LEGAL CAPACITY OF A

COMPANY AND THE

ULTRA VIRES DOCTRINE
 Duties of directors

 At common law, directors are subject to a fiduciary duty to act in good faith and in the best interests of the company,
as well as the duty to exercise their powers with care and skill.
 The fiduciary duties of a director generally entail:
 • avoiding a conflict of interest between the director’s personal interests and the interests of the company;
 • not exceeding the limitations of his or her power;
 • maintaining an unfettered discretion and
 • exercising his or her powers for the purpose for which they were conferred.
 The Companies Act 71 of 2008 has introduced a partly codified regime of directors’ duties, which includes duties
similar to the common law fiduciary duties and the duty to perform their functions with reasonable care and skill.
 However, the common law is not excluded by the statutory provisions and will continue to apply, except where it is
specifically amended by the Act or is in conflict with a provision of the Act.
 Sections 75–76 of the Companies Act
Duties of directors

 duties of directors as they appear in the Companies Act of 2008 are the following:
 (1) to disclose to the board any personal financial interest in matters in which the company has a
material interest (s 75)
 (2) not to use the position of director, or information obtained while acting in the capacity of a director,
to gain an advantage for himself/herself or another person, or to knowingly cause harm to the company
or a subsidiary (s 76(2)(a))
 (3) to disclose to the board of directors any material information that comes to the director’s attention
(s 76(2)(b))
 (4) to act in good faith and for a proper purpose (s 76(3)(a))
 (5) to act in the best interests of the company (s 76(3)(b))
 (6) to act with a reasonable degree of care, skill and diligence (s 76(3)(c))
Directors must not abuse position or information (s 76(2)) and must act in a certain
way when there is a personal financial interest (s 75)

 a director has a fiduciary relationship with the company and must avoid making use of company information
for his or her own benefit.
 A director must also avoid causing harm to the company.
 Section 76(2)(a) of the Act prohibits the abuse of his or her position by a director. It protects information that
a director has access to while acting as a director.
 A director is prohibited from making use of information obtained by virtue of his or her office, for his or her
own personal gain or for another person’s benefit.
 Section 76(2) also states that a director should avoid knowingly causing harm to the company or to its
subsidiary.
 REPRESENTATION OF A COMPANY

 Representation relates to a person acting under the company’s authority. If a company gives an agent authority to
act on its behalf, the agent possesses actual authority and will bind the company to acts which fall within the scope
of the mandate given to him or her.
 Authority can be given expressly (in writing or orally) or by implication. Whether authority has been conferred is a
question of fact.
 The shareholders, directors and prescribed officers have the same powers (in terms of s 20(5) of the Act) that they
have when the company intends acting ultra vires, to restrain the company or directors from doing anything
inconsistent with a limitation or restriction on the authority of the directors to perform an act on behalf of the
company.
 A company may also be bound to a contract on the basis of ostensible authority where the person purporting to
conclude the contract on its behalf lacked actual authority, express or implied, but the other party to the contract had
been misled by the company into believing that he or she did have authority. This is referred to as ostensible or
apparent authority.
 Ostensible authority applies only when the agent did not have actual authority to bind the company.
LEGAL CAPACITY OF A COMPANY AND THE ULTRA VIRES
DOCTRINE

 By “capacity of a company”, it is meant the sphere of actions that a company may legally perform.
 The ultra vires doctrine is based on the understanding that a company exists in law only for the purpose for which it
was incorporated.
 According to the ultra vires doctrine, when an act on behalf of the company falls outside its main and ancillary
objects, the company does not exist as a legal person for the purposes of that contract and consequently such an act is
not binding on the company. Such an act is described as an ultra vires act.
 A company is a fictitious person. As such, it is unable to speak or act for itself. As a juristic person therefore,
representatives must be appointed to speak and act on a company’s behalf.
  The principles of agency law regulate the relationship between a company and its representatives.
  To provide a more specific structure to the general agency relationship, the authority of a company’s representatives
(e.g. a Director) would usually have been set out (and often limited) in that company’s MOI.
  The ultra vires doctrine has been a topic in company law that has had considerate attention though out its history.
  With recent changes in the form of the new Companies Act of 2008 new light has been brought to the continued
evaluation of this doctrine
 COMMON LAW POSITION OF ULTRA VIRES DOCTRINE

