Under the Companies Act 71 of 2008 (“the 2008 Act”) constitutive documents such as the memorandum of incorporation (“MOI”) serve as the foundation on which a company is established. Constitutive documents have often been observed as being contractual in nature. This is because, once a party holds a certain position in relation to the company, they immediately become bound by the terms of such constitutive documents. In such a scenario, the constitutive documents become what is referred to as ‘statutory contracts’. One question which commonly arises is who is bound by the terms of a company’s MOI, or put differently, who can a company’s MOI be enforced against?
I. SECTION 15(6) OF THE 2008 ACT
Section 15(6) of the 2008 Act provides that a company’s MOI is binding between the company and each shareholder, between or among the shareholders of the company, and between the company and each director or prescribed officer of the company. It is also binding between the company and any other person serving the company as a member of a committee of the board. Importantly, all of the above binding relationships are subject to the caveat that the MOI is only binding insofar as the exercise of their respective functions within the company. For example, where a director renders services to the company in his capacity as an accountant and not as a director, the MOI cannot be enforced against him.
II. THE CONTRACTUAL EFFECT IN TERMS OF THE 2008 ACT
It is fairly common knowledge that a company’s MOI is enforceable against individuals generally associated with the beneficial shareholding of a company. Therefore, under the 1973 Companies Act, a shareholder could enforce a breach of a statutory contract against the company in terms of which they held shares. The 2008 Act has extended this position to include directors, prescribed officers and committee members. However, a very important distinction must be drawn. Section 15(6) provides that whilst a company’s MOI may be enforced by the parties listed, such parties cannot enforce the terms inter se, although they may have other remedies in terms of the 2008 Act.
III. CONCLUSION
It is essential that members of a company understand that constitutive documents, in terms of the 2008 Act, cannot be enforced against each other but rather, against the company to which they belong. Should you require assistance in drafting, interpreting or enforcing an MOI, our team is ready to assist.
