Companies Bill: Submission by COSATU; Department’s preliminary response to public hearings

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Trade and Industry

20 August 2008
Chairperson: Mr B A D Martins ANC
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Meeting Summary

The Congress of South African Trade Unions (COSATU) gave detailed submissions on the Companies Bill. It noted that it had been expecting the New Economic Development and Labour Council (Nedlac) to finalise its deliberations and make a submission to the Committee, but when this had not happened, COSATU had decided to make its own submission. COSATU stressed that progressive legislation was needed, and that despite the reliance on the auditing profession to provide regulatory frameworks and bolster good governance, there was little to counter their independence being compromised. The calls to decriminalise certain activities were beneficial only to narrow and subjective interest groups, and this would render broader progressive socio-economic objectives subordinate. Loopholes in the existing law had been used already to undermine the Labour Relations Act (LRA) and the Insolvency Act. COSATU urged that South Africa should consider following the German models on board structure and governance, using a supervisory board comprising non executive Board members who represented both shareholders and employees. It also called for every Board to have a social and ethics committee drawn from trade unions and relevant communities. It submitted that the Bill should adopt a broader approach to corporate governance, and that private companies should not be exempted from having financial statements and audits. It commented at length on the business rescue provisions, which it believed should be supported in principle, but that far greater roles should be allocated to trade unions in facilitating and shaping business rescue, that they should receive notifications, and that the loopholes in the present Companies and Insolvency Acts should be closed. Furthermore any attempts to undermine the provisions of the Labour Relations Act should be subjected to criminal sanction. COSATU believed that those convicted of fraud, including attempts to undermine fair competition, should be precluded from holding office as directors of any company. In the event of a conflict, the Labour Relations Act provisions should prevail over the Companies Bill.

Detailed comments and submissions were then made by COSATU on clauses 2, 5, 6, all the clauses in relation to business rescue, winding up and mergers and takeovers, clauses 22 and 23, 30, 31, 45, 69, 78, and several of the clauses under Chapter 6.

Members made suggestions in relation to the personal liability of directors, and that the provisions against corruption should be extended also in relation to State Owned Enterprises. They queried the clauses around protection of former employees, the suggestions in relation to voting, the lack of incentive for investors, the mechanisms around business rescue, and their adequacy, whether the provisions in relation to directors were adequate, and the role of the Public Investment Corporation.

Meeting report

Companies Bill: Public submissions: Congress of South African Trade Unions (COSATU)
Ms Prakashnee Govender, Parliamentary Liaison Officer, noted that COSATU represented a large number of workers. Ms Govender apologised for the lateness of the submissions but explained that COSATU had been waiting for New Economic Development and Labour Council (Nedlac) both to finalise its deliberations on matters ancillary to the Bill and for Nedlac to make a submission to the Committee. This had not happened, COSATU had decided to go ahead on its own.

Ms Govender noted that the present Companies Act was over 30 years old and, given the dynamics of corporate activity, the laws around corporate governance required updating, especially in light of the American experience with Enron, the South African experience with Fidentia, and the recent Competition Act transgressions around bread and pharmaceutical price fixing. More progressive legislation was needed. The stakeholders were wider than first impressions provided, thus the “triple bottom line accounting” emphasis. She submitted that there was a moral and social imperative to legislate properly.

Ms Govender submitted that there was a misperceived reliance on the auditing professions to provide the regulatory framework for protection of good governance, yet insufficient pre-emptive measures to counter the very real possibility of their independence being compromised. The calls to decriminalise certain activities were beneficial only to narrow and subjective interest groups, and this would render broader progressive socio economic objectives subordinate. Ms Govender submitted that certain loopholes in the existing law had been used already to undermine the Labour Relations Act (LRA) and the Insolvency Act.

Ms Govender said it was unfortunate that Nedlac had not made a submission. COSATU concurred with the Nedlac process, but still had some fundamental concerns that remained unresolved by the Nedlac process. It was submitted that these concerns related to the fact that the overall architecture and organisation of the Bill was fixed prior to it being tabled thereof at Nedlac. These included the refusal to consider the co-determination models (adopted in the European Union (EU), especially by Germany) for Board structures allowing for trade union and other stakeholder participation, and also a more meaningful participation by trade unions in the business rescue provisions.

