The Committee noted that its independent advisor, from the Commercial Law Department of the University of Cape Town, had submitted some proposals on reckless trading and other implications of technical and commercial insolvency, the position of regulators under business rescue schemes, shareholder appraisal rights within the context of possible commercial insolvency, and the power of business practitioners to demand the return of books and documents belonging to the company. Her comments were set out and commented on by the Department. The Department noted that technical insolvency was no longer an offence, and insolvency would be measured by a company’s ability to pay its debts. If a company was trading under certain circumstances, this could trigger a warning of possibility inability to pay debts, and the Commission would be empowered to act to determine the next step. Members were concerned about the use of the terms “reckless” and “gross negligence”, suggested that they be removed and that “reckless” should be replaced with “commercial insolvency”, which should also be defined. In answer to a Member’s question, the Department noted that the position had been clearly enunciated in case law, and the Department was reluctant to include a definition in the Bill. However, changes would be proposed to the wording. The Department agreed with the independent advisor and the South African Revenue Service that provisions for business rescue schemes were to protect the company’s own assets, not those it held for others. The advisor suggested that the sections on shareholder appraisal rights should use the word “oblige” rather than “entitle”. The Department agreed that business practitioners should be able to demand the return of books and documents.
The Department then tabled its proposals and the Committee’s recommendations for amendments. Clauses 3, 7, 8 and 9 contained technical changes. It was noted that Clause 3 wording may change if the National Treasury needed more stringent requirements, but the policy would not. The proposals for Clauses 1,10, and new clauses amending Section 22, 31, and 39, were accepted, but Members pointed out that Clause 2, referring to the right to inspect the securities register, would also need to be amended to refer to “right to inspect or copy the securities register” for consistency. The Department and Committee also agreed with new wording for Clauses 18 and 20. The changes to all other clauses, up to Clause 37, were outlined. A new proposal to amend Clause 19, by omitting the former subsection (2)(a) was also explained. Members asked that the phasing in of symbols in Clause 6 be discussed further, but were assured that the use of symbols had not presented problems elsewhere in the world. Members were also assured that transitional arrangements in respect of audits were contained in Clause 118.
Companies Amendment Bill: Proposals for amendments
The Chairperson said that the Committee had referred some issues to an independent advisor, Ms Kathy Idensohn, Senior Lecturer, Commercial Law Department, University of Cape Town. It had also received an opinion on some issues from the Department of Justice and Constitutional Development (DOJ). She tabled a document (entitled “Preliminary Advices: The Companies Amendment Bill 40 of 2010”) drafted by Ms Idensohn, who was not present, but would be attending the deliberations scheduled for Friday 18 February 2011.
She noted that Ms Idensohn furnished advice on four issues.
Reckless trading: Technical and commercial insolvency
The Chairperson noted that Ms Idensohn was of the opinion that reckless trading should refer only to commercial insolvency.
Mr Rory Voller, Director:Legal and Regulatory Services, Department of Trade and Industry, said that the Department of Trade and Industry (the Department or dti) had amended the legislation to remove technical insolvency as an offence, and to place the legislation in the sphere of commercial insolvency, where insolvency was measured by whether a company was able to pay its debts.
Dr M Ambrosini-Oriani (IFP) questioned the use of the terms “reckless” and “gross” negligence.
Mr Flip Dwinger, Director: Corporate Law, Department of Trade and Industry, said the Department had looked again at insolvent trading. Formerly, there was a prohibition on this. Now, should a company trade while technically insolvent, this would trigger a warning that the company might not be able to pay its debts, and here the Commission was empowered and allowed to determine the next step.
Mr T Harris (DA) wanted the Department to include a definition of “reckless trading”.
Dr Ambrosini-Oriani wanted the terms “reckless” and “gross” negligence either to be removed, or to be more clearly defined.
Mr J Smalle (DA) suggested the term “reckless” be replaced with a reference to “commercial insolvency”, which should be defined in the definitions. He wanted to know if companies had to perform a liquidity test and whether these had to be part of the annual statements.
Mr Dwinger replied that it was not the Department’s intention to define this in the legislation, as it had already been clearly enunciated in case law and the Department did not want that definition to be changed. The wording had to make it clear that this referred to the situation where a company was unable to pay its debts.
The Chairperson proposed that the Committee’s content specialist change the wording of the amendment, taking into account the inclusive response of the Department and the input of Ms Idensohn.
The position of regulators under business rescue schemes
Ms Idensohn indicated that the purpose of this provision was to protect the company and its own assets only, not the assets it held for others, and agreed with the South African Revenue Service’s submission to exclude, for example, action by SARS to recover taxes.
