Companies Amendment Bill: NCOP briefing & voting

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Meeting Summary

The Committee was briefed by the Department of Trade and Industry on the Companies Amendment Bill B40B-2010 as adopted by the National Assembly on 15 March 2011. The Department gave a brief historical background to the Amendment Bill and placed it within the context of the Principal Act. Providing an efficient regulatory environment for business that had certainty, was an important function of the Department. Extending the implementation date would not provide certainty to the market. The amendments would bring legislation up to date with current practices. The Department had taken the opportunity afforded by the extension to correct errors it had found in the Bill.

Key features of the Bill were that it would cut down on red tape. It was a flexible framework accommodating both big and small companies. The introduction of the Business Rescue Practitioner replaced the judicial process which had resulted in many companies being lost to liquidations. It tackled governance issues such as human rights, employments rights and environmental issues.

The Department commented briefly on important clauses in the Bill:
▪ Domestication of foreign companies: Would simplify registration of foreign companies seeking to register in South Africa.
▪ Powers of Business Rescue Practitioners:  Practitioners had to approach the court if it wanted to cancel contracts and stock exchange securities.
▪ Registration of external companies: Companies conducting business within the country had to register.
▪ Independent review of financial statements: Whilst not as rigorous as an audit, it would offer an assurance on the affairs of a company.
▪ Licensing of Business Rescue Practitioners: Resolved the inconsistency in sections 138(1) and 138(2). People who fell outside the regulated professions could seek a licence through application to the Companies Commission.
▪ Conversion of Par Value shares: Par value shares were being phased out. The conversion of these shares were optional not compulsory and would attract no tax. However should the rights of these shares be changed, then it would have tax implications.
▪ Registration of symbols as company names: The Department had a list of approved symbols which could be included in a registered company name. SWIFT had confirmed that any adjustments were nothing more than normal and would not result in exorbitant costs as was initially claimed. SWIFT recognised the Department’s list of symbols and even more. Business had three years to prepare for the introduction of symbols.
▪ Disqualification of directors: The exemption of owner-directors convicted of fraud from holding directorships for five years was deleted.
▪ Legislation taking precedence over the Companies Act: The Public Finance Management Act as well as the Municipal Finance Management  Act and the National Payment Systems Act (judicial management) would take precedence where it dealt with section 8 only.
▪ Trading in insolvent conditions: Section 22 prohibited reckless and fraudulent trading and trading under insolvent circumstances and made it clear that by “technical insolvency” one meant that a company was unable to pay its debts in the normal course of business. Now start-up companies who technically were trading under insolvent conditions were not affected.

State of readiness to implement the Act: None of the amendments changed the principal Act, the amendments only clarified instances in the Act. Companies had three years to incorporate symbols if necessary. The Department said that it had undergone a one year process to become ready. Over the last two weeks the new
Companies and Intellectual Property Registration Office (CIPRO) website had undergone major testing and would launch within the next few days. Extra IT support had been required for the transition to the new site. It added that the ValorIT tender had been transacted irregularly as the process had been tainted. The Department had felt duty bound to cancel the tender. The company concerned had become litigious but the Department would still deliver a service and had proceeded to upgrade the security features by signing an agreement with an existing supplier (Waymark).

Members said that it was not true that all concerns had been incorporated into the amendments. Members wanted a summary of what existing companies would need to implement by the 1 April 2011. Members wanted a postponement of the 1 April implementation date because the Act was fatally flawed hence the number of amendments. Members said CIPRO still had problems, attempts to register a company on its website had failed despite numerous attempts. Members  said people convicted of fraud should be banned for life from serving as a director. Inter company loans was an integral part of business and calling for shareholder meetings was not practical. Members feared that compliance reviews were likely to cost more, not less. Members questioned the need to have a social and ethics committee to monitor governance issues as labour already had legislation covering its needs. Members noted that NCOP consultation on the Bill had only started that morning fuelling suspicion that the NCOP was merely rubber stamping the legislation. Who appointed the Business Rescue Practitioners? Was the Income Tax Act also going to be amended? Would the Income Tax Act or the Companies Act take precedence?

