of Table A and art 74 of Table B.

235  Manner of and time for declaration of interest(1) No declaration of interest by a director under section 234 shall be of any effect unless it is made at or

before the meeting of directors at which the question of confirming or entering into the contract is first taken into consideration and, if in writing, is read out to the meeting or each director present states in writing that he has read such declaration.

(2) If for any reason it is not possible for a director to make any such declaration at or before a particular meeting of directors, he may make it at the first meeting of directors held thereafter at which it is possible for him to do so and shall in that event state the reason why it was not possible to make it at such particular meeting.

NotesWhere disclosure must be made to a meeting of directors, it must be made to a meeting of the board of directors, and therefore the requirements of the legislation cannot be satisfied by a disclosure to a sub-committee of the directors.2241  Nothing in the articles can alter this requirement, for it is a statutory requirement and its provisions are mandatory.2242  Such declaration does not have to be in any particular form, and where not in writing an audible utterance by the director or officer concerned of the relevant

facts is not the only way in which the disclosure may be made.2243  Thus disclosure may be made by an agent.2244  One of the ways in which it may be made is by tacit assent to and adoption of the assertions made at the meeting by others; and therefore, where the meeting is informed by others of all the facts that it needs to know about the director's interest, the director's silence may effectively furnish his confirmation of those facts.2245  But a specific declaration of interest must be made; it is not enough that all the other directors know of the interest.2246

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However self-evident the director's interest in such contract may be, the mere obviousness of a director's interest in a particular contract is no reason for non-compliance with the requirements of the section.2247  Thus the required declaration must be made in regard to service contracts, 2248  and to variations of such contracts 2249  (a variation of a contract being itself a contract).2250

A duty 'to declare the nature of his interest' imposes on a director the duty to disclose full information about the nature of any transaction which it is proposed to enter into, which disclosure must be such that the other director or directors can see what this interest is and how far it goes.2251  The requirement is for full and frank declaration by the director, not of 'an interest', but of the precise nature of the interest he holds; and when his claim to the validity of a contract or arrangement depends upon it (ie where the articles require disclosure in terms of the sections), he must show that he has in letter and in spirit complied with the section and any article to like effect.2252

It has been held that where a director is interested in a contract, the statutory disclosure provisions secure that three things happen at a directors meeting. First, all the directors should know or be reminded of the interest; second, the making of the declaration should be the occasion for a statutory pause for thought about the existence of the conflict of interest and of their duty to prefer the interests of the company to their own; third, the disclosure or reminder must be a distinct happening at the meeting which therefore must be recorded in the minutes of the meeting. The existence of this record operates as a necessary caution to directors who might otherwise think that their interest might pass unnoticed if the contract falls to be scrutinised at some later date; and it affords valuable information as to the existence of any interest and its disclosure and, thereby, protection for shareholders and creditors alike in case they later wish to investigate a contract.2253

It has been held that, in the context of legislation which specifically authorises sole directorships, the legislature cannot have intended by use of the word 'meeting' in the sections to exclude sole directors from their ambit, and hence from the achievement of the statutory object; and that this conclusion is reinforced by the consideration that the concept of the holding of a director's meeting in case of a sole directorship is familiar to

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company lawyers. 2254 Indeed, both the fact that the making of the declaration should be the occasion at the meeting for a statutory pause for thought by the directors (about the existence of the conflict of interest and their duty to prefer the interests of the company to their own) and the requirement that the declaration be recorded, must have enhanced value and importance in case of a sole director, where there are no other directors to witness or police his actions. 2255 In the case of a sole director, two different situations may arise. The sole director may hold a meeting attended by himself alone or he may hold a meeting attended by someone else, normally the company secretary. When holding the meeting on his own, he must still make the declaration to himself and have the statutory pause for thought, though it may be that the declaration does not have to be made out loud, and he must record that he made the declaration in the minutes. The court may well find it difficult to accept that the declaration has been made if it is not so recorded. If the meeting is attended by anyone else, the declaration must be made out loud and in the hearing of those attending, and again should be recorded. In this case, if it is proved that the declaration was made, the fact that the minutes do not record the making of the declaration will not preclude proof of its making. In either situation the language of the section must be given full effect: there must be the required declaration of the interest. 2256

Since the sections neither permit or prohibit a director from voting on the matter, 2257 it follows that the interested director cannot himself vote on the

contract, 2258 unless permitted to do so by the company's articles. 2259 Table A art 76 and Table B art 74 (art 74 does not apply where the company has only one director) provide that subject to the provisions of ss 234-241 (ie all the provisions relating to statutory disclosure) a director may not vote in respect of any contract with the company in which he is interested and, if he does so vote, his vote is not to be counted. These articles accordingly permit disclosure of interests in contracts to the board, as provided for by s 235-241, and so alter the common law rule requiring disclosure to the general meeting. 2260 But they expressly provide that the interested director may not vote on the matter.

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    2241   Guinness plc v Saunders [1988] 2 All ER 940 944 (CA); affd on other grounds, [1990] 2 Ch 663; [1990] 1 All ER 652 (HL).

    2242   Guinness plc v Saunders [1988] 2 All ER 940 994 (CA); affd on other grounds, [1990] 2 Ch 663; [1990] 1 All ER 652 (HL).

    2243   Novick v Comair Holdings Ltd 1979 (2) SA 116 (W) 138.    2244   Novick v Comair Holdings Ltd 1979 (2) SA 116 (W) 139, where it was also said that disclosure can be

conveyed to a responsible officer of the company who can be expected in the discharge of his duties to pass it on to the board; and that substantial, if not literal, compliance with the requirements of ss 234-235 will suffice.

    2245   Novick v Comair Holdings Ltd 1979 (2) SA 116 (W) 138.    2246   Guinness plc v Saunders [1988] 2 All ER 940 944 (CA); Runciman v Walter Runciman plc [1992] BCLC

1084 1094-1096. And see Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald [1995] 3 All ER 811 819. But see Lee Panavision Ltd v Lee Lighting Ltd [1992] BCLC 22 32-33 (CA), where the directors had failed to disclose formally at a board meeting an interest common to all of them (and which, ex hypothesi, was already known to all the directors), and where Dillon LJ said that he would 'hesitate' to hold that such an apparently technical non-declaration of interest in breach of s 317 of the English Companies Act 1985 had the inevitable results that the agreement in question was fundamentally flawed (he however left open the question whether non-disclosure under the section does affect the validity of the transaction).

    2247   Runciman v Walter Runciman plc [1992] BCLC 1084 1093-1094. The legislation does not require 'disclosure' of interest (which presupposes that the persons to whom the disclosure is made do not already know the facts), but a 'declaration' of interest. Cf judgments of Samuels and Mahoney JJA in Woolworths Ltd v Kelly (1991) 4 ACSR 431 CA(NSW), who held that no formal declaration of a director's interest is required, and that the section does not require disclosure of facts to those who are fully aware of them. But see judgment of Kirby P (at 434-432) where the learned judge set out what he considered to be the 'rationale of formality in the declaration'.

    2248   Foster v Foster [1916] 1 Ch 532; [1916-1917] All ER Rep 856; Runciman v Walter Runciman plc [1992] BCLC 1084 1093-1094, where it was pointed out that to exclude service contracts from the ambit of the legislation would involve ridiculous and pointless distinctions being drawn, (a) between the employed and self-employed director, and (b) between benefits given to a director as part of his contract of employment and those given separately.

    2249   Runciman v Walter Runciman plc [1992] BCLC 1084 1094.    2250   Runciman v Walter Runciman plc [1992] BCLC 1084 1094. See also Woolworths Ltd v Kelly (1991) 4 ACSR

431 CA(NSW).    2251   Movitex Ltd v Bulfield [1988] BCLC 104 121.    2252   Liquidator of Imperial Mercantile Credit Association v Coleman (1873) LR 6 HL 189 205; Neptune (Vehicle

Washing Equipment) Ltd v Fitzgerald [1995] 3 All ER 811 817.    2253   Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald [1995] 3 All ER 811 817-818.    2254   Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald [1995] 3 All ER 811 816-817, where Lightman J

rejected the argument that 'meeting' prima facie means 'a coming together of more than one person' ( East v Bennett Bros Ltd[1911] 1 Ch 163 and Re London Flats Ltd [1969] 2 All ER 744) and that, accordingly, in the case of a sole director there can be no meeting of directors at which the sole director can declare his interest in a proposed contract — and therefore the decision whether the company should enter into the contract must be left to the shareholders.

    2255   Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald [1995] 3 All ER 811 817-818.    2256   Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald [1995] 3 All ER 811 818-819.    2257   In England, the Cohen Committee considered whether directors should be prohibited from voting at

board meetings on contracts in which they are interested. It concluded that a general prohibition would be impracticable. Instead, it recommend that directors should as a general rule disclose to their shareholders in the directors' report, contracts of any magnitude in which any of the board have a substantial interest. Report of the Committee on Company Law Amendment Cmnd 6659 (1945) para 95.

    2258   The rule against self-dealing; as to which see notes Self-Dealing and Disclosure of interest in note CONFLICT OF INTEREST AND DUTY in notes on s 208.

    2259    eg in Rolled Steel Products Ltd v British Steel Products [1982] Ch 478; [1982] 3 All ER 1060 1061; [1986] Ch 246; [1985] 3 All ER 52 57 (CA) the articles provided that: 'Provided the director declares his interest in a contract or arrangement or proposed contract or arrangement with the company in manner provided by section 199 of the [Companies Act 1948] he shall be counted in the quorum at any meeting of directors at which the same is considered and shall be entitled to vote as a director in respect thereof'.

    2260   See Transcash SWD (Pty) Ltd v Smith 1994 (2) SA 295 (C) 306. See notes Self-Dealing and Disclosure of interest in note CONFLICT OF INTEREST AND DUTY in notes on s 208.

236  Written resolution where director interestedSubject to the provisions of section 36 and notwithstanding any provision in the articles of a company permitting the taking of a resolution by way of a written resolution signed by directors, no such resolution which concerns contracts or proposed contracts referred to in section 234 shall be valid unless the provisions of that section and section 235 are complied with.

NotesSection 236 renders invalid a 'resolution by way of a written resolution signed by directors' unless the provisions of s 234 and 235 are complied with. The articles of companies frequently dispense with the need to hold a meeting by providing that a resolution in writing, signed by all the directors, will be valid and effectual as if it had been passed at a meeting of the directors duly convened and held. 2261 As to such provisions, see notes on s 242. Where the interest arises only after a contract has been entered into, the resolution authorising it will be a dead letter, and hence the question of possible retrospective invalidity will not arise.

Section 36 operates only to save acts of a company that are beyond its objects and powers from being rendered void by reason of the company's lack of capacity or power, or the directors' lack of authority in so far as they lack authority by reason of the company's lack the capacity or power to perform such acts. Therefore s 36 has no relevance in so far as s 226 is concerned, and hence there is no reason why s 236 should be made 'subject to the provisions of s 36'. The protection afforded third parties in the case of invalidity under s 236 is that afforded by the rule in Royal British Bank v Turquand, 2262 and the rules in regard to estoppel.  

    2261   See art 76 of Table B, which provides that '[s]ubject to the provisions of the Act, a resolution in writing signed by all the directors shall be as valid and effectual as if it had been passed at a meeting of directors duly convened and held'. Table A contains no such provision.

    2262   (1855) 5 E & B 248; affd (1856) 6 E & B 327; [1843-60] All ER Rep 435.

237  Disclosure by interested director or officer acting for company(1) A director or officer referred to in section 234(2)(b) who is in any way, whether directly or indirectly,

materially interested in any proposed contract to be entered into by him on behalf of the company, shall, before entering into such contract, declare his interest and the full particulars thereof at a meeting of directors as prescribed by section 235, and shall not enter into such contract unless and until a resolution has been passed by the directors approving thereof.

(2) Any such officer who becomes materially interested in any contract entered into by him on behalf of the company after it was entered into, shall forthwith declare his interest and the full particulars thereof by a written notice given to the directors.

(3) A notice referred to in subsection (2) may be delivered to the secretary of the company, if the company has a secretary, and the secretary shall forthwith transmit it to the directors for whom it is intended.

(4) Nothing in this section shall be taken to prejudice the operation of any rule of law restricting an officer of a company from having an interest in contracts with the company.

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(5) Any director or officer of a company who fails to comply with any provision of this section, shall be guilty of an offence.

NotesA director or officer referred to in s 234(2)(b) is 'a director or officer of the company who either alone or together with others has been authorised by the directors of the company to enter into such contract or any contract of a similar nature'. 'Such contract' is 'any contract or proposed contract which is of significance in relation to a company's business'. In it is unclear what 'any contract of a similar nature' is.

In terms of s 234(1), a director of the company who is in any way, whether directly or indirectly, materially interested in such a contract or proposed contract, or who so becomes interested in it after it has been entered into, is required to declare his interest and full particulars thereof as provided in the Act, and s 235 provides for the manner and time for such a declaration of interest. Thus, as far as a director is concerned, s 237(1) does not impose a duty of disclosure — it merely refers to his duty to disclose under s 234. But it does impose a duty upon him to declare his interest before entering into the contract and a duty not to enter into the contract 'unless and until a resolution has been passed by the directors approving thereof'.

Section 237 does however impose a duty to disclose interests in contracts on the officer of a company (s 234(1) deals only with directors). An officer who either alone or together with others has been authorised by the directors of the company to enter into such a contract at a meeting of directors as prescribed by s 235 must, before entering into the contract, declare his interest at a meeting of directors; and he may not enter into the contract unless and until a resolution has been passed by the directors approving it. If he subsequently becomes interested in a contract entered into by him, he must forthwith declare his interest and the full particulars thereof by a written notice given to the directors.

Section 237(4) provides that nothing in s 237 is to be taken to prejudice the operation of any rule of law 'restricting an officer of a company' from having an interest in contracts with the company. Section 234(5) contains identical provisions in regard to the operation of s 234 in regard to directors, as to which see notes on s 234. An officer of a company stands in a fiduciary relationship to his company. 2263 In any event, an officer of a company who is authorised to enter into a contract on behalf of the company is an agent of the company, and, for that reason alone, stands in a fiduciary relationship to it. As a fiduciary, an officer is under a duty at common law to disclose to the company his interest in any contract that he enters into on behalf of the company. Such disclosure must be made to the board of directors. Failure to make such disclosure will render the contract voidable as against the officer and as against a third party who had knowledge of the officer's breach of duty, ie his failure to disclose his interest.

The offence in s 237(5) is punishable by a fine or imprisonment for a period not exceeding one year or both such fine and such imprisonment. 2264

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    2263   See note FIDUCIARYDUTIES in notes on s 208.    2264   Section 441(1)(e).

238  When particulars of interest to be stated in notice of meeting(1) If a director of a company is in any way, whether directly or indirectly, materially interested in a contract

or proposed contract which is placed before the company at any meeting thereof for confirmation or authorisation, the notice convening any such meeting shall state the full particulars of the interest in such contract of the director concerned.

(2) A company which fails to comply with the provisions of subsection (1) and any director who is a party to such failure, shall be guilty of an offence.

NotesSection 238 requires disclosure of a director's interest in contracts of the company to be stated in the notice convening a general meeting where the contract is placed before the company in general meeting for confirmation or authorisation. This disclosure is in addition to the disclosure to the board required by s 234 and (where applicable) fulfilment of the requirements of s 337.

The articles of the company may require certain contracts to be placed before the general meeting for confirmation or authorisation. In addition, a number of provisions of the Act require this, for example, s 228. At common law, a director must disclose his interest to the members in general meeting, and the members may then authorise the directors to enter into the contract. Therefore, it would seem the provisions of s 238 apply where such a disclosure is made, although of course it will in any event be necessary for the notice convening the general meeting to contain this information. Failure to comply with s 238 is a criminal offence. Where the articles of the company do not permit disclosure to the board, and the common law therefore applies, failure to make disclosure to the general meeting will render the contracts voidable at the instance of the company as against the director concerned and against a third party with knowledge of the director's breach of duty. Unlike s 234, s 238 does not require that the contract be of 'significance in relation to a company's business'. The common law duty of disclosure has no such limitation.

