Corporate Laws Amendment Bill; Export Credit and Foreign Investments Insurance Bill: briefing

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
29 July 2002
CORPORATE LAWS AMENDMENT BILL; EXPORT CREDIT AND FOREIGN INVESTMENTS INSURANCE BILL: BRIEFING

Chairperson

Corporate Laws Amendment Bill
Export Credit and Foreign Investments Insurance Bill [B29-2002] (document will be available here shortly)
Export Credit and Foreign Investments Insurance Act, 78 of 1957, as amended

SUMMARY
The briefing on the Export Credit and Foreign Investments Insurance Bill dealt with the consequential amendments proposed by Clauses 1, 2, 4 and 6. The reason for indemnifying no more than 90% of the total cost of the contract in Clause 3 was explained, as well as the proposed repeal of Section 8 of the principal Act by Clause 5 of the Bill. Clause 7 introduces the possible retrospective operation of the Bill.

The discussion on this briefing highlighted concerns with how and where the retrospectivity issue would be incorporated into the Bill, and the cost-implications of the proposed amendments, should they be adopted. The Industrial Development Corporation stated that the Bill was needed to secure an optimal return on taxpayer's money.

The briefing on the Corporate Laws Amendment Bill dealt with the need to move from the current revenue stamp-based mode of payment for Companies and Intellectual Property Registration Office (CIPRO) services, and to a fully computerised format, as well as the need to establish an independent account for CIPRO. The Corporate Laws Amendment Bill also introduces a comprehensive and free name search to be employed by applicants, and is aimed as avoiding passing-off infringements; calls for the review of fees for creating authorised share capital via regulations, and reintroduces annual returns for companies.

The discussion on this briefing highlighted concerns with the capacity of CIPRO to properly assess annual returns, and additional information regarding the name search was requested. The sanctions imposed by the Corporate Laws Amendment Bill on dormant companies who fail to submit annual returns was discussed, and the regularity of submission of annual reports was discussed.

MINUTES
Briefing on Export Credit and Foreign Investments Insurance Bill

Clause 1
Mr Johan Strydom: Senior Legal Advisor to the Department of Trade and Industry, informed Members that the only amendments made to Section1 in the Export Credit and Foreign Investments Insurance Act 78 of 1957 (the principle Act) by the Export Credit and Foreign Investments Insurance Bill [B29-2002] (the Bill) are the deletion of the terms "contract of insurance" and "Export Credit Agency, the insertion of the word "buyer" in the current definition of "Corporation", and the insertion of "person" in the definition of "policy of insurance".

Clause 2
This clause now provides that the Minister of Trade and Industry (the Minister) must conclude an agreement with the Export Credit Agency regarding the terms of the agreement of insurance. Members should also note that the "in" incorporated in the square brackets in the proposed Clause 2(b) of the Bill, should properly be placed outside those brackets. Clause 2(b) also substitutes the term "Corporation" with the "Export Credit Agency".

Clause 3
Mr Matee: Export Credit Insurance Office, informed Members that the reason for this proposed amendment lies in the fact that the standard practice is not to indemnify the full 100% of the loss on the contract, and the current formulation of Section 3 of the principal Act does not pose any problems as long as it receives at least 10% up-front from the foreign buyer, or the foreign buyer assumes 10% of the risk. A problem does however arise when 90% of the loss is financed by the institution, who then in turn requests to be indemnified for the full 90%.

Section 3 has is thus amended by Clause 3 of the Bill to now provide that the maximum sum insured in terms of any policy of insurance cannot exceed 90% of the total value of the contract. This essentially places the bank in the same position as an exporter.

Clause 4
Mr Strydom noted that this clause contains only consequential amendments regarding the substitution of the terms "policy" and "Corporation" with "contract" and "Export Credit Agency" respectively.

Clause 5
This clause aims to repeal Section 8 of the principal Act in its entirety, which deals with the position of those officials within the Department responsible for administering the provisions of the principal Act. The proposed amendment establishes that Export Credit Agency as a juristic person and its employees do not fall within the ambit of the Public Service Act, as far as their capacity and remuneration is concerned. Instead, these terms and conditions of employment will be detailed in the Articles and Memorandum of Association of the Export Credit Agency itself.

Clause 6
Only consequential amendments are proposed to the corresponding provision in the principal Act.

Clause 7
This is an important provision, and Members will note that no reference is made to the Presidential proclamation. This means that should Parliament adopt the Bill and the President then assent to it, it would become law and once published in the Government Gazette, it would become operative or commence immediately.

