Companies Bill: public hearings

Meeting report

Companies Amendment Bill (the Bill): Public hearings
KPMG Submission
Mr John Louw, Chairperson, KPMG, indicated that he would only highlight certain of the submissions,  to amplify the written submissions by his firm. He pointed out the main comments were contained in part A of the documents, with secondary comments in Part B and editorial comment on the Bill in Part C. He mentioned as a general comment that KPMG was concerned that the time allowed for comment on such a complex Bill was too short.

The first main comment was on the clarity on the audit, independent review requirement and the financial reporting standards. KPMG noted that clause 30(10) of the Bill provided for the Minister to make regulations, including different requirements for different categories of companies, prescribing the categories of any private companies that were required to have their annual financial statements audited.

KPMG pointed out that they were not entirely in agreement with the categories. There were a number of private companies in South Africa with a significant public interest. The purpose of a statutory audit was to provide reasonable assurance that the financial statements were free from material misstatements and further fairly presented the company's financial position. The audit offered a level of public protection. In order to provide clarity, the regulations must be published as soon as possible.

Mr Louw pointed out that the Bill provided for the Minister to make regulations on the manner, form and procedures for an independent review other than a formal audit, as well as the professional qualifications of the persons who conducted such reviews. He noted that Auditors were governed and bound by the set of standards issued by the International Auditing and Assurance Standards Board, and that the Independent Regulatory Board for Auditors (IRBA) then monitored compliance with these standards. Because the Bill provided for those who may not be subject to IRBA to do the reviews, KPMG feared that there might be inconsistency.

KPMG submitted that Financial Reporting Standards (FRS)  should be set by the Financial Reporting Standards Council (FRSC). KPMG pointed out that clause 204 of the Bill amended the function of the FRSC to an advisory role to the Minister of Finance. KPMG believed that the FRSC should coordinate the entire standard setting process, for reasons of practicality. This would include issuing of guidelines, circulars and South African specific standards.

In respect of the provisions of clause 94(7), KPMG believed that the function of the Audit Committee to pre-approve any proposed agreement with the auditor in respect of non-audit services provided practical problems in interpretation. The interpretational difficulties were highlighted, and KPMG questioned what would be included, whether it was practical, in view of quarterly meetings of such Committees. A proposal for clarification was given.

KPMG noted the five year “cooling off” period in respect of auditors who had served as auditors to a company for two or more successive financial years. This was not consistent with the practice in other jurisdictions. Although KPMG agreed with the principal of the “cooling off” to ensure independence and avoid over-familiarity, it noted that there was a shortage of auditors,  and therefore suggested this be reduced to two years.

KMPG noted that there was further clarity needed of where the solvency and liquidity test needed to be applied in the Bill. It commended the shift from a capital maintenance regime to one based on solvency and liquidity as in line with international corporate best practice, but pointed to a number of seemingly inconsistent or unclear references to solvency in the Bill. The term “solvent company” was not defined. KPMG suggested that attention must be given to clauses 22, 128,  and the use of the term “consolidated assets of the company”. KPMG noted that there was also reference made to financial circumstances of the company in clause 4(1), and suggested that the phrase “or the group, as the case might be” also be included.

KPMG then turned to the liability of auditors. It noted that corporate failure and the exposure of previously undetected cases of management deception often led to accusations of audit failure, which in turn led to law suits against auditors. This risk, combined with insufficient insurance cover, and the high costs of whatever cover was available,  threatened audit firms and could deter auditors from undertaking this service. It fully supported limitation of auditor liability. Although it understood concerns that shareholder interest may be prejudiced by such limitation, it pointed out that there were ongoing efforts by the Profession to improve audit quality, and that any limitation should be approved by shareholders and be shown to be fair and reasonable. It would probably be best to amend the Auditing Professions Act (AP Act) but the Companies Bill should also make reference to this concept.

In respect of Business Rescue, as set out in Chapter 6 of the Bill, Mr Louw noted that there were some initiatives to streamline all insolvency and business rescue legislation into one Bill. It believed that for clarity and consistency the contents of this Chapter of the Bill should be moved to the Insolvency and Business Recovery Bill.

Discussion
Prof B Turok (ANC) wished to make some observations. He questioned whether any person paid by another whom he was investigating could ever be truly independent and impartial. He did not believe that in these circumstances auditor and company were ever at arm’s length.

Prof Turok enquired the difference between audit services and non-audit services and he wished for further comment on the suggestion that the Minister should not be the first port of call.

