25 November 2010
			
The Chairperson			
Portfolio Committee on Trade and Industry
Committee Secretary
P O Box 15
Parliament
Cape Town
8000

Attention:  Ms J Fubbs	Doc Ref:
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Dear Ms J Fubbs

Companies Amendment Bill 2010

We thank you for the opportunity to comment on the Companies Amendment Bill. The members of the Banking Association support the modernisation of company law in South Africa, and offer the following comments with the aim of facilitating the smooth implementation of the Companies Act, No 71 of 2008.

The banking industry would like to take this opportunity to thank the Minister of Trade and Industry and his Department for engaging the banks and business in general through BUSA and for remedying many of the concerns raised in this Amendment Bill. 

The comments that we offer are categorised as follows: Category A includes comments which are critical and must be addressed; Category B includes important comments that will assist in facilitating smooth implementation of the Act and avoid unintended consequences in its interpretation; and Category C includes comments which are general in nature and assist with tidying up of certain definitions and correcting spelling, grammar, etc.

CATEGORY A	

1.	Amendment of section 11 of Act 71 of 2008

The Banking Association would like to draw the Portfolio Committee’s attention to a practical implementation problem that has been identified in respect of Section 11(1) of the Companies Act, 2008. This is not a substantive policy matter but rather a technical issue that will impact on all of the banks as well as many other companies and organisations that transact with companies.

1.1	Proposed amendment to Section 11(1)(a)(i), (ii) and (iii)

The right to use proposed symbols, as outlined in section 11(a)(ii), for a company name is technically problematic for the following reasons:

The banking and national payments system operates through a platform of inter-connected information technology systems. These systems are used to receive, store, and process information; open, operate and close secure bank accounts; and make payments between participants in the South African economy. The existing systems are programmed to capture only specific recognised characters. These systems are not programmed to capture symbols such as those listed in Section 11(1) because symbols in a software programme are recognised as further computer programme instructions as opposed to data to be captured.

The effect of this technical reality is that the information technology systems of the banks, and their customers for that matter, are currently not able to capture, store, or process the names of companies which contain symbols.  Critical to the operation of any business is the opening of a bank account. The inclusion of symbols in a company’s name will therefore serve as a limitation to the opening of a bank account for and transacting with that company, at the present time.

The current Companies Act, No 61 of 1973, is silent on the right to use these marks and symbols in company names, and it is the understanding of the Banking Association that CIPRO hitherto would not register company names containing such symbols, as its systems could not accommodate them. Where companies have used these symbols in their names – such as ‘Pick ‘n Pay’ – and opened bank accounts it was made possible by a ‘work around’ solution that is not suitable for universal application. However, now that the Companies Act, No 71 of 2008 proposes an explicit right to use these symbols, it is expected that the volume of such companies may increase with attendant technical impediments for the banks and their counterparties and customers.

From a technical perspective, punctuation marks and special characters have specific meanings in computer programming languages and data description. The use of these marks and symbols will cause the computer programmes to malfunction resulting in failed transactions. This problem extends to the following activities: opening a bank account; printing of cheque books; payment of cheques; and issuing of debit and credit cards.

For example, within only one bank there are at least 73 different computer systems that would need to be adapted to accommodate these punctuation marks and symbols, at an estimated cost of close to R100m. This would be a complex project which would need a minimum period of 24 months to be completed without posing systemic risks to the operability of the bank’s  information technology systems.  If this is extrapolated into the national payment system as a whole it becomes obvious that the granting of a seemingly innocuous right to use symbols and punctuation marks will have technical consequences that could cost the financial services industry millions of rand to prepare for.

The functioning of the entire economy depends upon the efficiency and security of the national payments system. Without significant and costly changes to the information technology systems of all participants in the national payments system, the use of symbols and punctuation marks in company names will generate considerable risk of failed and / or fraudulent transactions within that payment system.

This problem became apparent as banks started to prepare their information technology systems for the implementation of the new Companies Act. Various attempts have been made to find cost-effective and quick solutions to the problem. However, these have had to be rejected due to the high levels of associated risk in respect of fraud as well as non-compliance with legislation such as the Financial Intelligence Centre Act. (FICA requires that all financial institutions obtain and store identifying records of all customers and their transactions.) If companies have the right to register names with punctuation marks or special characters which cannot be accommodated by the banking system then such a right can be said to be in conflict with other legislation, such as FICA. Further, refusing to open an account for a company with symbols in its name could result in the banks being open to charges of unfair discrimination and the risk of litigation.