The problem then arises that a lacuna could very well be created during the interim period from 2 July 2001 till the date upon which the Bill comes into operation. This is especially significant if one considers that the stakes and interests involved in this industry are very high, and the possible prejudice to be caused to interested parties has to be seriously considered. There is thus a need to consider possible retrospective operation of the Bill and, although there may be reluctance and hesitancy regarding this route, this particular piece of legislation could very well be the case where the consequences of enacting the proposed amendments would only be advantageous.

Discussion
The Chair contended that this Committee wants to avoid the creation of the undesirable situation in which the Minister's decision-making powers enter into the realm of direct micro-management in this area. The State Law Advisors should also be present at these meetings, as one expects important issues such as retrospectivity to have been identified by them at an early stage.

Furthermore, should Section 8 of the principal Act be repealed, the Bill would be entering into the realm of corporate governance of the Export Credit Insurance Agency. Mr Strydom did mention that these aspects would be detailed in the Articles and Memorandum of Association of the Export Credit Insurance Agency, and in this regard it would be most useful to make copies of those documents available to Members so that they can be satisfied that the new proposed dispensation does not unfairly prejudice or disadvantage employees.

Clarity is also requested as to how and where the retrospectivity aspect would be incorporated into the Bill.

Mr Strydom replied that the retrospectivity aspect would be incorporated in Clause 7 of the Bill, which would provide that the Bill would come into operation on 2 July 2001.

Mr Kriek, from the Industrial Development Corporation (IDC), stated that the amendments proposed by the Bill are especially important as far as its timing is concerned, as the proposed arrangement would save the taxpayer significant amounts of cash. The Mozal project uses foreign exchange currency to export goods from South Africa, and the cost-savings on this arrangement are significant. The second phase of this arrangement should be completed by the end of August 2002, and the funders have allowed the drawdown to continue till the end of that month. The IDC would, however, default on the contract with its funders should the new dispensation proposed by the Bill not be approved by Parliament. Should it not be approved, the traditional Rand-based dispensation would have to be returned to and, as mentioned earlier, this would have serious cost-implications on the South African taxpayer.

The Chair informed Mr Kriek that the Bill could, at the earliest, be finalised by the end of August.

Mr Kriek replied that this would be appreciated.

Ms C September (ANC) requested clarity regarding the cost-implications should the proposed amendments not be accepted.

Mr Kriek replied that he is unable to furnish the specifics, but the costs would run into the hundreds of millions of rands should the rands-based costing scheme be returned to, and this would in turn significantly increase the subsidy scheme.

The Chair contended that the input of the State Law Advisors is needed in this regard, as well as the Articles and Memorandum of Association of the Export Credit Insurance Agency as far as Section 8 of the principal Act is concerned, as well as on the retrospectivity issue.

Dr Pat Kohlo, CEO of the Export Credit Insurance Agency, informed Members that the word "limited" has been omitted from the definition of "Corporation" in Clause 1(b) of the Bill, and should actually be included in that definition.

Briefing on Corporate Law Amendment Bill
Adv Flip Dwinger, Deputy Director: Companies and Intellectual Property Registration Office (CIPRO), informed Members that CIPRO has been operating as a trading entity within the Department since 1 April 2002, provided that it is able to cover its operational costs within the next two years from funds generated by it.

CIPRO has not been able to upgrade its fees dispensation since 1989 but, with the full computerisation currently underway at CIPRO, this will be achieved. The intention here is not to yield a profit to CIPRO, but rather to raise sufficient capital to cover its operational costs.

CIPRO's primary shortfall lies in the manner of payment rendered for its services, which are then currently being done via revenue stamps and then channeled into the State Revenue Fund. The problem here is that CIPRO experiences great difficulty in retrieving cash from this fund, and has thus been granted a two year period by the National Treasury to amend legislation that would enable CIPRO to store funds procured for services rendered in its own account. This is the aim of the Corporate Laws Amendment Bill.

The Corporate Laws Amendment Bill also seeks to address the following matters. Firstly, the current name registration system is being abused by people who submit names which they know would, if registered, infringe and prejudice the trading rights of existing businesses. CIPRO has thus made a sophisticated name search facility available on Internet where potential business people can do a name search, free of charge, prior to lodging an application. In this regard, all efforts are being made to ensure this service is made available to all South Africans, and those in the rural areas especially. The South African Post Office's Public Information Terminals (PIT) will prove vital in this regard.