A motion to accept the Bill without amendment was passed with six in favour and two against.

Meeting report

Corporate & Consumer Regulation, said that once the legislative processes had been completed and published, the Department would implement it. She said she found comfort in the extensive stages of presentation, workshops and negotiations that the Department had gone through (see accompanying document).

Key features of the Bill were that it would cut down on red tape. It was a flexible framework accommodating both big and small companies. The introduction of the Business Rescue Practitioner replaced the judicial process which  had resulted in many companies being lost to liquidations. It tackled governance issues such as human rights, employments rights and environmental issues. She noted that companies had had 24 months to prepare to implement.

She said the reason for the deferment was because business had requested it, not because the Bill needed rectification. The benefit was that it would come into effect at the same time as the Consumer Protection Act. The Department had taken the opportunity afforded by the extension to correct errors it had found in the Bill.

She commented on important clauses in the Bill:
Domestication of foreign companies: This would simplify registration of foreign companies seeking to register in South Africa.

Powers of Business Rescue Practitioners: This clarified practitioner’s powers such that practitioners had to approach the court if it wanted to cancel stock exchange contracts and securities.

Registration of external companies: If an external company conducted business within the country, it would be required to register in South Africa. Those who were only conducting meetings would not be required to register.

Independent review of financial statements: Whilst not as rigorous as an audit, it would offer assurance about the affairs of the company.

Licensing of Business Rescue Practitioners: This resolved the inconsistency in sections 138(1) and 138(2). People who fell outside the regulated professions could seek a licence through application to the Companies Commission.

Conversion of Par Value shares: Par value shares were being phased out as they served no purpose and made enforcement difficult and impractical. The conversion of these shares were optional not compulsory and would attract no tax when converted. However, should the rights of these shares be changed then it would have tax implications.
 
Registration of symbols as company names: Certain symbols could be included in a company name. The Department had a list of approved symbols. The IT systems of banks might be affected. The UK had confirmed that any adjustments were nothing more than normal and would not result in exorbitant costs as was initially claimed by banks. SWIFT recognised the Department’s list of symbols and even more (see attached document). Business such as banks had three years to prepare for the introduction of symbols.

Disqualification of directors: Owner-Directors had been exempted from the requirement that convicted fraudsters were disqualified for five years from holding directorships. This exemption had now been deleted and Owner-Directors would also be banned for five years. There had been debate on the length of the ban Constitutional investigation had shown that such should not be longer than five years.

Legislation taking precedence over the Companies Act: The Public Finance Management Act (PFMA) as well as the Municipal Finance Management Act and  the National Payment Systems Act (judicial management) would take precedence where it dealt with section 8 only.

Trading in insolvent conditions: Section 22 prohibited reckless and fraudulent trading and trading under insolvent circumstances and made it clear that by technical insolvency was meant that a company was unable to pay its debts in the normal course of business. Now start-up companies who  technically were trading under insolvent conditions were not affected.

State of readiness to implement the Act: She said nothing had changed the principal Act, the amendments only clarified instances in the Act. Companies had three years to incorporate symbols if necessary.

Discussion
Mr A Lees (DA – KwaZulu Natal) said that it was not true that all concerns had been incorporated in the amendments. He wanted a summary of what existing companies would need to do to implement by 1 April. He wanted a postponement of the implementation date of 1 April because the Act was fatally flawed, hence the number of amendments. CIPRO still had problems, he had attempted to register a company on its website yet could not log on despite numerous attempts. People convicted of fraud should have a life ban from serving as a director. Inter company loans were an integral part of business and calling for shareholder meetings was not practical. He quoted from a Business Day article claiming that compliance reviews were likely to cost more not less. Labour already had legislation covering its needs so there was no need for companies to have a social and ethics committee to monitor governance issues. Consultation with the National Council of Provinces (NCOP) had only started that morning and that was a failure. Who appointed the Business Rescue Practitioners? Referring to par value shares, he asked whether the Income Tax Act was also going to be amended. Which would take precedence, the Income Tax Act or the Companies Act?

