Presentation to the Portfolio Committee on Trade and Industry Response by the Department of Trade and Industry (the dti) on Companies A/B Date: 25 January 2011 Venue: V475 Parliament, Cape Town Companies Amendment Bill, 2010
Purpose • The purpose of this presentation is to provide the Portfolio Committee (PC) with responses on submissions made by stakeholders during the Public hearings on the Companies Amendment Bill, 2010
Delegation • Ms Zodwa Ntuli: Deputy Director General (DDG), Consumer and Corporate Regulation Division (CCRD) • Mr MacDonald Netshitenzhe: Acting Chief Director, Policy and Legislation (CCRD) • Adv. Mandla Mnyatheli: Chief Director, Office of Company and Intellectual Property Law Enforcement (CCRD) • Adv. Rory Voller: Director, Legal and Regulatory Services Companies and Intellectual Property Registration Office (CIPRO) • Mr Tshifhiwa Mavhutugu: Director, Legislative Drafting (CCRD) • Adv. Flip Dwinger: Legal Consultant (CIPRO) • Mr Desmond Ramabulana: Deputy Director, Commercial Law and Policy (CCRD)
Introduction • The Companies Act No.71 of 2008 (“the Act”) was passed by Parliament in late 2008, and assented to by the President in April 2009. • During process of developing regulations to give effect to the Act, it was discovered that several sections of the Act contained errors which the dti considered necessary to rectify before the Act takes effect • On 22 December 2009, the Minister of Trade and Industry published a Notice in the Government Gazette soliciting public submission and comment on matters that may need to be corrected • The correction process was only confined to apparent errors and does not extend to a review of policy matters already endorsed by Cabinet in 2007, which are currently contained in the Act.
Introduction - Continued • The scope of the correction was therefore limited to identifying items inadvertently omitted from the Act, including errors pertaining to inconsistencies, incomplete sentences, misalignment, ambiguities and similar technical concerns with the text of the Act • The purpose of the Bill is therefore to settle the Act by more perfectly representing its policy in coherent, and consistent provisions of the text – this process was not intended to give a second bite to stakeholders on matters that were settled in Cabinet and Parliament • The Bill contains a number of amendments correcting syntax, spelling, grammar, numbering, punctuation, alignment, reference, typographical and similar patent technical errors in the text. It also entails correction of text pertaining to inconsistencies and disharmony among provisions of the Act, as well as addressing conflict with other regulations
Introduction - continues • Comments and consultation with stakeholders have enriched this process significantly, the dti is grateful to stakeholders for this • Consider the purpose of the Companies Act 71 of 2008 and the intention and purpose of the Companies Amendment Bill • Benefits of the progressive provisions of the Companies Act must be properly weighed against any potential harm or unintended consequences • Cost of compliance should not be left unattended if unreasonable and defeating purpose of the legislation, but such must be quantified • Impact of the Companies Act will be assessed at regular intervals in terms of the regulatory impact assessment • Presentation does not cover all matters raised, but main ones
Issues • General: Audit of subsidiary of Foreign Public Companies • Comment : • Subsidiaries of foreign companies may be substantial companies or a group of companies in South Africa but are not required to be audited. • Response: • the dti agrees that subsidiaries of foreign companies should be treated equally in terms of audit requirements by looking at impact on the society, taking into account factors such as annual turnover, number of employees and economic activities. • For purposes of clarity, it is recommended that section 30 (2) be amended in order to address this area.
Issues - continued Clause 19: Verification of Annual Financial Statements (AFS) of companies where all shareholders are directors Comment: Companies whereby the shareholders are also the directors must subject their AFS to first shareholders meeting after approval by the board. Response: The proposal is welcomed as it emphasises that preparation of AFS should be enforced. Verification of AFS demonstrates financial accountability and whoever prepares such should be able to account to the authorities even if such a person is an owner managed company. This is in line with the spirit that every company, big and small should prepare AFS. It is recommended that an appropriate change to the Bill be made.
Issues - continued • General: Reportable irregularities • Comment: • Stakeholders concerned that there is no provision for reportable irregularities under the regime of Independent Review • Response: • the dti agrees that Independent Reviewers should have the obligation to to report to the Commission or any other authority on reportable irregularities uncovered. • It is recommended that an appropriate amendment should be effected.
Issue - Continued Clause 43: Persons allowed to act as directors Comment: Person convicted of fraud, dishonesty, removal from position of trust etc would in a company where he or she is the sole director and shareholder or in a related company where consent has been given, not excluded from acting as a director or disqualified. The position is problematic. Response: the dti agrees that this section might require reconsideration in order to create consistency in provisions dealing with persons that can serve as directors of companies, irrespective of the nature of the company. The owner managed company still transacts with other parties, including the public. What is relevant is that third parties may be prejudiced by the actions of this single director and the size of the company is immaterial.
