5.6 EVENTS LIKELY TO ARISE IN PRACTICE
As one can see from the non-binding opinion the scope of ring-fencing has widened to include virtually any kind of disclosure that should be made to third parties, for example let us say that in order for a company to do a transaction of say over R1 million rand and the MOI says that in order for this transaction to be approved it has to be approved by all the directors of the company. As this is a term in the MOI that may require disclosure to third parties the term RF should be inserted behind the name. If a transaction is done on this basis and only one director signs the resolution and not all the directors, then the third party dealing with the company cannot hold the company bound to the contract because the authority for the transaction is not correct. The courts will need to decide! (see the turquand rule) The question that arises here is, does a company need to involve outsiders in corporate governance issues in a company as it could become a nightmare when things go wrong?
Another example is if the company is prohibited from entering into any transaction with a software company and this is entrenched in the MOI then the third party cannot get out of this contract if there is no RF behind the name. If there is an RF the company may be restrained from performing under the contract, for instance by its shareholders, but the contract is not void, the shareholders may have a claim for damages against the directors. In this instance the third party would have deemed knowledge of the MOI and would not be in a position to claim for damages.
It is really important for a company to get its corporate governance procedures right to avoid conflict.
The RF provisions create complexity in the law and may cause litigation where parties believe they can use RF conditions to their advantage!
For the purpose of convenience, I have quoted the important points from the practice note on RF below dated Nov 2012! This was issued after the first practice note.
4. It is against this background that that it must be considered whether the requirement to use (RF) in the company name is applicable or not in any particular case. In principle, if a limitation could have any effect on third parties, it would be advisable to use (RF) in the name. If on the other hand, it is of no consequence to third parties there would also be no need to warn them. (My Comment This paragraph is key)
5. Inconsiderate use of the expression "RF" in the name of a company could lead to unnecessary confusion and in the circumstances, it is submitted that the expression "(RF)" be used only in cases where it is evident that —
5.1 the purpose or objectives of the company are restricted or limited in the Mol of the company;
5.2 the powers of the company are restricted or limited in its Mol;
5.3 any other pertinent restricting condition is contained in the Mol of the company;
5.4 any requirement in addition to those set out in section 16, for the amendment of any of the above mentioned restrictions or limitations is contained in the Mol; or
5.5 the Mol of a company contains a prohibition on the amendment of any particular provision of the Mol.
6. The CIPC is further of the view that if the Memorandum of Incorporation contains a provision —
6.1 setting higher standards or more onerous requirements under section 15 (2) (a)
(iii) than would otherwise apply to the company in terms of an unalterable provision of the Act; or
6.2 requiring a special resolution to approve any matter not listed in section 65 (11);such a provision in itself is not a restriction contemplated in section 11 (3) (b) as it does not limit the powers or capacity of the company but rather prescribes a different procedure to perform the activity concerned.