Prof Turok expressed concern on the confidentiality aspects, expressing the opinion that the interest of the public should be paramount and that there should not be auditor / client privilege.

Prof Turok asked the difference between internal and external auditing, and why two operations were needed.

Prof Turok commented that the ethics of the auditing profession should be subordinate to the interest of the wider field of the public and the employees. He welcomed transformation and transparency and accountability in the corporate world.

Prof Turok did not understand a hostile takeover situation and in this regard he felt the Boards of Directors did not place the position of the shareholders above the interests of the Board members.

Prof Turok asked what reckless trading meant.

Mr Louw attempted to encompass all the questions in his reply. He explained that money could be siphoned off by those who had no rights to it. Therefore, for the satisfaction of the ultimate owners of that money, almost every corporate entity, ranging from publicly quoted and Stock Exchange listed companies down to small entitles, should know where the money was, and what systems were used to keep track of it. Internal auditors would be tasked with keeping a check upon the money in a corporate entity. However, a further check was still needed. The external audit was performed by auditors who were not employees of the body being audited. That external Auditor was subject to the rules and regulations of the organised auditing profession.

Mr Louw conceded that external auditors could develop a relationship with the Directors of companies, and so become privy to information about threats to the company or plans for expansion. However, this type of information was of an operational nature, It should not be confused with the information gleaned from the audit, which was simply an examination of the financial history of the company. An auditor gaining knowledge of either issue could be jeopardized in his relationship with the directors, but more importantly with his own professional body, if he revealed it without the permission of the company; therefore it was confidential information that wasp privileged. He said that a wider interest group relating to a business enterprise could require information about the company. An Auditor was obliged to reveal some when signing of the financial statements. However, he should not reveal the confidential information. An auditor was required to attend the Annual General Meeting of the Company for which he had performed an audit, and at this meeting shareholders could raise questions and he could answer questions falling within his duty.

Mr Louw explained that  non –audit services arose from the specialised knowledge that auditors had of commerce, such as information systems and computer hardware. A company might approach auditors for advice, guidance or assistance on – for instance – the purchase of a computer software package. This was clearly not part of the audit, but the advice would attract a fee, similar to a management consultancy fee.

Mr Louw explained that the regulatory bodies of the auditing profession set standards of ethics that the organised profession deemed necessary, with which an auditor must comply, in order to remain on the roll and permitted to practice.

Mr Louw said that the question of a hostile takeover was not addressed in the Bill but he was happy to research hostile takeovers for Prof Turok.

With regard to transformation he added that there were doubtless those who did not agree with the principle, but  he felt that this Government policy was being implemented.

Institute of Directors (IOD) Submission
Ms Lindie Engelbrecht, Chief Executive, Institute of Directors, noted that the IOD had submitted written comments in addition to her address. The IOD felt that the Bill was necessary but did not regard it as fully satisfactory. She felt that this Bill would not decrease the cost of doing business in South Africa, but rather contained elements which would increase the cost of doing business, and that this could be detrimental to investment.

The IOD and the King Committee were very concerned that minimal or no training was required of a Director before assuming a directorship, which therefore meant there was “on the job” training, which in turn gave rise to the problems experienced with companies. She asked that formal training and education for directors should form a qualification criteria before appointment as directors and consideration also be given to a type of internship for directors, to be created by the Department of Trade and Industry (dti). 
 
The IOD noted that the Bill, in clauses 1, 66 and 75 to 77,  provided for experts to assist the Board of Directors through membership of sub committees, and that they would be “deemed directors” and thereby have the responsibilities of a full director imposed upon them. Such experts, having neither the remuneration nor prerequisites, but nonetheless having obligations and responsibilities, may well refuse to assist Boards, and this would be a severe loss to South Africa. IOD believed that individuals should be permitted to serve on board sub-committees without serving on the board, provided the standard of contract and liability was appropriately set out contractually, and on the understanding that the Board still remained ultimately accountable for decisions.

IOD then commented on the Business Rescue provisions, but believed that they should not be in the Bill. The argument had been advanced that business rescue had little in common with insolvency, but IOD was not persuaded by this, particularly since a “financially distressed” business was one on the brink of insolvency. This procedure would only commence on the verge of insolvency and thus may be ineffective. There would be an anomaly between this Bill and the Insolvency laws, and an adverse impact upon Labour laws and the positions of employees. IOD submitted that the Business Rescue provisions be removed from the Bill, and the provisions, with the necessary amendments, be incorporated instead in the Insolvency and Business Recovery Bill.

IOD commented on the clauses dealing with related and inter-related persons, and control. The principle was supported but the definition was too wide. IOD submitted that the definition of related should include only a spouse, a spousal equivalent and dependent children.

