Practise Questions 2
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University of Pretoria *
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Course
320
Subject
Law
Date
Nov 24, 2024
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Pages
11
Uploaded by ElderPartridge3544
Revision note on selected aspect drafted for purposes of the semester test
scheduled 14 October 2020 (ODR 320)
1.
X signed a restraint of trade agreement in his personal capacity, undertaking not
to compete with Y Ltd. X then used his existing company, Q (Pty) Ltd, of which
he was the sole shareholder and the only director, to compete with Y Ltd. Q (Pty)
Ltd was not a signatory to the restraint of trade agreement. Which of the following
statements is/are correct?
(1) Q (Pty) Ltd cannot be interdicted from competing with Y Ltd since Q (Pty) Ltd
was not a party to the restraint of trade agreement.
(2) The incorporation of Q (Pty) Ltd for purposes of enabling X to act in breach of
the restraint of trade agreement is an unconscionable abuse of the
company’s separate leg
al personality.
(3) X is guilty of improper conduct in using the company as a cloak to act in
breach of the restraint of trade agreement.
a. (1) only
b. (2) only
c. (2) and (3)
d. (3) only
Note: X signed the undertaking not to trade within a certain time/area (eg two
years, five kilometres from Y Ltd’s place of business) in his personal capacity but
then used an established company to hide behind by making the company trade
under those circumstances that he (X) is prohibited from trading under. (1) is not
correct because Q can be interdicted from competing with Y because the court
can disregard the imaginary ‘veil’ or separation between the affairs of X and Q,
and because X may not compete with Y, Q can then also not compete with Y. (2) is
not correct because X used a company that was already in existence
–
so Q was
not incorporated for this purpose and that ground for piercing the corporate veil is
not applicable to this set of facts
–
there is no indication of incorporation. (3) is
correct because the way in which X
used (‘hid’) behind the company in order to
circumvent a legal obligation (the restraint of trade) is what is the real issue here.
2. Sharky Inc is a registered company that specialises in corporate law. The
directors of the company are A, B and C. After his retirement six months ago, D
is no longer a director of the company. The company owes R5 million to X in
respect of the purchase of office furniture from X a year ago. Sharky Inc owes a
further R500 000 to Y in respect of delictual liability, which was incurred three
months ago. Which of the following statements is/are correct?
(1) D may be held personally liable to pay the debt of R500 000 to Y.
(2) D may be held personally liable to pay the debt of R5 million to X.
(3) If D makes payment to X of the debt of R5 million, he has a right of recourse
against A, B, C and the company.
(4) D may not be held liable for payment of the company
’s debts
.
a. (1), (2) and (3)
b. (1) and (2)
c. (2) and (3)
d. (2) only
e. (4) only
Note:
Section 19(3): “
If a company is a personal liability company the directors
and past directors are jointly and severally liable, together with the company, for
any debts and liabilities of the company as are or were contracted during their
respective periods of office.
”
The basic rule pertaining to a personal liability
company (hint: the company’s name has the abbreviation ‘Inc’ after it) is that the
directors are personally liable (so (4) is wrong) with the company for the debts of
the company. The directors are past and present directors
–
past directors who
were directors when the debt was entered into, so resigning does not relieve a
director from the obligations that arose during his or her term of office. The
liability is joint and severally (so together or apart but then, in the last instance, if
a director paid more than his share he has a right or recourse against the other
directors for their proportionate shares, but not the company too (so (3) is
wrong)). The directors are liable together with the company (but if the company
pays the whole debt then the company does not have a right of recourse against
the directors). The debts are only debts that were ‘contracted’
(not all debts)
–
so
the directors are not liable for eg delictual debts (so (1) is incorrect). (2) is correct
because the director can be held liable alone in his personal capacity, for a debt
contracted during his term of office.
3.
