Abstract

This article analyses the capacity provisions in the Companies Act 71 of 2008 (the “Act”). According to section 20(1) of the Act, ultra vires contracts are not void; the application of this rule should not depend on the title of the company’s representative. It should be possible to restrain proposed ultra vires action and executory ultra vires contracts by means of section 20(5). However, wholly executed ultra vires contracts should be irreversible on capacity grounds. Furthermore, once an ultra vires contract has been ratified by a special resolution in terms of section 20(2), the company’s insiders should lose the right to restrain the contract in terms of section 20(5); conversely, successful restraint should prevent subsequent ratification. The authority of the board of a limited capacity company should still be limited to the conclusion of intra vires acts, regardless of the validity of ultra vires contracts. The purpose of the optional RF provisions and the capacity-linked statutory doctrine of constructive notice is not clear: section 19(5)(a) does not provide any obvious benefit to limited capacity RF companies with regards to avoiding liability on an ultra vires contract. In conclusion, the capacity provisions create too much uncertainty and risk for a company’s existing and future creditors and should be amended.