In relation to Corporate Governance and Board structure, Ms Govender submitted that South African corporate law had followed the management-oriented models popular in the UK and Commonwealth, which emphasised the primacy of management discretionary powers acting through Board structures. Where the company’s profits did not overlap with broader social and economic objectives and interests, there was little incentive for the Board to prioritise the latter. When management performance and remuneration was linked to profitability many companies opted to retrench workers to reflect higher profit margins. The USA operated a shareholder-centered approach, which emphasised greater accountability to shareholders. This applied to public but not to private companies. The accountability did not, in practice, work, and shareholders were often merely required to rubberstamp the composition of the Board, and had a cozy relationship with it. In the EU and Japan corporate governance systems took the interests of stakeholders into account, and these could include employees and the general public. Germany used the co-determination model, with a supervisory board comprising non executive Board members who represented both shareholders and employees. This was responsible for the supervision of the Management Board, comprising executive members responsible for the operations. COSATU called for the co-determination model to be brought into South African company law. As a transitional measure it wished every Board to have a social and ethics committee drawn from trade unions and relevant communities.

Ms Govender then moved to the distinction between publicly traded and privately owned companies. She noted that the emphasis in the Bill was on regulation of public companies, and the King II report recommended measures against public and not private companies. The Bill adopted a similarly narrow approach, especially in regard to reporting requirements, auditing, and disclosure of remuneration. COSATU submitted that better corporate governance should be promoted for its own sake and for the public interest, not only where there were a large number of shareholders. Many of the provisions of the Bill could be avoided by a company merely de-listing from the Stock Exchange and converting into a private company. Edcon and Pep were two examples of companies that had recently followed this approach. Both had paid their directors enormous sums in actual remuneration, share options and bonuses. In terms of this Bill, a similar company would not be obliged to provide audited annual financial statements or details of directors’ remuneration.

Ms Govender commented also on the business rescue provisions. COSATU had long called for formal business rescue plans to save jobs and therefore the principle in the Bill was supported. However it felt that the provisions could be interpreted narrowly and lead to retrenchments. Trade unions should play an active role in facilitating and shaping business rescue processes, and should receive early and timeous notification of such processes and access to all relevant information in the proceedings and generally. COSATU believed that there could be opportunistic attempts by employers to use such processes to undermine the section 189 and 198A provisions in the LRA. In the past it had been a well established practice for many employers to exploit gaps in the corporate legislation to intentionally evade compliance with other laws. She pointed to the repeated formation and liquidation of successive corporate entities, which had the same individuals as Directors or managers. She pointed out that liquidation would dissolve a company and terminate all contracts, including labour contracts. These contracts, having been made by the company, were not enforceable against the individual directors. Whilst some liquidations may have been genuine, others did so to subvert the LRA.

Ms Govender noted that in the past another method had been to set up of an intricate network of interrelated companies or other type of corporate entities. Each company had a separate legal entity and legal obligations, including debts, that could not be enforced against other members of the group. Employees could find, after liquidation, that they were in fact not employed by the company A, although they were working for it, but by Company B, which had no assets to pay the employees. Although the procedure of “piercing the corporate veil” was in theory available, it was expensive and complex, and not often allowed by the Courts, and had little guarantee of discovering assets. The Bill should have made attempts to counter these problems.

Ms Govender said that anyone who had acted fraudulently should be precluded from taking any office in the corporate law field. 

Ms Govender then commented on the specific provisions in the Bill. A written proposal was tabled for broadening the ambit of clause 2(2)(d) to allow related companies to be held jointly and severally liable where there was intention to defraud.

In respect of the solvency and liquidity tests, Nedlac believed that if a company failed to pay Unemployment Insurance payments or VAT or pension deductions, that company should immediately be regarded as one in financial distress, and that shareholders, trade unions, employees and other creditors should be informed.

COSATU called for retention of clause 5, so that the LRA would prevail over this Bill in the event of a conflict

The provisions of Clause 6 were supported but it was submitted that it was too narrow, and should be extended to instances where the intention was to evade compliance with other legislation. Trade unions and stakeholders should be able to receive prior notification of intention to apply for an exemption and for them to be able to lodge objections. Sub clause 6(10) was a general one, but she said that sometimes branch offices received notices but did not pass them to Head Offices, so the Head Office of the Trade Union should be notified directly. 

Nedlac agreed that the winding up provisions in the Bill should not reduce existing protection to both trade unions and employees of a winding up, as already contained in the Insolvency and Companies Acts. Therefore each of the different sections dealing with business rescue (clauses 128-155), winding up (clauses 79-83), mergers and takeovers (Clauses 122-127) should contain notification provisions, reflecting the current 346 (4A) and 346 (A) of the existing Companies Act and include notification to both employees at the workplace and the Head Office of the Trade Unions, who should be engaged with as they must be recognised as representatives of employees.

Ms Govender noted that clause 22(1) contained provisions against reckless trading, noting that the Companies and Intellectual Property Commission (the Commission) could issue a compliance notice to a company found to be engaging in such prohibited conduct. COSATU submitted that criminal sanctions were needed, but accepted that there were concerns about meaningful enforcement and that adequate mechanisms were needed to detect and investigate problematic behaviour. In addition the compliance orders should also be allowed to operate against perpetrators, so that the Commission could compel compliance without necessarily requiring the company to cease operations.