X NPC is an aviation club which offers membership to helicopter enthusiasts and
other persons who are interested in helicopters. The main object of X NPC,
according to its Memorandum of Incorporation, is to foster and develop
enthusiasm for the sport of aviation. In order to cover the basic costs of the club,
X NPC also leases
helicopters to qualified pilots on a “hire and fly” basis for a
fee. Which of the following statements is/are correct?
(1) X NPC is running a commercial enterprise and may not be registered as a
non-profit company.
(2) A non-profit company must not make any money, and must not distribute
profits to its members or directors.
(3) The fees received by X NPC from the lease of helicopters must be used to
promote aviation.
(4) A commercial enterprise may be incorporated as a non-profit company
provided that its object relates to communal or group interests.
a. (1)
b. (1) and (2)
c. (2) and (3)
d.
(3) only
e. (3) and (4)
f.
(1) and (3)
The main objective of an NPC (in it is the one company that must state its
business in its MOI) must be a public benefit object (such as feeding the
homeless) or an object related to a cultural or social activity, or communal or
group interests. An aviation club falls into the latter categories eg a social/sport
activity. As this is the main objective, while (1) is the correct theory
–
if a company
runs a commercial enterprise then the company may not be registered as a non-
profit company
–
the facts do not support this because the main objective is not a
profitable one: it is a club aimed to foster and develop enthusiasm for a particular
sport. So (1) cannot apply to the facts and also not (4) because a commercial
enterprise may not be incorporated as a non-profit company. A non-profit
company can make money but it must be used to further the objective of the
company
–
so (2) is incorrect because the fees recovered from pilots must go
towards covering the costs of the club. (3) is therefore correct.
4.
Which of the following statements concerning an external company is correct?
(1) It is a foreign company.
(2) It must register with the CIPC in South Africa.
(3) It is a South African company incorporated in South Africa.
(4) It is a foreign company whose registration is transferred to South Africa.
a.
(1) and (2)
b. (1) only
c. (2) only
d. (2) and (3)
e. (4) only
f.
(2) and (4)
g. (1), (2) and (4)
Note: This is pure theory
–
an external company is a foreign company that has
certain business affairs (or otherwise complies with the requirements for
registration eg an employment contract with an employee in South Africa) in
South Africa. It must register with the CIPC and some of the provisions of the CA
will apply to it, but it is not a South African company (not (3)) or a domesticated
company (not (4)). Make sure that you also know and understand the difference
between a foreign company (eg incorporated in India); an external company (eg a
company incorporated in India but with a factory in Cape Town that makes shoes
and employs people here in South Africa); and a domesticated company (eg a
company originally incorporated in India but who transferred its registration to
South Africa and will thereafter cease to be a company registered in India).
5.
The Memorandum of Incorporation of Salomon states that the company may not
offer its shares or securities to the public. It also states that the shareholders of
the company may not sell their shares to a non-shareholder unless the other
shareholders of the company have first had an opportunity to purchase the
shares at a price determined by the auditors of the company. What type of
company is this?
a. Public company
b. Private company
c. State-owned company
d. Personal liability company
e. Non-profit company
f.
Domesticated company
g. External company
Note: This is pure theory
–
the restrictions of a private company that needs to be
in the MOI. You also need to know which suffix/abbreviation has to come after
each type of company.
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6. Which of the following statements concerning the legal status of the
Memorandum of Incorporation of a company is/are correct?
(1) It is binding between the company and each shareholder in his or her
capacity as a shareholder.
(2) It is binding between the shareholders of the company
inter se
.
(3) It is binding between the company and each director in the exercise of his or
her functions within the company.
(4) It is binding between the company and each employee in his or her capacity
as an employee.
(5) It is binding between the company and its legal representative.
a. (1), (2) and (3)
b. (1), (2), (3) and (4)
c.
(1), (2), (3), (4) and (5)
d. (1) and (2)
e. (1) and (3)
f.
(2) and (3)
g. (2), (3) and (4)
h. h. (1), (2) and (4)
i.
