Companies Draft Bill: Workshop (continued)

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Trade and Industry

17 May 2007
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Meeting Summary

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Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
16 May 2007
COMPANIES BILL WORKSHOP (CONTINUED)

Chairperson:
Mr B Martins (ANC)

Documents handed out:
Corporate Law Reform Workshop by Department of Trade and Industry (DTI)

Audio Recording of the Meeting

SUMMARY
The Department continued with its workshop on the Companies Bill. Chapter 6 dealt with business rescue. Business rescue was one of the most important innovations in the Bill. It was developed in order to timeously save companies from insolvency. Members were also interested in the concerns that were raised by stakeholders and what the Department’s response was to such concerns. Another important aspect of the Bill was that it decriminalised company law. Generally the Bill uses a system of administrative enforcement in place of criminal sanction.

The Department is planning to host a workshop for all stakeholders on the consequences of the Business Rescue Model on the 9 June 2007. The time frames for the Bill are:
Bill updated by 31 May 2007 taking into consideration all the public comments received. Chapter 6 would be excluded from that version, as a workshop on it is still to take place 9 June 2007. From 1-30 June 2007 the updated Bill would be submitted for further comments. The Bill would be further reviewed from 1-30 July 2007. On the 15 August 2007 the Bill would be submitted to Cabinet. On the 31 August 2007 the Bill would be submitted to the State Law Advisors. The Bill was expected to be introduced to Parliament in February 2008.

MINUTES
Workshop on the Companies Bill (continued)
The Department continued with its workshop on the Companies Bill. The delegation comprised of Mr Tshepo Mongalo (Project Manager: Company Law Reform, DTI), Adv R Voller (Director of Legal Services) and Mr K Sendue (Chief Financial Officer representing CIPRO, the Companies and Intellectual Property Registration Office).

Mr Mongalo proceeded with Chapter 5, which dealt with takeovers, offers and fundamental transactions. He stated that the Companies Act at present did not make provision for self-standing merger or takeover provisions. The Bill consequently introduces easy merger and takeover provisions. A quorum would be achieved by 25% of votes and more than 50% of the quorum needed to approve a transaction. The current Act required court approval of transactions all the time. Some of the major changes include notification of share purchases of 5% of a widely held company, approval of fundamental transactions by a court only required if a significant minority is opposed (at least 15%) or if there was a procedural irregularity or a manifestly unfair result found. The aforementioned was supported by a remedy of appraisal rights for dissenting minority shareholders. The chapter additionally introduced the concepts of merger and amalgamation of companies.

Prof B Turok (ANC) said that often mergers and acquisitions were of such a complex nature that minority shareholders did not know what was happening. He asked if the Bill could have a provision that would make it a requirement that mergers be set out in a manner that could be understood by minority shareholders. Prof Turok also asked for definitions on the various types of shares that were to be found.

Mr Mongalo said that the Takeover Regulation Panel was required to provide clarity to minority shareholders on a transaction. The role of the panel was regarded as important and applied to widely held shares. A document containing definitions on various types of shares was being drafted and would be forwarded to the Committee by the week's end.

Chapter 6 dealt with Business Rescue. Mr Mongalo stated Business Rescue was one of the most important innovations of the Bill. Business Rescue replaces the current Judicial Management System. Business Rescue would be largely self administered by the company, under independent supervision within constraints set out in the chapter, and subject to court intervention at any time on application by any of the stakeholders. The new system recognises the interests of shareholders, creditors and employees, and provides for their respective participation in the development and approval of a business rescue plan.

Mr Mongalo noted that under the old Judicial Management System, interested parties could approach the court to place the almost insolvent company under judicial management. The old system was court driven. That system had been a drastic failure since its inception in 1926. In most instances judicial management was not done in time to save a company and insolvency was the consequence. The Business Rescue Model attempts to intervene much earlier in the process in order to save companies from insolvency. The company board or its shareholders would be able to pass a resolution so as to place the company under business rescue. As previously stated, such resolution was subject to objection. The resolution was regarded as being as effective as a court order. The Business Rescue System was also regarded as being a more debtor friendly system. The process of court engagement was however retained. If no resolution had been passed for the company to be placed under business rescue, affected parties could go to court and make a case that business rescue was a better option than liquidation. Once business rescue had commenced either by resolution or by court order, an independent supervisor would be appointed to work hand in hand with company management to save the company from insolvency.

