Companies Amendment Bill: briefing and adoption

Meeting report

ECONOMIC AND FOREIGN AFFAIRS SELECT COMMITTEE
31 August 2004
COMPANIES AMENDMENT BILL: BRIEFING AND ADOPTION

Chairperson: Ms N Ntwanambi (ANC)

Document handed out:
Companies Amendment Bill [B10-2004]
Companies Amendment Bill (B10A-2004)

SUMMARY
The Department of Trade and Industry briefed the Committee on the Companies Amendment Bill. The Bill seeks to make it clear that a court may not remove the name of a person from a register of members of a company unless the name was entered through fraud or illegality. It also seeks to enhance the principle of good governance by amending section 218 of the Companies Act of 1973. The Committee adopted the Bill.

MINUTES
The Department of Trade and Industry briefed the Committee on Companies Amendment Bill. Mr M Moeletsi, (Deputy Director-General) Mr J Strydom (Mr M Netshitenzhe (Director: DTI) represented the Department.

Mr Strydom took the Committee through the Bill. He noted that the Committee had had exhaustive discussion on clauses 3,4 and 5. There were still some problems on clause 2.

The Chairperson asked the presenter to deal with issues that were not resolved in the previous meeting.

Clause 2 Amendment of section 91A of Act 61 of 1973, as inserted by s 1 of Act 60 of 1998
Mr Strydom said that there was a lengthy debate on the meaning of this clause in the Portfolio Committee of Trade and Industry. If one reads the clause in isolation one would conclude that the clause is unfair. A whole range of transactions involving a large number of people might take place in respect of the securities within a short period of time. A sale of securities transaction might take place between A and B. B would be the transferee and therefore the new owner of the securities. Assuming that there was a dishonest intermediary involved in the transactions and there was some illegality or fraud pertaining to the transfer of the securities and the intermediary had knowledge of the fraud or illegality, the person who was initially dispossessed of the shares or securities would, in the normal course of the law, be entitled to vindicate them. The proposed provision would respect B as the lawful owner or holder of the securities. Hence the provision seems unfair.

The question is why would the law respect a transaction tainted by fraud. The reason is to protect the integrity of STRATE (Share Transaction Totally Electronic) system. The system provides for dealing in securities electronically.

In terms of the Bill vindication of the shares or securities would no longer be allowed. The person dispossessed of the securities would be entitled to claim his or her money from the intermediary or broker. Apart from this a fund operating like an insurance fund has also been established for persons in this kind of situation. There would be chaos in the trading of uncertificated securities if a dispossessed person was allowed to vindicate them.

It was important to point out that fraud is almost non-existent in relation to this kind of transaction. However, the amendment is important to protect the integrity of the system of dealing with securities. The market operates on the basis of perceptions rather than reality. There would be major problems should a person be entitled to vindicate securities from a number of people.

The principle contained in clause 2 already exists in the form of section 91A(4)(c). A transferee who was a party to or had notice of the fraud or illegality may not rely on section 91A(4)(c). In this case the person who sold the securities would be in a position to vindicate the securities. In terms of section 115 of the Companies Act a person may, on just cause shown, apply to the court for rectification of the register of members of a company. The effect of the rectification order would be to reverse the transaction. This is what clause 2 seeks to prohibit.

The Chairperson asked who would pay should a person lose his or her securities.

Mr K Sinclaire (NNP) asked if the security fund is the same as the fidelity fund for attorneys. He noted that the presenter pointed out that fraud was not common practice in relation to the trading in uncertificated securities. He asked if fraud really occurred in practice.

Mr D Gamede asked if knowledge of fraud or illegality is based on conviction or mere suspicion. He also asked what would be considered a just cause for the purposes of section 115. The question is whether it is sufficient for an applicant to say that something that should not have happened has happened and provides evidence in support of the claim.

Responding to questions by both Ms Ntwanambi and Mr Sinclaire, Mr Netshitenzhe said that banks such as Absa and First National Bank formed the Banking Council. Each bank contributes something to insure for any eventuality. He agreed that fraud or any such eventualities do not commonly take but because one is dealing with market perception there was a need to cater for this. Very few claims have been lodged. There would be havoc in the market if transactions were reversed on just cause shown. So there was a need to close this loophole.