The offence in s 238(2) is punishable by a fine or imprisonment not exceeding one year, or both the fine and imprisonment. 2265

  

    2265   Section 441(1)(e).

239  Minuting of declarations of interest(1) Every declaration of interest made under section 234, 235 or 237 (1) shall be recorded in the minutes of

the meeting of directors at which the declaration is made, and any declaration of interest by an officer under section 237 (2) shall be recorded in the minutes of the first meeting of directors held after the date of that declaration.

(2) Where any such declaration is made in writing, the company shall, unless copies of the minutes are circulated to the directors, cause the minute recording the declaration to be read out at the first meeting of directors held after the meeting in the minutes of which the declaration was recorded.

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(3) Any company which fails to comply with any provision of this section, shall be guilty of an offence.

NotesThe declaration of interest under s 234 is the general notice given by a director under s 234(3); under s 235 it is the declaration of interest of the director to meetings of directors; and under s 237(1) it is the declaration of interests by a director or officer (as prescribed in s 235) before entering into a contract on behalf of the company. The declaration of interests under s 237(2) is the written declaration of interests given by an officer who, after entering into a contract on behalf of the company, becomes materially interested in the contract.

Any company which fails to comply with any of these provisions is, in terms of s 239(3) guilty of an offence, which offence is punishable by a fine.2266  But failure to record the declaration (if made) does not preclude proof that the declaration was made and that the statutory provisions were complied with.2267

  

    2266   s 441(1)(i).    2267   See Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald [1995] 3 All ER 811 817 818-819. And see s

242(4).

240  Register of interests in contracts of directors and officers and inspection thereof

(1) Every company shall keep at its registered office or at the office where it is made up a register of interests in contracts in one of the official languages of the Republic, and shall enter therein the particulars of any declarations of interest made under section 234, 235 or 237, including any amendments under section 234(3)(b).

(2) The provisions of section 110 as to the place where the register of members of a company shall be kept and of section 113 as to the inspection of and copies of or extracts from that register, shall apply mutatis mutandis to the register to be kept under this section.

NotesSection 110 requires the company's register of members to be kept either at its registered office or (on notification to the Registrar in the prescribed form) at any office of the company within the Republic where the work of making it up is done.

Section 70 quin2268  of the Companies Act 46 of 1926 required that, unless the members decided otherwise by special resolution, a return had to be placed before every annual general meeting specifying the contracts entered into by the company since the previous general meeting in respect of which a declaration of interest had been made. The Van Wyk de Vries Commission considered this to be unsatisfactory: inspection of the return at the general meeting as impracticable, and it had become the general practice to waive the requirement by passing a special resolution. Believing that there should be a 'full accounting to the members of these matters', the Commission recommend that, instead,

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every company should be required to keep an up to date register of contracts in respect of which a declaration of interest had been made by any director.2269

 

     2268   As substituted by s 48 of Act 46 of 1952.    2269   Commission of Enquiry into the Companies Act Main Report RP 45/1970 para 44.29-44.35

241  Duty of auditor as to register of interests in contractsThe auditor of any company shall satisfy himself that the register of interests in contracts has been kept as required by section 240 and that every declaration of interest recorded therein has been minuted as required by section 239.

NotesSee also s 300(d), which provides that it is the duty of the auditor to satisfy himself that a register of interests in contracts as required by s 240 has been kept and that the entries therein are in accord with the minutes of the directors' meetings.

Proceedings at Meetings of Directors (ss 242-246)

242  Keeping of minutes of directors' and managers' meetings(1) The directors of a company shall cause minutes in one of the official languages of the Republic of all

proceedings of meetings of directors or managers to be entered in one or more books to be kept for that purpose at the registered office of the company or at the office where such minutes are made up.

(2) Any resolution of directors or managers of a company in the form of a written resolution signed by the directors or managers shall be deemed to be a minute of a meeting and shall be entered in the book or books provided for in subsection (1) and be noted by the next following meeting of directors or managers.

(3) For the purposes of this section loose leaves of paper shall not be deemed to constitute a minute book unless they are bound together permanently without means provided for the withdrawal or insertion of leaves, and the pages or leaves are consecutively numbered.

(4) The minutes of any meeting of the directors or managers of a company purporting to be signed by the chairman of that meeting or by the chairman of the next succeeding meeting shall be evidence of the proceedings at that meeting.

(5) If default is made in complying with any requirement of subsection (1), (2) or (3), the company, and any director, manager or officer of the company who knowingly is a party to the default, shall be guilty of an offence.

NotesMinutes of meetingsIt is the duty of the secretary to ensure that minutes of all directors' meetings and meetings of committees of the directors are properly recorded in accordance with s 242.2270

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Section 246 imposes a duty on the auditor of a company to satisfy himself that a minute book or books are kept by the company in the prescribed form.

The offence in s 242(5) is punishable by a fine or imprisonment not exceeding three months, or both the fine and imprisonment.2271

Section 243 provides that where minutes are kept in accordance with s 242, the meeting is deemed to have be duly held and convened and all proceedings at it 'duly had', until the contrary is proved. Failure to record a resolution does not render it invalid, and an unrecorded resolution may always be proved aliunde.2272

In Re Portuguese Consolidated Copper Mines Ltd2273  a meeting of directors of the company purported to allot shares. The allotment was void, as notice had not been sent to all directors. One of the grounds on which it was held that the allotment had been ratified was that the minutes of the invalid meeting had been subsequently signed at an indisputably valid meeting, ie the signing of the minutes of the invalidly convened meeting of the board amounted to a ratification of the resolution. In Municipal Mutual Insurance Ltd v Harrop, 2274  Rimer J held accordingly, that is to say, he held that the signing of the minutes of an invalid meeting at a later validly convened board meeting amounted to a ratification of resolutions passed at the invalid meeting; by authorising the minutes to be signed, the directors impliedly resolved to lend the authority of the board to the resolutions whether or not they had been validly passed at the earlier meeting. He, however, went on to say: 'If I had been required to rule on that submission

unaided by authority, I think my inclination would have been against it. For example, I should have thought that there was much to be said for the view that, when a board meeting approves the minutes of a prior board meeting and authorises the chairman to sign them, all that it is doing is providing the board's confirmation that the minutes represent a true record of what happened at the prior meeting. Resolutions purportedly passed at that meeting will be valid or void, depending on the facts surrounding them; but assuming them to be invalid, I find it in principle quite difficult to see that the board's subsequent approval of the minutes purporting to record such void resolutions could somehow impliedly validate them. My inclination would be that any such ratification would have to be subject to an express resolution to that effect.' 2275

Meetings of directorsUnless the company's articles otherwise provide, and save in the case of a private company with only one director 2276  or where all the directors consent to what is done, 2277

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directors can act only by means of a properly passed resolution at a properly convened 2278  meeting of the board of directors from which no director has been excluded 2279  and at which a quorum is present.2280  Failure so to act renders their decision invalid, 2281  except as regards strangers who contract with the company without notice of the defect.2282

Unless the articles otherwise provide, the members of the board must meet in person; proxy attendance is not recognised.2283  In art 75 of Table A and art 73 of Table B it is provided that the directors 'may meet together' for the despatch of business. Whether this permits directors' meetings to take place telephonically is a matter of interpretation of these words. While orthodox rules of construction require that the words of the articles be given the meaning they had when adopted, the courts are entitled to recognise that articles of association are instruments of company governance intended to endure and to be capable of operating with flexibility in changing circumstances.2284  The purpose of the requirement that directors meet together is to ensure that they are able to deliberate together concerning the affairs of the company and resolve upon action to be taken. Deliberation in this sense involves that each director: (a) is able to know of the matters of fact and opinion articulated by all other directors participating in the meeting; and (b) is free to seek to persuade those other directors to particular views in regard to the matters properly before the meeting.2285  Cases may arise in which physical presence in the same room will not necessarily satisfy this purpose and when other arrangements may do so, eg where a large number of directors meet in a room with poor acoustics, a director with a limited hearing capacity may, without the assistance of some electronic device, find it difficult or impossible to take part in directors' deliberations.2286  The words 'meeting together' when ordinarily used in regard to a meeting of directors connote a meeting of minds made possible either by physical proximity or by technology. Thus, provided that each participating director is able to be aware of the contributions to the meeting made by each other director and to contribute himself to the meeting without significant

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impediment, directors can, generally speaking, meet together by video links or by using telephone conference connections. 2287 Generally, reasoning by analogy, a meeting of two directors can be held using an ordinary telephone connection. 2288

The articles usually provide that the directors may regulate their meetings as they think fit. 2289 They usually also provide for the election of a chairman; 2290 empower the directors to determine the period for which the chairman is to hold office; and provide that, if no chairman is elected or if at any meeting the chairman is not present within five minutes after the appointed time for holding the meeting, the directors may elect one of their number to be chairman of the meeting. 2291 Questions arising at any meeting must be decided by resolutions 2292 passed by a majority of votes. 2293 The articles usually provide that in the event of an equality of votes the chairman will have a second or casting vote. 2294 There is, however, no right to a casting vote at common law. 2295 Directors each have one vote, unless the articles otherwise provide. 2296

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Although it is usual to follow the order of the agenda, directors can deal with matters on the agenda in such order as they deem fit. 2297 When entitled to vote on a matter, a director may not be prevented from doing so by his co-directors. 2298 In Choudhury v Bhattar2299 the court, following Pulbrook v Richmond Consolidated Mining Co2300 ruled that a director is entitled to bring an action in his own name against the other directors if he was wrongfully excluded from acting as director, and that included an injunction or an interdict to restrain his exclusion. Furthermore, a director is entitled to all relevant information, time to consider the matter, and an opportunity of stating his views, even though he may ultimately have to submit to a majority decision. 2301 If he is prevented from voting or his claim to be heard is brushed aside, the resolution is invalid. 2302 But a resolution of the board is not invalid merely because every director did not make himself aware of all the details of the matter. 2303 Concurrence with a resolution must, however, be expressed by a director in that capacity and for the purpose of resolving, as a director, upon the affairs of the company. 2304

Unless permitted to do so by the articles, a director may not vote on any contract in which he has an interest. 2305 The articles usually specifically provide that a director may not vote on such a contract and that, if he does, his vote shall not be counted. 2306 Where the articles do not permit a director to vote on such a contract, the remaining directors, unless authorised to do so by the articles or the general meeting, cannot act in the matter, ie it must be dealt with by the members in general meeting. 2307

Although in the case of closely held companies much latitude is given to directors in regard to the formalities that should attend their meetings, 2308 there must be an intention that the occasion be a directors' meeting, an awareness by the persons present that they

RS 6, 2009 ch8-p342-1

are concurring, in their capacity as directors in the management of the affairs of the company, and a demonstrable expression of will approving a resolution. 2309

The articles invariably of a private company frequently dispense with the need to hold a meeting by providing that a resolution in writing, signed by all the directors, will be

RS 7, 2010 ch8-p343

valid and effectual as if it had been passed at a meeting of the directors duly convened and held. 2310 In Southern Witwatersrand Exploration Co Ltd v Bisichi Mining plc 2311 the company's articles contained this provision. Cameron J said 2312 that the provision 'creates a "round robin" procedure for directors' decisions', and pointed out the procedure is well-known, and is accommodated by s 242(2). He held that the provision stipulates three conditions for its operation: (i) there must be a written resolution; (ii) it must be signed by the directors; and (iii) their signification of assent must be unanimous. Thus, '[a]t the price of unanimity, evidenced in writing, the provision . . . creates a facility for eliminating the formality of a duly convened meeting'; but the provision 'exacts its warrant', for it 'renders dispensable the "interchange and reciprocal influences" that usually characterise decision-making'. 2313 Although a 'round robin' usually refers to a document in which the names of subscribers arranged in a circle so as to disguise the order in which they have signed, in corporate decision-making the term is more generally applied, 2314 and 'signifies the immateriality not only of the sequence in which assent is signified, but the places and dates where it occurs'. The learned judge held that, although a 'round robin' resolution will usually comprise a single piece of paper containing a resolution and all the directors' signatures, there is no reason in principle why this should be so, nor does any provision of Act or the standard articles require that it should. 2315

Where not dispensed with by the articles, a formal meeting may nevertheless be dispensed with if all the directors consent to what is done. 2316 Even when applied to shareholders, the doctrine of unanimous assent ought to be applied with caution, for it leaves the issue undebated, raises questions as to what exactly each member believed

RS 7, 2010 ch8-p344

himself to be consenting to, and is open to abuse. 2317 When applied to directors, a further problem arises, namely, that the directors, unlike the shareholders, owe the company a duty to give their full consideration to matters that come before them. Thus, bearing in mind that the doctrine is not necessary in order to protect third parties, the

doctrine should be applied with even greater caution in regard directors' decision, if indeed it should be applied at all. 2318

This, however, has not been the attitude of our courts. In Southern Witwatersrand Exploration Co Ltd v Bisichi Mining plc 2319 art 76 of the company's articles of association provided that '[s]ubject to the provisions of the Act, a resolution in writing signed by all the directors shall be as valid and effectual as if it had been passed at a meeting of directors duly convened and held'. A shareholders agreement, to which all the shareholders, but not the company, were parties, provided that '[a] resolution signed by the majority of [the company's] directors shall be as effective as if it had been passed at a meeting of the majority of its directors properly constituted and held'. Cameron J held that, while it was 'true that art 76 stipulates an alternative decision-making method in the form of a resolution "signed by all the directors", the company's members had in their members' agreement expressly agreed to create a further alternative'. He said that '[t]he articles themselves did not purport to be exhaustive of the ways, outside meetings, in which the directors' assent can be signified. Specially, neither art 76 nor any other provision in the articles or the memorandum of association purports to exclude the creation or adoption of any other method of decision-making or the manner in which it may be evidenced. Article 76 . . . thus defines one method of obtaining and recording assent, without excluding others.' 2320 Cameron J, while accepting that 'the only way in which [the company's] articles could be altered was by means of a special resolution in terms of s 62', 2321 held 2322 that the principle of unanimous assent was applicable. He said 2323 that, although the members' agreement did not authorise a specific appointment or transaction, 'in effect, it sought to create a further general means of obtaining and recording a directors' decision', and he was 'unable to see any reason why the doctrine should not apply, at least as between the assenting members'.

But, of course, there is a vast difference between a resolution arrived at informally by unanimous assent, and unanimous assent about what will constitute a binding resolution. Whether a resolution is binding on the company is, ultimately, a question of legal principle; it is not something that can be decided by the members or the directors. True, the members can, by determining what goes into the company's articles, determine the

RS 8, 2011 ch8-p345

procedures. But resolutions passed in terms of the procedures specified in the articles are binding on the company because company law renders them binding. The doctrine of unanimous assent was developed by the courts on the theory that where all the shareholders or directors agree, the need for the protection afforded by the holding of meetings of the members or the directors could be relaxed in favour of flexibility. A resolution passed by unanimous assent is binding, not because the members or directors agree that it shall be binding, but because the courts have laid down a rule that it shall be binding. And it is binding, not on the members, but on the company; and therefore the doctrine cannot apply 'at least as between the assenting members'. The question was not whether art 76 or any other provision in the articles or the memorandum of association purported 'to exclude the creation or adoption of any other method of decision-making'. The question was whether the law permits any further method of decision-making.

In Randcoal Services Ltd v Randgold and Exploration Co Ltd, 2324 the company's articles contained two relevant provisions. Article 107 of the company's articles of association provided that '[r]esolutions shall be determined by a majority of votes of the directors present at a meeting of directors and in the event of the equality of votes the chairman shall only have a second or casting vote if more than three directors are present at the meeting'. And art 109 provided that '[a] resolution in writing signed by a quorum of directors who may at the time be present in the town where the office of the company is situate shall be as valid as if it had been passed at a meeting of the directors duly held and constituted'. Neither of these articles had been complied with. Nevertheless, the court, accepting as sufficient that two of the directors 'must have known' that the company was acting in terms of a 'substitution agreement' agreed upon by the other directors, found that all the directors had agreed to the decision. And, applying the doctrine of unanimous assent, held that the decision was binding on the company. Van Heerden DJC held: 2325'It may be that some provisions in the articles of association of a company relating to directors may not be altered by their unanimous asset. The test, I would suggest, is whether a particular

provision is capable of waiver, and that is the case if the provision enures for the benefit of the directors as opposed to the company. In my view the above quoted clause 107 clearly is such a provision. Its purpose is to give all the directors an opportunity to partake in a decision of the board. Hence there is no reason why the doctrine of unanimous asset could not have governed the conclusion of the substitution agreement(s).'The proposition that the directors can alter provisions of the articles is, obviously, wrong. What is more, provisions of articles such as art 107 do not enure 'for the benefit of the directors as opposed to the company'. Their purpose is not 'to give all the directors an opportunity to partake in a decision of the board'. Directors owe their company a duty to partake in the decisions of the board. They are fiduciary agents of the company, not its 'owners'.

