Companies Amendment Bill [B40-2010]: informal deliberations

Meeting report

Outstanding questions from the Committee
Certain questions asked by Members of the Committee during earlier deliberations on the Bill remained outstanding:

Mr J Smalle (DA) referred to Section 136 (2) of the Act and asked if the Department had considered the economic impact of the implementation of the legislation concerning the prudential capital banks had to keep in reserve (currently 8%).  He asked if the DTI had discussed the financial implications with the Department of Finance as banks would have to furnish guarantees to safeguard the sureties.  The financial sector made use of the Swift system to electronically transfer funds between South African and foreign banks.  He understood that the electronic systems were not compatible with the systems used by other countries.  He asked what the impact of the implementation of Section 11 would be on the systems that needed to be in place once the new Commission was established.  He noted that a period of three years was allowed for implementation by the sector and wanted to know if the Department was ready for the new legislation coming into effect in April 2011.

Mr T Harris (DA) referred to Clause 16 and suggested that the phrase ‘or copy’ was inserted in sub-clause (a) (2) as persons had the right to inspect and to obtain copies of records.  A consequential amendment was necessary in sub-clause (c) (a) as a person who was not a shareholder did not have the right to obtain copies of records.  The applicability of Section 218 in the 1973 and in the 2008 Acts was referred to the Department of Justice.  The reply received indicated that the Department of Justice considered the matter to be of a civil rather than a criminal nature.  The Department had indicated that the transgressions were of a criminal nature.  He requested that the matter was clarified.  He asked if Sections 69 and 218 of the 2008 Act had the same applicability as the 1973 Act.

Mr Theo Hercules, State Law Adviser, Office of the State Law Adviser, advised that the clause referred to sentencing and would therefore be considered to relate to criminal charges.  Depending on the case, the type of transgression could be either criminal or civil in nature.

The Chairperson suggested that Mr Hercules was allowed the opportunity to apply his mind to the matter and report back to the Committee at a later stage.

Ms Zodwa Ntuli, Deputy Director-General, DTI recalled that the DTI had requested permission not to respond to the question when it was first raised by Mr Harris.  The Department had checked that the provision did not contradict the Constitution or other legislation.  The DTI wished to avoid debating the issue as there was sufficient case law to determine the types of offences that should result in the disqualification of a director.

Mr MacDonald Netshitenzhe, Acting Chief Director: Policy and Legislation, DTI, advised that Section 136 (2) was extensively discussed with the banking sector as well as with Business Unity South Africa (BUSA).  All interested parties generally agreed with the provision in the Bill although certain parties felt that the phrasing of the clause could be improved.  The provision was not considered to hold any threat to the issuing of securities.  He said that the systems currently used by CIPRO might not require any changes once the Commission came into effect.  The right to copy records was implied but the Department would consider the suggestion made by Mr Harris concerning Clause 16.

Mr Rory Voller, Director: Legal Services, CIPRO replied that the period of three years allowed for the implementation of Section 11 was considered to be adequate.  The existing systems were already able to include the registration number in the company name as well as company names in more than one language.

Ms Ntuli added that the amendments to Section 136 arose from extensive consultation with stakeholders.  The DTI felt that it had to be made clear that contracts could only be cancelled by the court in cases where companies were undergoing business rescue proceedings.  Court proceedings needed to balance the rights of banks to enforce security for loans granted and the business rescue process.

Mr Selau agreed that the right to copy documents were implied and was enshrined in the Promotion of Access to Information Act.  In any event, parties involved in court proceedings generally exchanged documents.

Mr Smalle pointed out that there had been a number of different proposals concerning Section 136 from the banking sector, the Department and the Committee.  He disagreed that further discussion should be curtailed as the clauses would still be debated by the Committee in forthcoming deliberations.  He requested that the Department submitted subsequent changes to the Bill in writing.

The Chairperson agreed that the deliberations of the Committee were not precluded.  The Committee had received responses to the issues raised but may not necessarily agree with the DTI.  Discussions were not closed as the clauses of the Bill would still be debated.  She asked that the State Law Adviser considered the responses provided by the Department and provided the Committee with his opinion.