Issues raised Clause 43… • Disqualification can lasts until a period of 10 years and as soon as the criminal conviction expires, the purported director can be allowed to serve as a director. • If the incumbent wants his/her disqualification to be uplifted earlier, the High Court may be approached to fast track the rehabilitation process. The court has a discretion to grant rehabilitation based on the evidence. • In view of this it recommended to effect amendment to cater for disqualification to serve as a director for an owner managed company. 11
Issues – Continued . Clause 118 (5) Conversion of par value shares Comments Issued par value shares in existing companies should not be subjected to a mandatory or compulsory conversion as conversion may create tax liability. Response: The essence of the provision is to do away with the dispensation that allows for par value shares. the dti agrees that there should be no mandatory conversion as it might attract tax implications that were unintended. In practice companies will not be allowed to issue new par value shares going forward, and may convert par value shares to no par value shares. If existing rights are not changed, there may not be a tax implication. We recommend the approach that Parliament took with conversion of close corporation in that there should be no forced conversion. In view of this it is recommended that the section be amended to abolish par value conversion.
Issues - Continued Clause 80 (Section 133): Moratorium on legal proceedings during Business rescue Comment: Regulators rights to invoke enforcement action during business rescue proceedings must not be affected Response: It is not the intentionto exclude actions of regulators during business rescue process. A closer reading of section 133 (1) (a) paints the correct intention of the legislature. What is being emphasised is that all actions must be carried out with the consent or cooperation of the business rescue practitioner. To avoid confusion, we recommend that the section be clarified in the amendment to give a clear intention.
Issues raised Section 141: New Amendment Comment Voidable transactions under business rescue should not, preferably be referred to management to be reversed. The practitioner should personally deal with them. This is so since in practice the Act provides that the practitioner takes over the management of the company under distress. There may be circumstances that may require the practitioner to refer matters to management. Response the dti agrees with both counts and section 141 (2) (c) (i), should be amended in order to reflect that the practitioner should have a discretion to refer matters to management but should not be forced to do so even if it is not in the best interest of the company. 14
Issues - Continued Retention of Books or records under business rescue Comment: No person may retain books or records of the company if required by the business rescue practitioner. Such action is problematic as it would include books and records ceased under a search warrant. Response: In order to provide clarity, the dti agrees that an exception to the section must be included whereby documents ceased or obtained by way of a court process is excluded. In this regard, the practitioners may be provided with copies of the documents or be allowed to inspect the documents without undermining the pending process. It is recommended that amendment be effected as proposed. .
Issues - Continued Clause 3:Conflict of laws Comment: All financial and tax legislation should take precedent over the Companies Act in case of conflict Response: the dti agrees that the Municipal Finance Management Act (MFMA) and section 8 of the National Payment System (NPS) Act be included in section 5 (4). the dti does not support a wholesale approach to exemptions or trumping provisions. A proper legislative audit will be required and this matter can be considered when the Act come under review in future. The Companies Act is a law of general application and this does not preclude sectoral laws to require higher or stricter requirements.
Issues - Continued Clause 1: Definition of Regulatory Authority Comment: The definition of regulatory authority should include Financial Intelligence Centre and SARS Response: Definition is wide enough to include all regulatory authorities and therefore no amendment is recommended.
Issues - Continued Clause 1 and 19:Definition of Audit Comment: The definition of audit by excluding an independent review as part of the definition has the consequence of amending the definition of Audit in the Auditing Professions Act Response: the dti does not agree with the comment. However, it is possible that such impression may be created with the current wording. In order to rectify this the clause should start with an expression “for the purposes of this Act….” so that it is clear that there is no intention to amend Auditing Profession Act in a consequential manner. In view of this it is recommended that the clause amended accordingly.
Issues - Continued New Amendments: Regulation of Independent Reviewers Comment IRBA is offering to be sole regulator for accountants performing Independent Reviews Response IRBA is created by a statute which defines its parameters. the dti is of the view that a proper process of consulting stakeholders, including the accountants should be pursued through the relevant department responsible for IRBA. The Companies Act provides for accreditation processes in this regard.
Issues raised New Amendment: Trading under insolvent circumstances Comments: The inclusion of trading under insolvent circumstances as a prohibition renders all start up companies potentially falling foul of the prohibition due to loan capital being used. Response: the dti disagrees with this comment. There is good common law precedent on the difference between commercial and technical insolvency in this area. Where issues of insolvency and the barring of trading under such circumstances arises, the commission has a discretion of investigating the matter. However, for certainty, the provision could be revised to avoid the unintended consequence highlighted by the stakeholders.