 The crux of the ultra vires doctrine under common law was that any contract entered into by a company which was not in line
with the objects in its Memorandum of Incorporation (hereafter memorandum) was beyond the company’s capacity and
therefore void ab initio.
 Under common law the authority of a company to enter into a contract was relevant in an external and an internal context.
 Externally with a third party contracting with a company, if the authority of the company to enter into such a contract was not
included in the objects of the company then the contract was ultra vires and void.
 Internally between the company and the director entering into an ultra vires contract, the company may either select to restrain
the act of the director or if the contract had already been entered into then the company may claim damages against the director
who entered into the contract outside of the company’s capacity and therefore breaching his fiduciary duties.
 Historically, in order to create a legally valid contract between a company and another person (3rd party), it was necessary to
comply with two key requirements:
 1. the company had to have had the contractual capacity to enter into the agreement, and
 2. the company‟ s representative had to have had the necessary authority to bind the company.
  If either of these two requirements were lacking, the purported contract would be a nullity.
 COMMON LAW POSITION OF ULTRA VIRES DOCTRINE

 The ultra vires doctrine may have been advantageous for the company and its insiders, it would however always operate to the
detriment of third parties wishing to contract with the company.
  Indeed, the possibility of causing prejudice to outsiders is an almost inevitable consequence of the ultra vires doctrine.
  The ultra vires doctrine prohibits a company from entering into an agreement beyond its legitimate powers given in the
company’s MOA or AOA.
  Any purported contract concluded on behalf of a company dealing with matters outside of the limited scope of the
company’s main object as stated in its MOA, was void ab initio due to the company’s lack of capacity.
  Consequently, no party to an ultra vires company contract could enforce performance according to its terms
  In principle this doctrine had the effect of giving the company a right to declare that the contract was void due to lack of
capacity and the prejudiced party had no further protection.
  It also resulted in companies drafting very broad objects in its memorandum (MOA) and parties contracting with the
company had trouble knowing what the exact objects of the company were and the limitations of such.
  The traditional justification put forth for the ultra vires doctrine was that it served the important purpose of protecting the
interests of a company’s creditors and shareholders.
 ULTRA VIRES DOCTRINE POSITION IN TERMS OF THE
OLD COMPANIES ACT 61 OF 1973

 The 1973 Act first eradicated to some extent the ultra vires doctrine by the s36 of the Companies Act 61 of 1973 and
thereafter to a greater extent by the new Companies Act 71 of 2008, discussed below.
  The common law regarding the ultra vires doctrine was dramatically changed with the 1973 Act as now a contract
between a third party and a company will not be void solely for the reason that the contract was ultra vires, instead
such a contract will be binding and enforceable between the parties.
  S36 is the most relevant in determining the development of the ultra vires doctrine, it states that:
 No act of a company shall be void by reason only of the fact that the company was without capacity or power so to
act or because the directors had no authority to perform that act on behalf of the company by reason only of the said
fact and, except as between the company and its members or directors, or as between its members and its directors,
neither the company nor any other person may in any legal proceeding assert or rely upon any such lack of capacity
or power or authority’.
 ULTRA VIRES DOCTRINE POSITION IN TERMS OF THE
OLD COMPANIES ACT 61 OF 1973

 This section has the result that an ultra vires act (i.e.an act which is beyond a company’s legal capacity as set out in
its memorandum) will no longer be void.
 Even though not expressly stated the section operated regardless of whether the parties concerned knew the act was
ultra vires or not at the time the act was concluded.
  A vital aspect of this section is that it applies only to contracts between the company and third parties and has no
internal application as between the company and its members or directors, or as between its members and directors.
  However on an internal level common law is still in effect, as a director acting outside the objects of a company
acts unlawfully and can be held liable for any damages suffered by internal parties of the company such as its
directors, shareholders and other members.
 ULTRA VIRES DOCTRINE POSITION IN TERMS OF THE COMPANIES ACT 71 OF 2008 .
NB:THIS IS THE SUMMARISED NOTES SO PLEASE READ TOGETHER WITH THE
PRESCRIBED TEXT BOOK ON THIS PRINCIPLE ON PAGE 72-73.

 The new Companies Act of 2008 which came into effect on May 2011 addresses the shortfalls which were found in
the previous Act of 1973 regarding the position of ultra vires doctrine.
  Section 19 - Legal status of companies
  The doctrine of constructive notice has been abolished in this Act except in two situations as discussed in s19 (5):
  ‘(5) a person must be regarded as having received notice and knowledge of –
 (a) any provision of a company’s memorandum of incorporation contemplated in section
  15(2)(b) if the company’s notice of incorporation or a notice of amendment has drawn attention to the provision,
as contemplated in section 13(3); or (b) the effect of subsection (3) on a personal liability company...’
 Section 20 - Validity of company actions
  This section has extended and confirmed the rights, of third parties and internal parties, against persons
representing the company and who might cause damage due to an action which is prohibited in terms of any
limitation present in the company’s memorandum.