Companies Amendment Bill [B40-2010]: Department's further response to comments

Meeting report

Briefing by Department of Trade and Industry (DTI) - Responses to outstanding issues arising from the comments received on the Companies Amendment Bill [B40-2010]
Ms Zodwa Ntuli, Deputy Director-General, DTI, advised that the briefing to the Committee would deal with the four outstanding issues arising from the comments received on the Companies Amendment Bill.

Mr MacDonald Netshitenzhe, Acting Chief Director: Commercial Law, DTI, explained that Section 22 (1) (b) of the Act dealt with trading under insolvent circumstances.  Comments received suggested that the Bill defined what was meant by insolvency as a company could technically be insolvent if the entity had bank loans.  The issue of commercial and technical insolvency was already well-established in law and it was not the intention of this Bill to redefine insolvency.  The Department felt that a clear distinction needed to be drawn between ‘trading under insolvent circumstances’ and ‘reckless trading’, which was prohibited.  Government had a duty to protect the public against reckless trading practices.  The Companies and Intellectual Property Commission had the right to hold a person suspected of dubious trading practices to account.  Companies in financial distress could apply for business rescue assistance.  There was no problem with start-up companies.

Mr Flip Dwinger, Legal Adviser, CIPRO, explained that Section 69 of the Act dealt with ineligibility and disqualification of persons from being appointed directors of a company.  The provision in subsection (12) for exemption for single directors was criticised in a number of submissions and the DTI agreed to reconsider the provision in order to ensure legislative consistency.  The Department proposed that subsection (12) was deleted as there was a danger that the public could be defrauded or prejudiced by companies with a single director (i.e. owner-managed entities).  Subsection (10) provided for the prohibition to lapse after a period of 5 years, unless a court ruling decided that the period should be extended.  The DTI suggested that subsection (10) be retained.

Mr Johan Strydom, Law Adviser, DTI, explained that Section 218 (1) of the principal act dealt with void and voidable instruments.  If a contract was void, it had no operation in law and there were no legal consequences.  A voidable contract however had operation in law and had legal consequences but could be declared void at a later stage.  Section 218 stated that nothing in the Act rendered void an agreement unless it was declared void by a court of law.  This provision was inconsistent with other clauses in the Act, for example Section 78 (2) included provisions that would render an agreement void.  The DTI suggested that the Act be searched to identify all provisions that would be in conflict with Section 218 and that the Department considered amending Section 218 to prevent any inconsistencies in the Act.

Ms Ntuli advised that Section 11 made provision for the recognition of symbols in company names.  Comments received indicated that the cost of registering symbols was prohibitive and placed a financial burden on companies.  The Department acknowledged that there was a cost associated with compliance with legislation to companies but the intention was not to unduly burden entities with the cost of complying with something that was not strictly necessary.  The provision was considered to be necessary in order to align South African legislation with similar progressive laws in other countries (for example, the United Kingdom and the United States of America).  The Department was not provided with the basis for determining the costs involved and was not in a position to determine whether or not the registration of symbols would be an unreasonable financial burden on the entity concerned.  The Department considered making provision for the compliance with the provision to be delayed for a period not longer than 5 years, which would allow companies to prepare for the costs involved.

Ms Ntuli said that Section 218 was not contextualised and the lack of cross-references to other provisions added to the confusion.  She pointed out that the intention of the Department was to prevent companies from trading under insolvent circumstances but not to prevent start-up companies from operating although they could technically be insolvent.  The legislation needed to be clear and unambiguous.

Discussion
The Chairperson observed that the Department was referring to sections of the principal Act, which were not included in the clauses included in the Amendment Bill. The Members of the Committee would need to refer to the Act during deliberations

Mr Theo Hercules, State Law Adviser, Office of the Chief State Law Adviser, confirmed that the Chairperson’s observations were correct.

Mr B Radebe (ANC) asked what the experience was in the regarding the costs involved in registering symbols.  If the implementation of the requirement was postponed for five years, the term of the Committee would have expired before the legislation was fully implemented.

Ms F Khumalo (ANC) requested clarity on the differences between reckless trading and trading under insolvent circumstances.

The Chairperson asked Mr Hercules to explain the process involved in examining the Act in detail to establish if any clauses were in conflict.

Mr Strydom explained that the Bill needed to be read in conjunction with the principal Act.  He repeated the explanation that the provisions in Section 218 were in consistent with Section 78 (2) and possibly with other sections in the Act.  Careful consideration need to be given to any changes made in the Bill as the issue could not be resolved by merely deleting Section 218.  The clause would have to be retained but changed to remove any inconsistency with the other provisions.

Mr Hercules advised that the matter had been discussed with the DTI and the Office of the State Law Adviser agreed with the explanation provided.  The principal Act needed to be examined to ensure that any conflicting provisions were addressed.

Mr Netshitenzhe replied that Government had a duty to protect the public from unscrupulous operators.  Reckless trading would be harmful to the public and must not be allowed to occur.  Insolvency meant that the liabilities of a companied exceeded the assets and differed from liquidity, which referred to the entity’s ability to pay accounts due.  Although insolvency could be harmful, it was not punishable.  Reckless trading should be punished.

