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Presentation on the Companies Amendment Bill, 2010, highlighting its purpose, scope, and corrections to the Companies Act of 2008. Discussion includes important clauses such as domestication of foreign companies and powers of business rescue practitioners.
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BRIEFING TO THE SELECT COMMITTEE ON TRADE AND INTERNATIONAL RELATIONS THE COMPANIES AMENDMENT BILL Date: 16 March 2011 Venue: Parliament, Cape Town Companies Amendment Bill, 2010
Delegation • Ms Zodwa Ntuli – Deputy Director General, Consumer and Corporate Regulation Division (CCRD) • Mr MacDonald Netshitenzhe – Acting Chief Director: Policy and Legislation, CCRD • Mr Tshifhiwa Mavhuthugu - Director: Legislative Drafting, CCRD • Adv Rory Voller – Director: Legal and Regulatory Services, Companies and Intellectual Property Registration Office (CIPRO) • Adv Flip Dwinger – Legal Consultant, CIPRO • Mr Desmond Ramabulana – Deputy Director: Commercial Law and Policy, CCRD
Purpose The purpose of this presentation is to provide a high level overview of the Companies Amendment Bill, 2010, its purpose, rationale and scope to the Select Committee
Introduction • The Companies Act No.71 of 2008 (“the Act”) was passed by Parliament in late 2008, and assented to by the President on 9 April 2009. • The Act will take effect on a date fixed by the President in terms of section 225 – the Minister announced the effective date 1 October 2010 – at the request of business stakeholders implementation was deferred for to 1 April 2011 • During process of developing regulations to give effect to the Act, it was discovered that several sections of the Act contained errors which necessitated rectification • On 22 December 2009, the Minister of Trade and Industry published a Notice in the Government Gazette inviting the public to submit any matter that may need to be corrected in the principal Act • The rectification 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 • The scope 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. • The Bill contains a number of amendments correcting syntax, spelling, grammar, numbering, punctuation, alignment, reference, typographical and similar patent technical errors in the text. • The Bill also entails correction of text pertaining to inconsistencies and disharmony among provisions of the Act, as well as addressing conflict with other regulations
Discussion The discussion will focus on important clauses in the Bill – • Domestication of Foreign Companies • Powers of Business Rescue Practitioners • Registration of External Companies • Independent Review of Financial Statements • Licensing of Business Rescue Practitioners • Conversion of Par value shares • Trading in insolvent circumstances • Disqualification of Directors • Legislation taking precedent over the Companies Act • Registration of symbols as Companies Names • State of readiness to implement the Act
Issues • Domestication of foreign companies (section 13) • Section 335 of the 1973 Companies Act provides for a scheme for domestication of foreign companies wishing to transfer their registration to the Republic of South Africa, and thereafter to be regulated as if they had been incorporated in the Republic. • This scheme was omitted in the new framework and it was not the policy intention that such a scheme should be abandoned. • The Bill seeks to re-enact the domestication of companies in order to simplify registration of companies and cut unnecessary red tape for companies seeking domestication in South Africa
Issues Powers of Business Rescue Practitioner Section 136(2) The main concern relates to alleged unfettered powers of a business rescue practitioner (BRP) to cancel contracts during the application of the Business Rescue Chapter. Such powers if not expressly clarified could in the most extreme cases make it possible for the practitioner to repudiate a security agreement or arbitrarily renounce a contract without compensation to the other party. This could have also made it difficult for local companies to access finance or capital from foreign companies. The Bill provides clarity to avoid unintended consequences that may arise in interpretation of this provision over time.
Issues • … Powers of Business Rescue Practitioner (section 136(2)) • The amendment in the Bill harmonises section 134 dealing with security of property obtained by the company with section 136(2) on cancellation of contracts in order to provide certainty regarding the obligations of the company. • The Bill expresses the requirement for the BRP to seek court approval before proceeding with the process of cancellation of a contract in order to ensure the principles of fairness and reasonableness are applied. • This will reduce potential for abuse and unfair treatment of creditors.
Issue Registration of external companies Section 23 deals with registration of external companies who do business within the Republic while remaining primarily regulated by their country of registration or origin. The policy intention of this section is to reduce some regulatory burden on such foreign companies by deferring to the incorporating jurisdiction to carry out the primary regulation of their own companies. The reading of the Act imposes obligation on such companies to register even when they would not be carrying out economic activity but merely servicing their financial arrangements with local companies. This is due to the current formulation of section 23 and the factors enumerated therein which trigger registration. The impact is that the current formulation could place at risk the country’s ability to attract debt financing for both public and private enterprises.
