Much has been written in the past as to the doctrine of Constructive Notice and the application of the Turquand rule. Further, a fairly large body of case law clarified the application of the doctrine of Constructive Notice, the rules relating to establishing whether a representative of a company had ostensible authority to act, and when the application of the Turquand rule could aid third parties who have entered into a transaction.

The Companies Act 71 of 2008 (the Act) has, however, changed the playing field in this regard. The doctrine of Constructive Notice has been abolished, and the application of the Turquand rule has been codified in Section 20(7) and Section 20(8) of the Act.        

SECTION 20(7) AND SECTION 20(8) OF THE ACT

Section 20(7) and Section 20(8) of the Act read as follows:

(7)  A person dealing with a company in good faith, other than a director, prescribed officer or shareholder of the company, is entitled to presume that the company, in making any decision in the exercise of its powers, has complied with all of the formal and procedural requirements in terms of this Act, its Memorandum of Incorporation (MOI) and any rules of the company unless, in the circumstances, the person knew or reasonably ought to have known of any failure by the company to comply with any such requirement.

(8) Subsection (7) must be construed concurrently with, and not in substitution for, any relevant common law principle relating to the presumed validity of the actions of a company in the exercise of its powers. 

ONE STOP FINANCIAL SERVICES (PTY) LTD V NEFFENSAAN ONTWIKKELINGS (PTY) LTD AND ANOTHER (20028/14) [2015] ZAWCHC 89

In the case of One Stop Financial Services (Pty) Ltd v Neffensaan Onwikkelings (Pty) Ltd and Another (the OFS – case), the Western Cape High Court of South Africa delivered a judgment that clarified application of the principles of the Turquand rule and Section 20(7) and Section 20(8) of the Act, in light of the abolishment of the doctrine of Constructive Notice.

In the judgment Rogers J uses the following practical scenarios to illustrate the application of the relevant principles: person X believes that he has contracted with a company and can prove that the company’s representative Y, however, lacks actual authority, and such lack of authority can be traced to the company’s MOI. The relevant provisions in the MOI take the following examples:

  1. a provision placing a transaction of a particular kind altogether outside Y’s authority (Case 1);
  2. a provision making Y’s actual authority in relation to specific types of transactions subject to compliance with a condition (for example, the approval of shareholders), and the condition has not been met (Case 2);
  3. a provision under which authority might have been, but was not in fact, delegated to Y or was delegated subject to restrictions (Case 3); or
  4. a provision under which the company could have appointed directors or a managing director but did not in fact do so in circumstances where certain persons were nevertheless allowed to operate as its de facto directors or its de facto managing director (Case 4).

THE COMMON LAW AND POSITION PRIOR TO THE ACT IN TERMS OF THE OFS - CASE

Rogers J stated that, under the Common Law, and prior to the enactment of the Act, in order for X to meet a defence of lack of actual authority he would have to state that the company is estopped from denying Y’s authority and that Y had ostensible authority. This ostensible authority would be based on a representation made by the company that Y had authority, and X had reasonably relied on such representation.  However, X had the disadvantage that, because the company’s MOI is a document in the public sphere, knowledge of its contents could have destroyed X’s claim due to the doctrine of Constructive Notice. In Case 1, X should have been aware that Y could never bind the company to a transaction of the kind in question and as such, his claim would have been destroyed by the doctrine of Constructive Notice. In the other three cases, X could not reasonably have assumed Y to have the authority in question without investigating further and, as such, if he had otherwise proved the facts necessary to establish ostensible authority, X would be able to rely on the Turquand rule to meet a defence of lack of actual authority by the company.

THE POSITION UNDER SECTION 20(7) AND SECTION 20(8) OF THE ACT IN TERMS OF THE OFS - CASE

In terms of Section 19(4) of the Act the doctrine of Constructive Notice of a company’s MOI has been abolished, with the exception of Ring Fenced companies (RF companies).

Rogers J stated that one significant change brought about by the abolition of the doctrine of Constructive Notice is that a company can now be bound on the basis of ostensible authority even where the MOI places authority on the matter in question completely beyond the potential scope of authority of the representative, such as Case 1. This is so because a third party would not be deemed to have had Constructive Notice of the relevant restriction (except in the case of a RF company), the third party therefore could hold the company liable if the representative was held out by the company as having the relevant authority. The court stated further that the expression ‘formal and procedural requirements’ in Section 20(7) must be interpreted consistently with the conventional scope of the Turquand rule. In Case 2, for instance, the condition could be regarded as a formal or procedural requirement. Rogers J stated further that where a person is, or is held out to be, the company’s managing director, the precise terms of and restrictions on the authority delegated to the managing director might be regarded as a formal or procedural matter. The court pointed out, however, that in relation to an ordinary director, the conferral of authority to bind the company is not merely a formal or procedural matter (Case 3 and Case 4).

The court confirmed that due weight must be given to the requirement in Section 20(7) that the third party should have been dealing with the ‘company’ and that, in order for Section 20(7) to apply, the third party must establish that he was dealing with someone who had ostensible authority to bind the company, because only in those circumstances can he say that he was dealing with the ‘company’ and, as such, the Turquand rule will only apply in such cases.     

Phillip Kruger

Divisional Director | Legal, Johannesburg

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