In Municipal Mutual Insurance Ltd v Harrop2326 Rimer J, stating that the essence of the principle of unanimous assent is unanimity, rejected the argument that the same principle should also apply where the directors act on the basis of an informal assent of all the

RS 8, 2011 ch8-p346

directors other than those who choose to abstain on the grounds of personal interest, even though the abstainers are in fact permitted by the articles to vote on the matter.Convening and notice of meetingsThe articles usually provide that a director may at any time, and the secretary on the requisition of a director must, convene a meeting of directors. 2327 Where the articles do not prescribe any form of notice, directors may meet even on verbal notice. 2328 Where no specific time limits are prescribed in the articles for calling a meeting of directors, fair and reasonable 2329 notice must be given of meetings to every director who is within reach, 2330 and where such notice is not given the meeting is invalid. 2331 What is fair and reasonable notice depends on the circumstances of each case in the context of the company's structure, practice and affairs. 2332 The question whether a director is within reach depends upon the circumstances, including the nature of the business to be transacted. 2333 Directors who are overseas, severely ill, or cannot reasonably be contacted, usually cannot complain of lack of notice. 2334 If that business is contentious, the degree of inaccessibility would have to be very great; if the business is non-contentious but requires immediate action, the degree of inaccessibility would be very much less, 2335 particularly where the absent director knew and approved of the formal business to be transacted. 2336 The notice requirement can be expressly or impliedly waived. 2337 A director who objects to the lack

RS 1, 2004 ch8-p347

of notice should complain immediately, and should even refrain from taking part in any meeting that may eventuate, for participation may be read as acquiescence to the lack of or shortness of notice.2338

Although as a general rule it is not strictly necessary to give notice of the business to be transacted at the meeting, 2339  '[a]s a matter of prudence it is a very often done, and it is very wise thing to do it'.2340

A duly convened meeting may always be adjourned. But a meeting cannot be adjourned to a date which is known only to the quorum who happen to be present, and consequently no business can be validly conducted at such an adjourned meeting.2341

QuorumThe articles usually provide that the directors may themselves fix the quorum for their meetings and that if they do not do so it will be three, unless there are three or less directors, in which case it will be two.2342  In the absence of any provision in the articles, a majority of the directors must attend, 2343  unless the number to form a quorum is established by the practice of the board.2344  Unless the articles otherwise provide, a quorum must consist of directors 'capable of voting on the business before the board; otherwise it is idle', ie otherwise there is no quorum.2345  A quorum can be formed only from a properly constituted board, and therefore if the articles specify a minimum number of directors, 2346  a quorum cannot be formed if there are fewer than that minimum number unless the articles permit the directors in office to act.2347

Where the articles permit or the general meeting authorises the directors to act in a matter in which one of their number has an interest that conflicts with his duties to the

RS 1, 2004 ch8-p348

company, the director who has the interest must not, unless the articles so provide, be counted in reckoning a quorum.2348  A resolution reducing the quorum for the purpose of enabling those not interested to pass the resolution is invalid.2349  If two directors are interested in a matter, the objection cannot be avoided by splitting up the resolution with each voting only on the part that concerns the other.2350

A decision taken at an inquorate meeting is invalid, 2351  although the company may be bound as against a bona fide third party.2352  The articles, however, usually provide that if the number of directors falls below the quorum the continuing directors may act for the purpose of increasing the number of directors to make up the quorum or of convening a general meeting, but for no other purpose.2353  A subsequent meeting of directors cannot ratify the proceeding of a meeting invalid for want of a quorum.2354

If a quorum of directors is able and willing to hold board meetings they may do so under any circumstances.2355  But they would have to intend to hold a meeting of the board; a casual discussion of the company's affairs would not suffice, and a quorum cannot be obtained by forcing a director into a meeting against his will, eg by simply declaring that he is attending a meeting.2356

  

    2270   s 268G(c).    2271   s 441(1)(g).    2272   Re North Hallenbeagle Mining Co (Knight's Case) (1867) LR 2 Ch App 321; Re Fireproof Doors Ltd [1916]

2 Ch 142; Marshall Industrials Ltd v Khan 1959 (4) SA 684 (D) 688; Sugden v Beaconhurst Dairies (Pty) Ltd 1963 (2) SA 174 (E)182; Poolquip Industries Pty Ltd v Griffin 1978 (4) SA 353 (W) 356.

    2273   (1890) 45 ChD 16 (CA).    2274   [1998] 2 BCLC 541.    2275   [1998] 2 BCLC 541 551.    2276   African Diamond Distributors (Pty) Ltd v Van der Westhuizen 1988 (4) SA 726 (T) 729, where it was said

that when a company has only one director the concept of a meeting of directors is unrealistic: the requirements laid down by the articles of most companies and endorsed by law relating to meetings of directors and formalities in regard to them are only apposite in the case of companies having more than one director, and hence a sole director can perform all the juridical acts of the company without the constraints of a meeting, his position being that of a full meeting of directors. But see Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald [1995] 1 BCLC 352.

    2277   See below.    2278   See eg Majola Investments (Pty) Ltd v Uitzigt Properties (Pty) Ltd 1961 (4) SA 705 (T); Van Tonder v

Pienaar 1982 (2) SA 336 (SE) 341; James North (Zimbabwe) (Pvt) Ltd v Mattinson 1990 (2) SA 228 (ZHC) 236-237; Engling v Bosielo 1994 (2) SA 388 (BGD) 393.

    2279   Robinson v Imroth 1917 WLD 159 171; James North (Zimbabwe) (Pvt) Ltd v Mattinson 1990 (2) SA 228 (ZHC) 236-237. And see Van Tonder v Pienaar 1982 (2) SA 336 (SE) 341.

    2280   Re Haycraft Gold Reduction & Mining Co [1900] 2 Ch 230; Legg & Co v Premier Tobacco Co 1926 AD 132 139; Silver Garbus & Co (Pty) Ltd v Teichert 1954 (2) SA 98 (N) 102; Trek Tyres Ltd v Beukes 1957 (3) SA 306 (W); Burnstein v Yale 1958 (1) SA 768 (W) 771; S v Heller 1971 (2) SA 29 (A) 51; Southern Witwatersrand Exploration Co Ltd v Bisichi Mining plc 1998 (4) SA 767 (W) 773. 'The members are entitled to expect that their board shall perform its functions as a board, and that the proceedings of the directors shall be carried out in a normal and orthodox manner', per Romer LJ in Re HL Harmer Ltd [1958] 3 All ER 689 706 (CA).

    2281   Re Haycraft Gold Reduction & Mining Co [1900] 2 Ch 230; Blythe v The Phoenix Foundry Ltd, Wilson & Muir 1922 WLD 87 91-92; Legg & Co v Premier Tobacco Co 1926 AD 132 139; Silver Garbus & Co (Pty) Ltd v Teichert 1954 (2) SA 98 (N) 102; Trek Tyres Ltd v Beukes 1957 (3) SA 306 (W); Burnstein v Yale 1958 (1) SA 768 (W) 771; Van Tonder v Pienaar 1982 (2) SA 336 (SE) 341; James North (Zimbabwe) (Pvt) Ltd v Mattinson 1990 (2) SA 228 (ZHC) 236-237;Transcash SWD (Pty) Ltd v Smith 1994 (2) SA 295 (C) 299.

    2282   Re Bonelli's Telegraph Co (Collie's Claim) (1871) LR 12 Eq 246; Silver Garbus & Co (Pty) Ltd v Teichert 1954 (2) SA 98 (N) 102; Sugden v Beaconhurst Dairies (Pty) Ltd 1963 (2) SA 174 (E) 182.

    2283   Harris v English Canadian Co (1906) 3 WLR 5 (Can); Re Portuguese Consolidated Copper Mines Ltd (1889) 42 ChD 160 165. The articles of companies do, however, usually provide that a director may, with the approval of the board, appoint an 'alternate director' to stand in for him and exercise his powers: see arts 57 and 58 of Table A and arts 58 and 59 of Table B.

    2284   Re Giga Investments Pty Ltd (1995) 17 ACSR 472 476 (FC of A).    2285   Re Giga Investments Pty Ltd (1995) 17 ACSR 472 477 (FC of A).    2286   Re Giga Investments Pty Ltd (1995) 17 ACSR 472 477 (FC of A).    2287   Bell v Burton (1993) 12 ACSR 325 328-329 SC(Vic); Wagner v International Health Promotions (1994) 15

ACSR 411 421-422 SC(NSW); Re Giga Investments Pty Ltd (1995) 17 ACSR 472 477 (FC of A). In Bell v Burton supra 328-329 Tadgell J said (in the context of articles that provided that 'directors may meet together for the dispatch of the business'): 'No doubt there is no necessity nowadays — if there ever was — that directors should gather physically together at a directors' meeting. In appropriate circumstances they may meet by assenting to a document, or by telephone, video link, or other electronic means which caters for a meeting of their minds.' In Wagner v International Health Promotions supra 421-422 Santow J said: 'Essentially, what [Tadgell J in Burton v Bell supra ] held was that, under articles not materially different to those before me [which referred to directors 'meeting together'], that there is no necessity for the directors to gather physically together at a directors' meeting. I agree that the words "meeting together" connote a meeting of minds made possible by modern technology and not of bodies. There is evidence that there was a telephone conference call

so that the conversations took place with everyone hearing everyone else.' Cf Higgins v Nicol (1971) 18 FLR 343 357; Re Southern Resources Ltd (1989) 15 ACLR 770 792 SC(SA).

    2288   Re Giga Investments Pty Ltd (1995) 17 ACSR 472 476 (FC of A). In Magnacrete Ltd v Douglas-Hill (1988) 48 SASR 565 603 Perry J said: 'The law has not yet advanced to the position whereby meetings of directors may lawfully be held by separate phone calls to directors . . . . It may be that a meeting of directors could be held on a conference telephone but that is not the position here.' But where the directors act by unanimous assent, that can be achieved by way of telephonic consensus: see Blue Estates (Pty) Ltd v Minister van Landbou 1992 (4) SA 406 (A) 424.

    2289   See art 75 of Table A and art 73 of Table B. Thus the proceedings at meetings of directors are governed by the company's articles and by any rules made by the directors themselves by virtue of the powers given them by the articles:Eastern Resources of Australia Ltd v Glass Reinforced Products (GRP) Pty Ltd (1986) 10 ACLR 496 SC(Qld); Wilson v Permasnow (A'Asia) Ltd (1988) 14 ACLR 129 152 SC(Qld).

    2290   See art 79 of Table A and art 78 of Table B. In Rentekor (Pty) Ltd v Rheeder and Berman 1988 (4) SA 469 (T) the meeting was led and controlled by a person who not only was not a duly authorised chairman but also had no right to attend the meeting. The court however declined to hold that his presence, and the fact that he de facto held sway, vitiated the majority votes exercised at the meeting, the majority being determined in any event to exercise those votes in way they did. Where the power to appoint a chairman is vested in the board, the members cannot appoint a chairman: Clark v Workman 1920 IR 107.

    2291   See art 79 of Table A and art 78 of Table B. But a person who claims to have been chosen by acquiescence must have acted as such: Kelly v Wolstenholme (1991) 4 ACSR 709 SC(NSW).

    2292   In African Diamond Distributors (Pty) Ltd v Van der Westhuizen 1988 (4) SA 726 (T) it was said that the court a quo had taken too strict a view of the wording of a directors' resolution, and it should be emphasised that a resolution is not a contract and that the rules of contractual construction are not apposite.

    2293   See art 75 of Table A and art 73 of Table B.    2294   See art 75 of Table A and art 73 of Table B.    2295   See Nell v Longbottom [1894] 1 QB 767 771.    2296   There may, however, be limits to way in which articles can alter the general rule. In Sage Holdings Ltd v

The Unisec Group Ltd 1982 (1) SA 337 (W) 354 Goldstone J said that the stratagem adopted in the articles of the company whereby the 'A' directors and the 'B' directors each exercised a collective vote was 'foreign to the basic concepts of our law and subversive of the proper exercise of their fiduciary duties'. And it would seem that a 'director' who has no right to vote at all, is not a director: Whitehouse v Carlton Hotel (1987) 11 ACLR 715 735 (HC of A).

    2297   Re Cawley & Co (1889) 42 ChD 209 216 (CA).    2298   Pulbrook v Richmond Consolidated Mining Co (1878) 9 ChD 610 612; Robinson v Imroth 1917 WLD 159

169-173.    2299   [2009] 2 BCLC 108 (Ch D).    2300   (1878) 9 Ch D 610.    2301   Robinson v Imroth 1917 WLD 159 169-173; Novick v Comair Holdings Ltd 1979 (2) SA 116 (W) 128; Van

Tonder v Pienaar 1982 (2) SA 336 (SE) 341.    2302   Robinson v Imroth 1917 WLD 159 169-173; Novick v Comair Holdings Ltd 1979 (2) SA 116 (W) 128. In Re

HR Harmer Ltd [1958] 3 All ER 689 706 (CA) Romer LJ said: '[S]hareholders are entitled to have the affairs of a company conducted in the way laid down by the company's constitution. Members are . . . entitled to the benefit of the collective experience of the directors, and to expect that the directors and each of them can freely express their views at board meetings and that regard shall be had to what they say and to resolutions properly passed. If the board is browbeaten and either ignored or overruled by one of its number . . . in reliance on his superior voting power, the proprietary interests of the minority shareholders cannot fail to be affected and a case of oppression within s 210 [of the Companies Act 1948, s 252 of our 1973 Act] is, in my judgment, made out.' See also South African Broadcasting Corporation Ltd v Mpofu and another [2009] 4 All SA 169 (GSJ).

    2303   Novick v Comair Holdings Ltd 1979 (2) SA 116 (W) 128.    2304   Polikwa v Heven Holdings Pty Ltd (1992) 8 ACSR 747 786 SC(WA), where it was said that this holds true

even though it 'may not be necessary for a director consciously to apply his or her mind to the fact that the decision is being taken at a meeting of directors'.

    2305   See Gundelfinger v African Textile Manufacturers Ltd 1939 AD 314 323.    2306   See art 76 of Table A and art 74 of Table B. Section s 234, which requires a director to declare his

interest, contains no such prohibitions; hence the common law prohibitions apply.    2307   See Imperial Mercantile Credit Association v Coleman (1871) 6 Ch App 558 567-568. And see notes on s

208, note CONFLICT OF INTEREST AND DUTY .    2308   See Re Bonelli's Telegraph Co (Collie's Claim) (1871) LR 12 Eq 246; Petsch v Kennedy [1971] 1 NSWLR

494; Swiss Screens (Australia) Pty Ltd v Burgess (1987) 11 ACLR 756 758 SC(NSW); Versteeg v R (1988) 14 ACLR 1 14 SC(WA);Benjamin v Harding Corp Pty Ltd (1995) 16 ACSR 376 SC(NSW); Roden v International Gas Applications (1995) 18 ACSR 454 456 SC(NSW).

    2309   Swiss Screens (Australia) Pty Ltd v Burgess (1987) 11 ACLR 756 758 SC(NSW); Poliwka v Heven Holdings Pty Ltd (1992) 7 ACSR 85 90-91 SC(WA); (1992) 8 ACSR 744 785 SC(WA); and see UK Safety Group Ltd v Heane [1998] 2 BCLC 208. But even this proposition ought not to be applied so as to impose unnecessary

    2310   Thus art 76 of Table B provides that, '[s]ubject to the provisions of the Act, a resolution in writing signed by all the directors shall be as valid and effectual as if it had been passed at a meeting of directors duly convened and held'. Table A contains no such provision. Notwithstanding anything in the articles, no such written resolution is permitted which concerns a contract or proposed contract with the company in which a director is materially interested if such contract is of a kind referred to in s 234: s 236.