Issues Independent review of financial statements Section 1 deals with amendment to “definitions” such as “audit” to clarify that it does not have the same meaning as the one contained in the Auditing Profession Act of 2004. The Bill expressses that an “independent review” in terms of the Companies Amendment Bill does not have the same meaning as that contained in the Auditing Profession Act (APA). In terms of APA an “audit” also includes an “independent review”. Parliament was mindful that the policy behind the Act is to reduce regulatory burden, and that the above interpretation was not intended. The Minister in this regard will be issuing regulations to regulate the scheme of independent review.
Issues Licensing of Business Rescue Practitioners (section 138 (1) & (2) The formulation of these two subsections are inconsistent with each other - “regulated authority” as used in (1) has a defined meaning, and does not extend to the type of entity contemplated as being “designated” by Minister in (2). The current formulation makes it impractical for this section to be implemented because there is no entity that satisfies the criteria contemplated in both subsections. The amendment seeks to ensure that the scheme adopted will allow for appointment of business rescue practitioners with minimum prescribed qualifications who may fall outside the regulated professions. The Companies and IP Commission will license those persons through a simple and efficient process subject to vetting and approval. .
Issues Conversion of Par Value Shares The Act provided for phasing out of the Par Value Shares system through a process of conversion. It is envisaged that such conversion from Par Value Shares to No Par Value shares will not attract tax implications and will occur without changing of rights. Concerns were raised that the reading of the Act seems to envisage a ‘forced’ conversion. The Bill clarifies the optional nature of conversion of existing par value shares, but that no new par value shares can be issued further in South Africa The Bill further clarifies that such conversion should not affect rights, accordingly not attracting tax implications. Further regulations in this regard has also been drafted
Issues Registration of symbols as names of companies Stakeholders, in particular the Banking Sector, is of the view that there will be astronomical cost implications if registration of symbols is allowed. The banking sector further indicated that symbols will not be recognised by the SWIFT system This matter was thoroughly investigated and the conclusion is that the costs are nothing more than is necessary to comply – further, SWIFT confirmed that its system recognises even more symbols than the Act provides The Bill provides for 3 year period before section 11 comes into force to allow the sector to adjust its systems to the new regime
Issues Disqualification of Directors Section 69 used to provide that a director of an owner managed company may continue to be a director even if his or her conduct of dishonesty and fraud are at issue. The Bill provides for all directors to be disqualified for a specified period irrespective of the nature of the company in which they are directors The fact that company is owner managed does not mean that the harm on the public or customers is less Disqualification must last five (5) years and a further extension of such can be done through a court process The provision is in line with the Constitution of South Africa
Issues Legislation taking precedent over the Companies Act Section 5 of the Act provides for certain legislation such as the Banks Act and the PFMA to take precedent over the Companies Act if there is a conflict between them. Certain pieces of legislation were erroneously omitted and the Bill includes merely adds them The Bill adds the Municipal Finance Management Act since its provisions are virtually the same as the PFMA and Section 8 of the National Payment System Act, which specifically addresses aspects relating to judicial management
Issues Trading in insolvent circumstances The Bill clearly prohibits reckless and fraudulent trading, with offence provisions attached to this The reading of the Act prohibited trading in insolvent circumstances, which could affect start up companies The Bill introduces amendments to section 22 to portray the correct spirit of the legislature Section 22 further enhanced to give a proper meaning of what is meant by trading in insolvent circumstances
Issues State of readiness to implement the Act The Act was signed by the President on 9 April 2009 Implementation was set to take place on 1 October 2010 At the request by business stakeholders, Minister deferred it by further 6 months to 1 April 2011 None of the amendments affect the level of compliance required under the 2008 Act – instead it provides for relief in section 11, clarifies transition for different financial year ends, takes away interpretation of forced conversion, gives certainty in regards to cancellation of contracts All other provisions are alignment, consistency and clarification matters to make interpretation easier the dti is in a state of readiness to implement the Act on 1st April 2011
Consultation On Bill DEPARTMENTS AND PARTIES CONSULTED Includes National Treasury (NT), Department of Public Enterprises (DPE), South African Revenue Services (SARS), Financial Services Board (FSB), Business Unity of South Africa (BUSA), Business Leadership of South Africa (BLSA), Independent Regulatory Board for Auditors (IRBA), Banking Association of South Africa (BASA), South African Property Owners Association (SAPOA),Statutory Advisory Committee on Companies Law (SACCL), Insolvency Association of South Africa (IASA),Deloitte and Touche, Webber Wentzel Inc, University of Cape Town – Law Faculty, University of Stellenbosch – Law faculty, Cape Chamber of Commerce, Law Society, King Committee on Governance, Congress of South African Trade Unions (COSATU)
