Meaning of Ring Fencing
Ring fencing is generally a practice by a company by which it creates a separate legal entity different from itself in order to protect some of its own assets.
Meaning of Ring-Fenced Company
A Ring Fenced company is a company whose Memorandum of Incorporation (MOI) contains special conditions, which enables itself to give constructive notice to the public about the contents of its public documents including its Memorandum, which apart from others, prescribes limitation of powers of directors of a company.
Ring-fenced companies’ concept is more popular in South Africa. You would understand the concept more clearly after going through the following provisions.
South African Company Law - the Companies Act, 2008 (the 'Act')
A company would be called a Ring-fenced company if that company’s MOI includes any provision as prescribed under section 15(2)(b) or (c) of the Act which restricts or prohibits the amendment of any particular provision of the Memorandum.
Doctrine of Constructive Notice
Earlier under the old Act, the Public deemed to have Constructive Notice of the company’s public documents (i.e. the documents which are filed with the Commission or is available at the company’s office for inspection including the Memorandum and Association of the company).
Thereby, in case any party entering into any contract or arrangement with the company, executed by its Director(s) on behalf of the company, who has acted beyond his powers i.e. an ultra vires action while entering into that contract, then that party cannot take the stand that he was not aware of the limitation of powers of that director(s) as prescribed under the company’s Memorandum, and the law, therefore, cannot consider that contract as void, just because the party was unaware of the limitations of director's powers.
In accordance with the new Act, the Public will not deemed to have Constructive Notice of the company’s public documents.
But there are two exceptions to it, which are as follows.
(1) The above said provisions under new Act do not apply to a Personal Liability company.
(2) In case the Memorandum of Incorporation provides with any restrictive provisions as per Section 15(2)(a)(iii) and Section 15(2)(b) or (c) of the Act.
The provisions of the above mentioned sections are reproduced below:
Section 15 (2)(a)(iii)
The MOI of any company may include any provision imposing on that company a greater restriction, higher standard, longer period of time. The MOI may also include any other more onerous similar requirements.
The MOI of any company may include any provision which contains any restrictive conditions applicable to the company, & any requirement for the amendment of any such condition in addition to the requirements set out in section 16.
The MOI of any company may include any provision that prohibits the amendment of any particular provision of the MOI.
Acronym for Ring-Fenced Companies [Section 11(3)(b)]
A ring-fenced company has to use the expression "RF" at the end of its name.
ZYX Industries (Pty) Ltd (RF)
Notice of Incorporation
The Notice of Incorporation of a Ring-fenced company must provide a prominent statement as to all such restrictive conditions, provisions and prohibitions in the MOI and also provide info about its location in the MOI. [Ref.: Section 13(3)]
What is a Personal Liability company?
A personal liability company is a profit company, who meets the criteria prescribed for a private company and whose Memorandum of Incorporation states that it is a personal liability company.
In a personal liability company, for any debts & liabilities of the company - the directors (both present and past) are jointly and severally liable, along with the company. They will be liable only for the contracts which were contracted during their respective periods of office.