Furthermore, a wide range of companies that transact with other companies will be similarly affected by this practical difficulty, including retailers, cellular telephone companies, airlines, the Johannesburg Securities Exchange, STRATE, and also government agencies such as SARS, the Deeds Registry, the Unemployment Insurance Fund, and CIPRO itself.

Furthermore, given the inter-connectedness between participants within the national payments system, it is insufficient for only one or a few of them to implement a solution, as no solution will work until it has been implemented across the entire economy. 

A preliminary investigation into the matter has revealed that the scope of the systems changes required could be similar to the Y2K project and therefore impose a cost to the economy wholly disproportionate to the purpose and benefit of Section 11(1). 

The banking industry understands the rationale behind Section 11(1) and the desire to allow companies to exercise the right to freedom of expression in selecting their name. However, this right needs to be balanced with the economic costs of extensive economy-wide changes to company information technology systems, especially during the current difficult economic climate. 

Another technical problem is caused by the proposed right of companies to register names in any language. The term “any language” can be interpreted to include languages beyond the official languages of South Africa such as Chinese, Arabic or Hindi, which the Banking Association believes was not the intent of the legislation. The information technology systems of the banks, as with most other companies and organisations, will not able to capture, store or process the names of those companies which include words in languages not based on the alphabetical system, such as Russian, Chinese or Arabic. The reference in section 11(1)(a) to “any language” should be amended so as to restrict companies to the official languages as defined in the Constitution of the Republic of South Africa.  

Thus, it is proposed that serious consideration is given to amending Section 11(1)(a) of the Companies Act, No 71 of 2008 as follows:(bold brackets indicate a deletion and underlined words indicate an insertion)

1.2	Criteria for names of companies

(1)	Subject to subsection (2) and (3), a company name –
(a)	May comprise words in any official language, irrespective of whether or not the words are commonly used or contrived for the purpose, together with-
(i)	Any letters or numbers [or punctuation marks];
		[any of the following symbols: +, &, #, %, =;]
(ii)	any other symbol permitted by the regulations made in terms of subsection (4);
(b)	any company name may not comprise any marks, punctuation marks or symbols: +, &, #, %, =, -, ;

We also propose the deletion of subsection 4(a) of the proposed amendment.

However should this amendment not be supported by the Portfolio Committee, then we would like to urge the committee to consider providing a two-year transitional period before s11(1)(a) comes into effect.

2.	Amendment of section 22 of Act 71 of 2008

2.1	The 2008 Act provides that companies may not trade under insolvent circumstances and can be required to cease trading if they trade under insolvent circumstances.  Currently, it is a commercial reality that the majority of companies in South Africa trade under technical insolvent circumstances (i.e. their liabilities exceed their assets), but are commercially solvent, for example where a company is funded by shareholders' loans.  Companies would ensure that the claims of certain creditors are subordinated, which satisfies the requirements under the present Companies Act, No 61 of 1973. 

2.2	If the Companies Act, No 71 of 2008 Act remains unchanged, such companies contravene the 2008 Act and may have to cease trading.  This may potentially affect 80% or more of companies in South Africa. 

         It is therefore submitted that that sub-section 22(1)(b) be deleted in its entirety.

	Alternatively, the Companies Amendment Bill should provide clarity by defining insolvency for the purposes of interpreting subsection 22(1)(b) to mean commercial insolvency, which is whether or not a company has liquid assets or readily realizable assets available to meet its liabilities as they fall due to be met in the ordinary course of business and to thereafter be in a position to carry on normal trading. 

	We believe that this proposed amendment reflects the intent of the legislation.

3.	Amendment to section 136(2) of the Companies Act, Act 71 of 2008

3.1	The Banking Association appreciates the proposed amendments to Section 136(2) which deal with the powers of the business rescue practitioner. The amendments go far in addressing the serious concerns that the banking industry had with the original wording in the Act. However, to give full intent to spirit of the amendment, we would like to propose that the wording be further amended to provide more clarity.

 	South African banks typically source the funds they need to make loans into the South African economy in the form of capital from shareholders, deposits from customers and loans from other financial institutions. Banks also lend money to each other, buy, and sell financial products from and to one another to spread risk and enhance returns. This results in most South African banks having simultaneous claims upon each other and cross-border loans from international institutions.

The regulations under the Banks Act, No 94 of 1990 require banks to hold a minimum amount of share capital relative to their liabilities to ensure stability of the banking sector. Where a bank simultaneously owes and is owed money by another bank or similar counterparty the said regulations allow the bank concerned to use its net exposure to that bank or counterparty in calculating the minimum regulatory capital to be held provided that those exposures can be netted (i.e. set-off) against one another even in the event of insolvency. This results in banks not holding more capital than is necessary with a resultant curtailment of the cost of banking from which the economy benefits.