Ms K Sinclair (COPE – Northern Cape) said he agreed with Mr Lees about the Committee only being consulted that morning as this fuelled his suspicion that the NCOP was “rubber stamping” the legislation.

On the question of inter company loans, Mr MacDonald Netshitenzhe, DTI Acting Chief Director: Policy, said that corporate governance had to be emphasized. Shareholders were owners therefore when loans had to be made it should be done in a transparent manner with shareholder involvement through the passing of a resolution. British company law had a similar provision implemented recently for loans above a threshold level.

Adv Rory Voller, DTI Director - Legal and Regulatory Services, added that resolutions could be passed which were valid for a period of two years obviating the need to meet for each and every loan. On the independent review, he said that it had been done taking into account small companies. Close corporations could be done by its accounting officer, therefore there was a cost reduction to business. Accreditation of Business Practitioners was through a professional body such as a law society or by applying to be licensed by the Companies Commission.

Mr Netshitenzhe said that SARS and the Treasury had been approached concerning par value shares and they were comfortable with the amendments.

Adv Flip Dwinger, Legal Services: CIPRO, said that business had to do nothing by 1 April to be in compliance. Business had two years to change its Memorandum of Incorporation (MOI) if anything was in conflict or to adopt a standard new one.  He explained that the inclusion of social and ethics committees was at the request of Cosatu.

Mr Netshitenzhe said that the Department would conduct education and awareness campaigns amongst its stakeholders.

On trading while technically insolvent, Adv Dwinger said that the prohibition to trade had been removed and replaced by a clause about trading while technically insolvent acting as a trigger to red flag a company.

Concerning CIPRO, Adv Voller said that it had undergone a one year process to become ready. Over the last two weeks the new website had undergone major testing and would launch within the next few days. Extra IT support had been required for the transition to the new site.

Ms Ntuli said that while a two year period was given to fulfil the obligations of the new Act, the benefits accrued immediately. She said the social and ethics committee was not a requirement for all companies. The Department had done a skills audit and had retained personnel to be ready to implement the Act. The Commission would be a monitoring tool to bridge the gap between company law and insolvency matters.

Mr October said the ValorIT tender had been transacted irregularly as the process had been tainted. The Department had felt duty bound to cancel the tender. The company concerned had become litigious but the Department would still deliver a service and had proceeded to maintain and upgrade the security features by signing an agreement with an existing supplier (Waymark). It was proceeding against ValorIT to recover monies paid. Currently about 25% of the work had been done. A new IT system would be done only after an evaluation. He said that there had to be certainty in the regulatory environment. Pushing back the date would not provide that certainty.

Mr Lees said currently, companies reported annually on insolvency, the Commission would not know if a company was insolvent in the interim period.

Ms Ntuli said an employee could approach the Commission, the Commission could send a compliance notice to the company to verify that it could pay its debts otherwise it had to stop trading.

Mr Lees, seconded by Ms B Abrahams (DA – Gauteng), proposed an amendment to extend the implementation date by two months and that convicted fraudsters be banned for life from serving as a director.

Mr F Adams (ANC – Western Cape), seconded by Mr A Nyambi (Mpumalanga), proposed a motion rejecting the amendment. This motion was carried.

A motion to accept the Bill without amendment was passed with six in favour and two against.

Mr Lees said that notwithstanding his party’s objections to the Bill, he wanted to acknowledge and thank the Department for the work that they had done.

The meeting was adjourned.