Response of the Department of Trade and Industry (DTI) to the gaps identified between the issues raised and earlier responses
Ms Margot Herling, Content Advisor to the Committee, had conducted a detailed investigation of the issues raised during the public hearing process on the Companies Amendment Bill.  She had compiled a document listing the gaps between the issues that had been raised in the submissions received and the responses of the DTI, which was presented to the Committee on 9 February 2011.  The document was forwarded to the DTI for comment.  The Department had submitted written responses to the issues raised on 10 February 2010 (see attached document).

The Chairperson proceeded to read the comments and corresponding response from the DTI to the outstanding matters arising from the public hearings:

Clause 1: comments were made regarding the definitions for ‘all of the greater part of the assets or undertaking’, ‘holding company’, inter-related’, special resolution, State-owned company’, ‘annual financial statements’ and ‘’juristic person’.

Mr M Oriani-Ambrosini (IFP) asked for clarity on the difference between the subsidiaries owned by a South African company and a State-owned company.

Mr Flip Dwinger, Director: Corporate Law, CIPRO explained that both public and private companies could have subsidiaries.  The subsidiaries of a State-owned entity were not necessarily State-owned.  The definition of a State-owned company did not include subsidiaries.

Mr Harris referred to the comment made by ESKOM regarding whether or not certain conditions with regard to transparency in financial reporting were applicable to all the ESKOM subsidiaries.

Mr Dwinger replied that ESKOM appeared to be of the opinion that all its subsidiaries were State-owned companies but this opinion was not the correct interpretation of the provisions.

The Chairperson requested the State Law Adviser to provide the Committee with an opinion on this issue as well.

Mr Oriani-Ambrosini suggested that consideration be given to include subsidiaries that were 100% State-owned in the definition if it was a matter of policy that there was greater transparency in the financial reporting of subsidiaries of State-owned enterprises.

Ms Ntuli replied that a key policy of the DTI was that every company had to be accountable, regardless of the nature of ownership.  State-owned companies had to comply with multiple requirements (for example the Public Finance Management Act (PFMA) and the Companies Act) and the DTI acknowledged that certain exemptions were appropriate in order to avoid double reporting.

Mr Lionel October, Director-General, DTI, added that consideration had to be given to the level of oversight required over the hundreds of subsidiaries of State-owned enterprises.  The Board of the enterprise was held responsible for oversight over the subsidiaries of the entity.  The DTI was satisfied that the relevant provisions in the Bill were adequate.

The Chairperson suggested that the discussion over the policy concerning State-owned entities and their subsidiaries were deferred.

Clause 2: comments were made with regard to the solvency and liquidity test.  When assets equaled liabilities the company would be breaking even and should not be considered insolvent.

Mr Johan Strydom, Law Adviser, DTI, confirmed that the solvency test would be passed if a company broke even.

Mr Oriani-Ambrosini was under the impression that Clause 2 would be deleted from the Bill.

Mr Strydom agreed that Clause 2 would be deleted and that there would be no amendment to the current provisions of Section 4 of the principal Act.

Mr Oriani-Ambrosini had suggested that all reference to a ‘holding company’ in Section 4 of the principal Act was deleted as each company owned by a holding company was regarded as a juristic person in its own right.  This would be in alignment with international legislation.

Ms Ntuli replied that the provisions in the principal Act of 2008 made it clear that the assets of each company in a group of companies would be taken into consideration when the solvency test was applied.

The Chairperson suggested that the issue was flagged for later discussion.  She resumed the discussion on the responses to the outstanding comments concerning the degree of affinity of related persons (Section 2 of the Act) and Clauses 4, 7 p and 15.  The stakeholders had commented on Section 15 of the principal Act that dealt with the review of shareholder agreements and Memoranda of Incorporation (MOI).  Section 20 of the Act made provision for a special resolution to ratify unauthorised acts by directors but a comment was made that such ratification could be beyond the scope of the company’s MOI.

Mr Oriani-Ambrosini pointed out that the MOI specified the activities of a company and was a public document.  He questioned allowing the passing of a special resolution to extend the powers of directors to amend the MOI.

Mr Netshitenzhe agreed that there could be instances when a director exceeded his powers.  It was preferable to allow the highest authority of a company (i.e. the shareholders) the ability to take swift action to prevent activities that prejudiced the public.

Ms Ntuli pointed out that the relevant provision allowed a company to reject or to ratify the action taken by a director, provided that such action was allowable in accordance with the Act.

Mr Oriani-Ambrosini observed that most MOI’s included the proviso that activities were legal.  He was concerned that the interests of minority shareholders were not protected.