Separately, banks that trade financial instruments with one another typically require assurance that their claims against one another can be legally netted or set-off and that security in the form of cash collateral or similar to be provided by the debtor bank to the creditor bank will be returned against payment of the debt. Debtor banks naturally are reluctant to provide such security where it could become tied up in the insolvency of the creditor bank and therefore usually will decline to conduct such trade in jurisdictions where netting or set-off of the debtor bank’s debt against its claim for return of the security is not assured by law.

To cater for both the above-mentioned market needs and render South Africa an attractive destination for trade in financial instruments sections 35A and 35B of the Insolvency Act were introduced. It is also for these reasons that section 136 is intended to be subject to the said provisions of the Insolvency Act.

The proposed amendment whereby a Court may on application by a business rescue practitioner cancel any agreement will, we submit, negate the certainty that sections 35A and 35B of the Insolvency Act introduced as, as currently proposed, creditors of South African banks can be assured that netting or set-off will apply only until a Court might order otherwise. This will foreseeably prevent lawyers from opining that cross-border loans will be enforced according to their terms and from opining that claims and counterclaims will be offset against each other even in insolvency. If this occurs the cost to South African borrowers of raising funds in international markets will substantially increase, existing international borrowings will become repayable immediately or be substantially re-priced upwards and the banking industry will be forced to raise considerably more regulatory capital than is currently required. This could result in it becoming more difficult and more expensive for South African companies to finance their business operations, expansion, and investment plans. The borrowing costs for parastatals, such as Eskom and Transnet, would be negatively impacted. Ultimately, economic growth, employment and development could be jeopardized.

In order to provide greater certainty and avoid ambiguity, we propose the following deletions (in brackets) and the following additions underlined.

“(2A) When acting in terms of subsection (2)-
(a)	a business rescue practitioner may not suspend any provision of:
	(i)	an employment contract; or
	(ii)	an agreement to which section 35A or 35B of the Insolvency Act, [or] [applies] would have applied had the entity been liquidated;

(b)	a court may not cancel any  provision of –
	(i)	an employment contract, except as contemplated in subsection (1); 
	(ii)	an agreement to which sections 35A and 35B of the Insolvency Act, (Act No. 24 of 1936) would have applied had there been a liquidation;
	(iii)	an agreement or an agreement whereby security has been granted by the company or over the assets of the company.” 

4.	Commencement date and transitional arrangements

The banks have undertaken extensive work to prepare for the new Companies Act to come into operation. This work includes training of staff members about the new legislation; changes to forms and other documentation; and the design and implementation of new IT systems and business processes to manage business rescue which is a new process introduced in the new Act. All of the banks have complex systems in place and changes to these systems take considerable time and resources.

The process of effecting these systems changes has been hampered to some extent by the lack of finality on the content of the new Companies Act and the absence of final regulations pursuant to the Act. 

The new Companies Act is an important piece of legislation and will impact significantly on the South African economy. The banking industry believes that it is important that the economy is thoroughly prepared to implement the new requirements arising from this legislation. 

It is for this reason that the banking industry fully supported the decision of the Minister of Trade and Industry to announce a delay in the commencement of the new Companies Act to 1April 2011 recently. However consideration of the current timeframes and Parliament’s timetable in finalising the Amendment Bill would indicate that an extension might be necessary to allow both government (including CIPRO and companies across the economy to complete their preparations to implement the new law).

It is submitted that the Portfolio Committee may wish to consider providing for a phased or staggered commencement of the Companies Act in a similar manner to the provisions of the Consumer Protection Act, more particularly Item 2.  Schedule 2. Certain sections of the Act could become effective earlier than the rest of the Act i.e. the sections dealing with regulatory agencies and administration of the Act.

CATEGORY B	

1.	Amendment of Section 1 of Act 71 of 2008

The term “securities” is used throughout the Companies Act, 2008. The definition of the term “securities” in Section 1 of the Companies Amendment Bill, 2010, is currently too wide and it could be interpreted to also include funding raised in the ordinary course of business through bank loans. The impact of this interpretation will be that borrowers will have to comply with the formalities set out in the Act. This will have a major impact on the costs and time required to implement financing transactions. 

It is therefore suggested that the definition of ‘securities’ is amended so as to exclude agreements relating to funding through bank loans. The following wording is proposed:

The definition is hereby amended –

	“securities” means any shares, notes, bonds, debentures or other instruments, irrespective of their form or title, issued or authorised to be issued by a profit company for the purpose of raising capital, but excludes any instruments or agreements entered into for the purposes of raising funding in the ordinary course of business and instruments referred to in section 43(1)(a)(ii).

