Since a company is not flesh and blood, an individual (or individuals) must therefore act on behalf of the company when negotiating, entering into legally binding agreements or signing documents. These individuals must have been given authorisation and must therefore have capacity to act on behalf of the company.
The role of the board of directors
Section 66 of the Companies Act, 71 of 2008 (the Act) determines that every company must have a board of directors and the business and affairs of the company “must be managed by or under the direction of its board”. The board has the authority to exercise all the powers and perform any of the functions of the company, except to the extent that the Act or the company’s Memorandum of Incorporation (MOI) provides otherwise.
All decisions by the board of directors, or the shareholders where necessary, are made according to the provisions of the Act and MOI. Once the board of directors are in agreement, these decisions are put into writing and are then referred to as board resolutions which then govern future transactions made by an individual on behalf of the company.
Capacity to act on behalf of the company
The Companies Act and the company’s founding documents including the MOI and its shareholders agreement (if one is in existence) will determine and dictate the company’s capacity and who the individuals are that have authority to represent the company.
When entering into an agreement, such as buying a house from a company, it is important to make sure that the director/manager signing the agreement on the company’s behalf has the necessary capacity to represent the company and that the board of directors signed a resolution in support of the transaction.
This general rule of capacity and representation is qualified by further legal doctrines and precedent, such as:
- The Turquand Rule: Based on a judgment from a UK court, which held that people transacting with companies are entitled to assume that internal company rules are complied with, even if they are not.
Based on these legal doctrines, certain acts by the company may still be valid or ratified, although the capacity to represent may not have existed at the time.
As this can be a very technical issue, whenever one is confronted with the validity of company’s decision or contractual obligations, legal advice should be obtained.
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