Clause 23 (2) was criticized as unclear, and should reflect that only one of the activities listed should be required in order to trigger company registration. Entering into employment contracts should be considered as an activity of “conducting business”.

Ms Govender believed that provision should be made in clause 26 to allow trade unions the right to inspect company records, especially when engaging with a business rescue operation process.

Ms Govender noted that private or limited liability companies did not have to prepare annual financial statements, in terms of Clause 30. She submitted that private companies of a minimum size (as determined by turn over or size of workforce) should be automatically required to prepare annual financial statements that would then be audited.

Clause 30 (6), (7) and(8) required that annual financial statements disclose the remuneration of company directors and certain senior executives. Firstly, as the Bill was currently worded, this would exclude private companies. As already stated COSATU wished this provision to be much wider. COSATU also asked that individuals’ remuneration must be disclosed, with remuneration being defined broadly so as to include all benefits such as directors’ fee, salaries bonuses expense allowances, shares and even loans or financial assistance. Apart from transparency, such disclosure would monitor corruption and reveal the role played by corporates in entrenching income inequalities.

COSATU further submitted that clause 31 should be amended to allow trade unions to demand access to annual financial statements, or other financial statements, when a company failed to comply with employment related contractual or statutory obligations.

COSATU pointed out that sometimes workers had believed they were working for a certain company, but they were not. It therefore suggested that for any contract the name and registration number of the company should be provided as an upfront obligation. Furthermore trade unions and employees should receive notification whether assets on its premises we re held by another company in the group.

Clause 45 provided for loans and financial assistance to directors. COSATU believed non- executive directors should be precluded from accessing such loans and financial assistance.

COSATU then called for its comments about the Board to be included under Clause 66 as well.
Clause 69 outlined the criteria for appointment as a Director. COSATU supported the objectives but had concerns that they were not stringent enough. Anyone who was convicted of offences involving fraud, where this was also associated with evading compliance with labour and insolvency or competition legislation, should not be eligible to hold directorships.

COSATU noted that clause 78 stated that a company should not be permitted to indemnify a director from fiduciary duties, or liability for misconduct, or gross negligence. It proposed that this should be further strengthened by providing that any resolution, memorandum of incorporation or agreement running counter to this should be declared void.

In respect of rotation of auditors, COSATU submitted that there was over-reliance on the accounting profession, which often was biased, and might go so far as to collude with covering up violations. It would suggest increasing the five-year “cooling off” period even further and certain other suggestions were made as to the calculation.

COSATU noted that Chapter 6 provided for the introduction of a new business rescue model, which it supported in principle from the standpoint of saving jobs. However, Ms Govender reiterated the suggestions that the trade unions be more actively and directly involved in such process, and kept advised. COSATU supported the provisions of clause 129, but had comments to make on the supervisor’s appointment. COSATU submitted that substantial income could be gained from the liquidation process, and that often liquidators were biased to the larger creditors and banks. Therefore trade unions wished to be able to make their own nominations, particularly to avoid the mindset that businesses could be saved by retrenchments. In respect of clause 131, it submitted that only workers and trade unions would have an interest, long term, in saving the business, but access to information was often a problem for them.

COSATU then suggested amendments to clause 135(3)(a) to reflect that all workers’ claims should be treated equally and not paid out in the order that they were incurred. In respect of clause 140, it called for the business rescue plan to be developed in consultation with trade unions and employees. Similarly there should be notice to the trade unions if the business rescue was to be abandoned under clause 141. In respect of remuneration of the Supervisor, NEDLAC asked that the regulations in regard to remuneration must be tabled at Nedlac. 

Detailed comments were made in respect of clause 144, and COSATU repeated its earlier submissions regarding the dispatch of notices, and the fact that these should incorporate the provisions of the Insolvency Laws. However, it was very disturbed by the fact that the Bill appeared to remove the preferred rankings of employment claims, and that Provident Funds should be included in the definition of pensions claims. Clause 145(4)(a) was also seen as problematic and proposed that voting also include voting by number.

The Chairperson and several members thanked COSATU for their detailed and comprehensive submission.

Prof B Turok ANC observed that the provision for professional indemnity insurance seemed to reduce the personal liability of directors, which was an essential part of good corporate governance. He suggested that the provisions in the Bill against corruption should be extended to Directors corrupting state employees and collusion with state personnel and State Owned Enterprises.

Ms Govender said that there was no objection to the Bill applying to State Owned Enterprises (SOEs) but she felt that the Public Finance Management Act (PFMA) was applicable. She added that Government should have regard to the observations by Pro Turok.