Mr Mongalo emphasised that the chapter protected the interests of workers and gave them a say on the issue of business rescue. The Department was planning to host a workshop on the consequences of the Business Rescue Model on the 9 June 2007. DTI had received many queries on the model. The Banking Council, the Department of Justice and COSATU were some of the parties who had made comments. He agreed to provide the Committee with confirmed particulars on the workshop some time in the near future.

In response to a committee member's request for greater detail on the differences between the Judicial Management System and the proposed Business Rescue Model, Mr Mongalo promised to have a document setting out the differences between the old and new systems ready for the Committee within two weeks.

Ms F Mohamed (ANC) proposed that the Department should inform all stakeholders on the progress made on the Bill. Advocacy work on the Bill should be encouraged so as to keep the public informed. She made specific mention that women's groups such as the ANC Women's League, should be kept informed as well.

Mr Mongalo stated that consultations were always ongoing. The problem was limited timeframes. The Department had a deadline in August 2007 to present an updated Bill to Cabinet for introduction to Parliament. He noted that if members wished specific stakeholders to be part of the process, they would be invited to the workshop.

Dr P Rabie (DA) reiterated sentiments that the Judicial Management System was a failure as it had caused many companies to flounder. He pointed out that the issue was about the cost of capital. Dr Rabie asked what the concerns of the banking fraternity were, bearing in mind that they were the providers of credit.

Mr Mongalo replied that the banking fraternity had made many comments and that they had a united front. Many concerns had been raised over the ease with which a company could enter into a Business Rescue Model. Once under business rescue, a company could not be sued, as there would be a moratorium on legal action. Suppliers of stock to a company must also continue to supply. The banking fraternity feared that capital costs would increase. They wanted a tighter control over the process. The banking fraternity also requested that a specialised tribunal be set up to watch that the Business Rescue Model not be abused.

The Chair asked what the response of the Department had been to the concerns raised by the banking fraternity.

Mr Mongalo responded that comments had also been received that were contrary to those raised by the banking fraternity. Some parties had felt that the Business Rescue Model was too complex. The Department wanted all interested parties to come together in order to thrash out their differences. Mr Mongalo noted that a haphazard conclusion by the Department would be unreasonable.

Dr Rabie said that the Bill should favour rescue in favour of creditors in addition to safeguarding the interests of banks.      

Mr S Njekelana (ANC) asked whether there was a legislative arrangement with the Department of Justice and Constitutional Development to handle the Judicial Management process or did the courts handle it solely. He also asked for greater clarity on the issue of dissenting creditors.

Mr Mongalo noted that the Judicial Management System had always been court driven. A court order would be granted thereby placing the company under judicial management, which inevitably led to its liquidation. The Department of Justice’s involvement was limited to its link with the Master’s Office. With the new legislation in place the Department of Justice’s role would be limited to designing models for entities not falling within the ambit of companies such as partnerships, trusts, sole proprietorships.

Mr Mongalo explained that a Business Rescue Plan was subject to a vote and that creditors had a right to object. Workers could buy out any dissenting creditors who had voted against the approval of the plan.

Ms B Ntuli (ANC) asked how the Bill relates to the Competition Commission.

Mr Mongalo replied that the Bill did not really fall within the domain of the Competition Commission. The Competition Commission’s mandate was in terms of the Competition Act.  

Prof Turok commented that the decision on whether to go with liquidation or with rescue depended on where you were in the queue as a creditor.

Mr Mongalo said that first in line was secured creditors, SARS and administration costs. Thereafter would be preferrent creditors, wages of employees and payments to be made by the company. Last in line would be unsecured creditors and shareholders.

Ms Mohamed said that when a company liquidated itself, transfer of assets often took place long before liquidation. She asked how the Bill would affect the role of the Asset Forfeiture Unit in judicial management.

Mr Mongalo replied that unlawful disposition provisions in insolvency also applied to the Business Rescue Model. Assets that had been unlawfully disposed of could be clawed back during business rescue.

Mr S Rasmeni asked how the Bill impacted upon mergers and takeovers in the Competition Act.

Mr Mongalo responded that Chapter 6 did not deal with mergers and takeovers. The approval of mergers and takeovers would still take place in terms of the Competition Act.

Mr Mongalo said that there were possibly certain constraints in the Chapter 6, especially relating to the running of the company during business rescue. For example, if the company wished to take on post commencement finance, management of the company had to discuss it with the supervisor first. The supervisor had the right of veto over the decisions of management. Mr Mongalo noted that the banking fraternity had been opposed to the suggestion that management of the company should assist in the running of the company after business rescue. The banking fraternity felt that management was often the cause why companies failed. However, it was not always management’s fault and that sometimes market changes caused companies to go under. The Department was of the view that it would lead to an untenable situation if the supervisor was required to run a company without the assistance of management under business rescue.  