Mr M Moeletsi added that electronic transactions are very liquid. A number of people might trade in the same share within a short period of time and it would be difficult to know who to pursue if one wants to vindicate the shares. The protection is necessary so as to encourage foreign investors to come into the country. It is true that fraud is not common practice but before one comes into the country, the first question to ask would be what kind of protection exists in the event of something happening.

Mr Netshitenzhe added that the Bill seeks to tamper with the principle of rei vindicatio.

Mr D Gamede asked if knowledge of fraud or illegality is based on conviction or mere suspicion. He also asked what would be considered a just cause for the purposes of section 115. The question is whether it is sufficient for an applicant to say that something that should not have happened has happened and provides evidence in support of the claim.

Mr Strydom replied by way of an example. A is the seller of the shares and C is the transferee. B, an intermediary, was also involved in the transaction. Assuming some kind of illegality or fraud between B and C, A would be entitled to vindicate shares from C because C fell foul of section 91A (4)(c) by being party to the illegality or fraud. The law would not tamper with this position. Another possibility would be that B perpetrated the fraud and C had no knowledge of it. Ordinarily A would, on the basis of section 115, be in a position to seek the reversal of the transaction if he or she shows just cause to do. The name of C would be removed from the register of members and be substituted by that of the lawful owner. This provision would protect C for the sake of the integrity of the system and because there are insurance mechanisms in place to compensate A. The law would respect the transaction irrespective of the fraud or illegality. The Bill would protect only those who were not party to or had no notice of the fraud or illegality.

Mr Sinclaire said that it is good to have the fund. He asked who is responsible for managing the fund.

Mr Netshitenzhe replied that STRATE [Share Transaction Totally Electronic] (Pty) Limited manages the fund.

Mr Strydom added that there is in great integrity in the system and the occurrence of fraud is very negligible. The market system functions on the basis of perception and sentiments hence the need for legislation. Should that rare instance of fraud happens then there would be certainty as to what would happen to the shares.

Clause 3 Amendment of section 218 of Act 61 of 1973, as amended by section 17 of Act 59 of 1978 and section 24 of Act 132 of 1993
Mr Strydom said that questions have been asked why there is a penalty of imprisonment without the option of a fine or to a fine exceeding one hundred rand in section 218 of the Companies Act. The Adjustment of Fines Act, 101 of 1991 provides for the adjustment of the monetary side of penalties in the form of fines so as to keep in touch with inflation. The Act does not apply to section 218 of the Companies Act. The one hundred rand referred to in section 218 is a threshold and not the actual fine. If one raises the threshold the scope of the exclusion would be decreased. If, for instance, the threshold was raised to one thousand rand then a person sentenced to a fine of five hundred rand would still qualify to serve as a director.

Clause 5 Substitution of certain expressions in Act 61 of 1973
This clause deals with the substitution of expressions in the current Act that have become obsolete. For instance, "Attorney General" would be replaced by "Director of Public Prosecutions" and "Supreme Court" by "High Court. The presenter proposed an amendment to clause 5(a). The words "the arrangement of sections opposite section 401, and in" should be deleted.

Mr D Mkono (ANC) said that the Department of Trade and Industry had indicated that some amendments would be effected to the current Bill. He asked when the Committee would have an updated copy of the Bill. The Bill was introduced in order to ensure that there would be good governance, investors would be encouraged to invest in South Africa and that people on the grass roots level would also benefit. He asked if there was any clause in the Bill that would promote these objectives. There might be problems when an owner of a company is arrested for infringing provisions of the Companies Act and the company subsequently liquidated. He asked if there is any provision in the Bill that would ensure that employees of the company do not lose their jobs. He also asked how the Department would make sure that people at grass-root level benefit from the Stock Exchange.

The Chairperson said that it would be preferable to have stakeholders of the Department, like the Johannesburg Stock Exchange, to brief the Committee on their activities.

Mr Strydom replied that the real reason why the Department wants to ensure that there is integrity in the market place is to ensure that more people become involved.

Mr Moeletsi added that the Department did not make the Stock Exchange presentation. The Committee was at liberty to invite the same presenters and the Department would offer assistance in locating them. The National Treasury would be better suited to explain how ordinary people would benefit.

He said the Department was busy with consultation on the Company Law Policy. There would be a broader law reform that would result in the repealing of Companies Act of 1973 and the Close Corporation Act. The Department aimed to implement the new Act in 2006.

Voting on the Bill
The Chairperson read the motion of desirability for the Bill and the Committee agreed and the Bill was adopted with amendment to clause 5(a).

Meeting adjourned