LML4806 Company Law Summary
LML4806 Company Law Summary
LML4806 Company Law Summary
LML 406-T
December 2008
LML406-T
Company Law
2008
INDEX
INDEX................................................................................................................................2
GENERAL MEETINGS......................................................................................................6
1. Kinds of member meetings......................................................................................6
a. Class meetings.....................................................................................................6
b. General meetings.................................................................................................6
c. Annual General Meeting......................................................................................6
2. Voting rights.............................................................................................................6
a. Equal voting rights...............................................................................................6
b. Exceptions to equal voting rights........................................................................7
c. Pender v Lushington............................................................................................7
3. Voting procedures....................................................................................................7
a. Voting procedures................................................................................................7
b. Voting agreements................................................................................................7
4. Resolutions..............................................................................................................7
a. Simple majority...................................................................................................8
b. Special resolutions...............................................................................................8
c. Special resolution – requirements........................................................................8
d. Special resolution – notice...................................................................................8
e. Special resolution – proof....................................................................................9
f. Special resolution – registration..........................................................................9
g. Special resolution - creating authority.................................................................9
5. Unanimous assent....................................................................................................9
a. General rule.........................................................................................................9
b. In re Duomatic Ltd...............................................................................................9
c. Gholke and Schneider v Westies Minerale (Edms) Bpk.....................................10
DIRECTORS: GENERAL.................................................................................................11
1. Directors and the Board of Directors.....................................................................11
2. Legal position of directors and board of directors.................................................11
a. Definition of director.........................................................................................11
b. Directors - Various legal positions....................................................................11
c. S v Marks...........................................................................................................12
d. Ross & Co v Coleman........................................................................................12
3. Appointment of directors.......................................................................................13
a. Appointment & Acceptance...............................................................................13
b. Power to appoint................................................................................................13
c. Vacancies...........................................................................................................13
d. Director’s consent to act...................................................................................13
e. Offence: Publication of directors’ names..........................................................14
f. Irregular appointment........................................................................................14
4. Types of directors...................................................................................................14
a. Alternate directors.............................................................................................14
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b. De facto directors..............................................................................................14
c. Re Hydrodam (Corby) Ltd.................................................................................15
d. Executive & Non-executive directors.................................................................15
5. Qualifications for the office of director.................................................................15
a. Share qualification.............................................................................................15
b. Statutory disqualification (S 218)......................................................................16
c. Disqualification by order of court (S 219).........................................................16
6. Removal of directors, resignation and retirement..................................................16
a. Removal by ordinary Resolution........................................................................16
b. Special notice and representations....................................................................16
c. Compensation or damages................................................................................17
d. Removal ito Articles...........................................................................................17
e. Frustrating removal...........................................................................................17
f. Filling a vacancy...............................................................................................17
g. Swerdlow v Cohen.............................................................................................17
h. Nourse v Farmers’ Co-operative Co Ltd...........................................................17
7. Winding-up: Effect on directors............................................................................18
8. Registers concerning directors and officers...........................................................18
DIRECTORS: RIGHTS & DUTIES.................................................................................19
1. Rights, Powers and duties of directors..................................................................19
a. Rights & Duties.................................................................................................19
b. Management......................................................................................................19
c. Confidentiality...................................................................................................19
d. Remuneration.....................................................................................................19
e. Access to company records...............................................................................20
f. Right to discharge duties....................................................................................20
