Companies Amendment Bill: public hearings Day 1

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Trade, Industry and Competition

29 November 2010
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

Business Unity South Africa stressed the need for the introduction of a regulatory impact assessment (RIA) system in South Africa. This would ensure that the regulatory burden of new legislation was tested. BUSA’s submission looked at the Act’s Sections 15, 22, 34, 115, 136 and 218. In Section 22 BUSA pointed out that companies may not trade under insolvent circumstances. It was commercial reality that many private and unlisted public companies traded under technically insolvent circumstances - where their liabilities exceed their assets - but they were commercially solvent. If the Act remained unchanged; such companies contravened the Act and might have to cease trading. BUSA proposed Section 22 of the Act should be limited to commercial insolvency only. BUSA noted its support for submissions from SAICA, IRBA, Banking Association, Deloitte, and Webber Wentzel which would significantly improve the final Companies Act. BUSA requested that the Act should become effective not earlier than six months after the President assented to the Companies Amendment Act. BUSA had already approached the Minister of Trade & Industry on issues relating to CIPRO which were instrumental to the successful implementation of the Act. The Act would not be implementable unless challenges with CIPRO were addressed.

South African Institute for Chartered Accountants submission proposed changes to eight definitions and to Sections 4, 11, 15, 22, 29, 30, 34, 66, 136, 218, 90(2)(b) and 94(7)(b) and discussed transitional arrangements for auditing requirements. SAICA concluded by requesting sufficient time for the corporate world to prepare for the new Act.

Deloitte discussed the uncertainty about transitional arrangements for the audit requirement and auditor rotation. It also proposed changes to Section 30 on auditor exemption and Sections 22, 34, 72(4), 66 and 218. It requested that the original Section 225 be retained that allowed one year for the Act to come into operation.

STRATE requested changes to the definition of ‘‘securities’’ and to the phrase ‘company’s securities register’ in Section 37(9)(a) and (b).

The
Banking Association of South Africa explained the burdensome effect of Section 11 which dealt with the criteria for names of companies. The information technology systems of all banks were currently not able to capture, store or process the names of companies which contained punctuation marks and symbols. These would cause the programmes to malfunction resulting in failed banking transactions. To change this would be expensive. It also proposed changes to Section 22.

BASA was of the view that extension of the Act’s commencement date was necessary to allow both CIPRO and companies to complete their preparations to implement the new law. 

Committee members asked why those that had made submissions were requesting that the promulgation of the Act be delayed when they were all in support of it. The Committee asked how much time would be sufficient for companies to be ready for the implementation of the Act.

Meeting report

Ms Sami Siwisa, Director: Economic Policy, explained that BUSA was a confederation of chambers of commerce and industry, professional associations, corporate associations and unisectoral organizations. It represented South Africa businesses on macro-economic and high-level issues that affected it at national and international level. BUSA’s function was to ensure that businesses played a constructive role in the country’s economic growth, development and transformation and to create an environment in which businesses of all sizes and in all sectors could thrive, expand and be competitive. Ms Siwisa stressed the need for the introduction of a regulatory impact assessment (RIA) system in South Africa. This would ensure that the regulatory burden was reduced in the long run.

BUSA’s submission looked at the Act’s Section 15, 22, 34 with 84 (as amended in Clause 50 of the Bill),
115, Section 136 and 218 (see submission).

The submission pointed out in Section 22(1)(b) read with Section 22(3) stated that companies may not trade under insolvent circumstances and could be required to cease trading if they trade under insolvent circumstances. It was commercial reality that many private and unlisted public companies in South Africa traded under technically insolvent circumstances (i.e. their liabilities exceed their assets) but were commercially solvent, for example where a company was funded by shareholders’ loans. If the Act remained unchanged; such companies contravened the Act and might have to cease trading. It was submitted that Section 22 of the Act should be limited to commercial insolvency only.

BUSA
supported submissions from SAICA, IRBA, Banking Association, Deloitte, and Webber Wentzel which would significantly improve the final Companies Act.

In conclusion BUSA proposed that Section 225 be amended to indicate that the Act would become effective on a date determined in the Companies Amendment Act, which date should not be earlier than six months after the President assented to the Companies Amendment Act.
BUSA had already approached the Minister of Trade & Industry on issues relating to CIPRO which were instrumental to the successful implementation of the Act. The Act would not be implementable unless challenges with CIPRO were addressed.

Discussion
Mr M Oriani-Ambrosini (IFP) asked if the Committee should look at Section 22 so that those who become insolvent and were owing did not go to jail in the absence of fraud.

Ms Siwisa replied that as far as corporate law was concerned, administrative penalties served a much more useful function for the governance of companies. If there was proof of criminal liability, it was understandable why DTI would want criminal charges. BUSA encouraged administrative penalties.

Mr J Smalle (DA) asked about Section 115. Should there not be any penalties imposed on foreign companies doing business in South Africa.

