Companies Amendment Bill [B40-2010]: deliberations

Meeting report

Briefing by the Department of Trade and Industry (DTI)
Ms Zodwa Ntuli, Deputy Director-General, DTI introduced the delegates from the Department.

Mr Johan Strydom, Law Adviser, DTI, explained that the proposed amendments to the Companies Amendment Bill were in response to the comments received from interested parties during the public hearings on the Bill.  The proposed amendments were included in the document circulated to the Members of the Committee and should be read in conjunction with the Bill and the principal Act, i.e. the Companies Act, Act 71 of 2008.  The proposals were submitted to the Committee for consideration and would be included in the A version of the Bill if approved by the Committee.

Mr Strydom took the Committee through the proposals of the Department and explained the rationale for amending the various clauses of the Bill.

Clause 1: the definitions of ‘asset’ (d), ‘creditor’ (j) and ‘liability’ (t) to be deleted as these concepts were generally understood.  The definition of ‘Master’ (u) was not inconsistent with the definition in the Administration of Estates Act.  A technical correction was made to sub-clause (v) (b).  Notes and bonds were not securities and should be omitted from sub-clause (dd).

Clause 2: the Department recommended that the provisions under sub-clause (a) be deleted.  If the provisions were retained, it would mean that all the companies in a group of companies had to be solvent.  This would be unfair on holding companies where one or more of the companies in the group were insolvent but the holding company was in fact solvent.

Clause 3: it was preferable to list the Acts that took precedence over the Companies Act.  The DTI proposed that the Local Government Municipal Finance Management Act and the National Payment System Act were included in the list of legislation to which the Companies Act would be subordinate.

Clauses 6 and 9: the abbreviation of ‘Propriety Limited’ (Pty Ltd) to remain.

Clause 8: omit the erroneous inclusion of ‘body corporate’ in sub-clause 11 (b).

Clause 10: insert sub-clause (b) (iii) to allow companies to impose higher standards and replace ‘special conditions’ with ‘restrictive conditions’.

New Clause amending Section 22 of Act 71 of 2008: reckless trading prohibited.  The Department proposed that the provisions dealing with grave, fraudulent activity was retained but that recognition was given to the fact that trading under insolvent circumstances was not necessarily fraudulent.  The proposal was that the provisions were modified to the effect that trading under insolvent circumstances was not considered to be a criminal activity and allowed the company to satisfy the Commission that debts could be paid.  It was acknowledged that debts could be due but were not necessarily payable at the same date.

Clause 16: replace ‘and’ with ‘or’ in sub-clause 4 (b).

Clause 18: replace ‘consistent’ with ‘in accordance’ in sub-clause (b).

Clause 19: insert sub-clause (2A) to make provision for owner-directors of companies to be exempted from the audit or independent review of financial statements.  The intention was to reduce the burden of unnecessary audits on single-owner companies.

New Clause amending Section 31 of Act 71 of 2008: access to financial statements and related information.  The proposed provisions specified that it would be a criminal, statutory offence for a company to fail or refuse to allow a shareholder access to inspect or copy such documents.

Clause 20: a technical correction to add subsection (7).

Clause 23: to make provision for the transfer of different types of shares or securities.

Clause 29: to exclude redeemable securities from being considered as the buying back of shares by a company.

Clause 40: to include additional circumstances requiring a special resolution to be taken.  The DTI acknowledged that there might be additional circumstances and would consider including a ‘catch-all’ clause to cover other eventualities.

Clause 41: allowance was made for a director to serve on more than one committee of the company.

Clause 43: sub-clause 12 to be deleted and the disqualifications in sub-clause 8 to apply to all directors of a company, regardless of whether the company had a single owner-director.  The DTI acknowledged that a company owned by a single person was not necessarily a small organisation and could engage in practices harmful or prejudicial to the public.

Clause 49: included the apostrophe in ‘it’s’.

Clause 50: to make provision for certain companies to be exempted from the requirement to have a Company Secretary or an audit committee.

Clause 54: to remove any implication that an audit committee had additional functions to the functions determined by the board of a company.

New Clause to amend Section 99 of Act 71 of 2008: to allow incorporation documents other than a South African Memorandum of Incorporation in the case of foreign companies.

Clause 73: to omit sub-clause (b) that increased the prescribed percentage of shareholding from 35% to 50%, that would be prejudicial to minority shareholders.

Clause 75: to replace ‘reacquires’ with ‘re-acquires’.

Clause 80: to allow the functions of a regulatory authority to continue after business rescue proceedings had commenced.

Clause 83: technical corrections to syntax.