    2311   1998 (4) SA 767 (W).    2312   1998 (4) SA 767 (W) 776-777.    2313   referring here to the remarks of E M Grosskopf JA, in a comparable context, in Blue Grass (Pty) Ltd v

Minister van Landbou 1992 (4) SA 406 (A) 424.    2314   referring here to Basil Wunsh 'Companies: Authority of Representatives and Minutes' 1975 De Rebus 315

320-321.

    2315   The learned judge pointed out (at 777) that if 'a company secretary faxes each of the directors, diversely located, a copy of a resolution and asks for it to be signed and restransmitted, it would . . . be grossly formalistic to deny the cumulated returned signed copies constitute a ''resolution'' as envisaged by art 76 and s 242(2)'. He held (at 778) that in the case before him 'there was such a resolution, though it existed in two parts and in different locations'.

    2316   Re Bonneilli's Telegraph Co (Collie's Claim) (1871) LR 12 Eq 246; Silver Garbus & Co (Pty) Ltd v Teichert 1954 (2) SA 98 (N) 102; Burnstein v Yale 1958 (1) SA 768 (W) 771; Marshall Industrials Ltd v Khan 1959 (4) SA 684 (D) 688;Majola Investments (Pty) Ltd v Uitzigt Properties (Pty) Ltd 1961 (4) SA 705 (T) 711-712; Levitan NO v Petrol Conservation (Pty) Ltd 1962 (3) SA 233 (W) 235; Sugden v Beaconhurst Dairies (Pty) Ltd 1963 (2) SA 174 (E); S v Heller 1971 (2) SA 29 (A) 51-52; Chaterhouse Investments Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1; Molotlegi v President of Bophuthatswana 1989 (3) SA 119 (BGD) 128; Runciman v Walter Runciman [1992] BCLC 1084 1092; Blue Estates (Pty) Ltd v Minister van Landbou 1992 (4) SA 406 (A) 424; Alpha Bank Bpk v Registrateur van Banke 1996 (1) SA 330 (A) 348; Southern Witwatersrand Exploration Co Ltd v Bisichi Mining plc 1998 (4) SA 767 (W) 774; Randcoal Services Ltd v Randgold and Exploration Co Ltd 1998 (4) SA 825 (A) 840.

    2317   See R C Beuthin 'The Principle of Unanimous Assent' (1974) 91 SALJ 2.    2318   Thus it has been held that 'obtaining separate informal approval without the conduct of an actual

meeting . . . is generally invalid': per Olsson J in R v Brynes (1996) 20 ACSR 260 270 SC(SA); and see Magnacrete Ltd v Douglas-Hill(1988) 48 SASR 565 603; (1988) 15 ACLR 325 333 SC(SA). In R v Brynes supra Olsson J said (at 270-271) that '[t]his is of course, not to deny that the capacity of a corporation to include in its articles a provision that a resolution in writing agreed by all directors may be deemed to have been passed at a duly constituted board meeting'. But '[t]o the extent that, absent such a provision, this may still be done, as seems to be suggested by McGarvie J in J W Broomhead (Vic) Pty Ltd v J W Broomhead Pty Ltd [1985] VR 891, (1985) 9 ACLR 593, is, with respect, contrary to both authority and principle'.

    2319   1998 (4) SA 767 (W).    2320   1998 (4) SA 767 (W) 774-775.    2321   1998 (4) SA 767 (W) 776.    2322   1998 (4) SA 767 (W) 774-775.    2323   1998 (4) SA 767 (W) 776.    2324   1998 (4) SA 825 (SCA)    2325   1998 (4) SA 825 (SCA) 840-841.    2326   [1998] 2 BCLC 541 551.    2327   See art 75 of Table A and art 73 of Table B.    2328   Majola Investments (Pty) Ltd v Uitzigt Properties (Pty) Ltd 1961 (4) SA 705 (T) 711.    2329   In Browne v La Trinidad (1887) 37 Ch 1 17-18 (CA) it was held that in the circumstances notice of a few

minutes to a director was not such an irregularity as to vitiate the action of the board where the director could have attended the meeting and objected to the shortness of the notice. In Rentekor (Pty) Ltd v Rheeder and Berman 1988 (4) SA 469 (T) 493-496 it was said that, otherwise than with shareholders' meetings, if directors' meetings are called without any previous notice being given either of the day or of what they are going to do, this does not necessarily vitiate resolutions passed at the meeting.

    2330   Re Homer District Consolidated Gold Mines (1888) 39 ChD 546 (CA); Re Portuguese Consolidated Copper Mines Ltd (1889) 42 Ch 160 (CA); Young v Ladies' Imperial Club Ltd [1920] 2 KB 523 (CA); African Organic Fertilizers & Associated Industries Ltd v Premier Fertilizers Ltd 1948 (3) SA 233 (N); Burnstein v Yale 1958 (1) SA 769 (W) 771; Majola Investments (Pty) Ltd v Uitzigt Properties (Pty) Ltd 1961 (4) SA 705 (T) 710; Toole v Flexihire Pty Ltd (1991) 6 ACSR 455 461 SC(Qld). In John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113; [1935] All ER Rep 456 (CA) Greer LJ expressed the view that a director who is not entitled to vote at a board meeting is not entitled to notice of the meeting, but Slesser LJ considered that such a director is nevertheless entitled to notice.

    2331   Re Portuguese Consolidated Copper Mines Ltd (1889) 42 Ch 160 (CA); Barron v Potter [1914] 1 Ch 895; African Organic Fertilizers and Associated Industries Ltd v Premier Fertilizers Ltd 1948 (3) SA 233 (N); Burnstein v Yale 1958 (1) SA 769 (W) 771; Majola Investments (Pty) Ltd v Uitzigt Properties (Pty) Ltd 1961 (4) SA 705 (T) 710; Rentekor Ltd v Rheeder and Berman 1988 (4) SA 469 (T) 494; James North (Zimbabwe) (Pvt) Ltd v Mattinson 1990 (2) SA 228 (ZHC) 242-243; Engling v Bosielo 1994 (2) SA 388 (BGD) 393; Toole v Flexihire Pty Ltd (1991) 6 ACSR 455 461 SC(Qld); Bell v Burton (1993) 12 ACSR 325 329 SC(Vic). See South African Broadcasting Corporation Ltd v Mpofu [2009] 4 All SA 169 (GSJ) and notes on s 208 (on p 8-16-10).

    2332   Toole v Flexihire Pty Ltd (1991) 6 ACSR 455 461 SC(Qld). South African Broadcasting Corporation Ltd v Mpofu and another [2009] 4 All SA 169 (GSJ).

    2333   Re Portuguese Consolidated Copper Mines Ltd (1889) 42 ChD 160 (CA); African Organic Fertilizers and Associated Industries Ltd v Premier Fertilizers Ltd 1948 (3) SA 233 (N); Burnstein v Yale 1958 (1) SA 769 (W) 771; Majola Investments (Pty) Ltd v Uitzigt Properties (Pty) Ltd 1961 (4) SA 705 (T) 710.

    2334   Halifax Sugar Refining Co Ltd v Francklyn (189) 62 LT 563 565; Re Homer District Consolidated Gold Mines (1888) 39 ChD 546 (CA); Young v Ladies' Imperial Club Ltd [1920] 2 KB 523 528 (CA); Eastern Resource of Australia Ltd v Glass Reinforced Products (GRP) Pty Ltd (1986) 10 ACLR 496 499-500 SC(Qld).

    2335   African Organic Fertilizers and Associated Industries Ltd v Premier Fertilizers Ltd 1948 (3) SA 233 (N); Burnstein v Yale 1958 (1) SA 769 (W) 771; Majola Investments (Pty) Ltd v Uitzigt Properties (Pty) Ltd 1961 (4) SA 705 (T) 710.

    2336   African Organic Fertilizers and Associated Industries Ltd v Premier Fertilizers Ltd 1948 (3) SA 233 (N); Burnstein v Yale 1958 (1) SA 769 (W) 771.

    2337   See Petsch v Kennedy [1971] 1 NSWLR 494.    2338   Spicer v Mytrent Pty Ltd (1984) 8 ACLR 711 720 SC(NSW).    2339   La Campagnie De Mayville v Whitely [1896] 1 Ch 788 797 805; Eastern Resources of Australia Ltd v Glass

Reinforced Products (GRP) Pty Ltd (1986) 10 ACLR 496 SC(Qld); Rentekor (Pty) Ltd v Rheeder and Berman 1988 (4) SA 469 (T) 493-494. And see Robinson v Imroth 1917 WLD 159 171-172.

    2340   See La Compagnie de Mayville v Whitley [1896] 1 Ch 788 797ff 805, per Lindley and Kay LJJ respectively; see also Eastern Resources of Australia Ltd v Glass Reinforced Products (GRP) Pty Ltd (1986) 10 ACLR 496 500-

501 SC(Qld);Rentekor (Pty) Ltd v Rheeder and Berman 1988 (4) SA 469 (T) 495-496. And see Toole v Flexible Pty Ltd (1991) 6 ACSR 455 461 SC(Qld), where it was said: 'For almost 100 years, it has been the law that, at a properly convened meeting, directors may transact all business within their powers though no notice has been given to the members of the board that special business is to be transacted.'

    2341   Eastern Resources of Australia Ltd v Glass Reinforced Products (GRP) Pty Ltd (1986) 10 ACLR 496 501 SC(Qld).

    2342   See art 77 of Table A. See also art 75 of Table B, the provisions of which are only applicable where the company has more than one director. Because the Act requires a private company to have at least one director, it by implication permits the quorum of one in the case of a private company with only one director. But where a company has more than one director, it is doubtful whether the board may resolve to have a quorum of one, because the common law rule is that one person cannot constitute a meeting: see Sharp v Dawes (1876) 2 QBD 2 Ch 26 29.

    2343   York Tramways Co v Willows (1882) 8 QBD 685 (CA).    2344   Re Tavistock Iron Works Co (Lyster's Case) (1867) LR 4 Eq 233.    2345   Per Farwell J in Re Greymouth Point Elizabeth Railway & Coal Co Ltd [1904] 1 Ch 32 34; Cox v Dublin City

Distillery (No 2) [1915] 1 IR 345; A M Spicer & Son Pty Ltd v Spicer and Howie (1931) 47 CLR 151 186-187 (HC of A); Wilson v Permasnow (A'Asia) Ltd (1988) 14 ACLR 129 SC(Qld).

    2346   Faure Electric Accumulator Co Ltd v Phillipart (1888) 58 LT 325; British Empire Match Co Ltd (1888) 59 Ltd 291.

    2347   Re Scottish Petroleum Co (1883) 23 Ch 413 (CA).    2348   Re Greymouth Point Elizabeth Railway & Coal Co Ltd [1904] 1 Ch 32; Re North Eastern Insurance Co

Ltd [1919] 1 Ch 198 Blythe v The Phoenix Foundry Ltd, Wilson & Muir 1922 WLD 87; Gundelfinger v African Textile Manufacturers Ltd 1939 AD 314 323; Trek Tyres Ltd v Beukes 1957 (3) SA 306 (W) 310. See also Colin Gwyer v London Wharf [2003] 2 BCLC 153 ChD.

    2349   Re North Eastern Insurance Co Ltd [1919] 1 Ch 198.    2350   Re North Eastern Insurance Co Ltd [1919] 1 Ch 198; Blythe v The Phoenix Foundry Ltd, Wilson &

Muir 1922 WLD 87.    2351   See eg Re Greymouth Point Elizabeth Railway & Coal Co [1904] 1 Ch 32; Re North Eastern Insurance Co

Ltd [1919] 1 Ch 198.    2352   In terms of the rule in Royal British Bank v Turquand, as to which, see notes on s 36. See County of

Gloucester Bank v Rudry Merthyr Steam & House Coal Colliery Co [1895] 1 Ch 629 (CA); Re Bank of Syria (Owen and Ashworth's Case) [1901] 1 Ch 115 (CA).

    2353   See art 78 of Table A and art 77 of Table B. A continuing director or directors may act under this provision even though the number of directors has fallen below the statutory minimum: Macson Development Ltd v Gordon (1959) 19 DLR (2d) 465; APT Group Services Pty Ltd v Ferguson (1991) 6 ACSR 231 SC(Vic).

    2354   Wessels & Smith v Vanugo Construction (Pty) Ltd 1964 (1) SA 635 (O) 638.    2355   Barron v Potter [1914] 1 Ch 895 901.    2356   See Barron v Potter [1914] 1 Ch 895, where an attempted directors' meeting on a railway station

platform was ineffective (one director met another alighting from a train and, with a few introductionary words, tried to hold a meeting and elect additional directors while the pair were walking down the platform). And see Harris v English Canadian Co (1906) 3 WLR 5 (Can), where Martin J said: 'To hold that certain directors could form a quorum by coming upon another in a room, or in the street, and, despite the protest of the other, could, by merely declaring the body of persons so gathered together to be a meeting, actually give it that complexion, would be going . . . to unwarrantable lengths, and encourage the carrying on of business by a trick or artifice. . . .'

243  Validity of proceedings at meetings of directors or managersWhere minutes have been kept in accordance with the provisions of section 242 of the proceedings at any meeting of directors or managers of a company, the meeting shall be deemed to have been duly held and convened and all proceedings had thereat to have been duly had, and all appointments of directors, managers, officers or auditors of the company shall be deemed to be valid, until the contrary is proved.

NotesThis is a remedial provision which applies in the case of some failure to comply with

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procedural provisions contained in the Act or the articles, and it does not to breathe life into something which is a nullity by reason of some provision of the Act. 2357 As to meetings of directors, see notes on s 242.  

    2357   See Harman v Energy Research Group Ltd (1985) 39 ACLR 897 900 SC(WA).

244  When resolution at adjourned directors' or managers' meeting effectiveAny resolution passed at an adjourned meeting of directors or managers of a company shall for all purposes be treated as having been passed on the date on which it was in fact passed.

NotesArticle 75 of Table A and art 73 of Table B provide inter alia that the directors may adjourn their meetings as they think fit. At common law an adjourned meeting is deemed to be a resumption of the original meeting.2358 Section 244 removes, in regard to directors' and managers' meetings, the difficulties of the decision in Neuchild v British Equatorial Oil Co, 2359 where, applying the principle that an adjourned meeting is a continuation of the original meeting, it was held that a resolution passed at an adjourned general meeting was to be deemed to have been passed on the date of the original meeting.  

    2358   Scadding v Lorant (1951) 3 HL Cas 418; 10 ER 164; McLaren v Thompson [1917] 2 Ch 261 (CA).    2359   [1925] 1 Ch 346.

245  Directors' and managers' meetings: attendance register(1) Every director of a company present at any meeting of directors, and every manager thereof present at

any meeting of managers, shall at the meeting sign his name under the date of the meeting in a book complying with the provisions of section 242(3) to be kept for that purpose.

(2) Such book shall be kept at the registered office of the company or at the office where it is made up and shall during business hours be open to inspection by any member of the company without charge.

(3) Any company, director or manager who fails to comply with any provision of this section, shall be guilty of an offence.

NotesAs to who is a director, see s 1(1) sv director and notes on s 208. As to who is a manager, see s 1(1) sv manager and notes on s 211.

The member's right of inspection goes no further than the right to inspect this attendance register. 2360 He has no right to inspect the minutes of directors' meetings. The general rule is that the right to inspect includes a right to make copies. 2361

Regulation 4 of the Regulations for the Retention and Preservation of Company records read with item 4 of the schedule to those regulations, requires that the directors' attendance register be retained for a minimum of 15 years, which period runs from the

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date of a particular record or the date of the last entry in it. However, the original register which has be reproduced on microfilm in terms of reg 2(2) may be destroyed after a period of three years from the date on which the record has so reproduced.

Section 246 imposed a duty on the auditor of a company to satisfy himself that an attendance register is kept by the company in the prescribed form.

The offence is punishable by a fine for every meeting in respect of which the contravention has taken place. The court convicting may order the accused to remedy the default, insofar as is practicable, within a stated period.  

    2360   See Clutchco (Pty) Ltd v Davis 2005 (3) SA 486 (SCA) and the Promotion of Access to Information Act 2 of 2000.

    2361   See Spoor & Fisher v Registrar of Patents 1961 (3) SA 476 (A) 480-482.

246  Duty of auditor as to minute books and attendance registerThe auditor of a company shall satisfy himself that a minute book or books and an attendance register are kept by the company in the form prescribed by sections 242 and 245.