2.	Amendment of Section 13 of the Companies Act, Act 71 of 2008

It is submitted that the proposed wording of Section 13(11) of the Companies Amendment Bill, 2010, does not adequately capture the intention of the section. It is our understanding that the intention of this section is to protect the rights of both third parties and the domesticated company. To avoid confusion the terminology of “domesticated company” should be used consistently throughout this section. 

Amendments to the section are proposed to ensure more clarity. It is submitted that subsections 13(11)(c) and (d) should be deleted and replaced with the following:

11(c)	prejudice the rights of any person against or in relation to the domesticated company, or affect the property, rights, liabilities or obligations of [that juristic person] the domesticated company; or

11(d)	render ineffective any legal proceedings by or against that domesticated company [juristic person].

3.	Amendment of section 15(2)(b) of Act 71 of 2008

3.1	In terms of section 15(2)(b) of the Companies Act, No 71 of 2008, a company can be ‘ring fenced’.  The relevant section states “The Memorandum of Incorporation (MOI)” of any company may contain any special conditions applicable to the company, and any requirement for the amendment of any such condition in addition to the requirements set out in section 16; or

This means that the powers of a company to perform certain acts can be restricted.  This is done by placing the restrictions in the company’s MOI and adding the abbreviation “RF” to the company’s name. The abbreviation “RF” alerts third parties to the fact that the company is ring fenced and that limits are placed on its ability to transact.  Third parties are then required to read the company’s MOI since they will be bound by the ring fencing provisions.
Ring fenced companies are used often in project finance deals (including Public Private Partnerships where government is involved), preference share deals, corporate funding deals and black economic empowerment deals (especially in respect of equity holding).  Examples of the ring fencing restrictions are; the company may not sell its assets, give its assets as security, incur further debt, allow any shareholders other than shareholders who are described as a designated group, etc.

 3.2	If the proposed amendment is allowed, the restrictions will no longer relate to the ability of the company to transact, but it will only determine how the company should amend its MOI.  It will therefore only deal with an internal process and will not ring fence the company. The proposed amendment is in conflict with sections 19 and 20(1) which allows for restrictions on the powers, purpose and activities of a company.

3.3	We suggest that section 15(b) be amended as follows; “contain any restrictive or procedural requirement in respect of the company’s purpose, powers, activities or capacity, in addition to any requirements set out in section 16”.
		
4.	Amendment of Section 45 of Companies Act, Act 71 of 2008 

In order for companies in a wholly or majority owned group, to obtain benefits from their bankers by consolidating the balances in their various accounts thereby achieving a net position for the group and effectively setting off one company’s overdraft against another companies surplus cash (“cash management”) or simply to manage the cash position of the group on a short term basis, these groups make use of intercompany loans.

In order to ensure the cash management process, which constitutes financial assistance (the inter-company loans) as defined in section 45, each group company participating in the cash management process must comply with the provisions of section 45 of the Act. Section 45 sets out the formalities required, which include a special resolution and that the board must be satisfied that the company meets the solvency and liquidity test and that the terms and conditions of the inter-company loans are fair and reasonable to the company.

In terms of this section the Board needs to be satisfied that immediately after providing the financial assistance the company would satisfy such test. Since the intercompany loans are made at the close of business everyday under or in terms of the cash management process it will practically be very difficult for the board to comply with the formal requirements for these cash management arrangements.

Indeed this highlights a major impact for the treasury functions of major companies.  Whilst section 45, by its heading is intended to deal with “Loans or other financial assistance to directors”, its reach is clearly much greater than that.

This unintended consequence regarding cash management arrangements can be remedied by inserting the following sub-section, 45(1)(b)(iv):

‘“Financial assistance” does not include intercompany loans made or to be made under or pursuant to any netting or set-off arrangement entered into by any company[*and/or its subsidiaries] in the ordinary course of its banking arrangements for the purposes of netting debit and credit balances in its[*their]  bank accounts.

5.	Amendment to section 48 of Act 71 of 2008

5.1	The proposed addition of subsection 8(b) will make any share buy-back and any preference share “redemption” much more onerous, time consuming and  expensive than what is currently the position.

5.2	If sections 114 and 115 must also be complied with, then an independent expert must be appointment to prepare certain plans and reports. This will be very time consuming and costly.  Most of the preference shares issuers are Special Purpose Vehicles (SPV) and might not be in a position to afford it.  The entities are usually only created for that purpose and the shareholder will usually not benefit from such a protracted procedure.