New Clause to amend Section 140 of Act 71 of 2008, dealing with the powers and duties of practitioners: to ensure that the regulatory authorities and the practitioner involved in the business rescue proceedings were aware of each other.

New Clause to amend Section 141 of Act 71 of 2008: to allow practitioners a greater degree of discretion in directing the management of a company undergoing rescue proceedings to take appropriate steps.

Clause 86: to allow the practitioner access to the accounts of a company that was held by an accountant as lien for an unpaid fee.

Clause 87: to delete the obscure word ‘egregiously’.

Clause 105: to make provision for a fixed term of office applicable to persons appointed by the Minister to serve on the Tribunal.  The DTI proposed a term of five years.  Members of the tribunal might be re-elected for a second term but the Chairperson of the Tribunal could only serve one term of office.  A previous Chairperson may be re-elected for a second term of office as an ordinary member of the Tribunal.

Clause 109: to omit sub-clause (i) as the ‘body governing the regulation of the accounting professions’ would cease to exist when the new Act came into force.

Clause 112: to replace ‘business’ with ‘company’.

Clause 113: Section 218 of the principal Act stated that nothing in the Act rendered an agreement void unless such an agreement was declared void by the court.  Section 78 of the Act was inconsistent with Section 218 because Section 78 allowed an agreement to be considered void from its inception.  The DTI proposed the insertion of new sub-clause (1) to avoid the need for a court to confirm agreements to be void in terms of Section 78.

Clause 118: to allow the current Act to be applied to the end of the financial year-end of a company.  The new Act to be applicable to the following fiscal year of the company.

Amendment to Schedule 5 of Act 71 of 2008: to avoid the impression that the Minister was required to make regulations concerning the conversion of par value shares.  The DTI did not intend the conversion of such shares to be obligatory and proposed the insertion of the phrase ‘optional conversion’.

New Clause to amend Section 225 of Act 71 of 2008: to allow for the registration of symbols in the registration of a company name to be deferred for a period of three years from the date of commencement of the new Act.

Mr MacDonald Netshitenzhe, Acting Chief Director: Commercial Law, DTI, advised that the issue of reportable irregularities were omitted from the Bill and could be dealt with in the regulations.

Ms Ntuli explained that the DTI had decided to remove the insertion ‘entitled to continue to act as a director’ as the phrase might lead to confusion.  Although other applicable legislation or regulations might require audits to be done, the intention was not to relieve companies of the responsibility of conducting audits.  The provision for the practitioner to notify the regulatory authority if a company was undergoing business rescue was introduced to ensure that the relevant authority was aware of the rescue process and in a position to offer support and cooperation.  Although the conversion of par value shares was optional, the DTI encouraged such shares to be converted.

Discussion
The Chairperson thanked the DTI for the work done on a complex piece of legislation.

Ms C Kotsi (COPE) observed that it was apparent that most of the issues raised during the public hearings were addressed and that the DTI had taken the opportunity to include additional amendments to the existing legislation.

Mr J Smalle (DA) asked if it was clear that certain definitions were included in other applicable legislation.  He asked if it was necessary to list all the conditions in Clause 40 rather than drafting a single, all-encompassing clause.  Clause 83 (2) made no reference to instances where a court ruling allowed a business rescue practitioner to cancel a contract.

Mr M Oriani-Ambrosini (IFP) referred to Clause 2 and questioned the premise for holding a sound holding company responsible for an unsound subsidiary company.  Clause 18 did not specify which standards were applicable to non-public companies.  He suggested the insertion of ‘and’ between sub-clauses (a) and (b) of Clause 16.  He pointed out that all legislation was subject to the Constitution and that it was not effective to make one law subservient to another.

Mr T Harris (DA) referred to the new clause amending Section 22 of the Act.  The provisions attempted to differentiate between commercial and technical insolvency.  Sub-clause (3) dealt with the inability of a company to pay its debts but made no mention of the inability to cover operating expenditure.  He suggested that the provisions contained in Clause 16 allowed for the copying of records and that a time limit was imposed for the company to honour the request.

Mr Netshitenzhe agreed to the suggestion of including a time limit in Clause 16 (4) (b).  The right to copy records could be dealt with in the regulations or could be specified in the clause.

Mr Strydom explained that the definitions included in Clause 1 of the Companies Act should not be inconsistent with the definitions in other legislation, for example the definition of ‘Master’ should not differ from the definition in the Administration of Estates Act.  If the Administration of Estates Act was subsequently amended, any changed definition would be applicable to the Companies Act as well.  Section 4 (1) dealt with the solvency and liquidity test.  Clause 2 (2) initially proposed that the solvency test was applied to a holding company, regardless of the actual solvency of the individual companies held.  The Department proposed that the provision was amended to subject the individual companies owned by a holding company to the solvency test.

