By Kaylen Moodley – Candidate Attorney

A Company’s Memorandum of Incorporation (MOI) is its most important constitutional document. However, section 15 of the Companies Act 71 of 2008 provides that an MOI must be consistent with the Act, and any provision that conflicts with it will be void to the extent of the inconsistency. In the case of Ramela v Ndzunzu and Others (126/2022) [2024] ZAECELLC 45, the High Court was called upon to consider whether a director may be removed solely through the mechanisms provided in the Companies Act, namely section 71 (removal by shareholders) and section 162 (removal via a declaration of delinquency), or whether a company may also remove a director based on term limits set out in its MOI.

The Applicant (CEO of Border Cricket NPC) brought an application to declare the First Respondent’s continued occupation as director and chairperson unlawful. The crux of the Applicant’s case was that the First Respondent had exceeded the term limits set out in the company’s MOI. Specifically, the MOI restricted a director’s tenure to a maximum of nine consecutive years, unless one of the terms was served as President or Vice President, in which case a reappointment could only occur after a mandatory two-year cooling-off period.

According to records from the Companies and Intellectual Property Commission (CIPC), the First Respondent had continuously served as a director since August 2013, amounting to 11 years without a cooling-off period. This, the Applicant argued, rendered his current occupation unlawful and contrary to the MOI.

The First Respondent argued that the MOI was in the process of being amended to remove the 9-year limit, and that his continued service was aligned with the intended amended governance structure. The court, however, decisively rejected this contention. It held that an MOI cannot be amended by mere intention. In terms of section 16 of the Companies Act, an amendment to the MOI only takes effect once a resolution has been properly filed with the CIPC and ten business days have passed (unless a later effective date is stated). As these procedural requirements had not been met, the court held that the MOI had not been validly amended, and the existing term limits remained binding.

The First Respondent further argued that his removal could only be effected through the statutory mechanisms under section 71 or 162 of the Companies Act, and not through the MOI itself. Section 71 allows for the removal of a director by shareholders’ resolution, while section 162 allows for a court to declare a director delinquent under specific grounds such as gross misconduct. The court was therefore called upon to determine whether these two sections operate exclusively, or whether a company’s MOI may lawfully regulate removals as well.

The court rejected the argument that sections 71 and 162 were exhaustive. It held that section 66(4)(a)(i) of the Companies Act expressly allows an MOI to provide for the direct appointment and removal of directors by any person or mechanism named in the MOI. Therefore, MOI-based term limits and removal processes are permissible provided they do not conflict with the Act. The court reasoned that to read the Companies Act as excluding MOI-based removal mechanisms would render section 66(4) meaningless and contradict the principle that legal instruments should be interpreted harmoniously rather than in conflict.

Citing various authorities, the court held that an MOI is subordinate legislation and must be interpreted, where possible, to align with the overarching framework of the Companies Act. It endorsed the principle that the Act and the MOI should be read in pari materia — as forming part of a single legal system and complementing each other.

On the issue of non-joinder, the Respondents contended that the CIPC ought to have been joined to the application since the Applicant sought an order directing the CIPC to remove the First Respondent’s name from the company’s COR39. The court disagreed, holding that the CIPC’s role in this context was merely administrative. Its obligation was to give effect to the declaratory relief granted by the court. No prejudice would result from its non-joinder, and the court likened the situation to other routine cases where state bodies (such as the SAPS or Sheriff) are ordered to act without being joined as parties.

As a result, the court:

1. Declared that the First Respondent’s continued occupation as director was unlawful.
2. Ordered the CIPC to remove the First Respondent’s name from the COR39 register.
3. Ordered the First to Fourth Respondents to pay the costs of the application, including counsel’s fees on scale B.

Conclusion

The judgment confirms that the removal of directors does not need to be confined to section 71 or section 162 of the Companies Act. A company may include provisions in its MOI regarding term limits, removal processes, and reappointment conditions, provided that they are consistent with the Act. It also underscores the importance of complying with proper procedures when amending an MOI and reaffirms the legal status of an MOI as a binding and enforceable corporate governance instrument.

Photo by Dimitri Karastelev on Unsplash