Secondly, the current fee for creating authorised capital is prescribed in the Companies Act, and has not been revised since 1989. A more flexible manner by which fees of this nature are adjusted is needed, and it is therefore proposed that this be done via regulation by the relevant Minister.

Thirdly, annual returns for companies were abolished in 1986, and the unfortunate result was that the integrity of the database of information on companies suffered. CIPRO has to update its databases as the information contained therein is of the utmost importance, especially in the modern electronic environment.

Discussion
Mr S Rasmeni (ANC) requested additional clarification regarding the name searches.

Adv Dwinger responded that the search allows applicants to reserve a name that is not readily identifiable or phonetically similar to an existing name, and the current Act does not require the applicant to pay for the search, only for the eventual registration. The result is that great difficulty is experienced in dealing with the volume of applications. The new dispensation would not adversely affect the capital costing because the same number of applications for registration of names per day, and would render the entire process much more efficient.

The primary problem in this regard is that names similar to established names are being registered, and the new dispensation allows potential applicants to conduct a thorough search of the existing database free of charge, so that any clashing may be identified and avoided before any money changes hands.

The Chair contended that the reintroduction of annual returns is sound in principle, but questioned the present capacity of CIPRO to properly assess this documentation and inquired whether the documentation and results would then be made available for public scrutiny.

Mr Kriek responded that the annual reports are the only means by which CIPRO can "upkeep its data", and the latest South African Revenue Service (SARS) figures indicate that CIPRO generates R8,8m per annum from registration costs. The present dispensation is a "huge paper factory" which has to be upgraded as a matter of urgency.

These documents and results would definitely be open to the public, and a structure is being devised which allows applications to be lodged electronically.

Secondly, the Chair stated that there have to be quite a number of companies that are currently dormant, but have not formally deregistered. The legislation currently provides that such companies are guilty of an offence for not submitting their annual returns, but it is suggested that instead of prosecuting such companies CIPRO should automatically deregister such companies. This would also prove a great incentive for those companies to submit their annual returns.

Mr Kriek replied that the current practise is to forward correspondence to the registered head office or place of business of the company as well as its directors and managerial component to inform them of the violation, and they are then allowed a certain period of time within which to reply and oppose the institution of legal proceedings by CIPRO. Thus legal remedies are not resorted to immediately, and this would also rid the CIPRO database of "dead wood", which currently amounts to approximately 400 000 such companies.

A penalty is also built into Section 4(4)(i) of the principal Act, which provides that offending companies can be prosecuted.

Thirdly, clarity is requested as to when the Corporate Laws Amendment Bill will be tabled.

Mr Strydom responded that it should be published by the week's end.

Ms September (ANC) agreed that the financing aspect of the Corporate Laws Amendment Bill has to be amended, but questioned whether that Bill should not properly by overhauled in its entirety.

Adv Dwinger replied that the Department is currently engaged in an overhaul of the South African corporate law, and aims, in policy, to modernise the existing Companies Act.

Secondly, Ms September stated that the proposed amendments, as laudable as they are regarding their encouraging of proliferation of businesses, have to be balanced against the unforeseen circumstances which could very well discourage such proliferation instead of encouraging it.

Adv Dwinger replied that this very aim of the Corporate Laws Amendment Bill is to open up the economy. The current dispensation requires the application to be lodged in Pretoria, and the Corporate Laws Amendment Bill seeks to upgrade this process by allowing documentation to be lodged and paid for electronically. This would open up the economy, and in this regard the PIT's would be vital in providing this service to the entire country.

Dr J Benjamin (ANC) requested clarity on who exactly benefits from the proposed amendments, or is this another mechanism that makes it even more difficult for companies to operate.

Adv Dwinger responded that the principle operating here is that the taxpayer's money would not be used to subsidise South African business across the board, and all the fees paid would be properly reviewed.

Secondly, Dr Benjamin inquired whether it is entirely necessary to require companies to submit the annual returns every year, and whether it would not be preferable for companies to submit these on a once-off basis.

Adv Dwinger replied that updated and accurate information on the company is vital, and this includes its name, trading identity and number, information on its directors, management and capital structures and its postal, business and e-mail addresses. All this would be supplied in the annual returns, and there is thus a clear need to submit these regularly. This information would be used to compile an accurate and up-to-date database on South African companies and close corporations.