Mr Smalle asked if provision was made for a company to lodge an appeal if it was not satisfied with the outcome in terms of Clause 2.

Mr Rory Voller, Director: Legal Services, CIPRO, replied that Section 26 of the principal Act allowed for the copying of records.  Section 29 of the principal Act made provision for the regulations to specify which standards needed to be adhered to by companies.  The Companies Tribunal oversaw disputes concerning the work of the Commission and would deal with appeals from companies.

Mr J Selau (ANC) referred to Clause 105 and requested clarification of the prohibition on the re-election of the Chairperson and members of the Tribunal for a second term.

Mr Harris referred to Clause 43, which amended Section 69 of the principal Act.  He was not convinced that sub-clause (9) (a) under Section 69 should remain as it limited the time period applicable to the disqualification of directors.  He asked what the justification was for imposing a timeframe.  He referred to Clause 83 and asked if the Insolvency Act covered all the concerns raised by the stakeholders in the public hearings.  He questioned the need for the retention of Section 218, given that there was a contradiction with Section 78.  He asked if the reason for deferring the inclusion of symbols in company names for three years for three years was because of the prohibitive costs involved. He requested the reassurance of the DTI that the Commission and all the necessary systems would be in place to ensure the implementation of the Act by the effective date.

The Chairperson asked if foreign companies would be included in the provisions of Sections 31 and 32 of the principal Act.

Ms Ntuli advised that the DTI would investigate where any omissions had occurred, as pointed out by the Committee.

Mr Netshitenzhe explained that the DTI was taking all suggestions made into consideration when formulating its proposals.  The provision concerning the term of office of the Chairperson and members of the Tribunal was proposed as the current Act made no mention of a limited term of office.  The DTI had approached its counterparts in the United Kingdom in an attempt to determine the basis of the cost of registering symbols.  The deferment of this provision would not jeopardize the implementation of the Act.  The DTI accepted that there would be a cost of compliance to companies but was sensitive to instances where the cost of compliance could be a severe financial burden.

Mr Strydom confirmed that Clause 105 was proposed because the current Act was silent on the term of office of members of the Tribunal.  The DTI proposed that the Chairperson and members served a five-year term but were eligible for election to a second term.  The Chairperson could only serve a singe term as Chairperson but could be re-elected as an ordinary member for a second term. He agreed that the five-year disqualification period specified in Section 69 could be confusing as the period could in fact be longer.  If Section 218 was removed from the Act, there would be no provision for a court to declare an agreement void.

Mr Voller explained the difference between the right of a practitioner to suspend contracts during business rescue proceedings and the cancellation of a contract.  Clause 40 listed the conditions requiring a special resolution but the DTI would consider drafting a clause to cover as yet unknown conditions.

Mr Flip Dwinger, Director: Corporate Law, CIPRO, referred to Section 35 (a) and (b) of the Insolvency Act.  The Insolvency Act did not apply in a business rescue situation and the proposal made was intended to make this Act applicable.  Clause 40 was a summary of all the conditions requiring a special resolution and made it easier for all responsible for implementation.

Ms Ntuli added that a list of conditions was a better way to draft legislation and made it easier for the provisions to be interpreted.  The 1973 Act pre-dated the Constitution.  Section 37 of the Constitution provided guidance and all legislation was subject to the Constitution in any event.  Regardless of the term imposed for the disqualification of a director, a person might approach the court to extend the period as well.  She gave the assurance that the DTI and the Commission were both on track and ready to implement the Act on 1 April 2011.  The Department was not convinced that the cost of registering symbols claimed by certain banks (R100 million) and had requested details of the actual costs involved.  The registration of symbols was considered to be a progressive piece of legislation and the DTI felt that it was necessary to include the necessary provisions in the Bill even though implementation was deferred for three years.  The Companies Act applied to foreign-owned companies and the subsidiaries of foreign-owned companies incorporated and registered in South Africa.

The Chairperson advised that the Committee would continue with its programme of deliberations on the Bill.  A number of issues remained outstanding but there would be further opportunity to engage with the DTI.  She noted that representatives from the National Treasury had attended the proceedings.  The Department was excused as the remainder of the meeting was devoted to Committee business.

Ms Margot Herling, Content Adviser to the Committee presented a summary of the outstanding matters arising from the public hearings to the Members.  The document was forwarded to the DTI for comment and the Department’s responses would be heard in the meeting scheduled for 11 February 2011.

The meeting was adjourned.