(1), (2), (3) and (5)
j.
(1) only
k. (2) only
Note: This is pure theory
–
the status of the MOI and the relationships that it
creates. It binds the company and the shareholders (a relationship); the company
and the directors (a relationship); the shareholders amongst themselves (a
relationship). See your textbook and PowerPoint slides for the various persons
bound to each other through the MOI and look out for the capacities in which they
are bound. For example, the MOI binds the company and the directors in the
capacity of director and not as an attorney if the person fulfils two roles. This
means that a director of the company may not enforce a provision contained in its
Memorandum of Incorporation appointing her as the attorney of the company
against the company because the person does this in her capacity as attorney and
not as director and the MOI does not bind the company and its legal
representative in a relationship, only the company and the directors. The same
goes for a shareholder appointed as an attorney
–
the capacity is wrong. So (1),
(2) and (3) are correct. As an example of (2), a shareholder of the company may
enforce, against another shareholder of the company who wishes to sell his
shares, a right of first refusal contained in the company’s
MOI but the MOI is not
binding on employees or legal representatives, so (4) and (5) are incorrect.
7.
When a company’s name contains the abbreviation “RF”:
a.
the doctrine of constructive notice applies to the company.
b.
the company is regarded as a public company.
c.
the company is regarded as a private company.
d.
the company must appoint an auditor.
e.
Chapter 3 of the Companies Act of 2008 applies to the company.
Note: This is pure theory
–
it means that the third party is deemed to have
knowledge of the contents of the ring-
fenced provisions in a company’s MOI. So if
the MOI states that only Sam can represent the company and Max represents the
company, then the company will not be bound to the contract as Max is not an
authorised agent of the company. The third party can also not hold the company
liable based on ostensible authority or estoppel because the third party is deemed
to know that only Sam, and not Max, can represent the company. This is a way in
which a ring-fenced provision can protect the company. It is also an exception to
the general rule because the doctrine usually does not apply
(see section 19(4): “
a
person must not be regarded as having received notice or knowledge of the
contents of any document relating to a company merely because the document
has been filed or is accessible for inspection at an office of the company
”) except
for two instances
–
the RF company and the Inc company and only in respect of
the ring-fenced provisions of the company and the liability part of an Inc
company. Here is an example to help with your understanding (no need to know
the contents) of how the Notice of Incorporation of an RF company looks (it is an
annexure to the normal notice):
8.
The role of the CIPC in the registration process of a company is:
a.
to deal with disputes regarding company names.
b.
to issue a unique registration number to the company.
c.
is to issue a registration certificate to the company.
d. all of the above.
e. (b) and (c) are correct.
f.
(a) and (b) are correct.
g. (a) and (c) are correct.
Note: This is pure theory
–
the Companies Tribunal deals with name disputes, not
the CIPC.
9.
The following are compulsory and form part of the incorporation of the company:
a. The submission of a MOI and a Notice of Incorporation (NOI) to the
CIPC together with payment of the prescribed fees.
b. The submission of a names reservation, MOI and a Notice of Incorporation
(NOI) to the CIPC together with payment of the prescribed fees.
c. The submission of a NOI, MOI and a Notice together with payment of the
prescribed fees to the Companies Tribunal.
d. The submission of a MOI together with payment of the prescribed fees
electronically to the CIPC.
e. The submission of a names reservation, MOI and a Notice of Incorporation
(NOI) to the Companies Tribunal together with payment of the prescribed
fees.
Note: This is pure theory
–
know the process and the documents needed (and
don’t forget that you need to pay a fee!!)
10. When entering into agreements on behalf of a (Pty) Ltd company, with a third
party contractor, the board of directors may sign the agreement as agents of the
company. Who is bound to the agreements so entered into?
a.
The third party contractor and the board of directors.
b.
The board of directors and the (Pty) Ltd company jointly and severally.
c.
The (Pty) Ltd company and the third party contractor.
d.