The decision to change from a capital maintenance regime to one based on solvency and liquidity was commended. There should not be reference to any specific documentation, but rather emphasis on “fair and complete” valuation.

In regard to the categorisation of companies, IOD noted that the definition in the Bill differed from the Corporate Laws Amendment Act (CLAA), which recognised widely held and limited interest companies. There would be  a cost implication for companies reverting to the more correct classification.

IOD commented on Clause 30(2), which provided for the Companies and Intellectual Property Commission (the Commission) to require companies to prepare annual financial statements. However, there were no clear guidelines. There was danger of inconsistent application and uncertainty for stakeholders. 

IOD considered that companies of significant public interest should not be exempted from preparing and presenting annual financial statements. Smaller entrepreneurial bodies would benefit from easier requirements around establishment and operation, but IOD still cautioned that public or stakeholder interests should not be forgotten.

IOD considered that all requests for any information regarding companies should be made in terms of the Promotion of Access to information Act (PAIA), and that this Bill must be read in conjunction with it.

Clause 35 required that at least one share of every company be held by a natural person, which implied that a company could not have a wholly owned subsidiary. Many companies were structured with wholly owned subsidiaries. The logic of this provision was unclear as it would complicate the administrative procedures and the costs. It was submitted either that clause 35 be amended to allow wholly owned subsidiaries or be entirely removed.

IOD noted that in terms of clause 69 (12) even  a disqualified person may act as a director of a company in certain circumstances. This was contrary to the stated objects of transparency and accountability, and did not afford protection to employees, and other stakeholders.

IOD pointed to the inconsistency between clause 72(2)(2), that allowed committees to include non-directors, and 94(4) that noted that every member of the Audit Committee must be a director. Membership of the audit committee must be clarified

IOD noted that the Bill should also clarify whether the common law duties of directors were being replaced with the provisions in the Bill around director conduct; IOD submitted this was not desirable and the Bill should make it clear that the Bill must be read in conjunction with the common law principles. Examples of unclear wording were found in clause 76(3)(a), and the failure to mention unfettered discretion beyond what was mentioned in clause 75.

In respect of liability of directors, it was submitted that clause 77 restricted liability to the company, yet clause 218 could still deter directors from accepting appointment, which would be disadvantageous in the light of skills shortages. Their failure to attend meetings should not excuse them from liability for decisions taken. IOD suggested that attendance at meetings where material decisions were to be taken should be made part of the due diligence requirement. Exclusion under subclause (3)(e) should be limited to a vote against a known fraud or contravention. The definitions in subclause (9) of ‘willful misconduct’ and ‘wilful breach of trust’ must be clarified.

In relation to clause 92, dealing with the rotation of auditors, IOD agreed with the principle of the “cooling off” period, but was seen as too long in the South African context as well as contrary to international practices. IOD suggested this be reduced to two years. It noted further the need to define ‘auditor’ and ‘designated auditor’, preferably in line with the AP Act.

Clause 94(2) required that the audit committee include three non-executive director members. IOD believed this was too onerous, if not impractical, for small companies, who would simply not appoint such committees, which was not in the interests of good corporate governance. IOD suggested that a minimum of 2 non-executive directors be included, and that there should not be differing definitions or criteria. Such members should also not be appointed by the shareholders, as the audit committee was sub committee of the Board. IOD said the Board could delegate, but not abrogate, responsibility for such decisions. The essential relationship of trust and confidence between the Board and the Audit Committee must be retained. Further comments were made on clause 94(7), as it was unclear whether the audit committee must approve contracts for non-audit services; the wording must be tightened and provide for ratification of decisions. The wording in relation to non-audit functions must also be tightened to clarify that the audit committees should not be performing management functions.

IOD commended clause 162, relating to applications to declare a director delinquent or under probation, but noted that its success would depend on consistency of application. IOD therefore suggested that applications must be lodged with the Ombud, who should establish the validity of any claims, and only if they were considered to be valid should court proceedings ensue. 

Ms Engelbrecht then noted a number of secondary comments, set out in considerable detail in the presentation. IOD noted that annual financial statements were not defined and suggested that the International Financial Reporting and Accounting Standards (IFRAS), as adopted by the Financial Reporting Council (FRC) be used. Under the general interpretation, clause 5(4)(b)(ii) said that this Bill would, in the event of conflict, prevail over sector-specific legislation. However, IOD felt that those Acts provided clarity and this needed further consideration. In relation to the Financial Reporting Standards in clause 29, IOD, similar to other submissions, noted that for credibility purposes  financial reporting in South Africa must comply with international standards. It also expressed concern over the likely delays should the Minister have to issue the standards.