Notes

See also s 300(c), which provides that it is the duty of the auditor to satisfy himself that the minute books and attendance registers of meetings of the company and of the directors and managers have been kept in proper form as required by the Act.

Indemnity and Relief of and Offences by Directors and Others (ss 247-251)

247  Exemption from or indemnity against liability of directors, officers or auditors of a company

(1) Subject to the provisions of subsection (2), any provision, whether contained in the articles of a company or in any contract with a company, and whether expressed or implied, which purports to exempt any director or officer or the auditor of the company from any liability which by law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he may be guilty in relation to the company or to indemnify him against any such liability, shall be void. Provided that this subsection shall not be applicable to insurance taken out and kept by the company as indemnification against any liability of any director or officer towards the company in respect of any negligence, default, breach of duty or breach of trust.

[Sub-s. (1) amended by s. 12 of Act 35 of 1998.](2) The provisions of subsection (1) shall not be construed as prohibiting a company from indemnifying any

director, officer or auditor in respect of any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in which he is acquitted or in respect of any such proceedings which are abandoned or in connection with any application under section 248 in which relief is granted to him by the Court.

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NotesIntroductionIn England,  2362  the decision in Re City Equitable Fire Insurance Co Ltd  2363  drew attention to the practice of including in articles of association provisions exempting directors from liability for loss except when due to 'their own wilful neglect or default', or even in every case other than of actual dishonesty.  2364  Disturbed by the decision in Re City Equitable Fire Insurance Co Ltd  2365  recognising the validity of such provisions, the Greene Committee recommended  2366  the prohibition of 'articles and contracts relieving directors and other officers from their liability under the general law of negligence and of breach of duty or breach of trust'. The Committee  2367  considered 'that this type of article gives a quite unjustified protection to directors'. It pointed out that under such an article 'a director may with impunity be guilty of the grossest negligence provided that he does not consciously do anything that he recognises to be improper'. Believing it to be a 'hopeless task' to attempt 'by statute to define the duties of directors', it concluded that the Companies Act should 'prohibit articles and contracts directed to relieving directors and other officers of a company from their liability under the general law of negligence and of breach of duty or breach of trust'.  2368  The Committee was:247-251)'. . . satisfied that such an enactment would not cause any hardship to a conscientious director or make his position more onerous and, [that] there is no foundation whatever for the suggestion that it would discourage many otherwise desirable persons from accepting office. A director who accepts office does not consciously do so upon the footing that he may be as negligent as he pleases without incurring liability. It is only when he has been negligent and the company have suffered a loss, that he is content to take shelter behind the article. It is, moreover, in our opinion fallacious to say that the shareholders must be taken to have agreed that their directors should be placed in this remarkable position. The articles are drafted on the instructions of those concerned in the formation of the company, and it is obviously a matter of great difficulty and delicacy for shareholders to attempt to alter such an article as that under consideration.'  2369

Following the recommendation by the Greene Committee, such a provision was introduced as s 152 of the English 1929 Companies Act. It was contained in s 205 of the

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1948 Act. The corresponding provision in the English 1985 Act is 310(1).  2370  Section 137(1) of the Companies Act 1989 substituted the present 310(3). This introduced a provision excluding from the prohibition in s 310(1) contracts of insurance taken out by the company which provide insurance for an officer or auditor of the company against such liability.  2371

Our Lansdown Commission, noting that the articles of companies sometimes purported to relieve directors 'of liability for negligence or other default committed in the performance of anything done by them on behalf of the company', recommended the

adoption of the provisions contained in s 152 of the English 1929 Companies Act, adding 'but there should be a power in the court to grant relief in suitable cases'.  2372  In 1939 the provisions were inserted  2373  as s 70sext in the Companies Act 46 of 1926, which provisions are now contained in s 247(1) of the present Act. But the exact wording of the English section was not adopted. In particular, (i) while the English s 310(1) refers to 'any provision, whether contained in the articles of the company or in any contract with the company or otherwise', s 247(1) omits the words 'or otherwise', and (ii), while the English subsection refers to any provision 'for exempting' such persons from liability, s 247(1) refers to any provision 'which purports to exempt' them from liability.  2374

The proviso to s 247(1) was added by s 12 of Act 35 of 1998. Like s 310(3) of the English 1985 Act, the proviso makes an extensive inroad on the prohibition. It goes further than the provision that gave rise to concern in the Re City Equitable Fire Insurance Co Ltd  2375  case. In effect, it enables the directors of companies to free themselves - at the expense of their shareholders - from all liability to compensate their company for losses caused to it as a consequence of their wrongdoing, provided they can obtain the necessary insurance cover.

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Any provision, whether contained in the articles of a company or in any contract with the companyIf the words 'any provision, whether contained in the articles of a company or in any contract with a company' refer only to provisions in the articles of a company or in a contract with the company, the subsection leaves unaffected provisions in the company's memorandum and resolutions of its general meeting or board of directors. It is unlikely that that was what the legislature intended, and therefore it would seem that the words 'any provision' ought to be emphasised, and that the words 'in the articles of a company or in any contract with a company' ought to be understood as examples of the manner in which any such provisions can be effected. On the other hand, it would seem clear that all such provisions must be provisions binding the company, ie provisions to which the company is a party. That is to say, the words 'any provision' must be read eiusdem generis with 'articles' and 'any contract with the company', and therefore, for example, they do not include a contract between a director and insurer in terms of which the insurer undertakes to indemnify the director against his liability to the company.

Section 310 of the English Companies Act 1985 is worded differently. 2376 It refers to 'any provision, whether contained in the articles of a company or in any contract with a company or otherwise'. It was argued that the words 'in any contract with the company or otherwise' cover 'any insurance policy indemnifying a director or other officer against his liability in negligence to the company whether the policy be in the name of the director or the company, in other words whether he himself is the insured or whether the company effected the insurance on his behalf'.2377 It was accepted that this is to argue that the words 'or otherwise' should not be construed eiusdem generis . But, it was said, that 'argument should fail on the grounds that there would be little for the words "or otherwise" to bite upon if they did not cover provisions like those contained in an insurance policy. In other words, if such insurance contracts and similar devices were excluded from the scope of [the section], there would be no real room for the words "or otherwise" to operate'. 2378

This rather surprising proposition has been rejected. 2379 Section 310 of the English 1985 Act applies only to exemptions and indemnities given by the company itself. This is because, first, on the face of it, s 310(1) is primarily concerned with a 'provision . . . exempting any officer', and 'given that the sort of claims contemplated by s 310 are claims brought by the company, it could only be the company which granted any such exemption'. 2380 Secondly, the phrase 'whether contained in a company's articles or in any contract with the company or otherwise', while 'somewhat cumbersome', directs attention 'to an arrangement with the company, and not anyone else'. Thirdly, in the context of s 310 the words 'or otherwise' do not naturally mean 'or anyone else'. Rather,

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they are 'directed more towards covering an arrangement with the company which may not amount to a contract but which nonetheless might give rise to an argument that the company had agreed to exempt the director, or to indemnify him, in respect of the matters referred to at the end of s 310(1)', eg some sort of arrangement with the

company amounting to an estoppel. 2381 Fourthly, s 310(3)(a) provides that s 310 does not prevent a company 'from purchasing and maintaining for any such officer or auditor insurance against any such liability'. It would be 'somewhat surprising' if the company could take out such insurance but a director could not take out such insurance himself. In short, 'the words "or otherwise" in s 310(1) are to be construed eiusdem generis with the proceeding words "whether contained in a company's articles or in any contract with the company". After all, the company's articles of association are, at least in a sense, contractual provisions between the company and its members. In those circumstances, it can be said with force that there is a genus, namely, an arrangement to which the company is a party, which restricts what might otherwise be said to be a very wide meaning of the words "or otherwise".'

Finally, even if the words 'or otherwise' in the English s 310 were given the improbable interpretation argued for above, that argument can have no relevance in regard to our s 247; for it does not contain those words. See now ss 232-234 of the Companies Act, 2006.Which purports to exempt any director or officer or the auditor of the company from . . . any liability which by law would otherwise attach to him(1) Both exemptions from liability arising from breach of duty and exemptions from duty are voidSection 247(1) renders invalid, not only all provisions that purport to exempt a director from liability in the event of his acting in breach of duty,2382 but also all provisions that purport to exempt a director from his duties.2383 This is because the section does not merely render void a provision which, but for the provisions of s 247(1), would exempt a director from any liability in respect of any negligence, default, breach of duty or breach of trust (thus leaving it open for the articles to exempt a director from these duties, so that he cannot incur such liability). Rather, it renders void a provision that has as its purpose the exemption of a director from any such liability which, but for that provision (ie the provision in the articles of a company or in any contract with a company), would attach

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to him for breach of duty.2384  Clearly that is the purpose, not only of a provision that purports to exempt a director from liability resulting from a breach of duty, but also of a provision that purports to exempt a director from a duty. Hence, s 247(1) renders void both a provision that purports to exempt a director from liability arising from a breach of duty and a provision that purports to release a director from a duty. In both cases the provision purports to relieve a director from 'liability . . . which would otherwise attach to him'.2385

From this it also follows that a provision is void, not only when it purports to abrogate a duty, but also when it purports to narrow the extent of the duty or to lower the standard of conduct required by the duty.2386

(2) Exemption distinguished from ratificationWhat is prohibited is the exemption from liability or duty - not the ratification of a breach of duty or a prior release.2387  An exemption from liability is a blanket removal or extinction of a duty, or of liability for its breach - so that the directors concerned are no longer subject to the duty, or are no longer liable for any breach or breaches of it that they may have committed, or will no longer incur liability if they breach it. A ratification, on the other hand, merely relieves the director of liability incurred as a consequence of a

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particular breach of duty; and a prior release merely relieves the director of the duty, or liability for its breach, in regard to a particular act or transaction.2388  Thus the section is does not cover ratifications 2389  or prior releases.2390

(3) What is permissibleThe articles of companies may, and frequently do, relax the rule the requiring a director to disclose to the members in general meeting his interests in company contracts, by permitting such disclosure to be made to the board. Such provisions have been recognised by the courts (not only before the introduction of the provisions now contained in s 247(1), 2391  but also after their introduction) 2392  as valid. Indeed, their validity

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is implicitly recognised by the legislature, for art 76 of Table A and art 74 of Table B permit disclosure in terms of the statutory disclosure provisions of ss 234-241, 2393  which provisions require disclosure to the board of directors.2394  It has been held that such provisions are not rendered void by s 247(1), because the rule that requires disclosure ought, on a proper analysis, to be understood as one imposing a disability rather than a duty.2395  But it would seem that the reason why these provisions are not void is that they merely determine the organ of the company to which disclosure must be made: they neither purport to exempt the directors from their duty to disclose nor purport to relieve them from liability for breach of it.2396

The articles may even permit the interested director to be counted in the quorum and vote on the matter (provided of course that he makes full disclosure of his interest) 2397  and

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to retain certain incidental profits.2398  Since the director's duty not to act for the company in matters in which he has an interest is a duty not to act in such matters without the consent of the company, it would seem that a provision in the articles of a company permitting directors to act in such matters is valid, 2399  because the duty exists only in the absence of consent.2400  For the same reason, it would seem, a provision in the articles permitting the directors to retain incidental profits is valid, 2401  ie the duty to account for profits is also a duty that exists only in the absence of consent. But, of course, no provision in a company's articles can relieve its directors of their duty to act in the interests of the company, 2402  or of their duty to disclose.Any negligence, default, breach of duty or breach of trustA director is not a trustee, 2403  and therefore, although in England directors have always been treated as trustees of the assets under their control 2404  and have been treated as having committed 'breaches of trust' for the purposes of provisions in the Companies Acts which refer to 'breaches of trust', 2405  they, strictly speaking, cannot commit breaches of trust.2406  Thus it would seem clear that 'breach of trust' in the context of s 247(1) means

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breach of fiduciary duty. However, since the subsection also refers to 'any breach of duty', 'breach of trust' adds nothing to the provision. 2407

In Tito v Waddel (No 2) 2408 Megarry V-C was concerned with the question whether failure to comply with the 'self-dealing' 2409 and the 'fair-dealing' 2410 rules constituted a 'breach of trust for the purposes of s 19(2) of the Limitations Act 1939. He held that such failure does not constitute a 'breach of duty', and, ex hypothesi, is not a 'breach of trust'. In this he was mistaken, for these rules do impose duties, and failure to comply with them is a breach of fiduciary duty, and hence a 'breach of trust' for the purposes of s 247(1). 2411

Or to indemnify him against any such liabilitySection 247(1) renders void not only any provision in the articles or a contract with the company which purport to exempt a director from the specified liability, but also all such provisions which purport 'to indemnify him against any such liability'. The word 'indemnify' has at least two meanings. First, it means to keep free from, secure against any hurt, harm or loss — to give an indemnity to. Thus in Viscount of the Royal Court of Jersey v Shelton 2412 Lord Brightman said that '[a] company has no cause of action against a director in respect of a matter against which the company has agreed to indemnify him'. Secondly it means to compensate for loss suffered, expense incurred etc. 2413

The articles cannot relieve a director from the obligation to act in the interests of the company as a whole. 2414

Section 247(1) refers to 'any contract with the company'. Thus it includes a contract between the company and a third party in terms of which the third party undertakes to

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compensate the director for damages that he is obliged to pay to the company as a consequence of his breach of duty etc, eg a contract between the company and an insurer in terms of which the insurer agrees to indemnify the director against his liability to the company. In England the Companies Act 1989 2415 amended the provisions of s 310(3) so as to include a provision to the effect that s 310 does not prohibit a company

'from purchasing and maintaining for any such officer or auditor insurance against any such liability'. 2416 A similar provision is now contained in the proviso to s 247(1) (as to which, see below).

Section 247(1) renders void any provision purporting to indemnify a director against any liability which by law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he may be guilty 'in relation to the company'. The words 'in relation to the company' could be understood to mean 'in connection with', and so include wrongs committed against third parties by the director when acting in connection with the company's affairs. But it would seem to be reasonably clear that 'in relation to the company' means 'against the company', ie liability arising from breach of duties owed to the company. 2417 Section 247(1) does not apply in respect of any negligence, default, breach of duty or breach of trust in relation to the company of which he may be guilty; rather, it applies 'in respect of any negligence, default, breach of duty or breach of trust of which he may be guilty in relation to the company'. It is not merely the wrongful conduct that must be 'in relation to the company', but also, and in particular, the guilt. What is more, the company can exempt its directors only from duties owed to it. It would seem that 'indemnify' must also be interpreted to refer to duties owed to the company. For s 247(1) provides 'or to indemnify him against any such liability', ie the same liability from which the director may not be exempted. Hence, its operation is limited to duties owed to the company. 2418

Thus, the section does not operate to prohibit indemnification against claims brought against the directors by third parties, such as creditors. This means that a company can obtain insurance or have an indemnification provision in its articles or in a contract with its directors specifically providing coverage or indemnification for directors who are held liable in damages to third parties. 2419

RS 7, 2010 ch8-p361

Not applicable to insurance taken out and kept by the company as indemnification against any liability of any director or officerThe Companies Amendment Bill 2420 explained: 'On the recommendation of the King Committee on Corporate Governance 2421 a proviso is now being added to the section to allow a company to protect itself by taking out insurance against liability of a director or officer towards the company in respect of negligence, default, breach of duty or breach of trust.'

The purpose of the provision is, however, not to protect the company, but to protect its directors and officers at its expense. The King Committee (a committee formed at the instance of the Institute of Directors in Southern Africa) recommended that '[t]he Companies Act should be amended to entitle a company to pay for additional insurance cover for directors and officers to cover conduct on their part which may have contributed to a failed audit, save for gross negligence or recklessness on their part'. 2422 The Committee did not identify the persons to whom this liability is incurred, but, presumably, it had in mind liability to third parties. The Committee also made the rather more outrageous recommendation that '[b]ecause of the onerous duties placed on directors the question of companies indemnifying directors, which is negated by Section 247 of the Companies Act, should be revisited'. 2423 The purpose of both these recommendations was, then, to protect directors and officers, at expense of the company, against their own wrongdoing.

A company would 'protect itself' by taking out insurance entitling it to be indemnified against any loss it has suffered as a result of negligence, default, breach of duty or breach of trust on the part of its directors and officers. 2424 It would then be able to recover its losses even when its directors were unable to meet their liabilities. Having paid the company, the insurer would be entitled to enforce the company's claims against the wrongdoing directors. There has never been anything in s 247(1) to prevent a company from taking out such insurance.