Both (a) and (c) in separate contracts.
e.
The company must act personally, so no contract came into being.
Note: A company is a juristic person who can only enter into contracts through
representation by a natural person agent
–
irrespective of the type of company.
The agents who enter into agreements on behalf of their principal are merely
conduits through which the principal and the third party contractor contract. Only
the principal and the third party contractor will have rights and duties in terms of
the contract. The agent will not acquire rights or duties but the company will
because it is capable of acquiring rights and duties if properly represented by a
duly authorised agent.
11. Section 66(1) of the Companies Act 71 of 2008 specifies that:
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a. The board of directors must manage the business and the affairs of the
company.
b. The board of directors may delegate their authority to manage the
business and the affairs of the company.
c.
The board of directors must be given permission in terms of the MOI of a
company to manage the business and the affairs of the company.
d. Both (a) and (b)
e. Both (c) and (a)
f.
None of the mentioned options.
Note: The board must manage the business and affairs of the company or the
board may delegate their authority. The board does not need permission from the
MOI, the default position is that the board of directors will manage the business
and the affairs of the company. If the MOI states that the board will not manage
the business and the affairs of the company but rather appoint someone else then
that will override the default position.
12. An agent is given a specific mandate and he knows that he cannot successfully
contract with third party contractors due to the limit placed on his authority. The
agent then induces a third party contractor to agree to the terms of a contract that
the agent has no authority to conclude by misrepresenting themselves (the
agent) as the company’s Managing Director knowing that the third party
contractor will agree to the contract if he thinks the agent is more important. What
will the consequences of that agreement be?
a.
The agent exceeded his mandate so the principal will not be bound.
b. The agent exceeded his mandate so that the principal can benefit from
the agreement thus the principal will be bound to the agreement.
c. The third party contractor will have a claim against the principal on the
basis of misrepresentation of the agent.
d.
The third party contractor will have a claim against the agent on the basis
of misrepresentation of the agent.
e. (a) and (d).
f.
(b) and (c).
Note: An agent who exceeds his mandate will fail to bind the principal and the
third party contractor may have either a claim in delict on the basis of
misrepresentation against the agent or a claim against the agent on the basis of a
breach of warranty of authority.
13. Paul, Michael, Mark and John are directors of Luna Properties (Pty) Ltd.
According to th
e company’
s MOI, Paul is the Managing Director of the company
and he has the authority to make decisions regarding the buying and selling of
property within the price range of R100 000.00
–
R150 000.00. The four directors
decide, at a board meeting, that Michael will from now on also have the authority
to buy property within the R100 000.00
–
R150 000.00 price range. Who of the
following parties may buy property worth R155 000.00:
a. Michael.
b. Paul, the Managing Director.
c. Mark.
d. John.
e. the board of directors.
Note: Even if a company appoints someone as the managing director, that office
of the managing director may have its authority restricted as in the scenario
above. Therefore, once the contract exceeds the amount of authority the only
people who have authority to conclude that contract will be the board of directors
as their authority as a collective group is not restricted in this set of facts.
14. Alex started a welding business. Due to the fact that his sister, Gwen, was the
managing director of a top ten law firm he asked her to be the managing director
of his welding company as he had no business experience with regards to
running the business. Gwen is the sole director of the company. Alex is paid a
monthly salary of R50 000.00 to weld and Gwen is paid a monthly salary of R50
000.00. Alex is the sole shareholder. Select the statement that is most correct
regarding the above set of facts:
a.
Alex may enter into agreements on behalf of the welding company.
b. Gwen is the only person who may enter into agreements on behalf of
the welding company.
c.
Gwen needs Alex’s permission before entering into agreements for the
company.
d.
Alex needs Gwen’s permission before entering into agreements for the
company.
Note: Gwen is the only person who has authority to manage the business and the
affairs of the company, no one else has authority to manage and make decisions
for the company. Alex structured the company in a way that he only needs to do
the welding.