g. Brown v Nanco (Pty) Ltd...................................................................................20
2. Fiduciary duties.....................................................................................................20
a. Statutory and common law duties......................................................................20
b. The fiduciary relationship..................................................................................20
c. Protection against exploitation..........................................................................21
d. Basis of liability for breach of fiduciary duty....................................................21
e. Typical breaches of director’s fiduciary duties..................................................21
f. No fiduciary duty towards individual members................................................22
g. West Mercia Safetywear Ltd (in liq) v Dodd......................................................22
h. Regal (Hastings) Ltd Gulliver...........................................................................22
i. Cook v Deeks.....................................................................................................23
j. Robinson v Randfontein Estates Gold Mining Co Ltd.......................................23
k. Industrial Development Consultants Ltd v Cooley............................................23
l. Atlas Organic Fertilizers (Pty) Ltd v Pikkewyn Ghwano (Pty) Ltd...................23
m. Sibex Construction (SA) (Pty) Ltd v Injectaseal CC..........................................24
n. Fulham Football Club Ltd v Cabra Estates plc.................................................24
3. Duty to act with care and skill...............................................................................24
a. Meaning of “care” and “skill”...........................................................................24
b. Basis of liability for breach of duty...................................................................24
c. In re City Equitable Fire Insurance Co Ltd.......................................................24
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d. Fisheries Development of SA Ltd v Jorgensen; Fisheries Development
Corporation of SA Ltd v AWJ Investments (Pty) Ltd.................................................25
DIRECTORS: STATUTORY RESTRICTIONS & PERSONAL LIABILITY.................26
1. Restrictions on directors........................................................................................26
a. Restrictions........................................................................................................26
b. Loans to directors..............................................................................................26
c. Novick v Comair Holdings.................................................................................27
2. Contracts between directors and their company....................................................28
a. Statutory provisions and common law rules......................................................28
b. Avoidance of voidability....................................................................................28
c. Statutory provisions for disclosure....................................................................28
d. Failure to disclose.............................................................................................28
e. Time for disclosure.............................................................................................29
f. Manner of disclosure.........................................................................................29
g. Recording a disclosure.......................................................................................29
h. Aberdeen Rail Co v Blaikie Bros.......................................................................29
3. Indemnity of directors and relief by the court.......................................................29
a. Statutory provisions...........................................................................................29
b. Limitation on indemnity.....................................................................................29
c. Insurance by company.......................................................................................30
d. Indemnity against costs of litigation..................................................................30
e. S 248 Relief by the Court...................................................................................30
f. Barlows Manufacturing Co Ltd v RN Barrie (Pty) Ltd.....................................30
4. Personal liability towards others............................................................................30
a. Statutory provisions...........................................................................................30
b. Personal liability...............................................................................................30
c. Section 424-Fraudulant conduct of business.....................................................30
d. Duties towards creditors....................................................................................31
e. Delictual liability...............................................................................................31
f. Gordon and Rennie v Standard Merchant Bank................................................31
g. Ex parte Lebowa Development Corporation Ltd...............................................31
h. Philotex (Pty) Ltd v Standard Merchant Bank...................................................31
5. Corporate governance and director’s duties..........................................................32
OTHER OFFICE-BEARERS............................................................................................33
1. Employees..............................................................................................................33
2. Company Secretary................................................................................................33
a. Statutory provisions...........................................................................................33
b. Appointment & Duties.......................................................................................33
c. Relationship towards company..........................................................................34
d. In re Maidstone Buildings Provisions Ltd.........................................................34
e. Panorama Developments (Guilford) Ltd v Fidelis Furnishing Fabrics Ltd......34
3. Managers................................................................................................................34
a. Manager – statutory definition..........................................................................34
b. Characteristics, rights & duties of manager.....................................................35
c. Managing director.............................................................................................35
d. Moresby White v Rangeland Ltd........................................................................35
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e. Nelson v James Nelson & Sons Ltd...................................................................35
4. Chairperson............................................................................................................35
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GENERAL MEETINGS
a. Class meetings
Meeting for holders of special classes of shares re matters that concern only
holders of those classes of shares.
“Outsiders” only if members approved
E.g. to change rights attached to shares – need to amend articles – General
meeting
Quorum – per articles- e.g. 2 persons representing at least ⅓ of shares in that
class.
b. General meetings
All meetings of the general body of shareholders.