Appendix 1
Key Issues in Companies Amendment Bill Adopted National Assembly on Tuesday 15 March 2011
Joan Fubbs (ANC) Chairperson of the PC on Trade & Industry
 
Honourable Speaker,
Honourable Members of this House
Colleagues and Compatriots
People of South Africa
 
1        Today, before this Honourable House, is a piece of legislation that truly seeks to transform the economic & structural imbalances. This is only the third Companies Act (2008) soon to be joined by its sister the Companies Amendment Act, since 1926 and 1971.
 
2        Mr Speaker we also note that the 2008 Act has not yet been implemented as the ANC led government in its wisdom heard the reasonable voices of our countrymen and women in business small, medium and large enough to be considered conglomerations. We have searched for that balance that takes into account the small business, that generates significant jobs and the captains of large companies including internationally ranking finance houses among them our big four banks.
 
3        For the first time in South Africa, companies whether small, medium or large will with their employees, their creditors, and their shareholders all benefit from a balanced, fair and reasonable approach. This will enable companies technically insolvent but commercially solvent to continue trading. That is those companies able to pay their day to day operational expenditure and meet their
debts as they become due and payable will be allowed to continue operating.
 
4        This is found in the amendment to section 22 which is now a new Clause 14.  The Committee grappled with this and eventually achieved a compromise which clarified the actual intent of the legislation. This benefits the economy in general, employees, shareholders and even creditors. A “win-win” situation is achieved.
 
5        We cannot forget that when the new Companies Act comes into effect with the amendments put before this House for adoption today it will only be the third version of this law since 1926. We listened patiently to the arguments articulated that there would be no case law for the Act and wish to advise all that legislation cannot wait for case law to be developed - that is simply putting the cart before the horse. Democracy, good governance and indeed economic and socio-political transformation demands that precedents be set occasionally and consequently related case law developed. The guiding principle is to pass appropriate legislation and not to be sidetracked from our purpose.
 
6        One of the key issues: Business Rescue finally offers companies in South Africa a constructive option and not simply and only liquidation. Companies that are basically sound and only technically insolvent will obtain the support they need to retain employees, satisfy all shareholders and maintain their commitments to their creditors. However, there has been a need to ensure responsible use of Business Rescue. Therefore cancellation of contracts has been subjected to a court process, and suspension depends on an analysis by the business rescue practitioner on the basic viability of that company to turn around and rise above its current financial difficulties. Again a “win-win” outcome is achieved. 
 
7        Furthermore, the consideration to suspend or cancel contracts is limited where these are employment contracts or contracts that would have been subject to Sections 35A or 35B under the Insolvency Act if the company had been liquidated. This will protect employees and ensure stability within the market, as contracts subject to netting arrangements will remain unaffected. (Section 136 or Clause 87, p42-43) Once again the ANC led government gives us a “win-win” victory for all concerned.
 
8        Provisions for business rescue have also been amended to ensure that the enforcement and compliance roles of regulatory authorities remain unhindered during the business rescue process. (Sections 133, 140 &142, p42 and 44-45). Indeed prudence with progress is now explicit in the provisions.
 
9        Internationally, it is now acceptable by many countries that minority shareholders should be taken into account. However, under existing legislation, in the case of a merger or an amalgamation, the minority is ignored if a 75% majority prevails. Minority shareholders were forced to accept the transaction terms supported by shareholders who seek to “cut and run” with their capital which was increased by everyone.
 
10   The 2008 Act is now amended by the Companies Amendment Act B40 (Section 164 or Clause 103) and protects minority shareholders through an “appraisal right”. This right is practised effectively in Canada and the United States among other countries in the West. So if the minority shareholders do not agree with proposed terms they will be entitled to a cash payout for their shares based on a fairly valued estimate. The ANC’s principle of equity across the socio-economic spectrum was acknowledged while recognising international practices.
 
11   In short, we have a piece of legislation that marks a decisive shift from a monopoly dominated and driven economy to a broader more inclusive and democratized economy as we strive to concretise our developmental state. This translates into ensuring minority shareholders are no longer at the mercy of the majority. Fairness, equity underpins rights and responsibilities.  “Win-Win” again.
 