The need for Chapter 6 was questioned; if it remained then lines of distinction needed to be clarified, as well as whether a person brokering a deal could be appointed as supervisor. There were some concerns that the procedure could be abused. There was no clarity on who could be appointed as supervisors, nor the precise effect on employment contracts. IT was suggested that Directors should remain liable even under a Business Rescue, though they could have a right to hold a dissenting view. Extensive further criticisms were expressed around the Chapter.

Further clarity was called for on clause 33, 87, 22, 77, 136, 138,

It was suggested that the provisions of clauses 129(3) and 131 could be abused or were not realistic.

It was recommended that clause 159 be withdrawn and instead the Protected Disclosures Act should be amended..

Discussion
Dr P Rabie (DA) called for further amplification of the comment about disqualified directors.

Prof Turok observed that while there was reference to reducing the cost of business, media reports recently had indicated that business profits were at an all-time high. He wondered if business was not making too much profit.

Prof Turok asked for clarification on the difference and effect of share options and preferential shares, noting that Directors often derived more remuneration from these than their basic salary, which he believed impacted upon good corporate governance.

He believed that King II principles set out the requirement for the public interest and he felt that this was neglected and that the interests of the shareholders and directors superceded the interest of the wider group of stakeholders, which was unacceptable. He believed that corporate workings often lacked integrity.

Prof Turok supported the suggested provisions for the training of directors and intern directors and the concentration on integrity, saying that the Andersen and Enron debacles were indicative of the problems. He was of the opinion that the interests of the public should be protected at all costs. While he would like to see the pool of private shareholders increased he was constantly aware that the Directors and Management would hold their own interests supreme. He was unhappy if the Audit Committee appointed the auditors as he wanted more of an arms length situation. He reasserted that when the company was paying the auditors, they were not independent, and this was to the detriment of the public, the economy and the fiscus. The Ombud’s office should be more powerful.

Mr S Njikelana was pleased the Department was upgrading the legislation through this Bill. From his experiences in serving on an audit committee, he too wondered if there was sufficient arms length between the Auditors and the audit committee (AC) and he did not quite understand that the AC was viewed as a sub committee of the Board of Directors and why it should extend beyond financial audit. 

Mr Njikelana questioned why there should be reference to the Insolvency provisions and the Department of Justice and Constitutional Development. His view was that Business Rescue was designed to protect the labour force at all costs and was proposed so as not to let companies fail.

Ms Engelbrecht gave an overall reply. She referred to the question of clause 69 and Directors’ ineligibility, as well as the suggestions on training and internships, and emphasised that a director who had been disqualified should be disqualified for all circumstances, and for ever. She cautioned that the reference to the costs of doing business must not be confused with the cost of compliance in doing business, which she viewed as a separate issue. She conceded that points on options and share options should be discussed, but this was not the place for such a discussion. She too was keen that shareholder wealth, rather than increased earnings by Directors and Management should be increased. She advanced that the King Report was trying to advance integrity in the system. She did not clearly understand the opposition to the emphasis on the arms length requirement for the Board, the AC and the Auditors. She said the submission that the AC be appointed by the Board, and not the Shareholders, was opposing the requirements for transparency and accountability. Finally, she reiterated that the Business Rescue provisions were good in theory but misplaced, and should be set out in the insolvency laws. As they were designed in this Bill they provided organised labour with too much potential power in relation to other creditors who did not enjoy the double protection provided by the Labour Relations Act.

Prof Turok replied that notwithstanding the costs of compliance with legislative requirements he felt that companies were making excessive profits and that Boards were doing things without hindrance so that the shareholders were not enjoying the full benefits of their investment.

Ms Engelbrecht disagreed with his contentions of a philosophical nature about business, which did not address the Bill directly.

Mr L Labuschagne (DA) added that shareholders were receiving increased dividends but it seemed that there was a need for more protection of their interests and this required clear language in the legislation.

Ms Engelbrecht agreed.

Mr Njikelana expressed an interest in the question of deemed directors and their liabilities. He remarked that the Business Rescue provision seemed to require various steps and might be implemented too late to save a company. He still felt that shareholders should appoint the AC and did not concede that shareholders would advance one interest over another, or take a position which would be detrimental to the company.

