A company’s Memorandum of Incorporation (MOI) is its foundational governance document. Yet, section 15 of the Companies Act 71 of 2008 makes clear that its provisions must not contradict the Act, and where inconsistencies arise, those conflicting clauses are unenforceable to the extent of the conflict.

This principle was central to the Eastern Cape High Court’s recent decision in Ramela v Ndzunzu and Others (126/2022) [2024] ZAECELLC 45, which dealt with whether a director could be lawfully removed by applying term limits set out in the MOI, or only through the mechanisms provided in the Companies Act specifically section 71 (removal by shareholders) and section 162 (court-declared delinquency).

Background: MOI Term Limits and the Disputed Directorship

The applicant, then CEO of Border Cricket NPC, challenged the continued directorship of the first respondent, who also served as the board chair. According to the company’s MOI, directors were limited to a maximum of nine consecutive years in office, unless one of those terms was served as President or Vice President. In that case, reappointment was only permitted after a mandatory two-year break.

CIPC records showed that the first respondent had served continuously since August 2013, a total of 11 years, without any cooling-off period. The applicant argued that this contravened the MOI and rendered the respondent’s current position as director invalid.

In response, the first respondent claimed that the MOI was in the process of being amended to eliminate the nine-year cap, and that his continued service was consistent with the intended governance revisions.

Court Findings: Amendments Must Follow Due Process

The court rejected the argument that proposed amendments could be relied upon before taking legal effect. Referring to section 16 of the Companies Act, it confirmed that amendments to an MOI must be properly passed by resolution, filed with the CIPC, and be effective only after ten business days (unless a later effective date is specified). None of these steps had been taken, so the court ruled that the original MOI remained binding.

Are Sections 71 and 162 the Only Routes to Remove a Director?

Another central issue was whether the only permissible methods of removing a director are those found in the Companies Act namely shareholder removal (section 71) or court-declared delinquency (section 162) or whether the MOI itself could validly impose removal conditions, such as term limits.

The first respondent argued that removal must follow section 71 or 162 exclusively. However, the court disagreed. It pointed to section 66(4)(a)(i) of the Companies Act, which expressly permits an MOI to set out alternative mechanisms for the appointment and removal of directors by any party or process identified in the MOI.

Accepting the respondent’s argument, the court reasoned, would render section 66(4) superfluous and undermine the legislative intent. It affirmed that MOI-based removal processes are valid so long as they do not conflict with the Act.

Legal Interpretation: Harmonising the MOI and the Companies Act

The court reiterated that an MOI, while subordinate to the Act, forms part of the company’s regulatory framework and must be interpreted consistently with the Act. Where possible, the two instruments should be read in pari materia, as complementary parts of a unified legal system.

On the Non-Joinder of the CIPC

The respondents also objected to the CIPC not being joined to the application, as the relief sought included the removal of the first respondent’s name from the company’s COR39 register. The court found this argument unpersuasive, noting that the CIPC’s role was administrative—it was merely required to give effect to the court’s declaration. No prejudice would arise from its absence in the proceedings. The court drew parallels with cases involving the SAPS or Sheriff, where enforcement is ordered without their formal joinder.

Outcome

The High Court:

• Declared that the first respondent’s continued service as a director and chairperson was unlawful;
• Directed the CIPC to remove the respondent’s name from the COR39 form;
• Ordered the first to fourth respondents to bear the costs of the application, including costs for counsel on a scale B basis.

Conclusion: What This Case Means for Corporate Governance

This decision affirms that a company is entitled to set term limits and removal criteria for directors within its MOI provided these do not contradict the Companies Act. The case also underscores the procedural rigour required to amend an MOI and reinforces its enforceability as a binding governance document.

For directors, boards, and company secretaries, Ramela v Ndzunzu is a powerful reminder that MOI provisions are not merely aspirational, they are legally enforceable and must be complied with unless validly amended in line with the Act.