2. Voting rights
S 193 – 195
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Share capital – vote iro each share
o Public company - Par value – votes in same proportion to total votes as
nominal value of shares bears to nominal value of all shares.
o No par value – 1 vote per share
Limited by guarantee – each member 1 vote
Articles can provide otherwise
c. Pender v Lushington
Chairman at general meeting, in breach of articles, rejected certain votes as
invalid
Action brought by shareholder whose vote was rejected
Grounds:
o Proposed policy was adverse to interest of company (rejected)
o Votes were improperly rejected by chairman (accepted)
People can vote any way they please, even for personal gain
No obligation on shareholders to vote in best interest of company at large
Shareholders have the right to have their votes recorded.
3. Voting procedures
S 197 – 198
a. Voting procedures
Show of hands – 1 vote per member
Poll – general rule - votes in proportion to shares held
Can demand poll if:
5 members having right to vote;
Members representing at least 10% of voting rights; or
Members holding at least 10% of issued share capital.
b. Voting agreements
Shareholders at liberty to enter into voting agreements - enforceable
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4. Resolutions
Formal decisions of a company at general meeting.
a. Simple majority
In general – resolution passed by simple majority of members present and entitled
to vote, provided quorum requirements were met.
Simple majority – ordinary resolution – effective from date of adoption unless
other date was specifed.
b. Special resolutions
Converting one type of company into another
Change of name
Alteration of objects and powers
Alteration, removal or incorporation of conditions in the memorandum
Alteration of articles
Alteration of share capital
Authorising payment of interest on share out of capital
Authorising issue of par value shares at a discount
Authorisation of nor par value below book value
Acquisition of own shares
Conversion of shares into stock & vice versa
Approval of share option scheme for directors
Making a loan to a director
Approval of payments to directors for loss of office or in connection with
schemes, arrangements or take-overs
Getting inspectors appointed by Minister to investigate company affairs
Winding up by the court and voluntary winding-up
Sanctioning agreement between solvent company & creditors
Sanctioning acceptance of shares in another company in exchange for assets
of company wound up voluntarily
Disposal of records of company wound up voluntarily by members.
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Clerical, or
Grammatical nature
is not permissible.
5. Unanimous assent
a. General rule
All members were fully aware and assented unanimously.
Valid decision even though meeting was not held
Illegal results cannot obtain validly through unanimous assent
b. In re Duomatic Ltd
Unanimous assent as substitute for a formal resolution
Mr Elvins & Mr East = only directors and only shareholders
Articles – Director remuneration should be determined by company in general
meeting
No resolution passed
Directors – service contracts
Directors withdrew money as and when needed
At year end amounts totalled and entered into accounts as “directors’ salaries”
Company wound up – Liquidator sought to recover these sums from directors
Amounts paid not authorised by general meeting or formal board meeting
Directors/members applied their minds and informally agreed on
remuneration
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If all shareholders who have right to attend and vote at general meeting assent
to some matter – assent is binding as a resolution in a general meeting
would be
Only members entitled to vote on the issue need to agree
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DIRECTORS: GENERAL
1. Directors and the Board of Directors
Every company must have a director or directors
Public company – at least 2
Private company – at least 1
From incorporation to election – subscribers deemed to be directors
Board of directors and general meeting – organs of the company
Board of directors – acts of management & acts of agency
Particular act –
Performed by whom? (e.g. individual director or board)
Determine validity – did persons have authority to act on behalf of company?
External transactions
- Law of Agency
- Exceptions – delictual and criminal matters
Corporate act
- Some instances – acts not that of agent, rather deemed to be act of
company
- Signing negotiable instruments e.g. cheques
- Signing written contract
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- Director = functionary within company
- Can enter into contractual relationship
- General contract
- Special mandate
- Employment contract – dismissal does not in itself cause termination
of office.
c. S v Marks
Criminal liability of director
Definition of director ito Criminal Procedure Act – S332(10)
o Person who controls or governs that corporate body
Control/govern not only complete or effective control –wider meaning
Control any of company’s activities
Marks was tacitly accepted by the board as the person who controlled or at
least predominantly influenced the conduct of the company affairs.