Ms Engelbrecht re-affirmed that the Business Rescue provisions could be distorted away from the preservation of the company to ensuring of the interests of the work force. Additionally she re emphasised that if the shareholders were empowered to select the AC they could be making appointments other than for reasons of professional competence, which would ultimately adversely impact upon the company.

South African Institute for Advanced Constitutional, Public, Human Rights and International Law (SAIFAC) submission
Dr David Bilchitz,  of the South African Institute for Advanced Constitutional, Public, Human Rights and International Law (SAIFAC) presented a long written and oral presentation, touching upon several constitutional issues in relation to the Bill (see attached presentation)

Discussion
Prof Turok thanked the presenter, adding he thought the presentation interesting, but naïve, adding that we must accept that South Africans lived in a capitalist system, with all its abuses. He felt that the presentation addressed wider issues than the Bill and he expressed concern that the Congress of South African Trade Unions (COSATU) had not deigned to make a presentation on the Bill. He added that e would be interested to receive greater detail about the references to the United Nations, and management and their marginalisation.

Dr Rabie expressed interest in the references to the work of Dr Ruggie, as mentioned in the presentation, and he mused that companies, in addition to making a profit and bearing in mind the interests of their wider stakeholders, must now also be concerned about the impact of their company activities upon the environment and the broader public. 

Mr Njikelana commended the presenter for going beyond the immediate impact or consequences of the proposed legislation. He asked whether the policy framework should not also address wider issues, especially where fundamental Human Rights questions were raised – for instance the World Trade Organisation, the government impact upon companies and shareholders and excessive food and fuel prices. Addressing himself to Prof Turok’s observations he asked whether this Bill should not also effect transformation as the equivalent Australian legislation had claimed to do, or whether it was solely about transformation of company governance. He observed that there should be a paradigm shift, but without impacting on the bottom line.

Mr Labuschagne agreed with Prof Turok that the presentation was too philosophical. The Bill of Rights provided for certain matters; why then should they be repeated in other legislation. Although Britain did not have a Constitution, it nonetheless managed to develop legislation with good intentions covering a wide range of stakeholders. The provisions by other countries to de-criminalise actions, making them subject to administrative penalties, seemed strange to him, as he felt that if there was a law there should be liability. He questioned whether such provisions were practicable

Dr Bilchitz stated that a company was a creature of creation, and must be viewed in this light. Companies were created by humans, who in their own capacity were subject to the Bill of Right, so the companies they had created should also be subject to it. The concept of human rights prohibited the killing of another human. By extension, therefore, a company should not be permitted to kill the environment, through indifference and the non imposition of environmental laws. The killing of the environment might have a greater impact on the a number of people, and was thus of more impact than the killing of one human being. There was a need for consistency and a viewing of the scale of operation. He added that it seemed to him that often the large public corporations were viewed in one light and judged on one scale of criteria, while a smaller private company’s equal or worse environmental defalcations were condoned, because such operation provided employment, which was regarded more highly than the destruction of a large area or segment of the environment.

Dr Bilchitz addressed Prof Turok’s reference to his activities on the socio economic committees when drafting the Constitution, and said that some people regarded these conditions as not achieving their desired effect, and creating possibly unintended consequential effects. He emphasised that the avoidance of harm was a task both of Government and also the directors of companies. When directors voluntarily assumed the extra rights accorded to them as Directors, they should be aware of the concomitant liabilities. He disputed that the International Conventions, such as the UN Declaration on Human Rights, was applicable only to humans. He submitted that they were applicable to companies as well.

Dr Bilchitz said that Prof Ruggie and his teams’ work was “work in progress” and the final word had not been received from them and their successors in this field. He submitted that corporations, companies, and other forms of economic activity could not be beyond the statutes, and he added that he was happy to work in drafting and refining the Bill further. He submitted that the WTO had a significant impact upon the environment through its decisions on trade, and should be a part of the holistic control of the environment, trading practices and other activities to restrain harm. He urged that an attitude of good corporate governance, in the widest possible sphere or extension, was necessary, and not simple concentration on the bottom line or profits.

Prof Turok said he felt an objective body in addition to the Ombud would be required.

The Chairperson said that the issues raised had been flagged and would be addressed in due course, and noted the offer of assistance in the drafting.

Bowman Gilfillan Attorneys submission
Mr Jon Schlosberg, Chairman, Bowman Gilfillan, said that the presentation was a summary of the work of ten lawyers over the preceding year and a half. Those speaking were doing so on behalf of the firm, drawing on their experience in corporate law, and were not mandated by any of the firm’s clients.