12   One issue our country cannot afford is: “reckless trading”. No country can, as the United States of America learned with the reverberating “sub-prime” damage, which engulfed the industrialised economies of the West and threatened the livelihoods of the developing world’s peoples. Our Eminent Commercial Law Consultant, Ms Idensohn, put it this way: “Companies should be expressly prohibited from trading recklessly or with gross negligence” she went on to equate this with fraudulent business activities and/or intent.
 
13   A person who has a beneficial interest but also a person not contemplated has the right under the amendment of Section 26 to inspect or copy the securities register of a profit company or the members register of a non-profit company upon the payment of a fee. Implicit in this Bill before the House today is the need for government wide economic planning, and implementation that will align policies and so achieve the objectives set out in the economic transformation resolutions that are needed in our country led by the ANC.
 
14   It would be remiss of me not to mention the submissions made both during public hearings and in writing and even in external multi-party engagements with stakeholders over a three month period. Further the Portfolio Committee engaged an expert in company law presently employed by the University of Cape Town, Ms Kathy Idensohn, and also business practitioner, Mr Jay Pema, with company experience in small and large businesses ranging from financial to organisational management. This gave technical and professional specialist expertise to the members of the Committee in their exercise of oversight and during deliberations. It also recognises the different roles of the executive and the legislature.
 
15   The enactment of this Bill obligates DTI to ensure that small and emerging businesses, yes, also medium companies understand the full benefits and later ensure that accessible booklets are written. Clearly then sufficient capacity in our developmental State is called for and we have been re-assured that the Minister and his Department will roll-out the capacity to implement the legislation.
 
16   Symbols that pose a problem will only be operational in three years from the commencement of the proclaimed Act (2014.) (Section 225 or Clause 121) (p52)
 
17   The intention around par value (a minimum fixed value when a share is first issued) given shares is now clearly spelt out, as the amendment ensures that it remains an optional conversion with no additional tax implications. However, no further par value share may be issued. (Item 6 of Schedule 5) (pg55).
 
18   Directors or potential directors found guilty of acts of dishonesty will have to wait five years after their sentence has been served before being able to act as a director. However, the provision that enabled a disqualified person to serve as a director in a private company if all of the shares of that company are held by that disqualified person alone or by himself and related persons has been removed. This balances the need to protect society who may on application to the courts have this five year period even extended, but also recognises the letter and spirit of our Constitution and Bill of Rights that acknowledges the process of rehabilitation and effective re-integration into the community and society at large. (Section 69 of the principal Act).
 
19   This country, its peoples, industrialists, companies, and the financial sector know only too well that the economic structural imbalances must be robustly addressed. Skilled employment, synchronisation of the financial sector, the revived industrial sector and the small and medium companies where the most jobs are generated is going to directly benefit from this Bill. Profit maximisation will shift in a manner that leaves policy space for all stakeholders in our economy.
 
20   As Chairperson of the Portfolio Committee on Trade and Industry, I would like to thank all PC Trade & Industry, support staff, and committee members for their robust deliberations, DTI for their co-operative engagement. Personally, I would like to thank the Minister, Dr Rob Davies, the Acting DG, Mr Lionel October, and the DDG, Ms Zodwa Ntuli, for having been accessible. Indeed my earnest appreciation goes to the Whip of our Committee Hon Bheki Radebe for his political acumen. The multi-party committee did not always agree but rigorous engagement has resulted in a robust piece of proposed legislation which the African National Congress fully supports.
 
21   I would like to urge that all parties put the greater good of society first and remember our country’s reputation and robust financial and economic stability. The world is waiting for this crafted and amended company legislation. Indeed our own people, including captains of industry and small business need it. Do not fail them.
 
 
Joanmariae Fubbs (ANC)
CHAIRPERSON PORTFOLIO COMMITTEE OF TRADE & INDUSTRY
(021) 403-3224 CELL: 083-6003693


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