Dr S Rasmeni (ANC) wished to know whether there were provisions for the protection of former employees who, having taken a retrenchment package, then used it for starting their own entrepreneurial enterprises.

Addressing Dr Rasmeni she explained that the Bill applied to all juristic persons conducting an enterprise irrespective of the reasons for starting such enterprise. She re-iterated COSATU’s plea that any notices, irrespective whether these related to business rescue or insolvency, should be served on the workers concerned, their organised representatives and the Head office of such Trade Unions in an effort to ensure the receipt and full appreciation of the implications..

Mr L Labuschagne (DA) referred to page 34 of the submission and queried whether the voting should not be by category rather than numbers. He added that the business rescue provisions seemed to be too little too late.

Ms Govender again emphasised that the voting in insolvency and business rescue should be re evaluated so as to protect the worker. She submitted that this was part of the socio-ethical considerations of business, which should not be severable from other business considerations, nor boxed neatly in a separate category.

Prof E Chang (IFP) observed that there was not a great deal of incentive for investors in the Bill.

Ms F Mahomed (ANC) referred to the submissions on page 32, and felt that business should run in conjunction with the trade unions. She agreed that clause 144 (4) deserved clarification.

Mr D Oliphant (ANC) wondered if there was enough provision for COSATU to be part of the business rescue plan and whether the provided mechanism was adequate. He said that when a business was on the brink of financial trouble or insolvency, management would often play on the emotions of the workers and “force” the workers to make decisions.

Dr P Rabie (DA) wondered whether it was indeed necessary to include provident with pension funds

Ms M B Ntuli (ANC) wished to have some further details on what was currently contained in the insolvency law.

Dr Rasmeni added that the reference to Directors starting an enterprise, running it into trouble, declaring themselves insolvent and starting afresh was reminiscent of DRD Gold Mines, who had been closing shafts and starting up elsewhere with no apparent plan, rendering several workers unemployed.

Ms Govender noted that in regard to the Board of Directors, COSATU had suggested the adoption of the German model where there was a two tier approach. She also lamented that the Bill did not provide for speedy resolutions in relation to handling businesses on the brink of financial problems, and she reminded the members of her earlier plea for a greater and more defined role for organised labour. In her opinion, even the provisions in the USA around the approaches to companies in crisis, described in the written submission under Chapter 11 and Chapter 7 approaches were an improvement, especially as these provided for speedy attention and the removal of the stigma of criminal fault.

Mr S Njikelana (ANC) said that the viewed the Bill as an attempt to grow the SA economy. In his view the provisions for administrative admissions of guilt removed the process from the criminal justice system, with its inherent delays, would overcome problems around the onus of proof, and would speed up a company to recovery. In short the Bill envisaged an overhaul of the whole process. This would include the remuneration aspects, the performance by directors and the social ethical character, which he agreed must be clear and non-ambivalent. He listed the main other clauses, as set out by COSATU and previous submissions.

Prof Turok added that the Bill seemed to him to be about the rights of shareholders. He reminded Members that the biggest shareholder in South Africa, at least in listed companies, was the Public Investment Corporation (PIC), which he saw having a multiplicity of tasks or obligations, such as securing a good return on investment, ensuring that there was good corporate governance, ensuring compliance with black economic empowerment policies and consideration of workers’ rights. The headlines in Business Day that morning concerned reports that the Johannesburg Stock Exchange (JSE) was requiring stronger activity from auditors in conducting their audits. He felt it ironical that both the trade unions and the headquarters of business should be calling for the same development.

Mr Njikelana felt that the proposals in Clause 15 (1)(c) should be clarified.

Ms Govender replied that in regard to the comments on speed, there were two requirements - namely, the proper issuing of the notices and the service of at least one copy on the Head Office of the Trade Union concerned. With regard to the comments on the administrative admissions of guilt, she said that COSATU was of the opinion that the removal of the criminal sanctions did not hold the individuals sufficiently responsible and that the companies, as showed in the recent Competition cases, could easily shrug off the fines imposed. COSATU felt that the German model for Boards was suitable for SOEs, public and private companies, and that South Africa should move to this approach. A further problem she had identified was that the Courts had their own rules and requirements, and that without sufficient information provided willingly by the companies,  the trade unions would not be able to clarify their positions and place a good case before the Courts. She had understood that the NPI was working on developing models which could be utilised by all companies, irrespective of their size. She commented further again on the classification and voting powers of creditors, noting that in COSATU’s opinion too much value and importance was given to secured creditors, usually the banks, who thus had a distinct advantage over other creditors. This was regarded as unconstitutional.

The meeting was adjourned.


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