Marks exercised control and governance of the companies
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o If benefits should remain undiminished under all circumstances – must
appear very clearly.
o Coleman’s action failed.
3. Appointment of directors
a. Appointment & Acceptance
Common law – director’s appointment complete when:
Appointed to office by those having authority to do so, and
Consent to appointment.
Company law – not director in law in absence of being appointed by those having
authority to do so.
b. Power to appoint
Power to appoint is determined by Companies Act and company Articles.
Unless otherwise provided,
Subscribers to Memorandum – deemed to be directors until first directors are
appointed. [S208(2)]
Majority of the subscribers may determine the number of directors and
appoint the first directors in writing. [S209}
c. Vacancies
Fill vacancy in accordance with Articles
Person appointed in such a way – “step in shoes” – for determining retire date
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o Not applicable for reappointments
Failure to lodge CM27
o Appointment not invalidated, but
o Offence.
Also offence if names of directors are not stated on trade catalogues, trade
circulars and business letters of company, incl:
Present forenames or initials and present surname
Any former forenames and surname
Nationality if not South African
f. Irregular appointment
Irregular appointment can be set aside – the acts of such director remains valid ito
S214.
May thus assume that person who appears to be validly appointed as director
may validly act in that capacity. Only applicable if:
Some form of appointment was made
There was no fraudulent assumption of power
It concerns an act which had been performed before the irregularity had
been discovered.
4. Types of directors
a. Alternate directors
Represent director who will be absent from board meetings for a lengthy
period
Subject to all duties & liabilities of other directors
Operate only when his nominator does not operate
Position determined by articles
Cease – discretion of nominator or when nominator is no longer director
b. De facto directors
Act as director without being appointed as such
o Control company, eg through nominee directors
o Not entitled to director remuneration
o Internally not regarded as director
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o Action prior to discovering defect remains valid (S 214)
o Re Hydrodam
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Qualification shares can not be given to director. Director legally liable for
market value of the shares
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Director entitled to make personal representation at meeting
Director may submit written representation in opposition – company must
send to members or, if received to late, read out at meeting
If representations are defamatory – court approached to prohibit needless
publicity.
c. Compensation or damages
S 220 not remove claim to compensation or damages iro untimely removal
Holding office purely ito articles – no claim for damages
Holding office ito seperate contract – claim damages for breach of contract.
e. Frustrating removal
Legitimate ways to prevent removal
o Loaded voting rights in private companies
o Specific voting agreements
o Extent of damages resulting from removal so substantial that company
can not proceed with removal
o May lead to winding up of certain types of private company S344 “just
& equitable”
f. Filling a vacancy
Regarded as casual vacancy
Person appointed must retire at time when the removed director would have
retired.
Director automatically cease to hold office if:
o Fails to obtain qualification shares in time
o Becomes disqualified to hold office ito articles,
S218 or S219
o Compulsory winding-up order made by court
g. Swerdlow v Cohen
Articles – No resolution will be effective unless Swerdlow, Cohen and Bahr is
in favour of such resolution
Company removes Swerdlow as director ito S 220
Nothing in memorandum or articles may impair a company’s power to pass an
ordinary resolution to remove a director.
Resolution remained valid and appeal was dismissed.
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h. Nourse v Farmers’ Co-operative Co Ltd
Agreement between Nourse and company contained grounds for dismissal
In case of such dismissal, company oblidged to give at least 6 months written
notice
Court ruled, Nourse could also be dismissed for reasons not listed in
agreement
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General rights
o Possible right to remuneration
o Right to access company records
o Right not to be prevented from properly performing duties.
