Companies Amendment Bill: Department response to public hearings

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Trade and Industry

24 January 2011
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Department of Trade and Industry presented a comprehensive response to the public comments on the Companies Amendment Bill and acceded to several of the suggestions. It agreed to change the Bill to make it easier for the public to view company registers of shareholders and directors, as well as to prohibit people convicted of fraud from becoming directors of owner-managed businesses. The compulsory conversion of no-par-value shares would also be removed from the Bill. The suggestion that the implementation date should be later than 1 April 2011 was not agreed to. The Department said it would be ready to implement the Act by 1 April 2011. The Committee was still concerned about people convicted of fraud being able to apply to the courts and being allowed to become a director again after a short period of five years. Also there was “three pages” less guidance on the matter in the Bill.

Meeting report

Department’s response to submissions on Companies Amendment Bill [B40-2010]
Ms Zodwa Ntuli, the Deputy Director General (DDG) for the Department of Trade and Industry's (dti) Consumer and Corporate Regulation Division (CCRD) presented the first part of the dti's response to the comments that had been made on the Companies Amendment Bill [B40-2010] (see document).

Ms Ntuli noted that the Companies Act No 71 of 2008 had been presented to the President in April 2009.
It had been discovered that several sections of the Act had comprised errors. An Amendment Bill corrected these and public hearings had ensued regarding those erroneous issues.

Ms Ntuli noted that the correction process was only for the correction of errors and not for the review of policy matters that had already being endorsed in 2007 by Cabinet. She noted that the Bill comprised amendments relating to the correction of syntax, spelling, grammar, and other technical errors. It also dealt with the address of conflict with other regulations. Ms Ntuli said that the benefits of progressive provisions of the Act needed to be properly weighed against potential harm.

She then addressed the specific issues commented on and the dti’s response:

Audit of subsidiaries for foreign public companies
Commentary resulting from the public hearings had been that the subsidiaries of foreign companies were not required to be audited.

Ms Ntuli said that the dti was in agreement. She noted that foreign companies should be treated equally in terms of auditing requirements.

Clause 19 Verification of Annual Financial Statements (AFS) of companies where all shareholders were directors
The public hearing comment had been that those companies should subject their AFS to a shareholders' meeting following approval by the board. The dti agreed with that comment as it supported the preparation of AFS.

Reportable irregularities
The commentary noted that no provision had been made for reportable irregularities under the Independent Review regime. Ms Ntuli said that the dti was in agreement with the commentary and that they recommended that an appropriate amendment should be put in place.

Clause 43 Persons allowed to act as directors after being convicted of fraud
The commentary at the public hearings was that this clause was problematic. The dti was in agreement that the clause needed reconsideration. Ms Ntuli noted that the disqualification period could last 10 years and that as soon as the criminal conviction had expired, the director should be allowed to serve again as director. The dti was of the stance that the incumbent could apply to the High Court to speed up the rehabilitation process and that the court had the discretion to do so but that it would have to be based on evidence.

Clause 118 (5) Conversion of par values
The dti was of the stance that there should be no mandatory conversion. Ms Ntuli noted that a mandatory conversion may attract unintended tax implications.

Clause 80 (Section 133) Moratorium on legal proceedings during business rescue
The commentary had been that regulators' rights to invoke enforcement during business rescue proceedings must not be affected. Ms Ntuli said that it was not the dti's intention to exclude the actions of regulators during the business rescue process.

Section 141 New Amendment
She said that the dti agreed with the public hearing commentary and that Section 141 should be amended.

Retention of books or records under business rescue
Public comments noted that no person should be allowed to retain books or records of the company if so required by the business rescue practitioner. The dti was of the stance that an exception to the section needed to be included whereby documents seized or obtained by means of a court process should be excluded.

Clause 3 Conflict of laws
Ms Ntuli noted the commentary and said that the Companies Act was a law of general application and that it did not preclude sectoral laws taking precedence.