The proviso s 247(1), however, entitles a company (in truth, the directors themselves) to take out and pay for 'insurance . . . as indemnification against any liability of any director or officer towards the company in respect of any negligence, default, breach of duty or breach of trust'. Only the director or officer concerned can be indemnified against his liability to the company. That this is what was intended is made clear by the

fact that the proviso states that 'this subsection shall not be applicable' to such insurance.

RS 7, 2010 ch8-p362

As noted above, there is no need to render the subsection inapplicable to an insurance policy taken out by the company to indemnify itself against loss caused to it by its directors' wrongdoing. If it was thought that this was not altogether clear, the words 'shall not be construed' would have been used. And, finally, if that had been intended, there would have been no need for the words 'taken out and kept by the company'. Section 310(3)(a) of the English 1985 Act provides that the section does not prevent a company 'from purchasing and maintaining' for any officer 2425 of the company insurance against any such liability. The word 'kept' in s 247(1) can only mean 'maintain' or, more frankly, 'continue to pay for'. 2426

Section 247(2)It would seem that the provisions of s 247(2) were inserted ex abundanti cautela (hence the words, 'shall not be construed'). Section 247(1) does not prohibit the payment of such indemnities. Where judgment has been given in his favour, the director, officer or auditor is not guilty of breach of duty, and therefore s 247(1) does not apply. That, of course, is not the case where he makes an application under s 248 for relief from liability. But the costs that he incurs when making such an application do not constitute a 'liability which by law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he may be guilty in relation to the company'.  

    2362   For the position in Australia, see Forge v ASIC (2005) 52 ACSR 1.    2363   [1925] Ch 407.    2364   Prior to the introduction of the provisions now contained in s 310 of the English 1985 Act and s 247(1) of

our 1973 Act, the articles of a company could provide that directors and other officers would not be liable for losses caused by them unless caused by their dishonesty, or wilful neglect, act, or default: Re Brazilian Rubber Plantations and Estates Ltd [1911] 1 Ch 425; Leeds City Brewery Ltd v Platts [1925] Ch 532 (CA); Re City Equitable Fire Insurance Co Ltd [1925] Ch 407; [1924] All ER Rep 485. And see Re City of London Insurance Co Ltd (1925) 41 TLR 521. In Re City Equitable Fire Insurance Co Ltd supra one of the company's articles provided that none of the directors should 'be answerable . . . for any loss, misfortune, or damage which might happen in the execution of their respective offices or trusts, or in relation thereto, unless the same should happen by or through their own wilful neglect or default'.

    2365   [1925] Ch 407; [1924] All ER Rep 485.    2366   Company Law Amendment Committee Cmd 2657 (1925-1926) paras 46 47.    2367   Company Law Amendment Committee Cmd 2657 (1925-1926) para 46.    2368   Company Law Amendment Committee Cmd 2657 (1925-1926) para 46, and see para 47.    2369   Company Law Amendment Committee Cmd 2657 (1925-1926) para 46.    2370   Section 310(1) of the English 1985 Act provides: 'This section applies to any provision, whether contained

in a company's articles or in any contract with the company or otherwise, for exempting any officer of the company or any person (whether an officer or not) employed by the company as auditor from, or indemnifying him against, any liability which by virtue of any law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he may be guilty in relation to the company.'

    2371   Section 310(3) provides that s 310 'does not prevent a company (a) from purchasing and maintaining for any such officer or auditor insurance against any such liability'.

    2372   Report of the Company Law Commission 1935-1936 UG No 45 1936 para 135. Paragraph 136 contained the following recommendation: 'That a provision be added to the Companies Act, 1926, voiding any stipulation in any articles of or contract with a company, purporting to exempt any director or other officer of the company from liability in respect of negligence, default, breach of duty or breach of trust.'

    2373   By s 43 of the Companies Amendment Act 23 of 1939.    2374   On this provision, see: C D Baker 'Disclosure of Directors' Interests in Contracts' (1975) JBL 181; J Birds

'The Permissible Scope of Articles Excluding the Duties of Company Directors' (1976) MLR 394; E J Rule and H S Brar 'Exempting Directors' (1979) New LJ 6; J Birds 'Directors' Duties of Care and Liability Insurance' in The Regulation of the British Securities Industry (eg B A K Rider 1979) Chp 7 p 114; J E Parkinson 'The Modification of Director's Duties' (1981) JBL 335; R Gregory 'The Scope of the Companies Act 1948, Section 205' (1982) 98 LQR 413; R Instone (1982) 98 LQR 548; R Gregory 'Section 205 of the Companies Act 1948 - A Reply' (1983) 99 LQR 194; J Birds 'Excluding the Duties of Directors' (1987) 8 Company Lawyer 31; L S Sealy 'Company - Directors "Duties" and Exempting Articles' [1987] CLJ 217; D Prentice [1988] All ER Annual Review 34; J Birds 'Reform of Section 310' (1988) 9 Company Lawyer 221; J Birds 'Directors Insurance and s 310' (1986) 7 Company Lawyer 209; R Cranston 'Limiting Directors' Liability: Ratification, Exemption and Indemnification (1992) JBL 197; S Turnbull & V Edwards 'Companies Act 1989: Directors' and Officers' Liability' (1990) 134 Solicitors Journal 768; M S Blackman 'Exemption of Directors from Liability and Section 247(1) of the Companies Act' (1993) 56 THRHR 537.

    2375   [1925] Ch 407; [1924] All ER Rep 485.    2376   As was s 205 of the English Companies Act 1948.    2377   Italics added.    2378   J Birds 'Directors' Duties of Care and Liability Insurance' in The Regulation of the British Securities

Industry (eg B A K Rider 1979) Chp 7 p 114 at 119. See also L S Sealy [1987] CLJ 217 at 217, who says that 'the

probably unintended feature' is that the wording of the section seems wide enough to outlaw 'many entirely acceptable practices (such as . . . even a professional liability indemnity insurance policy taken out by a director)'; Ross Cranston 'Limiting Directors' Liability: Ratification, Exemption and Indemnification' (1992) JBL 197 207.

    2379   Burgoine v London Borough Council v Waltham Forest [1997] 2 BCLC 612 626-627.    2380   Neuberger J said (at 625) that, '[i]n these circumstances . . . it would require clearer words before a

provision relating to indemnification applied to persons other than the company'.    2381   Also, no doubt, provisions in the company's memorandum and resolutions of the general meeting.    2382   See Viscount of the Royal Court of Jersey v Shelton [1986] 1 WLR 985 992 (PC).    2383   Movitex v Bulfield [1988] BCLC 104. Before the decision in Movitex v Bulfield 1988 BCLC 104, it was

argued that the articles could still avoid a 'breach of duty' by ensuring that there was no duty to breach. This was said to follow from the fact that the section refers only to provisions which exempt a director from liability 'which would otherwise attach to him' in respect of a breach of duty 'of which he may be guilty'. Since a director who has been released from a duty cannot be guilty of a breach of that duty, it follows that the section does not prohibit release from duties. That is to say, the words 'which would otherwise attach to him' refer to liability which would attach to the director were it not for the provision exempting him. As to this debate, see: K W Wedderburn 'Shareholders' Rights and the Rule in Foss v Harbottle' [1957] CLJ 194, [1958] CLJ 93 97; C D Baker 'Disclosure of Directors' Interests in Contracts' (1975) JBL 181; J Birds 'The Permissible Scope of Articles Excluding the Duties of Company Law Directors' (1976) MLR 394; E J Rule and H S Brar 'Exempting Directors' (1979) New LJ 6; J E Parkinson 'The Modification of Director's Duties' (1981) JBL 335; R Gregory 'The Scope of the Companies Act 1948, Section 205' (1982) 98 LQR 413; R Instone (1982) 98 LQR 548; R Gregory 'Section 205 of the Companies Act 1948 — A Reply' (1983) 99 LQR 194; J Birds (1987) 8 Company Lawyer 31; L S Sealy [1987] CLJ 217; D D Prentice [1988] All ER Annual Review 34; M S Blackman 'Exemption of Directors from Liability and Section 247(1) of the Companies Act' (1993) 56 THRHR 537.

    2384   The question to be asked is not 'Would the director have been liable for this breach of duty had s 247(1) not been enacted?' Rather, it is, 'Would the director have been liable for breach of duty had not the provision in question purported to exempt him from liability (either by purporting to waive the duty or by purporting to exempt him from liability consequence upon its breach)?'

    2385   Movitex v Bulfield [1988] BCLC 104. The English section refers to any provision 'for exempting' such persons from liability. In effect, in Movitex Ltd v Bulfield supra 117 it was held that the words 'for exempting' mean 'which has for its purpose the exemption'. This, then, is what our s 247 expressly states ('which purports to exempt' and 'wat 'n direkteur . . . heet vry te stel van 'n aanspreeklikheid'). See C D Baker 'Disclosure of Directors' Interests in Contracts' (1975) JBL181; J Birds 'The Permissible Scope of Articles Excluding the Duties of Company Directors' (1976) 39 MLR 394; E J Rule and H S Brar 'Exempting the Directors' (1979) New LJ 6; and especially Roger Gregory 'The Scope of the Companies Act 1948, Section 205' (1982) 98 LQR 413; R Gregory 'Section 205 of the Companies Act 1948 - A Reply' (1983) 99 LQR 194. As Roger Gregory (at 414-415) puts it, a director 'is exempted from liability just as effectively by a provision which says that the rules do not apply to him, as by one which says that the consequences of a breach of the rules do not apply to him'. The section requires one 'to compare the director's position under that provision with his position under the general law, and not with his position under the general law as modified by that provision'. It is 'the consequence of the exemption rather than the type of exemption which is the dominant consideration under the section'. Hence, as C D Baker ('Disclosure of Directors' Interests in Contracts' (1975) JBL 181 187) says, it is not necessary 'to give a strained interpretation of the words of the section in order that the wishes of the Greene Committee should prevail': the section avoids an articles which relieve a director from any liability 'which would otherwise attach to him', which words, on a literal interpretation, are 'capable of referring to an article which, by excluding the duty, prevents the liability from attaching to the director, just as much as one which excludes the liability itself'.

    2386   In Movitex Ltd v Bulfield [1988] BCLC 104 117-118. In this case Vinelott J pointed out that the solution that a provision may reduce or abrogate a duty so long it does not exempt the director from liability for breach of it 'leads to the absurd result that an article could, without infringing [the section], modify a director's duty to use reasonable skill and care in the conduct of the company's affairs and so avoid a liability for damages for breach of duty which would otherwise arise, a conclusion which seems to me manifestly in conflict with the purpose of the section.' Roger Gregory made the same point ('The Scope of the Companies Act 1948, Section 205' (1982) 98 LQR 413 415; and see (1983) 99 LQR 194), noting that a weakness in the construction which gives validity to an article prescribing a standard of care lower than the legal standard, is that the section lays it down that to test whether a provision is an exempting clause or not, one has to compare the director's position under that provision with his position under the general law, and not with his position under the general law as modified by that provision. But cf Ralph Instone (1982) 98 LQR 548 549-550.

    2387   As to ratification and prior release, see note RATIFICATION OR CONDONATION OF DIRECTOR'S BREACH OF DUTY AND PRIOR CONSENT OR RELEASE in notes on s 208.

    2388   Miller v Miller (1995) 16 ACSR 73 87 SC(NSW); Gray v Eisdell Timms Pty Ltd v Combined Auctions Pty Ltd (1995) 17 ACSR 303 312 SC(NSW). In Miller v Miller supra 87 Santow J said: 'The essential difference between ratification, which has had a long history of co-existence with the various versions of s 241 [of the Australian Corporation Law] . . . is this. Ratification can never be a blanket indemnification or exemption on a prospective basis, clearly prohibited by [the section]. . . . Rather it is a specific absolution, afforded usually though not always, retrospectively, but necessarily for specific and properly disclosed infractions of the director's duties and subject to certain limitations . . . The essence of ratification is that the release so given obviates the liability, so far as any right of action to enforce it by existing shareholders is concerned.' The learned judge went on to say (at 88): 'The notion of "exempt" is to "free from an obligation or liability" . . . . Section 241 is concerned with "blank cheque" indemnification and exemption, while ratification requires specific release after all disclosure of the particular cause for claim.'

    2389   It has been suggested that the section is wide enough to cover 'a shareholders' resolution granting absolution for a breach of duty' (Ralph Instone (1982) 98 LQR 548 549), 'a contract compromising an action brought against a director, a shareholders' resolution releasing a claim' (L S Sealy [1987] CLJ 217 at 217). Instone argued ((1982) 98 LQR 548 549) that the courts have actually accepted that the section does not prohibit release of duties. He says that if it were correct that s 205 of the English 1948 Act, on its true

construction, nullified exemptions from the scope of a director's duty as well as exemptions from the consequences of a breach of his duty, no absolution could be effectually obtained by means of a shareholders' resolution, because s 205 applies to 'any provision, whether contained in the articles of a company . . . or otherwise', and these words plainly cover such a resolution. That absolution can be obtained in advance is, he says, illustrated by Bamford v Bamford [1970] Ch 212 238 [1969] 1 All ER 969 972 (CA). So, Instone's argument is that, since such absolution is permitted, and since if the argument that directors cannot be released from their duties under s 205 were correct such a resolution would be hit by s 205, it follows that s 205 cannot prevent articles from waiving duties. But see R Gregory [1983] 99 LQR 194 195-196, who says that this reasoning: '. . . involves not construing "or otherwise"eiusdem generis with "articles" and "contract" . . . . In my view the eiusdem generis rule applies, and there is, therefore a line to be drawn between a shareholders' resolution appointing a director to office on terms excusing him in advance for breach of duty by denying the existence of duty, and a shareholders' resolution to absolve a director who confesses his sins actual or contemplated.'

    2390   See also Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134n; [1942] 1 All ER 378 (HL); Bamford v Bamford [1970] Ch 212; [1969] 1 All ER 969 (CA); Winthrop Investments Ltd v Winns [1975] 2 NSWLR 666, in all of which cases it was accepted that prior release is possible, and no mention was made of the English or Australian section corresponding to our s 247(1). Steven Turnbull and Vanessa Edwards 'Companies Act 1989: Directors' and Officers' Liability Insurance' (1990) 134 Solicitors Journal 768 say that it is reasonably clear that the words in s 310 'of which [the director] may be guilty' refer to future rather than past or accrued liabilities, 'and thus to prohibit only an exemption or indemnity granted in advance of the event'. But it would seem that the section is concerned with blanket releases, and the mere fact that a release from duty in regard to a particular transaction is granted 'in advance' does not bring it within the section.

    2391   See eg Imperial Mercantile Credit Association v Coleman (1871) 6 Ch 558 568-570; (1873) LR 6 HL 189 202; Costa Rica Railway Co Limited v Forwood [1900] 1 Ch 756; Robinson v Randfontein Estates GM Co Ltd 1921 AD 168 197-198 215-216 260 265-266.

    2392   See eg Gray v New Augarita Porcupine Mines (1952) 3 DLR 1 (PC); Boulting v Association of Cinematograph Television and Allied Technicians [1963] QB 606 636-638; [1963] 1 All ER 716 729-730 (CA); Hely-Hutchinson v Brayhead[1967] 2 All ER 14; affd [1968] 1 QB 549; [1967] 3 All ER 98 (CA); Novick v Comair Holdings Ltd 1979 (2) SA 116 (W) 137-140 152-153; Rolled Steel Products Ltd v British Steel Corporation [1982] Ch 478; [1982] 3 All ER 1057; [1986] Ch 246; [1985] 3 All ER 52 (CA); Australian Growth Resources Corporation Pty Ltd v Van Reesema (1988) 13 ACLR 261 269 SC(SA); Movitex Ltd v Bulfield [1988] BCLC 104; Joint Receivers and Managers of Niltan Carson Ltd v Hawthorne[1988] BCLC 298; Guinness plc v Saunders [1990] 2 AC 663; [1990] 1 All ER 652 (HL); Woolworths Ltd v Kelly (1991) 4 ACSR 431 CA(NSW); Centofanti v Eekimitor Pty Ltd (1995) 14 ACSR 629 642 SC(SA). And see eg Cowan de Groot Properties Ltd v Eagle Trust plc [1992] 4 All ER 700 762 ('the ordinary principles of law and equity which, unless excluded by the relevant articles of association, have the result that, if a director enters into or is interested in a contract, the contract may be voidable at the instance of the company'); Re Wallace Smith & Co Ltd [1992] BCLC 970 987 ('[a]s the Boulting case shows, the [conflict of interest and duty] rule is one for the protection of the person to whom the duty is owed, and that person may relax the rule, and this is not infrequently done.')