15. Alex started a welding business. Due to the fact that his sister, Gwen, was the
managing director of a top ten law firm he asked her to be the managing director
of his welding company as he had no business experience with regards to
running the business. The company’s MOI states
that one director for the
company is sufficient. Alex is the sole shareholder and welder of the business.
Select the statement that is most correct regarding the above set of facts:
a. If Gwen enters into a contract with a third party to buy a race horse, the
company will not be bound to the contract as it falls outside of the scope
of the business of the company.
b. If Gwen enters into a contract with a third party to buy a race horse, the
company will be bound to the contract even though it falls outside of the
scope of the business of the company.
c. If Alex enters into a contract with a third party to buy a race horse, the
company will not be bound to the contract as it falls outside of the scope
of the business of the company.
d. If Alex enters into a contract with a third party to buy a race horse, the
company will not be bound to the contract as Alex does not have the
authority to act on behalf of the company.
e. If Alex enters into a contract with a third party to buy a race horse, the
company will be bound to the contract even though Alex does not have
the authority to act on behalf of the company.
f.
(a) and (c)
g. (a) and (d)
h. (b) and (d)
Note: A contract between a company and a third party concluded by a person who
has the authority to act on behalf of the company is always valid based on the
nature of the contract. As Gwen is the sole director, she constitutes the board of
directors and has the authority to represent the company. Even if she acts outside
of the scope of the business of the company, the contract between the company
and the third party will still be valid and binding due to the provisions of section
20(1) of the Companies Act. This is the case even if the third party knew that the
business of the company was welding. However, Alex can obtain a court order to
restrain her from entering into the contract. Alex, on the other hand, has no
authority to represent the company and the contract will not be valid and binding
between the company and the third party based on the normal rules of agency and
representation.
16. Alex started a welding business. Due to the fact that his sister, Gwen, was the
managing director of a top ten law firm he asked her to be the managing director
of his welding company as he had no business experience with regards to
running the business. Gwen is the sole director of the company, Alex is the sole
shareholder and welder of the business, and Ms Dudu is the Manager of
Accounting of the welding company. The internal rules of the company state that
all contracts have to be authorised by the Manager of Accounting. Gwen buys
steel to the value of R500
000 from Steelworx without Ms Dudu’s approval.
Select the statement that is most correct regarding the above set of facts:
a. The welding company is not bound to the contract as the internal rules
stipulate that all contracts have to be authorised by the Manager of
Accounting, who never authorised the contract.
b. The welding company is bound to the contract notwithstanding that the
internal rules stipulate that all contracts have to be authorised by the
Manager of Accounting, and that no authorisation was given.
c.
Steelworx can rely on the
Turquand
rule.
d. Steelworx cannot rely on the
Turquand
rule.
e. (a) and (d).
f.
(b) and (c).
Note: This question deals with compliance with internal rules and the
assumptions that an innocent third-party can make. The submission that the
company is not bound to the contract because Ms Dudu did not authorise the
contract is incorrect. A person dealing with a company can assume that the
company complied with all its internal rules such as authorisation by Ms Dudu. As
Gwen has the actual authority to enter into contract of behalf of the company, the
Turquand
rule will apply in respect of other internal requirements in order to
‘complete’ the circle of authority.
This is therefore not a ground for denying
liability in terms of the contract provided that Steelworx did not know or did not
reasonably know/suspect non-compliance with the internal rules.
17.
Section 65(7) of the Companies Act 71 of 2008 states as follows: “For an
ordinary resolution to be approved by shareholders, it must be supported by
more than 50% of the voting rights exercised on the resolution.” Section 65(8)
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states that a company’s Memorandum of Incorporation may require a higher
percentage of voting rights to approve an ordinary resolution. The shareholder
agreement of X Ltd states for an ordinary resolution to be approved by
shareholders, it must be supported by at least 60% of the voting rights exercised
on the resolution. The Memorandum of Incorporation of X Ltd states that for an
ordinary resolution of the company to be approved, it must be supported by at
least 40% of the exercised voting rights. Which of the following statements is
correct?
a.