Ms Siwisa replied that foreign companies were governed by laws elsewhere. Historically, if there was a conflict between a South African Act and a foreign Act, foreign companies were governed by their domestic laws. BUSA was therefore proposing that where there were inconsistencies, foreign companies should be governed by their domestic laws. 

Ms C September (ANC) asked if the fact that DTI did not have capacity was the sole reason why BUSA was proposing for postponement of the implementation of the Act. Were there other business considerations?

Ms Siwisa replied that this was a double edged sword. Some companies were not able to file their returns to CIPRO due to inefficiencies in the system and this had affected their businesses elsewhere. Inefficiencies in government had a knock on effect on business.

Mr T Harris (DA) said that since CIPRO did not have capacity. When did BUSA think CIPRO would have capacity?

Ms Siwisa replied that BUSA was ready to provide additional support so that CIPRO was ready going forward. This had been communicated to the Minister of Trade and Industry.

Mr Harris asked if there should be a time limit as stated in Section 65 for the disqualification of directors that had committed a crime. The new Bill proposed a five year time limit for disqualification.

Ms Siwisa replied that this was a difficult question. DTI had tried to keep the spirit of the 1973 Act. Whether five years was sufficient to prohibit poor behavior from directors remained to be seen.

Mr B Radebe (ANC) said that the issue of insolvency applied only as far as informing those that were transacting with an insolvent company.

Ms Siwisa replied that the issue of insolvency did not only apply to those that were transacting with the insolvent company. Companies should be allowed to operate if they were technically insolvent as long as their shareholders were aware of this.

South African Institute for Chartered Accountants submission
Mr Eward Muller, Senior Executive: Standards, commended the Department of Trade and Industry (DTI) for issuing the Companies Amendment Bill as most of the legal-technical and grammatical amendments required had been made. Although SAICA had a number of comments to be made in respect of individual sections of the Bill, it had no hesitation in supporting it as an important element in the development of the South African economy and alleviation of the compliance burden for non public companies. SAICA proposed changes to several of the definitions such as ‘asset’, ‘creditor’, ‘distribution’, ‘group of companies’, ‘holding company’, ‘liability’, ‘financial statements’ and ‘private company’.

With regard to Section 4, the solvency and liquidity tests should be refined and applied at company level only, not group level. Legally, each company was a separate entity with no automatic rights to the assets of its subsidiaries and no legal obligation to honour the liabilities of its subsidiaries.

On audit exemption, amongst other points, it proposed a
new Section 30(2A):
“(2A) Except to the extent required by any other law or agreement, a private company is exempt from the requirements in this section to have its annual financial statements audited or independently reviewed, and from the requirements of subsection (3)(d), if every person who is a holder of, or has a beneficial interest in, any securities issued by the company is also a director of the company.”

It also proposed changes to Sections 11, 15, 22, 29,
34 with 84 (as amended in Clause 50 of the Bill), 66, 136, 218, 90(2)(b) and 94(7)(b) and discussed transitional arrangements regarding auditing requirements.

SAICA concluded by requesting sufficient time for the corporate world to prepare for the new Act.

Discussion
Mr Oriani-Ambrosini said that the bureaucratic supervision of companies through audits should not be part of the 21st century.

Mr Muller replied that the Act aligned with international practice. The audit would be restricted to companies that had issued securities or listed shares. These provisions were important.

Mr Harris asked how many companies would be affected by the requirement of independent reviews.

Mr Muller replied that independent reviews were for the category of companies not subject to audits.

Mr Harris asked if the fears about the transitional period applied to those companies that would have already conducted their audits by 1 April. 

Mr Muller replied that audit should be determined by the market and should not be determined by statute.

Deloitte submission
Dr Johan Erasmus, Regulatory Analyst: Deloitte, discussed the uncertainty about transitional arrangements regarding the audit requirement. Four possible options were proposed to assist in trying to clarify this for companies with differing financial year ends. With regard to auditor rotation Section 92 of the Act determined that the same individual may not serve as the designated auditor of a company for more than five consecutive financial years. Transitional arrangements were required to provide more clarity on existing audit relations and also when the five year period would come into effect. He proposed the term of service of an auditor be measured from the date of the auditor’s first appointment or re-appointment after the date on which the 2008 Act takes effect.

On audit exemption, Section 30(2A) provided for an exemption for owner-run companies to have either audited or independently reviewed statements. Deloitte was proposing that subsection (2A) be reincorporated into subsection (2). Thus, if a company was required to be audited in terms of section 30(2) it must be audited. Exemption should only apply in respect of an independent review.

Dr Erasmus proposed that Section 22(1)(b) which applied to reckless trading under insolvent circumstances, be removed as it might lead to unintended consequences. Section 34 was superfluous as the amended Section 84 regulated the applicability of Chapter 3. Section 72(4), which provided for the appointment of a social and ethics committee, was completely silent on the process to appoint, the required composition and the statutory duties and functions of this committee. Deloitte proposed that Section 72 be brought in line with Section 94 which regulated the composition, appointment and functions of the audit committee. Proposals were also made on Sections 66 and 218 (see document).