    2393   As to the legal status of provisions in the Tables to the Act, see Lock and Trotman v Queensland Investment & Land Mortgage Co Ltd [1896] AC 461 (HL).

    2394   Sections 234-241 make failure to disclose to the board a criminal offence, and art 76 of Table A and art 74 of Table B provide: 'Subject to the provisions of sections 234 and 241, inclusive, of the Act, a director shall not vote in respect of any contract or proposed contract with the company in which he is interested, or any matter arising therefrom, and if he does so vote, his vote shall not be counted.' In Transcash SWD (Pty) Ltd v Smith 1994 (2) SA 295 (C) 306 it was accepted that such an article incorporates the provisions of ss 234-241, thus permitting disclosure to the board (provided it is made in terms of these sections).

    2395   Movitex v Bulfield [1988] BCLC 104. See also Tito v Waddel (No 2) [1977] Ch 106 248-249; [1977] 3 All ER 129 247-248.

    2396   In Movitex v Bulfield [1988] BCLC 104 118-119 Vinelott J rejected this explanation, but did so on the doubtful assumption that directors are under a duty to participate in all decisions of the board, ie because a director may not vote on a matter in which he has an interest, a provision permitting a director to disclose to the board in effect amounts to a waiver of his duty to give the company 'his voice and advice' on all matters brought before the board. But it would seem that the rule is merely that a director may not, without his company's consent, act for his company in a matter in which he has an interest, and that he must disclose that interest to it. In S v Heller 1964 (1) SA 524 (W) 538 Trollip J was concerned with articles in the companies concerned which enabled a director to contract with the company and which provided that he was not 'liable to account to the company for any profit . . . realised by any such contract or arrangement by reason only of such director holding that office or the fiduciary relation thereby established but it is declared that the nature of his interest must be disclosed by him . . . .' Trollip J said: 'That article does not lessen but entrenches the director's duty to disclose the fact and extent of his profit for which, at common law, he would be liable to account to the company because, being material facts, they would be included in "the nature of his interest" (Robinson's case supra pp 197-8 215 and 260).' But see C D Baker [1975] 'Disclosure of Directors' Interests in Contracts' JBL 181 and J Birds 'The Permissible Scope of Articles Excluding the Duties of Company Directors' (1976) 39 MLR 394.

    2397   The articles can waive the self-dealing rule, ie permit director to act in a matter in which he has an interest. See Boulting v Association of Cinematograph Television and Allied Technicians [1963] QB 606 636-638; [1963] 1 All ER 716 729-730 (CA), where Upjohn LJ said: 'But the person entitled to the benefit of rule [that no one who has a duty to perform shall place himself in a situation where his interests conflict with his duty] may relax it. . . . Thus, the company may in its articles of association permit directors to be interested in contracts with the company. It may go further and articles may validly permit directors to be present at board meetings and even to vote when proposed contracts in which they are interested are being discussed.' See eg Table A art 84(2) of the English 1948 Act and art 94 of Table A of the English 1985 Act (permitting an interested director to act in certain such matters). For articles expressly permitting a director to act, despite having a conflict of interest: see eg Re Automative & General Industries Ltd [1975] VR 454; Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246; [1985] 3 All ER 52 (CA); Centofanti v Eekimitor Pty Ltd (1995)

15 ACSR 629 SC(Qld). And see eg Gundelfinger v African Textile Manufacturers Ltd 1939 AD 314 323; Movitex Ltd v Bulfield [1988] BCLC 104; Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald [1995] 3 All ER 811 814.

    2398   See arts 78 and 84(3) of Table A of the English 1948 Act and art 85(c) of Table A of the English 1985 Act (permitting a director to retain certain incidental profits).

    2399   See eg Boulting v Association of Cinematograph Television and Allied Technicians [1963] QB 606 636; [1963] 1 All ER 716 729 (CA); Movitex v Bulfield [1988] BCLC 104; Jackson v Invicta Plastics Ltd [1987] BCLC 329; Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald [1995] 3 All ER 811.

    2400   See Jackson v Invicta Plastics Ltd [1987] BCLC 329 343, where it was pointed that the rule is that directors may not 'without the consent of the company' place themselves in a position in which their interests conflict with their duty; and it was held that the company had consented because its articles contained provisions (i) requiring disclosure of interests to the board, (ii) providing that no contract in which a director had an interests would be liable to be avoided, (iii) permitting directors to retain profits in certain circumstances, and (iv) providing that a director was to be counted in the quorum and could vote at any meeting at which he was appointed to any office under the company. And see Galipienzo v Solution 6 Holdings Ltd (1998) 28 ACSR 139 144-145 SC(NSW).

    2401   See eg Guinness plc v Saunders [1988] 2 All ER 940 (CA); [1990] 2 AC 663 692; [1990] 1 All ER 652 661 (HL).

    2402   See Re Bright Pine Mills Pty Ltd [1969] VR 1002 1013; Australian Growth Resources Corporation Pty Ltd v Van Reesema (1988) 13 ACLR 261 269 SC(SA); Galipienzo v Solution 6 Holdings Ltd (1998) 28 ACSR 139 144-145 SC(NSW).

    2403   As Nourse LJ put it in Re Duckwari plc (No 2) [1998] 2 BCLC 315 321 (CA): 'The assets of a company being vested in the company, the directors are not accurately described as trustees of those assets.'

    2404   See eg Re Lands Allotment [1894] 1 Ch 616 631; [1891-94] All ER Rep 10332 1032 (CA); Belmont Finance Corp v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 405 (CA); Re Duckwari plc (No 2) [1998] 2 BCLC 315 321-332 (CA).

    2405   See Re Claridges Patent Asphatle Company Ltd [1921] 1 ChD 543 548, where Astbury J held that s 279 of the English Companies (Consolidation) Act of 1908 (in terms of which a director could be relieved from liability for 'negligence or breach of trust' - our corresponding section, s 248 of the 1973 Act, also provides, inter alia, for relief from liability for 'breach of trust'), 'clearly applies to a case of ultra vires, for '[a]ll applications of a company's money ultra vires the company are in fact breaches of trust on the part of the directors'. He added that the language of s 279 was 'perfectly wide and general' and he could see 'no reason for limiting the wide generality of that section to breaches of trust where no question of ultra vires comes in'.

    2406   Even in the case of trustees the concept of a 'breach of trust' is not without its uncertainties. Tito v Waddel (No 2) [1977] 3 All ER 129 246-247 Megarry V-C said that '[o]ne of the more unexpected curiosities' of the case was that it 'became common ground between counsel that the term "breach of trust" had not been defined in any case or textbook known to them'. Counsel for the Attorney-General argued that 'any breach of a duty owed by a trustee as such to his beneficiary was a breach of trust'. Megarry J noted that there is a substantial body of American authority on this question. He pointed out that two definitions, or descriptions, are current in the America. The first is that 'every omission or violation by a trustee of duty which equity lays on him' is a breach of trust. The second formulation is that 'a trustee commits a breach of trust if he violates any duty which he owes as trustee to the beneficiaries'. Megarry V-C said that the second version seems to be in substance close to the formulation by counsel of the Attorney-General; the first seems the wider, for unless some expression such as the phrase 'as trustee' which appears in the second version is implied into the first version, it seems that a breach by a trustee of some duty which equity imposes on him otherwise than under the law of trusts would be a breach of trust. Megarry V-C said that he would not, however, pursue the point; nor would he attempt any comprehensive definition of a breach of trust, for it was not necessary for him 'to undertake this perilous task'.

    2407   In Walsh v Permanent Trustee Australia Ltd (1996) 21 ACSR 213 215 SC(NSW) Brownie J said: 'A breach of trust is a breach of fiduciary duty, and therefore a "breach of duty": Walker v Wimborne (1976) 137 CLR 1 at 14-15; 3 ACLR 529 at 538-9; it is apt to regard a breach of trust as answering any of the descriptions "default", "breach of duty" or "misconduct"; and the general words of the statute ought not to be read down so as to exclude from their reach an action based on breach of trust.'

    2408   [1977] 3 All ER 129.    2409   By the 'self-dealing rule' he meant (at 228) the rule that 'if a trustee purchases property from himself,

any beneficiary may have the sale set aside ex debito justitiae, however fair the transaction'.    2410   By the 'fair-dealing rule' he meant (at 228) the rule that 'if a trustee purchases his beneficiary's beneficial

interest, the beneficiary may have the sale set aside unless the trustee can establish the propriety of the transaction, showing that he had taken no advantage of his position and that the beneficiary was fully informed and received full value'.

    2411   In Tito v Waddel (No 2) [1973] 3 All ER 129 247 Megarry J did say that if a trustee could properly be said to be 'under a "duty" not to purchase the trust property, and under a "duty" not to purchase a beneficiary's interest in the trust property without making proper disclosure, and so on', then 'there is much logical force in the contention that a breach of these duties is a breach of trust within the Limitation Act 1939, s 19(2)'.

    2412   [1986] 1 WLR 985 991 (PC).    2413   'Indemnity' also has two meanings. First, it means 'security or protection against contingent hurt,

damage or loss' and thus, 'a legal exemption from the penalties or liabilities incurred by any course of action'. Secondly, it means 'compensation for loss'.

    2414   Forve v ASIC (2005) 52 ACSR 1.    2415   s 137(1).    2416   See Ross Cranston 'Limiting Directors' Liability: Ratification, Exemption and Indemnification'

(1992) JBL 197 207 says that, in the absence of the new s 310(3), 'there is a good argument that section 310 would invalidate such an insurance. For a consideration of the arguments in favour of such insurance, see Vanessa Finch 'Company Directors: Who Cares About Skill and Care?' (1992) 55 MLR 179; Ross Cranston 'Limiting Directors' Liability: Ratification, Exemption and Indemnification' (1992) JBL 197 209.

    2417   See Burgoine v London Borough Council v Waltham Forest [1997] 2 BCLC 612.

    2418   Ian M Ramsay 'Liability of Directors for Breach of Duty and the Scope of Indemnification and Insurance' (1986) 5 C&SLJ 129 133. This interpretation is adopted by a number of commentators. See eg J Birds 'The Permissible Scope of Articles Excluding the Duties of Company Directors' (1976) 39 MLR 394 394-395.

    2419   Ian M Ramsay 'Liability of Directors for Breach of Duty and the Scope of Indemnification and Insurance' (1986) 5 C&SLJ 129 133. Cf Steven Turnbull and Vanessa Edwards 'Companies Act 1989: Directors' and Officers' Liability Insurance' (1990) 134 Solicitors Journal 768 who list the following as the prohibited indemnities: '(a) Liability of a director to the company itself (including those arising as a result of derivative actions brought on behalf of the company by its shareholders). (b) Liabilities of a director for fines arising from acts committed in relation to the company in breach of penal provisions of the Companies Act and related legislation. (c) Liabilities of a director to third parties under any provision of the Companies Acts and related legislation by which personal liability is imposed on the directors. (d) Liabilities of a director to third parties not falling within paragraph (c) above where the act or omission giving rise to the claim also amounts to negligence, default etc as against the company. (e) Liabilities incurred by a director (including his own and third party costs) in defending proceedings (whether civil or criminal) where judgment is not given in his favour or he is not acquitted, or in connection with any application under . . . s 727 [s 248 of our 1973 Act] where relief is not granted by the court.' They say that indemnity in respect of the liabilities mentioned in (a) and (b) is prohibited because they clearly include liability 'in relation to the company' and are therefore within the section. Although (c) and (d) concern liabilities to third parties, 'such liabilities arise out of situations where the director would incur liability to the company arising out of the same matter and are accordingly prohibited'.

    2420   B 32D-98.    2421   The King Report on Corporate Governance 29 November 1994.    2422   para 20.6. See also para 24.3: 'There should be a provision for additional insurance cover for directors

and officers at the company's expense to cover any conduct on their part which contributed to a failed audit, save gross negligence or recklessness'.

    2423   para 24.7.    2424   Nor has it ever been suggested that s 205 of the English 1948 Act prohibited such an insurance. See J

Birds 'Directors' Duties of Care and Liability Insurance' in The Regulation of the British Securities Industry (eg B A K Rider 1979) Chp 7 p 114 at 119, where he says that it should 'be pointed out that there is nothing in s 205 to prohibit an insurance effected by a company to indemnify it against any damages in case it might suffer by reason of a director's breach of duty, in other words a type of first party insurance . . . .'

    2425   'Officer' includes a director, manager or secretary: s 744.    2426   The same result could have been achieved more brazenly by a provision to the effect that, if a company

insures itself against harm caused to it as a consequence of the wrongdoing of its directors and officers, its directors and officers shall be exempted from liability.

248  Relief of directors and others by Court in certain cases(1) If in any proceedings for negligence, default, breach of duty or breach of trust against any director,

officer or auditor of a company it appears to the Court that the person concerned is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that, having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused for the negligence, default, breach of duty or breach of trust, the Court may relieve him, either wholly or partly, from his liability on such terms as the Court may think fit.

(2) Any such director, officer or auditor who has reason to apprehend that any claim will be made against him in respect of any negligence, default, breach of duty or breach of trust, may apply to the Court for relief, and the Court shall on any such application have the same powers to grant relief as are by subsection (1) conferred upon it with reference to proceedings referred to in that subsection.

NotesThese provisions are designed 2427 to protect honest directors, officers and auditors, and ought not to be construed in a narrow sense, 2428 and for this reason it has been held that the

RS 8, 2011 ch8-p363

court may grant relief from liability for damages for breach of contract. 2429 They do not, however, empower the court to grant relief to a director or other officer against a claim by a third party such as a creditor of the company; the only relief that can be obtained being relief from liability to the company itself 2430 and from criminal liability. 2431 Nor do they empower the court to relieve a director from liability for debts of the company imposed on him in terms of s 424. 2432

RS 8, 2011 ch8-p364

The word 'default' is to be construed as a failure to conduct himself properly as a director, officer or auditor of the company in discharge of his obligations pursuant to the provisions of the Companies Act. 2433That is to say, it is 'failure to act or perform adequately' and contemplates 'an omission or failure to do something, or to fall short in the performance of something required in law'. 2434 In Re Claridge's Patent Asphalte Co

Ltd2435 it was held that all applications of a company's money ultra vires the company are breaches of trust 2436 on the part of the directors. The legal bases of liability referred to overlap. 'Conduct (whether by commission or omission) which amounts to negligence could also, depending upon the circumstances, fall within the description of default, breach of trust or breach of duty', and if default has a meaning which extends beyond omission, then there is a default in failing to comply with the obligation to exercise reasonable care. 2437 And of course, a breach of trust is a breach of duty.