Ms Mohamed asked what the credentials of a supervisor should be. She urged the Department to set out the supervisor’s credentials in the Bill.

Mr Mongalo reacted that the Bill only provides that the supervisor should be a fit and proper person. Qualifications would be prescribed in the regulations.

Chapter 7 dealing with remedies and enforcement replaced the criminalising provisions of the current Companies Act with alternative measures. It also introduced procedures to address complaints. The High Court however remains the principal forum for remedies. Some of the new remedies include the right to seek a declaratory order as to a shareholder’s rights and the right to commence or pursue legal action in the name of the company (common law derivative action). The chapter also establishes an extended right of standing to commence an action on behalf of an aggrieved person, and a regime to protect “whistle blowers” who disclose irregularities or contravention of the Act.

Prof Turok felt that Chapter 7 should be read together with Chapter 8. He said that many agencies tasked with responsibilities, were not doing them well. Chapter 7 should be used as a fallback. Prof Turok referred to the shift from criminal enforcement (Company Law Act) to administrative enforcement (the Bill) was dependent on newly set up institutions performing. He felt that a caveat was needed.

Mr Mongalo said that he would provide more information on the agencies and the policies involved in addition to how the whole process was to take place.

Chapter 8 outlined the composition and role of regulating agencies and the administration of the Act. The Companies and Intellectual Property Commission (currently CIPRO and the Department) would be tasked with registration, enforcement of law and education. Mr Mongalo said that investigators and inspectors of the Commission would be granted broader powers such as search and seizure. The Takeover Regulation Panel currently known as the Securities Regulation Panel would be tasked with approval of certain offers. Takeover rules would now be passed only in consultation with the Minister. The Panel would no longer have the power to pass takeover rules. The Financial Standards Reporting Council (FSRC) had prior to the Bill not enjoyed legal recognition. It would officially be responsible for recognition of financial reporting standards. Its role would be to advise the Minister on financial reporting standards. The Companies Ombud would be formed in order to resolve shareholder disputes and to allow for appeal of administrative decisions.

Prof Turok found the formalisation of financial reporting standards by the FSRC to be a good provision as the Portfolio Committee on Finance had always been dissatisfied with the self-regulation of auditors and accountants.     

In reply to Ms Mohamed asking why there was no definition of a “companies ombud”, Mr Mongalo replied that the Department would consider drafting a definition for this.

Mr L Laubschangne (DA) was concerned about the appointment of the ombudsman, given that capacity was often a problem. The Bill made no provision for what the qualifications of the ombudsman should be. He felt it necessary to tighten up the Bill in this regard. 

Mr Mongalo said that the Department would look into the matter.

Chapter 9 covered offences and miscellaneous provisions. Mr Mongalo emphasised that the process was no longer reactionary but proactive. The Bill essentially had decriminalised company law. There were very few remaining offences. Some of the remaining ones were those arising out of refusal to respond to a summons, giving of evidence, perjury and similar matters dealing with the administration of justice in terms of the Act. Any such offences must be referred by the Commission to the National Public Prosecutor for trial in the Magistrates Court. The Bill uses a system of administrative enforcement in place of criminal sanctions to ensure compliance. The Commission, or the Takeover Panel, may receive complaints from any stakeholder or may initiate a complaint itself.

Mr Mongalo said that the Bill would be updated by 31 May 2007 taking into consideration all the public comments received. Chapter 6 would be excluded from that version, as a workshop on it was still to take place in June 2007. From 1-30 June 2007 the updated Bill would be submitted for further comments. The Bill would be further reviewed from 1-30 July 2007. On the 15 August 2007 the Bill would be submitted to Cabinet. On the 31 August 2007 the Bill would be submitted to the State Law Advisors. The Bill was expected to be introduced to Parliament in February 2008.

The workshop was concluded. The Committee thanked the DTI team, saying they were  impressed by the depth of knowledge that the team possessed.

Committee Report on Department Budget 2007/08
Mr Rasmeni referred to the Report and stated that little mention was made of the comments that had been made by members.

The Chair proposed that members read through the report, highlight missing issues and submit those to the committee secretary so that they could be written up.

Mr Rasmeni accepted the proposal and stated that committee section needed to capture what was being said at meetings.

The Chair proposed that minutes be written up for the specific meeting that was being referred to. Thereafter, a report would be drafted which the Committee would adopt.

Mr Njikelana seconded the Chair's suggestion and it was agreed to.

The meeting was adjourned.


 

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