The submission noted that t
he Minister of Trade and Industry is on record stating that the 2008 Act will become effective on 1 April 2011. It is proposed that section 225 be amended to indicate that the Act will become effective on a date determined in the Companies Amendment Act, which date may not be earlier than six months after the President assented to the Companies Amendment Act.

Discussion
Mr Radebe asked if there was a problem with complying with the new Act by the end of March it came into effect.

Dr Johan Erasmus replied that it was difficult to plan for the future when it was not clear which companies would be required to do independent reviews and which would be required to do an audit. Guidance was needed before the Act was proclaimed.

Mr Radebe asked why those making submissions were requesting the Act be delayed when they were in support of it.

Dr Erasmus replied that the companies were in support of the Act and the Bill as they stood. The issue was with practical implementation.

Ms C Kotsi (COPE) said that there was no need for clarity with regards to audit rotation as this would be five years going forward after implementation of the Act.

Dr Erasmus replied that it was only the audit partner or designated auditor that was required to rotate. There was no problem with this and what was just needed was guidance on when to start counting the five years.

Ms Kotsi said that stakeholders had had time to look at the Act as it had been available since 2008. Besides the technical aspects, what would be other reasons for requesting a delay in implementation by one year?

Dr Erasmus replied that there was need for clarification so that business could comply with the Act as soon as possible.

Mr Harris asked what the issue was with regards to transitional arrangements.

Dr Erasmus replied that the transitional arrangements dealt with practical implementation issues.

Ms September asked what prejudice business would face if the Amendment Bill was implemented earlier than their requested extension.

Dr Erasmus replied that businesses needed to implement a few things in order to be compliant with the Act.

STRATE submission
Dr Maria Vermaas, Head: Legal Division, explained that
‘notes’ and ‘bonds’ did not belong in Companies Act and should be deleted from the Clause 1(dd) definition of ‘‘securities’’ in Section 1 of the Act which defined it as “any shares, notes, bonds, debentures, or other instruments, irrespective of their form or title, issued or authorized to be issued by a profit company for the purpose of raising capital”. Further, the reference to ‘the purpose of raising capital’ was problematic. In case law it was clear that shares could be issued for ‘a proper business purpose’ other than raising capital such as to facilitate a BEE transaction. It would be impractical to create ‘the raising of capital’ as a test for the classification of ‘securities’. It was proposed that the old definition of ‘share’ of the 1973 Companies Act should be used as a basis for drafting a definition of ‘securities’ in the Companies Amendment Bill.

STRATE submitted that in
Section 37(9)(a) and (b), the phrase ‘company’s securities register’ should be replaced with ‘uncertificated securities register or as determined in accordance with the rules of the central securities depository’. The subsection should only apply to uncertificated securities because these could only exist in the form of an electronic entry when recorded in an account/record/ register as described in the Central Securities Depository (CSD) rules.

Discussion
Mr Harris asked what the costs of not making amendments to Section 1 would be.

Dr Maria Vermaas, Head; Legal Division replied that confusion would be created as there would be legal uncertainties if amendments to Section 1 were not made.

Ms September asked if bonds and notes were not part of debentures.

Dr Vermaas replied that there were no definitions of bonds and notes in the Companies Act. In practice debentures had never been defined as bonds. There was a definite distinction between bonds and debentures. Bonds could not be included to mean debentures. 

Banking Association of South Africa submission
Mr Nicky Lala-Mohan, General Manager: Legislation, explained the effects of Section 11 which dealt with the criteria for names of companies. The information technology systems of the banks were currently not able to capture, store or process the names of companies which contained punctuation marks and symbols. These marks had specific meanings in programming languages. These would cause the programmes to malfunction resulting in failed banking transactions.

BASA proposed that Section 22 should provide clarity by defining insolvency for the purposes of interpreting subsection 22(1)(b) to mean commercial insolvency, i.e. whether or not a company has liquid assets or reliable assets available to meet its liabilities.

BASA concluded the submission on the commencement date and transitional arrangements. BASA was of the view that further extension of the Act’s commencement date was necessary to allow both government, including CIPRO, and companies across the economy to complete their preparations to implement the new law. 

Discussion
Mr Oriani-Ambrosini said that there were some signs that were used in some company names which were not computer commands. How were these dealt with?

Mr Lala-Mohan replied that the BASA would provide a written response to this question.

Mr Harris asked how much time would be sufficient for companies to be ready for the implementation of the Act.

Mr Lala-Mohan replied that two thirds of the Act was being amended by the Amendment Bill and the regulations had not yet been promulgated. The tentative time should be a year as t
he original Section 225 of the 2008 Act provide companies with at least one year to prepare for the implementation of the Act.
Mr Smalle asked if the banking sector had done a cost analysis for the implementation of new software.

 Mr Lala-Mohan replied that the Association had not done a costing exercise. Standard Bank had engaged outside experts to do a quotation and the cheapest was R100 million.

The Chairperson thanked the Department of Trade and Industry and all those that had made submissions.

The hearing was adjourned.

 

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