Mr Dwinger explained that Section 20 (2) had to be read in conjunction with Section 20 (1), which put the issue in context.

Ms Herling explained the rationale behind the comments concerning Section 27 of the Act.  One comment referred to an extension of the time period in terms of Section 27 from 15 months to 18 months.  The second comment requested that the date of financial year end remained fixed as the last day of the applicable month, regardless of whether or not the day fell on a weekend or public holiday.

Mr Strydom advised that Clause 17 of the Bill deleted Section 27 (6) of the Act.

Mr Netshitenzhe referred to Clause 24, which amended Section 38 of the Act.  The DTI felt that a period of 15 months was adequate.

The Chairperson resumed with the comments concerning Clause 24 and Sections 39, 40, 45, 62, 64 and 44 of the principal Act.  The comment concerning Section 72 (4) requested a deference of the requirement to implement a social and ethics committee.

Mr Harris was under the impression that a two-year period was allowed for companies to establish a social and ethics committee.

Mr Netshitenzhe explained that the issue was discussed when the Bill was tabled in 2008.  No agreement was reached at the NEDLAC level and Parliament had exercised its right to pronounce on the matter.  The provision was included in Section 72 of the Act and must be implemented.

The Chairperson advised that the Committee was a Parliamentary body and would consider the issue during deliberations on the Bill.

Ms Ntuli explained that extensive discussions were held on the issue but the DTI did not consider it necessary to defer the implementation of the provision.

The Chairperson resumed with the comment concerning Clause 45.

Mr Harris queried if the definition of a director in Section 75 differed from the definition elsewhere in the Act.

Mr Dwinger explained that the definition in Section 75 was wider than the definition in Section 1 and was only applicable to the application of Section 75.

The Chairperson resumed with the comment concerning Section 80.  The comment received on Clause 67 suggested a time period for the launching of an application.

Mr Netshitenzhe explained that a time period could not be specified as it was not possible to determine how long a court process could take.

The Chairperson suggested that the comment concerning Section 115 was flagged for further discussion.  She resumed with the comments concerning Sections 116, 118, 128, 131, and 135 of the principal Act.  Clause 83 amended Section 136 of the Act and comments were made concerning the protection of certain agreements.

Mr Smalle suggested that the court rather than the practitioner should determine if a contract would be suspended or honoured during business rescue proceedings.

Mr Voller explained that there was a difference between the suspension and the cancellation of a contract.  Practitioners could decide on the suspension of a contract, which would relieve the burden on the courts.  Practitioners had no power to cancel contracts, which was the prerogative of the courts.

Mr Harris asked why agreements concerning clearing and settlement agreements could not be prescribed in the law.  The issue had been raised in the media and had caused alarm in the market.

Mr Voller was reluctant to include provisions for specific types of agreements in the legislation.  He pointed out that banks had a number of different agreements and a long list of agreements that they would prefer to be excluded from the business rescue process.  The DTI did not wish to undermine the business rescue process by legislating exemptions and preferred to allow the court process to decide which agreements would be cancelled.

Ms Ntuli acknowledged that the banking sector had expressed concern over the cancellation of agreements but the DTI was unwilling to undermine the business rescue process.

The Chairperson advised that the matter would be flagged for further discussion.  She asked the State Law Adviser to include an opinion on Section 136 of the Act.  She resumed with the comments made concerning Section 143 and the suggestion to allow minimal monthly fees and bonus payments to business rescue practitioners.

Mr October replied that the regulations dealt with matters concerning fees and remuneration.

The Chairperson noted that the regulations were currently open for public comment.  She resumed with the comments concerning Sections 145, 147, 164, 185 and 218.

Mr Oriani-Ambrosini queried the requirement that companies had to provide a list of shareholders to CIPRO. 

Mr Dwinger pointed out that a list of directors (not shareholders) had to be provided to CIPRO.

Mr Netshitenzhe requested that the Committee took into account the list of issues published by the Minister in the Government Gazette on 22 December 2009 on which comment was invited. 

Mr Harris asked if an updated version of the Bill would be made available to the Committee.

Ms Ntuli agreed to provide an updated version that included the additional amendments and changes discussed to date.

The Chairperson advised that the Committee would continue deliberations on the Bill on 15, 16 and 18 February 2011.

Mr Harris thanked Ms Herling and Mr Strydom for the exemplary work done.

The meeting was adjourned.