5.3	The permission of the court might also be required if 15% of the shareholders vote against the special resolution to buy back the shares.  This will be too time consuming and costly and create so much uncertainty that preference share schemes, as a black equity empowerment tool, might wane.

5.4	If section 115 applies, then section 164 (appraisal rights) will also apply.  This could jeopardise the continued use of preference share structures even further.

5.5	We suggest the omission of the proposed new section 8(b).

6.	Amendment to Section 112(5) of the Companies Act, Act 71 of 2008

The Companies Amendment Bill amends Section 112(5) by deleting the word ‘ratifies’ in the section. The effect of this is that the ability to ratify a transaction has been removed. We request that word be reinstated in the section.

The implication of the deletion is that it will bring about a very strict and formalistic approach to what is a common commercial transaction and this would seem to be in conflict with the objectives of the new Companies Act which is to create flexibility and promote economic activity. 

The effect of the deletion is that if a sale was concluded and due to an oversight, the requirements of the section were not complied with, there is no ability to subsequently ratify the transaction. 

This will be the case even if all of the shareholders have agreed to the transaction. This could have severe consequences, as often the sale would have been concluded and implemented, but there would be no ability to ratify it. The situation that would arise would be like trying to “unscramble the eggs”. This ‘unscrambling’ of a deal would be extremely difficult in practice and virtually impossible in some cases. If all of the parties are still willing to conclude and give effect to the transaction then the shareholders should have the ability to ratify the transaction. 

Preventing such ratification undermines the freedom to contract and inhibits economic activity. It is proposed that the word ‘ratifies’ not be deleted.

CATEGORY C	

1.	General

1.1.	Amendment to Section 1

It is submitted that the definition of “asset” is incomplete and therefore inconsistent with the IFRS definition. The following amendment is proposed:

‘Asset’ means a resource controlled by an entity as a result of past events, and from which future economic benefits are expected to flow to the entity.

1.2.	Amendment to Section 29

The Companies Amendment Bill amends sub-section 29(6)(a)(i) with the insertion of the words ‘fail in a material way’ and it is proposed that the same amendment to carried through to subsections 29(6)(b)(i) and (ii).

1.3.	Amendment to Section 30

The Companies Act, 2008, makes reference to ‘future directors’ in sub-sections 30(6)(e), (f) and (g). It is submitted that the requirement introduced by these sub-sections is impractical and that the reference to ‘future directors’ should be deleted. 

For example, at the time of preparing the annual financial statements, the board may have resolved to appoint a new director and such person accepts the appointment. However, in the interim between the preparation of the annual financial statements and the publication thereof, the new director may not take up the appointment for various reasons including ill-health or other commitments. In such a case, it would not be appropriate that this person’s information was publicly disclosed. 

1.4	Amendment to section 32(7) of Act 71 of 2008 

	The amendment should also delete subsection 7 as it is now obsolete and makes reference to the proposed deletion of subsection 6.

1.5	Amendment to section 73(8)

	A presumption is contained in the Companies Act, No 61 of 1973 which provides, with regard to minutes of a meeting of the directors or managers of a company, that signature by the chairman of the meeting (or chairman of the next succeeding meeting) shall be evidence of the proceedings at that meeting (section 242 (4)).  This is largely replicated, with appropriate changes, in section 73 (8) of the Companies Act, 2008.  

However, the Companies Act, No 61 1973 also contained a provision (section 243) that where minutes were kept in terms of section 242, various aspects of the meeting and the proceedings were deemed to be valid, until the contrary is proved (i.e. merely shifting the onus of disproving to the person alleging some invalidity).  This provision is not replicated in the Companies Act, 2008, which appears, in our view, to be an omission.  Consequently, we would recommend, for the sake of certainty and because this (like its counter-part on the Companies Act, 1973 is) is likely to be a very important provision, practically, in matters where the validity of especially a resolution is in issue that section 73 (8) be amended to read –

“Any minutes of a meeting, or a resolution, signed by the chair of the meeting, or by the chair of the next meeting of the board, [is] shall constitute, unless the contrary is proved, valid evidence of the proceedings of that meeting, or the adoption of that resolution, as the case may be.” 

1.6	Amendment to section 95(a) of Act 71 of 2008

	Section 95(a) proposes the insertion of the following words:

“and other persons closely involved in the business” in the definition of “employee share scheme”

The term “and other persons closed involved in the business” is ambiguous and is not used elsewhere in the Act. This will lead to confusion and as such it is recommended that the term be deleted.

1.7	Amendment to section 125 of Act 71 of 2008

	The word “reacquires” should read “re-acquires” in line 6.

Thanking you

Nicky Lala-Mohan
General Manager - Legislation