Ms Claire van Zuylen, Partner, Bowman Gilfillan, submitted that while the drafters of the Bill should be commended in general there were areas of the Bill giving rise to concern. Many of these concerns had already been raised by previous presenters, and she would not repeat them. Therefore she would confine herself to the Business Rescue provisions. She pointed out that in terms of Clause 136(2) the Business rescue supervisor may cancel any contract, other than contracts of employment. These powers were too wide, and impacted upon the privacy and sanctity of contract presumptions in the common law, and there was no certainty regarding these powers. In addition, there were no criteria for the qualifications of such business rescue supervisors and this field of endeavour might turn to be as murky as the field of the insolvency industry. She submitted that such decisions to cancel contracts might very well be prejudicial to creditors, other than labour, and consequently had tremendous impact upon the wider economy. She said that she would leave it to South African Property Owners Association, which would still be making its presentation later, to deal with the impact on contracts of lease or purchase of immovable property.  Although a creditor prejudiced by a breach of contract, including one by the supervisor during the business rescue, could sue, the position may well be that the company could not pay, despite the business rescue plan. She submitted that the preference accorded to labour under these provisions, when read with the provisions of the Labour Relations Act, gave the workforce a favoured position above all other creditors. She added that the long-standing provisions for judicial management of failing companies should not be interfered with unnecessarily or lightly. It was too easy for a company to resolve upon a business rescue plan, and there might well be a hidden agenda especially by Trade Unions or representatives of the work force.

Mr Rudolph du Plessis, Partner, Bowman Gilfillan, said his submissions were of a more technical nature. The definitions regarding mergers and acquisitions of companies needed to be clarified both in wording and purpose. The definition of Director was too narrow and should be amplified to cover the activities of those who performed the tasks and functions of directors but might not be held liable. The definitions of the insolvency and liquidity tests required to be clarified.

Mr du Plessis noted that clause 51 seemed diametrically opposed to clause 7, and with regard to this clause there was the question of the Memorandum of Incorporation possibly being void. He further submitted that the provisions of clauses 35 and 76 also required amendment or re-thinking or deletion.

He submitted that the capital of a company should not be reduced without the concurrence of the shareholders and he felt that clause 48 was not clear about whether this is for or not for a consideration.

Discussion
Prof Turok wondered why the observations regarding delinquent directors should not be referred to the Department of Justice and Constitutional Development. He asked whether there should be clarification between the concepts of tax evasion and avoidance, as used by the Minister of Finance, as he felt that there was a gap in the legislation. He added that he was not in favour of de-criminalisation of many activities, for he felt that an administrative penalty was too light a punishment, and he questioned whether administrative penalties would increase efficiencies.

Ms van Zuylen submitted that Bowman Gilfillan also felt that the provisions of the business rescue plan should rather be within the provisions of the Insolvency legislation, for otherwise she foresaw that there would be conflicts between the Companies Act and the insolvency law. She further submitted that the chief problem arising from the Business Rescue provisions was the timing, which was open to abuse, especially when the existing provisions of the Labour Relations Act were considered. She reiterated that rather than providing a concept of business rescue, the current provisions for judicial management of companies should be tightened up; improved and made more user friendly.

Mr du Plessis responded to Prof Turok’s remarks, pointing out that the terms “evasion” and “avoidance” in fact emanated from a judgment of the Court which held that a review of the business so that the minimum tax was paid was regarded as avoidance, and was within the law, whereas the simple non-payment of tax was illegal and was regarded as evasion. He conceded that some did not grasp the niceties of the distinction, but that for the moment it was binding. In short, avoidance of tax led to benefits, while evasion of tax led to penalties. He then added that the solvency test was more important than it may at first seem, as many of the consequent decisions provided for in the Bill depended upon solvency.

With regard to administrative non criminal penalties, Mr du Plessis submitted that the removal from the criminal justice system would ease the administration, and that the administrative penalties could be a more effective and speedier remedy than appearance in the criminal courts with the attendant delays.

Mr S Njikelana expressed the opinion that the Board should be watching developments closely so that if there was any fear that the company might require the business rescue provisions these should be implemented as soon as possible. He believed that the interests of labour superceded those of any other creditors and he was satisfied with the provisions in the Bill. He also was satisfied with the reduction of capital provisions.

Ms van Zuylen stated that with a business rescue plan the company would remain in control of the process, although under judicial management the final authority or influence had lain with the Court, which would take wider interests than the company only into account.  She submitted that clause 136 was too widely framed and required re-drafting. She added that the rights of general or ordinary creditors should be borne in mind, for otherwise no credit would be extended, resulting in a reduction in business activity and consequently in GDP.