Mr Macdonald Netshitenzhe, the acting Chief Director for Policy and Legislation (CCRD), continued the feedback from the Department on the public comments:

Clause 1: Definition of Regulatory Authority
He said that the definition was wide enough to include all regulatory authorities and thus no amendment was necessary.

Clause 1 and Clause 19: Definition of Audit
He said that that dti was not in agreement with the comments made. However, as a wrong impression might be created, the dti had inserted at the beginning: “for the purposes of this Act”.

New Amendments: Regulation of Independent Reviewers
On the matter of IRBA offering to be sole regulator for accountants performing Independent Reviews, the dti was 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.

New Amendments: Trading under insolvent circumstances

Comments suggested that t
he 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. The dti responded that it disagreed with this comment. There was 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 arose, the commission had a discretion of investigating the matter.
 However, for certainty, the provision could be revised to avoid the unintended consequence highlighted by the stakeholders.

Clause 6: The use of symbols &
foreign languages in company names
The use of symbols in company names was used by the United Kingdom and several US State jurisdictions. The Companies Act was progressive. A preliminary enquiry was that costs for changing systems were not astronomical and were mitigated by the benefits, but the dti would provide more information on this. In order to allow stakeholders to prepare their systems for compliance, it was recommended that the implementation of the provision be delayed, not that it be removed from the Act.

On the use of foreign languages in company names, the dti disagreed with comment. The Regulations would 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. No amendment was recommended.

Clause 16
Access to information in company registers
The dti agreed that the Companies Act can provide alternative shorter processes without excluding the PAIA as an option. In view of this, the Committee was advised not to accede to the proposed change of substituting ‘and’ with ‘or’.  

Clause 1: Definitions to be deleted
The dti agreed that  asset, creditor, liability, fair value must not be defined and should be deleted. Substantive definitions were used in accounting industry and would promote flexibility. Definition of private company must be amended in accordance with Section 8 of the Act.

Extension of effective date of Act
Several submissions argued for the effective date to be moved further than the third quarter of 2010 or target date of 1 April 2011. The dti said the legal framework would be ready on 1 April 2011.  The Minister had 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

Clause 2: Application of solvency and liquidity tests on Companies
The dti agreed with t
he request that the solvency and liquidity tests should apply to companies and not to group of companies. The amendment should make it clear that the test applies to the assets of the company as separate legal entity

Clause 29 Deletion of proposed subsection 8(b)
The dti was in disagreement that the subsection should be scrapped.

Clause 65: Ratification of  fundamental asset disposal done without the required special resolution
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. Public comments proposed that the power to ratify should be retained.

 The dti disagreed as the removal was there to protect shareholders by involving them in a fundamental transaction prior to its conclusion.

Clause 19: Transitional arrangement for audit requirements
The Act abolishes audit requirements for certain companies. The Act did not provide for transitional arrangements in respect of existing companies. The dti responded that 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.

Clause 23: Amendment of Section 37 of 2008
The dti agreed 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.

Clause 40(d): List of matters requiring special resolutions
The comment was that the list should not be exhaustive and should have a “catch all” phrase to cater for any other matter that could require a special resolution. The dti agreed that there should be a “catch all phrase” to cater for any other special resolution whether required by the Act or the company’s Memorandum of Incorporation.

Clause 113: Section 218(1) Void and voidable interpretation
The suggestion was to scrap this provision in the Act as it was in conflict with other sections and caused uncertainty. The dti said that the
section seemed to be in direct conflict with section 78(2) and possibly also other sections as raised by stakeholders. The dti would confer with the State Law Advisors on this.


Discussion
Ms C Kotsi (COPE) commended the dti's presentation. She commented on people who were not allowed to act as directors and said that there needed to be consistency with other laws in that regard. She sought clarity on Section 141 and the use of the wording 'may' and 'must'.