Ms B Solo (ANC) contended that should the applicants themselves conduct the name search and not be allowed to register they would then have to enlist the services of an attorney to register their trading name, and this could pose a problem for the smaller business person.

The Chair stated that additional information regarding CIPRO's fee policy is required, and should also perhaps indicate the authorised share capital of the company.

Adv Dwinger replied that this is presently detailed in the Companies Act, but that dispensation is in need of review and an upgrade. The Corporate Laws Amendment Bill does create certainty regarding the possible increase or decrease of fees in this regard.

Secondly, the Chair contended that it is not clear who exactly was consulted in drafting the Corporate Laws Amendment Bill, and all interested parties have to be granted the opportunity to comment on this piece of legislation.

Adv Dwinger responded that the Department has consulted the National Treasury and SARS, to a large extent, as well as all relevant stakeholders and agents. All those consulted fully supported the new dispensation proposed by the Corporate Laws Amendment Bill.

Thirdly, the Chair stated that the issue of corporate governance in this matter is critical, especially in view of the recent developments in the ENRON case in the United States.

There were no further questions or comments and the meeting was adjourned.

Appendix 1:
PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY
BRIEFING NOTES:
CORPORATE LAWS AMENDMENT BILL, 2002

1. The Companies and Close Corporations Registration Offices and the Patents and Trademarks Registration Offices have been amalgamated into a single office styled ClPRO (acronym for Companies and Intellectual Property Registration Office). With effect from 1 April 2002 CIPRO has, with the approval of the National Treasury, been converted into a trading entity, within the dti, under the Public Finance Management Act, 1999 (Act I of 1999), on condition that CIPRO covers its operational costs within the next two years from funds generated for services rendered by it.

2. The current fees charged for services rendered by CIPRO have since 1989 not been upgraded due to a lack of bettering service delivery in respect of the relevant services. With the full computerisation, which is underway within CIPRO, the fee structure can and will be fully revisited to make it fully market related and covering the real cost of each service rendered. It is and will not be the intention to make a profit but merely to cover the cost of operations.

3. The real problem lies in the manner of payment for CIPRO services. Currently payment is done by way of affixing revenue stamps to documents and applications for services. These moneys go directly into the State Revenue Fund and it is virtually impossible to retrieve the money from this fund. The National Treasury, in consultation with SARS, has approved that CIPRO be given 2 years to amend legislation and structures to enable CIPRO to put systems into place collect the money for services rendered for its own account. The amendments to the Companies and Close Corporations Acts aim to make this possible, leaving the Registrar sufficient flexibility to allow or apply market related manners of payment bearing in mind proper security in respect of getting the money owed.

4. Certain related matters are also addressed in the Bill:

· Name searches: The current position is that payment for a name reservation is only due upon actual reservation. This system is grossly abused by people submitting names that they actually know that cannot be allowed without entrenching the rights of existing businesses, the so called "passing off" or riding on the back of an established trade mark or business name. CIPRO has put a sophisticated name search facility on the Web where potential business people can do a very user-friendly name search prior to lodgement for an application free of any charge. CIPRO also has a help desk to advise and assist people in choosing a name which should not cause them future problems. This amendment will reduce the current abuse but will also help the business fraternity, formal and informal, to get a name reservation done with the minimum of effort as CIPRO intends making the electronic service available country wide at Post Office PIT terminals and all other distribution points which are available.

·

Section 63 fee for creation of authorised capital: The current fee for creating authorised capital is prescribed in the Companies Act as R5 per 1000 shares of a nominal value or R5 per 1000 shares of no par value. As this fee is entrenched in the Companies Act it has not been revised since 1989, and the need exists for a more flexible way of adjusting a fee of this nature. It is, therefore, proposed that the fee be in future determined by regulation by the relevant Minister, as all prescribed fees are handled.

· Re-introduction of an annual return: Annual returns in respect of companies were abolished in 1986 due to incapacity to deal with them. The result was that the database on reliable information contained in respect of companies suffered in respect of the integrity of the information contained therein. Reliable information contained in databases has become of utmost importance in the modern electronic environment and CIPRO needs to upgrade the integrity of its information. This will apply to both companies and close corporations. The benefit will be up to date corporate information which will soon be electronically available worldwide and a constant source of income for CIPRO as a nominal fee will be payable to upgrade the information. This type of information is of utmost importance for investors and creditors and can only benefit the South African economy as a whole. The ultimate intention is to create a data base gateway or starting point for all corporate entities.