In England, where the corresponding provision 2438 contains the words 'if it appears to the court hearing the case', it has been held that the court that hears the matter is the only court with jurisdiction to grant relief in respect of proceedings already commenced. 2439

There are three requirements for relief, namely, that the person concerned (a) acted honestly, (b) acted reasonably, and (c) ought fairly to be excused. 2440 The requirement that the director or officer should have acted honestly means that the court is not empowered to relieve such a person from any liability resulting from fraudulent conduct on his part. 2441 Whether the person concerned acted honestly or not must to some extent depend upon the way in which matters have been handled by the company in the past. 2442 The requirement that the director or officer must have acted reasonably gives rise to difficulty where liability arises from negligence. 2443 The fact that a director was paid for his services

RS 6, 2009 ch8-p365

has been taken into account in determining whether or not he acted reasonably. 2444 The court has also taken into consideration the fact that the person concerned acted on, 2445 or failed to obtain, 2446 legal advice. Directors have been held to have acted unreasonably where they acted blindly or without consideration at the behest of a majority shareholder without regard to minority shareholders; 2447 and where they acted with gross negligence. 2448 It has been suggested that the legislature may have intended that the court's readiness to find that a director or other officer who has been guilty of negligence has nevertheless acted reasonably, should vary inversely to the degree of negligence proved. 2449 Where the director had not acted dishonestly, but the transaction (a contravention of s 322(3)(b) of the English 1985 Act) was detrimental to the company, being one-sided in the sense that the director was to profit but not to bear a share of the loss, it was held that it could not be said that he had acted reasonably or that he ought fairly to be excused. 2450 Even where it is accepted that the person concerned acted honestly and reasonably, a mere technical defect may nevertheless, in the circumstances, be such that he ought not fairly to be excused. 2451

In PNC Telecom plc v Thomas and others, 2452 the court found on the facts that although there was no proof of fraud the director had placed himself in a position of a conflict of interest and duty. He was consequently in breach of his fiduciary duty to the company. He had failed to act reasonably, that is to say, applying the dictum of Buckley J In Re Duomatic, 2453 he had failed to act 'in the way in which a man of affairs with reasonable care and circumspection could reasonably be expected to act in such a case'. The court accepted that s 727(1) of the Companies Act, 1985 contemplated that a person could have acted reasonably even though ie s/he has been negligent. 2454

As to the words 'all the circumstances of the case', 'the case' directs attention 'to the way in which the default or breach has occurred'. 2455

It has been held that the court will not exercise its jurisdiction without clear evidence concerning the opinions of the persons concerned. 2456 The court may, however, exercise its jurisdiction even though the shareholders oppose the application; for the opinion of the shareholders is only one of the circumstances which the court has to take into account. 2457

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Under the above provisions persons have been relieved of liability for penalties resulting from their failure to obtain their share qualification, 2458 of liability arising from an ultra vires transaction, 2459 and of liability arising from their failure to obtain approval of the general meeting concerning the determination of their remuneration. 2460 However, the court will be reluctant to relieve a director from liability to repay money from which he has received a benefit. 2461 Where a company claimed money paid to a director as remuneration for services he had rendered in terms of an

unauthorised contract, the court declined to give the director relief from liability, both because the company's claim was for the recovery of money, and because an order permitting him to retain the money would entitle him to retain the remuneration without the authority of the board and, hence, would be contrary to the company's articles. 2462

As to the court's power to grant relief 'either wholly or partly', see Re D'Jan of London Ltd Copp v D'Jan, 2463 where it was held that the director concerned should be liable to compensate the company for an amount not exceeding any unpaid dividends to which he would otherwise be entitled as an unsecured creditor in the liquidation of the company. His negligence, although it could not be excused, was not gross, had occurred when the company was solvent and prosperous so that he was the only person at risk, and was the kind of thing that could happen to any busy man.  

    2427   The origin of this provision is to be found a recommendation of the Company Law Amendment Committee (Reid Committee Report) 1906 (UK). In par 24 the Committee warned that provisions of the Companies Act should not be used as engines of oppression for honest and prudent men. It stated that while it would not be either safe or wise to diminish the obligations imposed by the Act, 'we think that it would be both safe and wise to make some amendment in the law which shall prevent such penal provisions from operating unfairly'. The Committee recommended that the power be given to the court to relieve any director, or promoter, from liability for breach of duty imposed on him by the Act 'provided that the breach has been occasioned by honest oversight, inadvertence, error of judgment on his part, and in an action for negligence or breach of trust against a director to relieve him from his liability on such terms as the court may consider proper if the court is satisfied that he acted honestly and reasonably. The Committee drew attention to the fact that an analogous power had been given to the court in the case of trustees by s 3(1)(a) of the Judicial Trustees Act 1896. Following upon the Report s 32 of the Companies Act 1907 was enacted. See AWA Ltd v Daniels (1992) 7 ACSR 759 855 SC(NSW). And see J S Fourie 'Enkele Historiese Perspektiewe op die Vertrouenspligte van Direkteure en Artikel 248 van die Maatskappywet' (1991) 2 Stell LR 339. See also R Edmunds & J Lowry 'The Continuing Value of Relief for Directors' Breach of Duty' (2003) MLR Vol 66 195 where in reviewing the position in the UK the authors argue that the underlying rationale for this type of provision would be better met if the test for relief was based solely upon the court's determination of fairness.

    2428   Re Claridge's Patent Asphalte Co Ltd [1921] 1 Ch 543 548; AWA Ltd v Daniels (1992) 7 ACSR 759 855 SC(NSW).

    2429   AWA Ltd v Daniels (1992) 7 ACSR 759 855 SC(NSW).    2430   Customs and Excise Commissioners v Hedon Alpha Ltd [1981] 2 All ER 697 (CA); Ex parte Lebowa

Development Corporation Ltd 1989 (3) SA 71 (T) 107; Re Duckwari plc (No 2) [1998] 2 BCLC 315 325 (CA). In Customs and Excise Commissioners v Hedon Alpha Ltd [1981] 2 All ER 697 (CA) Stephenson LJ (at 824) held that s 448 of the Companies Act 1948 'is inapplicable to any claim by third parties to enforce any liability except a director's liability to his company or his director's duties under the Companies Acts. Wide and general though the opening words of s 448 are, read in their context they do not allow an officer or auditor of a company to claim relief in "any" legal proceedings which may be brought against him in his capacity as an officer or auditor of a company by the rest of the world'. And see Ackner LJ's judgment at 826. But see Lawson v Mitchell [1975] VR 579 594-595, where Kaye J held that, while 'negligence and breach of trust are constituted by factual situations which do not necessarily fall within the circumstances of the contravention or failure to comply with a statutory provision', the words 'default' and 'breach of duty' refer to the performance or omission to perform some act required or forbidden by the statute, and (at 599) that the introduction of those words into the section 'made the section applicable to those provisions in the Act imposing liability on persons to pay compensation to persons who had suffered loss, in consequence of an irregular allotment of shares or a false prospectus'.

    2431   Customs and Excise Commissioners v Hedon Alpha Ltd [1981] 2 All ER 697 (at 826) (CA) Ackner LJ said: '[T]he true ambit of s 448 [of the English 1948 Act], with one limited exception, is restricted to claims by or on behalf of the company or its liquidator against the officer or auditor for their personal breaches of duty. The only exception relates to the criminal process for the enforcement of certain specific duties imposed by the 1948 Act on the company's officers . . . .' See however Lawson v Mitchell [1975] VR 579.

    2432   Even if it were accepted that a director on whom liability in terms of s 424 is imposed has acted in breach of a 'duty' (see Re Produce Marketing Consortium Ltd [1989] 3 All ER 1, but see Commonwealth Bank of Australia v Friedrich(1991) 5 ACSR 115 SC(Vic) and consideration of this question in Standard Chartered Bank off Australia Ltd v Antico (1995) 131 ALR 116-117 SC(NSW)), it would not be possible for the court to hold that a director who is guilty of reckless or fraudulent trading had, nevertheless, acted honestly and reasonably, and that having regard to all the circumstances of the case, including those connected with his appointment, ought fairly to be excused for the negligence, default, breach of duty etc. Furthermore, s 424 imposes liability on 'any person' who was knowingly a party to the carrying on of the business of the company. Such persons need not be directors or officers of the company, and therefore 248 could have a 'capricious' operation if it were to applied to proceedings under s 424: see Standard Chartered Bank off Australia Ltd v Antico supra 117. And, since the provisions of s 248 do not apply to a claim by a third party, presumably it cannot apply where a member or creditor of a company brings proceedings under s 424 in the case of a company that is not in liquidation. Finally, in granting relief under s 424 the court exercises its discretion. It would seem unlikely that the legislature intended that the court under s 248 should have a discretion to interfere with the exercise of its statutory discretion by another court under s 424. See Re Produce Marketing Consortium Ltd supra, where it was said that relief from liability in terms of s 214 of the English Insolvency Act 1986 (wrongful trading) could not be granted under s 727 of the English Companies Act 1985. And see Re Duckwari plc (No 2) [1998] 2 BCLC

315 325 (CA). See also Commonwealth Bank of Australia v Friedrich supra; Standard Chartered Bank off Australia Ltd v Antico supra.

    2433   Customs and Excise Commissioners v Hedon Alpha Ltd [1981] 2 All ER 697 703 704 (CA); Re Duckwari plc (No 2) [1998] 2 BCLC 315 325 (CA).

    2434   Gamble v Hoffman (1997) 24 ACSR 369 381 (Fed C of A).    2435   [1921] 1 Ch 543 548. See also Re Sharpe [1892] 1 Ch 154 167 (CA).    2436   On the question of what constitutes a breach of trust, see notes on s 247.    2437   per Carr J in Gamble v Hoffman (1997) 24 ACSR 369 381-382 (Fed C of A).    2438   s 448(1) of the 1948 Act, s 727 of the 1985 Act.    2439   Re Gilt Edge Safety Glass Ltd [1940] Ch 495; [1940] 2 All ER 237.    2440   National Trustees Co of Australia v General Finance Co of Australasia [1905] AC 373 (PC); Niagara Ltd v

Langermann 1913 WLD 188 201-202; Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 2 All ER 1073 1155; Re Duomatic Ltd [1969] 2 Ch 365; [1969] 1 All ER 161.

    2441   Ex parte Lebowa Development Corporation Ltd 1989 (3) SA 71 (T) 107.    2442   Re Duomatic Ltd [1969] 2 Ch 365; 1969 1 All ER 161. In Re J Franklin & Son Ltd [1937] 4 All ER 43 47 it

was said by way of an obiter dictum that 'honestly' in this section means 'without direct motive', and that where directors act recklessly, but without considering the interests of the company, they may be said to have acted dishonestly.

    2443   In Ex parte Lebowa Development Corporation Ltd 1989 (3) SA 71 (T) 108 Stegmann J observed: 'The provision . . . envisages a situation in which a director's act or omission may be found to be both "negligent" and "reasonable" at one and the same time. Since an act (or omission) is only "negligent" if it is something which would not have been done (or left undone) by a reasonable man acting reasonably, there is some uncertainty as to what the Legislature can have had in mind when it empowered the Court to relieve a director from liability to the company for his negligence, provided that he acted "reasonably". The concept of "reasonable negligence" appears on the face of it to be self-contradictory.'

    2444   National Trustees Co of Australia v General Finance Co of Australasia [1905] AC 373 (PC).    2445   Re Claridge's Patent Asphalte Co Ltd [1921] 1 Ch 543; cf National Trustees Co of Australia v General

Finance Co of Australasia [1905] AC 373 (PC).    2446   Re Duomatic Ltd [1969] 2 Ch 365; [1969] 1 All ER 161.    2447   Selangor United Rubber Estates v Cradock (No 3) [1968] 2 All ER 1073.    2448   Niagara Ltd v Langermann 1913 WLD 188; and see Ex parte Lebowa Development Corporation Ltd 1989

(3) SA 71 (T) 108-109.    2449   Ex parte Lebowa Development Corporation Ltd 1989 (3) SA 71 (T) 108-109, where Stegmann J suggested

that: '[T]he less serious the departure from the standard of the reasonable man, the greater the readiness of the Court to find reasonableness for the purpose of s 248. In the case of culpa levissima, reasonableness may be found relatively easily; in the case of culpa levis less easily; and in the case of culpa lata or gross negligence (such as in Niagara Ltd v Langermann 1913 WLD 188) reasonableness may virtually never be found.'

    2450   Re Duckwari plc (No 2) [1998] 2 BCLC 315 325 (CA).    2451   Re J Franklin & Son Ltd [1937] 4 All ER 43.    2452   [2008] 2 BCLC 95 (ChD).    2453   [1969] 1 All ER 161.    2454   At para 94.    2455   Per Kirby P in Advance Bank of Australia Ltd v FAI Insurances Australia Ltd (1987) 9 NSWLR 464 490; 12

ACLR 118 141 CA(NSW).    2456   Re Barry and Staines Linoleum Ltd [1934] Ch 227 234.    2457   Re Gilt Edge Safety Glass Ltd [1940] Ch 495 502; [1940] 2 All ER 237 241.    2458   Re Barry and Staines Linoleum Ltd [1934] Ch 227; Re Gilt Edge Safety Glass Ltd [1940] Ch 495; [1940] 2

All ER 237.    2459   Re Claridge's Patent Asphalte Co Ltd [1921] Ch 543.    2460   Re Duomatic Ltd [1969] 2 Ch 365; [1969] 1 All ER 161.    2461   Re International Vending Machines Pty Ltd [1962] NSWR 1408; Gamble v Hoffman (1997) 24 ACSR 369

387 (Fed C of A).    2462   Guinness plc v Saunders [1990] 2 AC 633 695; [1990] 1 All ER 652 663 668 (HL). The Court of Appeal

(Guinness plc v Saunders [1988] 2 All ER 940 (CA)) held that, whether or not a director who, in breach of his fiduciary duty, is wrongfully in possession of the company's property is within the provisions of s 727 of the English 1985 Act, if the director's claim to be compensated for his services by way of quantum meruit or equitable compensation were to succeed, he would not need relief under the section; and, if it failed, he would have failed to disclose any grounds for relief under the section.

    2463   [1994] 1 BCLC 561.

249  False statements and evidence(1) Any person who in any statement, return, report, certificate, financial statement or other document

required by or for the purposes of any provision of this Act makes a statement which is false in any material particular, knowing it to be false, shall be guilty of an offence.

(2) Any person who on examination on oath or affirmation in terms of this Act or in any affidavit or deposition in or about any matter arising under this Act wilfully gives false evidence, shall be guilty of an offence and liable on conviction to the penalties prescribed by law for perjury.

Notes

The penalty for the offence in s 249(1) is a fine or imprisonment for a period not exceeding one year, or both the fine and imprisonment. 2464 As to examinations on oath, see ss 415, 417 and 498.

RS 1, 2004 ch8-p367

  

    2464   s 441(1)(e).

250  Falsification of books and records(1) Any director or officer of a company or any other person who conceals, destroys, mutilates, falsifies or

makes any false entry in or, with the intent to defraud or deceive, makes any erasure in any book (including any minute book), register, document, financial record or financial statement of any company, irrespective of whether it is or has been kept in electronic format, shall, subject to the provisions of subsection (2), be guilty of an offence.

[Sub-s. (1) substituted by s. 25 of Act 35 of 2001.](2) It shall be a defence to any charge under subsection (1) of concealing, mutilating, falsifying or making a

false entry or erasure in any book, register, document, financial record or financial statement to prove that the accused had no intention either to defraud or to conceal any offence or any conduct which he believed might constitute an offence or render any person liable to any penalty or civil obligation.

NotesThe penalty for each of the two offences is a fine or imprisonment for a period not exceeding one year, or both the fine and imprisonment.2465

  

    2465   s 441(1)(e).

251  False statement by directors and others(1) Every director or officer of a company or accountant employed by or auditor of a company or any other

person employed generally or engaged for any special work or service by the company who makes, circulates or publishes or concurs in making, circulating or publishing any certificate, written statement, report or financial statement in relation to any property or affairs of the company which is false in any material particular, shall, subject to the provisions of subsection (2), be guilty of an offence.

(2) In any prosecution under subsection (1) it shall be a defence to prove that the person charged had, after reasonable investigation, reasonable grounds to believe and did believe that the certificate, written statement, report or financial statement was true, and that there was no omission to state any material fact necessary to make the statement as drafted not misleading.

NotesAlthough the word 'director' in the winding-up provisions of the Act is usually used in a special sense to mean or include a person who was a director at the time of the order, in s 251 'director' is not used in that special sense, and therefore the section does not apply to a statement made by a director after the winding-up order has terminated his office.2466  This also holds true in the case of a statement made by an officer of the company, or accountant employed by or auditor of a company, or any other person employed generally or engaged for any special work or service by the company.2467

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To 'concur' in this context means being a party to, or at least agreeing beforehand to the making, circulating or publishing of such documents.2468  Mere approval of the contents of an already published statement, although it might be described as concurring in the contents of the document, does not constitute concurring in the publishing of it.2469

The offence is punishable by a fine or by imprisonment for a period not exceeding one year, or by both the fine and imprisonment.2470

  

    2466   Attorney-General v Blumenthal 1961 (4) SA 313 (T) 318.    2467   See Attorney-General v Blumenthal 1961 (4) 313 SA (T) 318.    2468   R v Milne and Erleigh (7) 1951 (1) SA 791 (A) 858.

    2469   R v Milne and Erleigh (7) 1951 (1) SA 791 (A) 859.    2470   s 441(1)(e).