Ms Ntuli advised that the Department had contacted the relevant authority in the UK and requested information on the cost of registering symbols.  A response was awaited.  It was not easy for the regulator to determine the costs involved as these were borne by the company.  The Department needed to have details of the basis for the costs involved before it could be established whether or not the amounts involved were justified.  The information should be available before the following meeting with the Committee.

Mr Radebe pointed out that the processing of the Bill could not be delayed because of additional changes.  The Act had to be implemented by April 2011 and was scheduled for tabling in Parliament on 17 March 2011.  He wanted to know how long it would take to make the necessary changes to ensure that the legislation could not be challenged because of inconsistencies.

Ms C September (ANC) said that the Act should be cross-referenced with other applicable legislation.  She asked if the legislation should allow for the courts to decide if an agreement would be void, which would not be inconsistent with any other reason for rendering a contract void.  She asked how it could be established that a start-up company was not engaged in reckless trading.  She asked if the Commission would have the necessary capacity to carry out the intended functions.

The Chairperson noted that the concepts of loans, liquidity, solvency and start-up companies needed to be clear.  The Committee had to take the impact of an economic crisis into account.  Start-up companies had to comply with the Companies Act as well and had to be on a sound operational footing, despite the need for initial financing.

Ms Ntuli replied that there were not many inconsistencies in the Act as the comments referred only to the conflict between Section 218 and Section 78.  She agreed that Section 218 needed to be contextualised to indicate the intention of the provision.  The current version of the Act was more aligned to other legislation and had been much improved.  The Department wished to take the trouble to examine the Act for any possible inconsistencies but was confident that the target dates for finalising the Bill would be met.

Mr Strydom explained that if a company had a memorandum of incorporation that allowed a director to be relieved of statutory duties in terms of the Act, Section 78 (2) made provision for such a memorandum to be declared void.  It was not desirable to encumber the courts with something that could be adequately dealt with by legislation.  The Bill amended the provisions of the Act and the Department requested that the necessary changes to Section 218 were included in the Bill as well.

Mr Netshitenzhe used the example of a sound company that operated in a satisfactory manner but subsequently found itself in financial difficulty to explain the various concepts.  Such a company could approach the Industrial Development Corporation (IDC) for a loan and agree the terms and conditions for the repayment of the loan.  Adverse economic or other conditions could impact on the company’s ability to repay the loan.  The company could approach the Commission to apply for rescue.  The Commission would have persons with the necessary expertise serving on it.  The purpose of the Commission was to take preventative steps that would avoid harm to the economy.  It was necessary to make provision for cases where persons found guilty of reckless trading were prevented from starting up a new company with the intention to continue such nefarious practices.  Reckless trading was a crime and the responsible person was investigated and penalised.

Ms Ntuli confirmed that the investigations conducted by the Department had found that certain start-ups were established in an attempt to hide and to continue nefarious practices.  The legislation needed to have clear and unambiguous provisions in order to protect the public.  The Department had established an investigations unit, the register of companies had been improved and the necessary systems were in place to track dubious operations.

Mr X Mabaso (ANC) asked if ‘reckless trading’ included cases where companies changed name on a regular basis in an attempt to hide unacceptable practices.

Mr Netshitenzhe reiterated that reckless trading meant that there was an intention to harm or defraud the public.  The name of a company was important for brand recognition but if it was changed with the intention to defraud or confuse the public that would be considered to be reckless trading.

Ms Ntuli pointed out that the Consumer Protection Act included similar provisions and that suspicions would arise if a company frequently changed its name.

The Chairperson commented that the Consumer Protection Act and the Companies Act were inter-related.  The Committee was reluctant to approve the Amendment Bill, knowing that further changes to the Act needed to be made.  The finalisation of the Bill was urgent and there was a time constraint.  It was necessary to strike a balance between meeting the deadlines and in ensuring that good legislation was passed in the interests of the public.  The Committee accepted that further changes to the Bill needed to be made but was unwilling to postpone the process of deliberations.  The Department was requested to submit the changes as soon as possible.

Ms September felt that the Parliamentary legal advisers needed to be involved in the process.

The Chairperson replied that a Parliamentary legal adviser as well as an academic expert was already available to assist the Committee.

Mr Mabaso was concerned that the Committee did not make adequate allowance for public consultation on the Bill, in particular that ordinary people and small enterprises had not had the opportunity to make submissions.

The Chairperson replied that submissions had been made by certain small companies during the public hearings on the Bill.  She agreed that ordinary members of the public needed to be encouraged to attend public hearings and that Parliament had to explore more creative ways of ensuring that the public was informed of upcoming hearings.  Public hearings were advertised in the Sunday Times newspaper but radio stations reached a far wider audience.

The remainder of the meeting was devoted to a discussion on the Committee’s planned activities during 2011.

The meeting was adjourned.