The percentage of voting rights required for the approval of an ordinary
resolution of X Ltd is more than 50% of the voting rights exercised on
the resolution.
b. The percentage of voting rights required for the approval of an ordinary
resolution of X Ltd is at least 40% of the voting rights exercised on the
resolution.
c.
The shareholders of X Ltd cannot approve an ordinary resolution.
d. The percentage of voting rights required for the approval of an ordinary
resolution of X Ltd is at least 60% of the voting rights exercised on the
resolution.
Note: This question deals with alterable and unalterable provisions. The default
rule is set out in section 65(7)
–
an ordinary resolution is 50%+1. Section 65(8)
states that this is an alterable provision because the MOI can make this
percentage higher (note
–
not lower, the Act only allows for a higher percentage
AND the Act only allows the MOI to do this, not a shareholder agreement). So the
MOI cannot determine a percentage of 40% (so not (b)) and the MOI can therefore
alter the default position to 60% but a shareholder agreement may not do this (so
not (d)). The default position of the Act will therefore apply ((a)). Shareholders can
approve an ordinary resolution
–
that is not the issue here, the issue is the
percentage, so (c) is also incorrect.
18. Connie and Bonnie want to incorporate a company FreeBeauty Ltd. The
company will manufacture and sell beauty products, which are animal cruelty-
free and certified as such. They have negotiated a deal with a company,
AnimalsRus (Pty) Ltd that can provide them with raw products that have not been
tested on animals and which they can use to create their own beauty range.
Connie and Bonnie secured investors who want to invest in their company, but
who will only do so if they (Connie and Bonnie) can show that they have some
suppliers lined up. Connie and Bonnie want to make sure that AnimalsRus (Pty)
Ltd becomes a supplier for their company, but they know that it may take some
time for their company (FreeBeauty Ltd) to be incorporated. They are worried
that AnimalsRus (Pty) Ltd will lose interest.
a.
Name the solution that the Companies Act of 2008 offers that will enable
Connie and Bonnie to secure the services of AnimalsRus (Pty) Ltd as
supplier.
Section 21 pre-incorporation contract
b.
Name the requirements of your proposed solution to Connie and Bonnie.
The agreement has to be in writing. FreeBeauty (the company) must
not yet exist but the understanding is that the company will be
incorporated. Connie and Bonnie must act in the name of or on
behalf of the proposed company (as agents, not principals). The
company has to ratify the contract before it is bound to it.
c.
Explain the risks of your proposed solution to Connie and Bonnie.
If
FreeBeauty is not is not incorporated or does not ratify the
contract/rejects any part of the contract, Connie and Bonnie will be
jointly and severally liable for the liabilities created in terms of the
pre-incorporation contract.
19. H holds 20% of the voting rights in S1 and S1 hold 30% of the voting rights in S.
H is a shareholder of S and controls 22% of the voting rights in S.
H is not the
holding company of S/S is not a subsidiary of H. H does not control S1
(less than the majority of the voting rights in S1) and therefore the voting
rights that S1 holds in S become irrelevant because S1 is not a subsidiary
of H. H also controls only 22% of the voting rights in S, which is less than
the majority needed for a holding company-subsidiary relationship.
20. H is a shareholder of S1 and can dismiss the majority of the BOD. S1 holds 60%
of the voting rights in S2 and 53% of the voting rights in S3.
H is not the holding
company of S/S is not a subsidiary of H. H does not control the
composition (appointment or election) of the Board of Directors. It
therefore becomes irrelevant what the situation is in respect of S1, S2, S3
and S. If H could control the composition of the Board of Directors and S1
was then a subsidiary of H, then S2 and S3 would be subsidiaries of S1,
and through S1, the subsidiaries of H (because of the majority of the voting
rights that S 1 can exercise).