Mr Voller said that the Department agreed with this suggestion, and had amended the proposals
Shareholder appraisal rights within the context of possible commercial insolvency
Ms Idensohn indicated that the section should be amended to use the word “oblige” rather than “entitle”.
The power of business practitioners to demand the return of books and documents belonging to the company.
Mr Dwinger said he did not disagree with the view expressed by Ms Idensohn, but that it was reasonable to have this as a requirement.
Department’s Proposals for Consideration & Committee’s Recommendations for Amendments to the Companies Amendment Bill (B40-2010).
The Committee then moved to consider the two documents together.
In relation to Clause 1, the proposals of the Department were accepted.
Mr Johan Strydon, Legal Advisor, Department of Trade and Industry, noted that for Clause 2, the amendment proposed by the Department omitted what had originally been lines 20-25, so as not to punish other companies within a group of companies.
Mr Strydom advised the Committee that there would still be further technical changes to Clause 3. These would, for example, correct wrong cross referencing, but there would not be policy changes.
Mr Voller said that if the Department of Finance or the Treasury needed more stringent requirements, they would inform the Department of this.
Mr Strydom said that additional legislation would be added in later.
Mr Smalle was concerned about the phasing-in of symbols over a three year period. He wanted this clause flagged for further discussion, because he wanted assurance that there would be no problems of incompatible systems between South Africa’s system and the extensively used SWIFT system.
Mr Voller replied that everybody would be affected by the three year period. With regard to the SWIFT system, he said the Department was liaising with its counterparts in the United Kingdom, where symbols had been in use already, and it was clear that there were no problems with the systems reading the symbols.
Mr Voller then responded to a question about hyphens in company names, saying that under Section 11(4) the Minister might prescribe that additional commonly-recognised symbols be added to the list.
The Department and Committee agreed to a grammatical correction
Mr Strydom pointed out the replacement of the term “body corporate” with the term “juristic person”
Mr Strydom said that the amendment noted was purely one that affected the phrasing, and not the substance of the clause.
Mr Strydom noted that it was suggested that new subclauses 1(b)(iii) and (3)(b) be added. The Committee had deliberated on the issue earlier on when discussing Ms Idensohn’s document.
Mr Strydom noted the addition of a new clause, dealing with reckless business, amending Section 22. This new clause should be read together with the original wording of the Bill, and the Committee’s Recommendations for Amendment.
A further new clause, amending Section 31, provided that it would be an offence not to provide access to records that a person had a right to inspect or copy.
Mr Harris said that Section 2 of the Amendment Bill read “has a right to inspect the securities register”, which did not establish the right to copy. He suggested that this also needed to be amended to read “has a right to inspect or copy the securities register”
Mr Voller agreed.
The Department and Committee agreed on the wording of this as contained in the documents.
Mr Strydom noted that subsection (2)(a) was to be omitted and replaced with new wording. This proposal had not been included in the earlier presentation, dealing with the instance where all securities of a company were held by its directors, which would exempt it from being audited. There were exceptions to this, as well as new insertions giving the Minister the power to make regulations regarding the duties of persons conducting reviews, and also giving the Minister power to accredit professions whose members would be qualified to conduct the reviews.
Mr Harris asked about the transitional arrangements for audit requirements.
Mr Voller replied that these were contained in Clause 118.
Mr Strydom noted that this clause now provided for the deletion of subsections (6) and (7) from the principal Act.
The Department and Committee accepted the wording of this clause.
Mr Dwinger said that the Department had not responded to the recommendation. He noted that the Committee’s advisor had said the 60 day grace period was a desirable addition.
It was noted that another new clause was to be inserted before Clause 25. This bore reference to Section 39 and was aimed at improving the grammar.
It was pointed out that this clause had been proposed to give effect to the intention of the Department to stop asset stripping of a company.
Mr Dwinger said Section 45 loans and financial assets to directors had to be fair and reasonable to the company. The company should not suffer.
Mr Strydom pointed to a new insertion after line 7, regarding redeemable securities. He distinguished these from shares.
Mr Dwinger said Section 62 provided that notices for an Annual General Meeting (AGM) had to include a summary of the financial statements. The amendment now proposed allowed for either the full financial statements or a summary. He pointed out that getting the statements summarised would be an added expense.
The Chairperson noted that deliberations would continue in the next meeting, from Clause 40 onwards.
The meeting was adjourned
- Further Preliminary Advice: Companies Amendment Bill 40 of 2010
- Preliminary Advice: Companies Amendment Bill 40 of 2010
- Committee’s Recommendations for Amendments to the Companies Amendment Bill
- Additional Amendments Outside the Scope of the Bill
- Department of Justice Legal Opinion: Section 69 & Clause 83 of Companies Amendment Bill 2010
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