Mr du Plessis added that the wording of the Bill must be considered also in conjunction with other legislation such as the Banks and Insurance legislation, and should specify which should prevail. 

Mr du Plessis commented further on reduction of capital. This could be achieved through a buy-back or take-back. Banks and astute trade creditors had regard to the capitalisation of a company before deciding to extend credit, as they were in business to make a profit, and weighed up the decision to extend credit against the risks.  If a company could unilaterally reduce its shareholding, this impacted upon its creditworthiness. It must be remembered that if the credit extender extended credit without due consideration of the facts it, in turn, laid itself open to charges of reckless or negligent trading. A wider, rather than a narrower, view of possibilities or ramifications should be taken, and this applied whether public or private companies were under consideration.

Ernst and Young submission
Mr Michael Bourne, Professional Practice Director, Ernst and Young, noted that he too had made a written presentation and would be dealing with parts of it only in his oral submission. Ernst and Young were concerned that the Bill was a “one size fits all” piece of legislation intended to cover large companies listed on the JSE and other stock exchanges, private companies, NGO’s, limited interest companies and family or individual businesses that previously operated under the Close Corporations Act. It was also concerned about the lack of a  clear cut and acceptable definition of liquidity or insolvency. It repeated points made earlier about the need for internationally acceptable and clearly defined accounting standards and regulations to be used for the financial statements. These, together with the ethics surrounding them, were dynamic and subject to rapid change, and he submitted that leaving it to the Minister to determine the regulations was impracticable. They should be the preserve of a Committee comprised of experts and practitioners in the field, who would be able to more swiftly react or adapt to changes and development. A good lesson could be learned from the Enron disaster, which required swift action.

Discussion
Prof Turok remarked that he regarded the Independent Regulatory Board for Auditors (IRBA) as a “self-regulating old boys club”, and he felt that they had shown self interest and did not always take into account the interests of the wider range of stakeholders. He believed that, to bring people to account, criminal consequences were more of a deterrent than administrative non-criminal penalties. Additionally he felt that the provision for wholly-owned subsidiary companies could give rise to monopolistic situations which he believed were not in the public interest. He thought that the question of limited liability of auditors encouraged situations such as Enron and Andersen in the USA, and he wished auditors to be fully liable for all consequences without any restriction. He felt that the provision for share options and preference shares was deplorable, and asked for an explanation. He was opposed to auditor confidentiality, as he believed that the Constitution gave every one the right of access to information, and accordingly the Auditors should be compelled to disclose everything they knew.

Dr Rabie felt inclined to agree with Prof Turok on some aspects. He wondered about the cost implications for small and micro enterprises to comply with the Bill and was concerned that these might be stifling growth. In the area of solvency and liquidity and associated problems he wondered whether the answer would not lie in establishing a company’s “net worth” as the criterion.

Mr Bourne admitted that the IRBA was a self regulating body, but denied that it was not effective. He reminded the members that IRBA acted in terms of the provisions of the Auditing Professions Act, and governed chartered accountants who were registered as auditors, but the representation requirements ensured that only 40% of this Council were chartered accountants, and that there was broad consultation. He further reminded Members that the Bill contained provisions for the auditing of companies, but that certain companies were entitled to request exemption, and this would be given quite readily to small enterprises and NGO companies.

With regard to Prof Turok’s remarks on wholly owned subsidiaries, he submitted that there might be good and proper reasons for wholly owned subsidiaries of companies, and each set-up should be examined pragmatically before the concept was condemned out of hand. With regard to the remarks on the limitation of auditors, the liability of auditors could be so extensive that the establishment of a nexus between the event and the consequences might be very difficult, both in fact and over time. If completely open liability was maintained, as advanced by Prof Turok, auditors would neither be able to obtain nor afford professional indemnity insurance, would therefore decline to perform audit tasks or functions and the current shortage of skills in the auditing field would be exacerbated considerably, with time delays. He submitted that the majority of auditors were honest, and the dishonest exceptions soon left the profession willingly or were removed. It was possible for auditors to make a bona fide mistake. Critics of the auditors did not appreciate that they did not produce the financial statements, but audited the statements presented by the Board of Directors, and were precluded from examining the management systems that the Board implemented, being limited merely to commenting on the efficacy of those systems. This was the reason for the requirement that members of the Audit Committees have expertise, by way of training and experience in auditing and associated matters, to be able to make a proper selection of an auditor and non-auditing services. Auditors did not act willfully to the detriment of the companies and their extended stakeholders. They could only act within the parameters of their profession and appointment. Perhaps unrealistic expectations of auditors, audits and profession arose from ill-informed people with little appreciation of the realities.