Duties:
o Obligations arising from fiduciary nature of office
o Duties of care, diligence and skill
o Duties resulting from provisions in Companies Act, other Acts and
company constitution
o Obligations created in separate contracts concluded with the company
b. Management
Responsibility for management is determined by Articles
Directors usually responsible for management except matters specifically
allotted to other organs by legislation or Articles
Modern trend – company is managed by or under direction of the directors
c. Confidentiality
Board meetings confidential – free and open discussion
Invasion of this right of privacy can be restrained via interdict.
d. Remuneration
Director has no right to remuneration unless right is given by articles or
contract
Articles is not a contract between director and company, thus director may not
claim remuneration based on an amount stated in the Articles.
If articles do not confer right, company may still remunerate – seen as gift,
not enforceable right.
Director without employment contract has no right to ordinary benefits of an
employee.
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e. Access to company records
Right to inspect books and accounts of company
Right to be assisted by an acceptable accounting advisor
2. Fiduciary duties
a. Statutory and common law duties
Exercise powers bona fide
For the benefit of the company
Display reasonable care and skill in carrying out office.
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c. Protection against exploitation
If director’s breach of fiduciary duty result in
o Loss to company, or
o Director benefits thereby,
Company may recover amount of such loss/benefit from director and transaction
may be set aside
Usually only own company, may include holding company directors if control
was abused.
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o Own authority
Can still bind company – Estoppel or Turquand rule
Direct breach fiduciary duty – liable for damages
Company can also recover such loss from director, e.g. where
unauthorized remuneration is paid
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If Gulliver obtained approval from general meeting, could have retained
profit.
i. Cook v Deeks
Secret profit rule
Directors started a new company to bid for new contract
Used voting powers to sell part of plant to new company
Privy Council held that benefit belonged to original company
Directors can not abuse voting powers to sanction transaction
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Not greater degree of skill which may reasonably be expected from a person
of his knowledge an experience (subjective)
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1. Restrictions on directors
S 226, 228, 295, 296
a. Restrictions
Benefits
o Payments for loss of office or on arrangements and take-overs
o Issue of shares – directors & their beneficiaries only in limited
circumstances
o Share option plans – only valid if
Director receive no undue preference, or
Approved by special resolution, or
Right is given to salaried director in capacity of employee
o Tax free payments – prohibited
Payments calculated by taking a director’s tax liability into
consideration, or
Payments varying with the amount or rate of tax
are taken as tax free payments.
o Loans to directors
Further statutory limitations
o Issue of shares are subject to prior approval of a general meeting
o Disposal of whole or substantially the whole of the undertaking or assets
of company – special resolution sanctioning specific transaction
required.
o Special responsibilities iro accounting records and disclosure.
b. Loans to directors
General approach:
o Prohibit certain loans to directors and managers
o Require disclosure in lending company’s AFS for exempted loans
o Includes loans made before appointment
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Any company or corporate body controlled by one or more of
the above.
May provide loan to holding company and subsidiary
o Provision of security which includes giving of guarantee by company
in connection with obligation of person above
o Both directly and indirectly
o Specifically exempt from prohibition:
Loan to own director – special resolution to specific
transaction or prior consent of all members or ratification
Providing funds – meet expenditure for purposes of company
or to perform his duties of office properly
Anything done bona fide in ordinary course of the business of
company actually & regularly make loans or provide security
Money to trustee/ employees to acquire shares in company or
holding company for benefit of employees
Approval of general meeting – housing of company’s director
or manager
Loan to director or manager of a subsidiary of lending
company if he is not also director or manager of lending
company
o Any director/manager/ lending company or its holding company who
authorizes, permits or is party to breach – liable to compensate
company and innocent third parties for any loss suffered as result of
invalidity of loan + guilty of offence
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c. Novick v Comair Holdings
Disposing of the Company’s major assets
Comair sold group of subsidiaries by letter of agreement.
Validity of letter of agreement was attacked – sale was not approved by
Comair shareholders at a general meeting – attack failed.
