Contracting with a company: Check for director authority!

A3BA recent High Court judgment reminds us once again of how important it is, when dealing with a company, to check that whichever director/s you are dealing with is/are fully authorised to bind the company.

R3.8m in claims attacked

  • A liquidation application was launched against a property developing company with 3 directors,
  • The applicant creditor was owed some R3.8m in loan and suretyship claims,
  • Its problem was that the suretyship and loan agreements had been signed by only one of the directors of the property company, with the knowledge and approval of the second director but not of the third,
  • The third director (acting as trustee of a creditor trust) opposed the liquidation application on the grounds that the first and second directors had acted without authority.  He argued that the creditor had no claim against the company, and therefore had no standing to liquidate it,
  • The Court found on the facts that the creditor had failed to prove that the first and second directors had acted with authority.  Nor had it proved that they were held out as being persons authorised to manage the company’s affairs.  Thus it could not enforce any claim, and the liquidation order was refused.

So, how do you prove authority?

You must firstly show that you were dealing with someone who had either actual or apparent (often called “ostensible”) authority to contract with you.  You can’t enforce your claim if you can’t prove authority!

Assumptions, assumptions

As a rule you are allowed to assume that the board of directors and any managing director have the necessary authority.  The same doesn’t generally apply to any ordinary director or employee, except perhaps to the extent that they hold an executive position (financial director or branch manager perhaps) which suggests that they have authority “usual to that type of position”.  Of course you can’t make any assumptions at all if you actually knew, or should have known or suspected, that the director or employee was acting outside his/her powers and authority.

No wriggle room

To complicate matters (sorry, but this is important and to your advantage) what happens if a company tries to wriggle out of its contract with you on the basis that, unknown to you, the director had breached some internal company procedure?  Since usually only insiders will know about a company’s internal policies, it would be highly unfair to you if that were allowed.

To protect you, our law says that, once you have proved actual or apparent authority as above, you can then assume that all the company’s internal rules and policies have been complied with.   Out of interest, if you ever hear lawyers earnestly and learnedly debating “The Turquand Rule”, this is what they are talking about.

Beware – our law on this is both complex and fraught with grey areas, and the notes above are just a summary of some general legal principles.  Insist on directors you contract with producing written proof of authority (a formal company resolution to start with) and take legal advice on your particular circumstances!

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Differences between liquidation and sequestration process

The application for liquidation and sequestration processes are often confused. Many people think that the processes are the same. However, there is a big difference between these two processes.

A simple way to describe liquidation is that liquidation is the winding up of a firm by selling off its free (un-pledged) assets to convert them into cash to pay the firm’s unsecured creditors. Before a liquidation application can be issued in court, a founding affidavit needs to be drafted. This affidavit will include all the details of the Applicant and / or Respondent. The Applicant is the person who wants to liquidate the company and the Respondent is the company. In the case where the Applicant is the company, there will be no Respondent. The affidavit will also include any details of the company, employees and creditors. A bond of security also needs to be signed for the purpose of the Master of the High Court.

Once the application is issued, the only people who receive this notice is the South African Revenue Services (SARS), the Master of the High Court, employees of the company and any trade unions. As soon as this is done, a Master’s certificate is obtained verifying the application, and a provisional liquidation order is granted.  A return date is then set, and all creditors are notified of the provisional liquidation through registered post and by placing the provisional order in two local newspapers. Should the Applicant’s attorneys receive no notice of intention to defend the matter, a final liquidation order is granted. The order together with the application is sent to the Master of the High Court and a liquidator will be appointed.

Sequestration is the preferred option for the individual who has exhausted all other options of resolution, and is now in a position where even if all their assets are sold, they would be left with such a high shortfall that it would be unreasonable to expect them to recover from this loss. A sequestration involves a little more administration work before a court date can be obtained. Before the Notice of Motion and Founding Affidavit are drafted, a valuer needs to be appointed in order to value the Applicant or Respondent’s estate. This needs to be done in order to ascertain whether the debtor is indeed over-indebted, and whether he / she has enough assets to provide a benefit for all creditors involved.

In the matter of a voluntary sequestration, the Applicant will be the party whose estate is to be sequestrated. The valuer needs to value the property of the Applicant on a forced sale scale. This will be calculated by subtracting 20% of the actual value of the property.

As soon as the valuer has made an estimate for the Applicant / Respondent’s estate, a Statement of Debtor’s Affairs needs to be handed in to the Master of the High Court for inspection by all creditors. This needs to be done no less than 14 or more than 30 days before the court date. A Notice of Surrender needs to be sent through registered post to all creditors to inform them that the Statement of Debtor’s Affairs is available for inspection.

The Notice of Surrender needs to be posted in two local newspapers and the Government Gazette no less than 14, or more than 30 days before the court date. Once all of the above-mentioned requirement has been adhered to, the notice of surrender can be annexed to the Founding Affidavit and can be heard by the court, no Bond of Security is needed at this point. A sequestration can only be heard by the High Court, whereas a liquidation can be heard either by a Magistrate’s Court or by the High Court, depending on the merits of the case.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.