Issues Raised Clause 6: The use of symbols in company names Comment: The use of symbols in company names is problematic in that some symbols are used for computer language commands and would be costly to implement. Response: The use of symbols in company names is used by the United Kingdom and several US States jurisdictions. The Companies Act is progressive in this regard. A preliminary enquiry is that costs for changing systems are not astronomical and are mitigated by the benefits, but the dti will provide more information in this regard. In order to allow the stakeholders to prepare their systems for compliance, it is recommended that the implementation of the provision be delayed, not that it be removed from the Act.
Issues raised Clause 6: The use of foreign languages in company names Comment: The use of foreign languages in company names is problematic Response: the dti disagrees with comment. The Regulations will prescribe the manner and alphabet type used in company names. In terms of the Constitution certain languages over and above the official languages must be promoted. In view of the above, no amendment is recommended. I
Issues Raised Clause 16: Access to information of company registers Comment: Subjecting such request for access to the provisions of PAIA, will place obstacles in the way of persons requiring such information and could lead to delays in such information being furnished. Response: the dti agrees that the Companies Act can provide alternative shorter processes without excluding the PAIA as an option. In view of the above, PC is advised not to accede to the proposed change of substituting ‘and’ with ‘or’.
Issues raised Clause 1: Definitions to be deleted Comment: The words asset, liability, creditor, distribution, group of companies, holding company, private company, fair value should not be defined or amended. Response: Asset, creditor, liability, fair value must not be defined and should be deleted. Substantive definitions are used in accounting industry and will promote flexibility. Definition of private company must be amended in accordance with Section 8 of the Act.
Issues raised General: Extension of effective date of Act Comment Several presenters argued for an effective date to be moved further than the third quarter of 2010 or target date of 1 April 2011. Response The legal framework will be ready on 1 April 2011. Minister has consulted widely on this matter and business was being prepared to fine tune their systems in line with the new dispensation. The implementation date was moved before at the behest of stakeholders.
Issues raised Clause 2: Application of solvency and liquidity tests on Companies Comment Solvency and liquidity tests should apply to companies not to group of companies Response the dti agrees that for liquidity and solvency test we don't treat companies as groups but individually. The amendment should make it clear that the test applies to the assets of the company as separate legal entity
Issues raised Clause 29 Deletion of proposed subsection 8(b) Comment The proposed subsection 8(b) will make any share buyback more onerous time consuming and expensive than what the current position is without any benefits. Response the dti disagrees that the proposed subsection 8(b) should be scrapped as it is there to protect assets or capital of the company to be stripped and therefore the benefits outweigh the costs. However, clause 29 may be improved in order to give clarity whether a redemption of shares is a “reacquisition” within the meaning of section 48.
Issues raised Clause 65: Ratification of fundamental asset disposal done without the required special resolution Comment Clause 65 amending section 112(5) provides for the scrapping of the power to ratify a disposal of all or greater part of the assets of a company where the shareholders have not approved the disposal by special resolution as required. Proposed that the power to ratify should be retained. Response the dtidisagrees as the removal is there to protect shareholders by involving them in a fundamental transaction prior to its conclusion.
Issues raised Clause 19: Transitional arrangement for audit requirements Comment The Act abolishes audit requirements for certain companies. The Act does not provide for transitional arrangements in respect of existing companies. Response All companies with a financial year end before the effective date of the Act must comply with provisions of the 1973 Act and continue to apply them until conclusion of the audit and approval of the financial statements by the board and presentation at the annual general meeting. For companies with the financial year end after the said effective date the provisions of the Act must apply.
Issues raised Clause 23: Amendment of Section 37 of 2008 Comment The reference in subsection 9 to “companies securities register” is incomplete and should also include a reference to the central securities depository Response the dti agrees that the expression “companies securities register” should be replaced with “uncertificated securities register or as determined in accordance with the rules of the central securities depository” as this expression would cater for both certificated and uncertified shares.
Issues raised Clause 40(d): List of matters requiring special resolutions Comment List should not be exhaustive and should have a “catch all” phrase to cater for any other matter that could require a special resolution Response the dti agrees that there should be a “catch all phrase” to cater for any other special resolution whether required by the Act or the company’s MOI
Issues raised Clause 113: Section 218(1) Void and voidable interpretation Comment Scrap the provision in the Act as it is in conflict with other sections and causes uncertainty. Response This section seem to be in direct conflict with section 78(2) and possibly also other sections as raised by stakeholders. The dti request further opportunity to confer with SLA in this regard.