Use market value test to determine whether assets sold constitute greater part
of company assets – Valuation – probably DCF
Respondents did not prove that true value of assets sold > half Comair’s assets
No justification to couple two independent sales of assets to independent
buyers
b. Avoidance of voidability
Articles permit contracts between directors and company
General meeting approve after full disclosure
“Exclusion clause” invalid
d. Failure to disclose
Offence
Contract may be voidable
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Profits may be recoverable from director
f. Manner of disclosure
Written declaration
Audible utterance
Tacit assent
Adoption of assertions
g. Recording a disclosure
Record in minutes.
Register of interest – kept at registered office – open for public inspection
b. Limitation on indemnity
Directors, officers and auditors – following limitation of liability = invalid:
o Negligence
o Default
o Breach of duty
o Breach of trust
o i.e. can not contract out fiduciary duty
General meeting may ratify or condone certain breaches of fiduciary duties
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No “stooge” or “puppet” directors
c. Insurance by company
Company may insure to protect them from the above
Director not protected – subrogation – insurance company claim against director
b. Personal liability
Directors in general not personally liable unless:
Bound himself personally – surety
Breach of authority – ultra vires
Acted fraudulently or recklessly
Acted negligently
Wrongfully procured breach of contract
Signed negotiable instrument obo company without using its name.
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c. Section 424-Fraudulant conduct of business
Supplementary to other common-law remedies
Winding up, judicial management or otherwise:
o Recklessly
o Intent to defraud creditors or any other person
o For any fraudulent purpose
Court may declare any person
o Knowingly a party to the carrying on of the business
o Personally responsible for all or any of company’s debts/liabilities
o Without any limitation of liability
Objective test – judging conduct against conduct of reasonable business
person
Also take subjective considerations into account
e. Delictual liability
Director caused company to commit a delict
Shareholders may sue director even after dissolution for omission which
caused pure economic loss
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Directors also directors of holding companies
Continued to provide financial assistance to failing subsidiary
Required to have reasonable regard for interest of creditors
Recklessly – gross negligence
Knowledge of facts – not necessarily of recklessness
Enough to support or concur in conduct of business
Court ordered relief to be paid directly to former creditors
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OTHER OFFICE-BEARERS
1. Employees
Nature of relationship depends on agreement between employee & company
Directors not necessarily employed
Employees have no formal say in management of the company.
2. Company Secretary
a. Statutory provisions
“officer” – in relation to a company, includes any managing director, manager
or secretary thereof
S 218 – Disqualifications of directors and others
S 268A – Mandatory appointment of secretary
S 268B – First appointment of secretary
S 268C – Filling of casual vacancy of secretary
S 268D – Body corporate or partnership may be appointed secretary
S 268E – Consent to act as secretary, entries in register of directors and
officers and lodging of returns
S 268F – Disqualification for appointment of secretary
S 268G – Duties of secretary
S 268H – Name of secretary to be stated on trade catalogues, trade circulars
and business letters of company
S 268I – Notice to be given of resignation or removal of secretary
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o Providing guidance to directors re duties, responsibilities and powers
o Making directors aware of all law, legislation relevant to company +
reporting any compliance failures at director or shareholder meetings
o Ensuring that meetings are minuted
o Certifying in AFS that annual returns were submitted and that returns
are true, correct and up to date
o Ensuring that copy of AFS is sent to every person entitled thereto
Resignation
o Company must notify Registrar within 21 days
Removal
o Secretary may request – AFS – statement why removed
o Written notice before end of financial year during which removed
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3. Managers
a. Manager – statutory definition
“Any person who is a principal executive officer of the company for the time
being, by whatever name he may be designated and whether or not he is a
director.
“Officer” includes any manager – corporate duties and liabilities
Have to keep minutes of management meetings
c. Managing director
Only is Articles provide for appointment of managing director
Appointed by directors
Power to transact the whole of the affairs of the company
Does not need to be employee of company, though usually the case
Usually extensive powers and duties
4. Chairperson
Not required by the Act
Chair at specific meeting – can also be elected for a period of time
Absence of specific mandate – no additional powers, mere director
Can also be managing director, unless prohibited by articles
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