Prof Graham Paddock

The Companies Act, 71 of 2008 (“the Act”) has been in operation since 1 May 2011. It provides for a two–year grace period for existing companies to update their governance documents. During this period most of the provisions of the pre-existing articles of association continued to be valid, even if they were not in accordance with the requirements of the Act. However, the grace period terminated on 30 April 2013 and since that date any provision in a company’s articles that is contrary to the Act has been invalid, and misleading.

While there is no provision in the Act that specifically obliges the directors of a non-profit home owners’ association company (“HOA”) to ensure that it adopts a revised Memorandum of Incorporation (“MOI”), they should do so. It makes no sense to run any organisation on the basis of documents that do not reflect the current requirements of the law. And, importantly, section 76 of the Act requires a company director to exercise a reasonable degree of care, skill and diligence in performing his or her functions, which arguably implies an obligation to ensure the company’s governance documentation is not outdated or wrong.

The Act provides a precedent MOI for a non profit company with members which is suitable for most incorporated HOAs; this is form CoR15.1E. As a company’s MOI cannot contain any provision that is in conflict with the Act, most of the provisions in this prescribed form are statements as to whether the various provisions in the Act that can be altered in terms of the MOI have in fact been altered, and it caters for the insertion of the details of any such alterations in various schedules. The HOA-specific provisions, such as the standard restriction on transfer, conduct rules, architectural conditions and any fining provisions are inserted in the schedules, so a reader has to flip back and forth between various parts of the document to understand its provisions. The prescribed form has also been criticised because it does not include any statements of the unalterable provisions in the Act that are relevant to the management of the company. This means that in order to see all the provisions that apply to the management and administration of the HOA, the reader must look not only at the MOI but also at a copy of the Companies Act – and the reader needs to know when reference to the Act is required to supplement the provisions in the MOI. The response to this criticism is that the provisions of the Act may change from time to time and any provision in the MOI that re-states a provision the Act could then become incomplete or misleading. Accordingly, it is argued, it is better for a director or member to consult an updated copy of the Act as well as the HOA’s MOI.

An HOA company is not obliged to use the prescribed form CoR15.1E as the basis of its replacement MOI. The directors can arrange for the drafting of a unique form of MOI. Apart from the special provisions for the particular HOA, this does not need to be a highly complex or lengthy document or one that can only be understood by lawyers. However, a decision will still have to be made as to whether the MOI will include statements of the relevant unalterable provisions of the Act, designed to be read as a comprehensive statement of the HOA’s governance provisions, or whether it will be a much shorter document containing little more than the altered and special provisions, which is designed to be read in conjunction with the Act.

In my view the directors should make the decision on whether to go the ‘comprehensive’ or the ‘only altered and special provisions’ route for the HOA’s MOI based on the level of commercial experience of the members of the HOA. If most of the owners of properties in the development are professionals and business owners who are likely to be familiar with relevant provisions of the Companies Act, the directors should propose a MOI that does not include any provisions that are not strictly necessary. However, if they expect that owners will have only minimal experience in dealing with company law matters, they should consider proposing a more comprehensive MOI that sets out the other information that owners might reasonably require to properly understand the HOA’s governance framework.

Article reference: Paddocks Press: Volume 09, Issue 12, Page 1.

Adjunct Professor Graham Paddock is the author of the Home Owners’ Association Survival Manual and the senior consultant at Paddocks, a sectional title and HOA specialist firm. For more information on the Home Owners’ Association Management course, click here.