Mr Netshitenzhe noted that the term 'may' was the decision that the dti had taken to allow for greater discretion for practitioners.

Ms Kotsi referred to trading under insolvent circumstances and said the term 'reckless' was not clear to her and she requested clarity. She wanted to know what the parameters of recklessness were.

In response to her concern, it was noted that reckless trading was defined in the context of gross negligence and fraud. So, if one had to conduct business in insolvent circumstances knowing that one would not be able to pay one’s creditors, then that would be termed ‘reckless’ trading.

Ms Kotsi sought more elaboration on access to information on company registers.

Mr X Mabaso (ANC) expressed his appreciation to the dti for their presentation. He noted the importance of development. He wanted to know that the impact of the Act would have on people who had been historically excluded from the mainstream economy. He wanted to know if the Act addressed that.

Mr Netshitenzhe said that the Act should remove all impediments for small businesses so that they were able to get and benefit from incentives from departments like the dti.

Mr Mabaso made reference to unscrupulous companies and wanted to know if there were any measures to prevent and reduce that problem.

Mr T Harris (DA) thanked the dti for a comprehensive presentation. He referred to slide 25 where it stipulated that the legal framework would be ready on 1 April 2011. He noted that the legal framework was up to the legislators. He said that, in terms of readiness, what was more important was the administrative readiness and whether the institutions under the dti would be ready to enforce the Act by 1 April 2011.

Mr Netshitenzhe said that he believed that it was within the competency of the Portfolio Committee to say that the effective date would come into existence. He noted that the dti had already requested urgency on the matter. The readiness of institutions to respond to the Act was important and the relevant Deputy Director General should be able to present a report on readiness.

Ms Ntuli said that the dti had been involved in the re-training of staff on the new Act. The process of establishing the institution was underway although sometimes they could not establish such immediately as the dti had to wait for approval from the National Treasury in terms of listing.

Mr Harris asked if CIPRO (Companies and Intellectual Property Registration Office) was ready.

Ms Ntuli said that the current IT system for CIPRO was in the process of being upgraded and the system would be up and running when the legislation came into effect.

Mr Harris made reference to slide 10 and the preclusion of someone from being a director. He noted the significant difference between the old Act and the 2008 Act and said that the time period in the current Act was significantly shorter. He sought clarity on whether it was for 10 years or five years that a person could be precluded from being a director. He referred to the old Companies Act and noted that the old Act provided more detailed guidance and it looked like the dti had removed three pages on this.

Nr Netshitenzhe said that the dti had digressed from the old Act and noted that in all probability amendments would still come in. The old Act was very similar to the new Act of 2008 in terms of disqualification criteria. The new act was a follow up of the old and was based on a trusted global remedy. Also, five years had been proposed in the new Act and it could range from anywhere between five and 10 years, depending on the courts.

Mr Harris referred to slide eight where the dti referred to 'spirit' and noted that it was naïve to talk about the spirit of the law instead of just legislating it somehow.

Ms C September (ANC) asked if the Portfolio Committee could perhaps look at the regulations themselves and then argue why some should not be legislated. She suggested that the dti should confer sufficiently with other departments on several pieces of legislation. The Bill straddled the content of a number of other pieces of legislation including constitutional matters and cross-referencing was necessary.

Mr Netshitenzhe agreed that it was indeed vital to confer with other departments.

Ms September added that the clause pertaining to directorships should not exclude the Constitution of the country. She suggested that the Committee Chairperson confer with the Chairperson of the Justice and Constitutional Development Portfolio Committee.

Ms September said that the dti needed to make reference to a budget plan as well as the rollout implementation of the legislation. She sought more elaboration on the Co-operatives Act. The Companies Act and the Co-operatives Act were not in competition with each other and they each served different people in the economy in different situations.

The dti noted that there was currently an extensive review of the Co-operatives Act of 2005 and that the audit requirement was very strict in the Co-Operatives Act.

The meeting was adjourned.

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