Mr Bourne noted that the public perception of share options was not quite correct. The King Commission had recommended that share options for directors only be considered after the financial year end, when progress or regress was evident, and that both share options and dividends for Directors would be voted upon by the shareholders after the event.

Mr Bourne then clarified the provisions around confidentiality. In the course of an audit an auditor might become privy to three classes of information. Firstly, there was a category of information to which shareholders, and maybe also other stakeholders, were entitle to receive. Secondly, there was auditing information that in due course might become available to the shareholders, but which, if released at a certain juncture, would amount to a premature release potentially causing damage to the company. Thirdly, the auditors might acquire information of a strategic nature, although it would not form part of the audit, such as business secrets, and if it was released into the public domain it would simultaneously damage the company and the auditor’s reputation.

Mr Bourne noted that solvency, liquidity, and nett worth were not dealt with in the Bill, other than in clause 4. Moving away from an assets valuation of a company to a solvency base had not been well thought out, and consideration should be given to defining the concepts clearly

Prof Turok said he felt that there was too much leeway in defining an auditor, an audit, and the requirements and this must be tightened up considerably.

Law Society of South Africa / Law Society of the Northern Provinces: submission
Ms Miranda Feinstein, Attorney, Edward Nathan Sonnebergs, instructed by the Law Society of South Africa (LSSA) and the Law Society of the Northern Provinces (LSNP), addressed the Committee. This Bill had been in gestation for some considerable time, and there had been the opportunity to have workshops, and that certain representations at the workshops had been confirmed, expanded upon or neglected by the drafters. This meant that there were still some areas needing comment.

There were clear and fundamental issues arising from the Bill, which she submitted had ramifications for the economy, and so it was essential to get everything right the first time. She suggested that the Company Ombud was given too extensive powers, and that these should be curtailed, and instead matters be referred to a full bench of the Court. There were suggestions or submissions that Ministerial responsibilities as set out in the Bill should be removed to Committees of professional persons, and whilst this might be laudable in intent, it derogated from the sovereignty of parliament. There was a need to redraft the clauses to ensure that matters could be resolved quickly; for instance, other legislation allowed for speedy intervention by experts with reference back to the Minister. The number of difficulties in interpretation, as highlighted by previous presenters, did point to a number of aspects that would no doubt go to litigation or declarators, and that these difficulties could be overcome by more attention to the drafting. She cited clause 66, relating to directors and deputy directors,  as one example, and the definitions of debentures and the circumstances in which they could or could not be used.

Although there remained the requirement of the Memorandum and Articles of Association there was no provision for governing shareholders agreements, which might contain provisions contrary to the intention of the Bill and different classes of shareholders, such as pre emptive rights. There was too little in the Bill around shareholders’ meetings and how and when they must happen, as also what would happen if there was deliberate abstention from meetings. The imprecise definitions also created problems in the area of beneficial interest, which, she submitted, was currently not feasible. The question of nominated Directors and deemed Directors was also of concern, and could give rise to “puppet” directors.

Ms Feinstein noted that the provisions for business recovery strategy and the role of labour might be self serving and diametrically opposed to the best interest of the company.

There were no requirements set out for the prospectus, which might be drafted by a person well versed in law, and used to attract gullible shareholders.

The attempt to have a “one size fits all” piece of legislation could impose financial burdens on small companies and NGOs, and clause 38 ran contrary to black economic empowerment principles.

STRATE  submission
Mr Martin Vermaak, representing STRATE, submitted that, in addition to all the concerns raised by the preceding presenters, there was further concern around Clause 56 beneficial interest in securities, as, because of the layers of potential holders,  it would be very difficult to determine who owned the company. Further details were contained in the written submission, but were not presented due to shortage of time.

Discussion
Prof Turok said he was interested in SPV share preference agreements and ring fencing. He asked whether this meant a substantial document.

Ms Feinstein apologised that it had been difficult to put complex and sophisticated concepts in less than technical language.

Mr Njikelana concurred with Prof Turok, asking for clarity on the difference between the Memorandum and Articles of Association and a shareholders agreement, the relationship between them and the significance of each.

Prof Turok asked whether it would be possible that Ms Feinstein return to elucidate upon her submissions and the current Company legislation at another session.

Ms Feinstein then elaborated briefly about the position and responsibilities of Directors, shadow and puppet Directors.

Prof Turok suggested that the presenters be recalled if Members wished to hear from them again.

The meeting was adjourned.