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Companies Amendment Bill, 2010
BRIEFING TO PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY16 November
2010Ms Zodwa Ntuli Deputy Director General: Consumer and Corporate
Regulation Division (CCRD)Mr MacDonald Netshitenzhe Director:
Commercial Law and Policy, CCRDAdv Rory Voller Director: Legal and
Regulatory Services, Companies and IP Registration Office
(CIPRO)Adv Flip Dwinger Legal Consultant, CIPROMr Desmond
Ramabulana Deputy Director: Commercial Law & Policy, CCRD
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*OutlinePurposeIntroductionRationale for ReformPolicy Objectives
of the Companies ActDiscussion on the BillDomestication of Foreign
CompaniesPowers of Business Rescue PractitionersRegistration of
External CompaniesIndependent Review of Financial
StatementsLicensing of Business Rescue PractitionersConversion of
Par value sharesEmpowering Minister to regulate Public
OfferingsVoid and Voidable resolutions provisions Legislation
taking precedent over the Companies Act
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*Purpose
The purpose of this presentation is to brief the Portfolio
Committee on Trade and Industry on the Companies Amendment Bill,
2010, which seek to rectify technical errors in the Companies
Act
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*IntroductionThe Companies Act No.71 of 2008 (the Act) was
passed by Parliament in late 2008, and assented to by the President
in April 2009
The Act will take effect on a date fixed by the President in
terms of section 225, which requires that at least one year elapse
between the date of assent and the effective date
During process of developing regulations to give effect to the
Act, it was discovered that several sections of the Act contained
errors which necessitated rectification of those mattersOn 22
December 2009, the Minister of Trade and Industry published a
Notice in the Government Gazette soliciting public submission and
comment on matters that may need to be corrected before the Act
The correction process was only confined to apparent errors and
does not extend to a review of policy matters already endorsed by
Cabinet in 2007, which are currently contained in the Act.
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*IntroductionThe scope of the correction was therefore limited
to identifying items inadvertently omitted from the Act, including
errors pertaining to inconsistencies, incomplete sentences,
misalignment, and similar technical concerns with the text of the
Act
The purpose of the Bill is therefore to settle the Act by more
perfectly representing its policy in coherent and consistent
provisions of the text The Bill contains a number of amendments
correcting syntax, spelling, grammar, numbering, punctuation,
alignment, reference, typographical and similar patent technical
errors in the text
It also entails correction of text to address inconsistencies
and disharmony among provisions of the Act, as well as addressing
possible conflict with other regulations
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Rationale for Reform Need for a review of the existing company
law regime
Outdated company legislationGlobalisation and advent of
democracyScourge of company scandalsDevelopments in the field of
financial reporting standardsEasing regulatory burden especially
for small businessesIncreasing market transparencySimplification of
company registration
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Policy Objectives Policy Objectives of the Companies Act
The repeal of the current Companies Act, 61 of 1973 and the
introduction of the new company legislation.Simplification of
company law in regard to the registration, maintenance, regulatory
and institutional frameworksThe abolition of the concept of par
value and nominal capital The introduction of the equity solvency
and balance sheet solvency tests to determine proper protection of
creditors The introduction of an enhanced regime for the protection
of shareholders, particularly minority shareholders
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Policy ObjectivesThe introduction of the non exclusive concepts
concerning the duties and obligations of directors towards
companiesThe reform of the mergers and acquisition regime and the
introduction of proper mergers in the proposed legislationThe
introduction of a business rescue regime in the Companies Act
Decriminalization, where appropriate, of the company legislation
andEstablishment of appropriate bodies and institutions for the
effective enforcement of the proposed legislation
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* DiscussionThe discussion will focus on important clauses in
the Bill
Domestication of Foreign CompaniesPowers of Business Rescue
PractitionersRegistration of External CompaniesIndependent Review
of Financial StatementsLicensing of Business Rescue
PractitionersConversion of Par value sharesEmpowering Minister to
regulate Public OfferingsVoid and Voidable resolutions provisions
Legislation taking precedent over the Companies Act
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*Issues
Domestication of foreign companies (section 13) Section 335 of
the 1973 Companies Act provides for a scheme for domestication of
foreign companies that may wish to transfer their registration to
the Republic of South Africa, and thus regulated as if they had
been incorporated in the Republic It was the policy intention to
migrate this scheme into the new dispensation to facilitate ease of
transfer by foreign companies but an omission occurred, which we
now propose to correct The Bill proposes to re-enact the
domestication of companies in order to simplify registration of
companies and ease the burden of doing business Section 49(b) and
(c) of the Bill were introduced to ensure that the arrangements for
domestication are reciprocall
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*Issues Powers of Business Rescue PractitionerThe concern was
raised that the phrasing of the provision seems to give unfettered
powers to the Business Rescue Practitioner (BRP) to cancel
contracts during a business the application of the Business Rescue
Chapter Such powers could in the most extreme cases make it
possible for the practitioner to repudiate a security agreement or
arbitrarily renounce a contract without compensation to the other
party This could have also made it difficult for local companies to
access finance or capital from foreign companies with the risk of
such contracts subject to cancellation by BRP This unfortunate
reading is clearly unintended and is inconsistent with the policy
on business rescue scheme, and section 136(2) is revised in the
Bill to clarify the powers of BRPBRP powers are now expressly
subject to a court process which will address the concern
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*Issues
The amendment in the Bill will harmonise section 134 dealing
with security of property obtained by the company with section
136(2) on cancellation of contracts in order to provide certainty
regarding the obligations of the company The Bill requires the
practitioner to seek court approval before proceeding with the
process of cancellation of a contract in order to ensure the
principles of fairness and reasonableness are applied This will
reduce potential for abuse and unfair treatment of creditors which
might have unintended consequences
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*Issue Registration of external companies Section 23 deals with
registration of external companies who do business within the
Republic while remaining primarily regulated by their country of
registration or originThe policy intention of this section is to
reduce some regulatory burden on such external companies by
deferring to the incorporating jurisdiction to carry out the
primary regulation of their own companies. The phrasing of section
23 imposes obligation on such companies to register even for
activities that in terms of policy were not intended to be
considered doing business The impact is that the current
formulation could place at risk the countrys ability to attract
debt financing for both public and private enterprises
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*Issues
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The Bill has revised section 23 to deal with the defect which
renders the policy rationale ineffective by rearranging the factors
that would trigger the requirements by external companies to
register in South AfricaThe Bill also ensures that external
companies who enter into employment contracts in South Africa are
required as a matter of must to register in South Africa as that
automatically means they conduct business in South Africa Companies
that merely hold meetings for instance in South Africa will not be
required to register as a company in South Africa but the
Commission will monitor such activities to prevent possible
evasion
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*Issues Independent review of financial statements Section 1
deals with amendment to definitions such as audit to clarify that
it does not have the same meaning as the one contained in the
Auditing Profession Act of 2004 In this Bill it has to be
elucidated that an independent review in terms of the Companies
Amendment Bill does not have the same meaning as that contained in
the Auditing Profession Act (APA) - In terms of APA an audit also
includes an independent review. Parliament was mindful that the
policy behind the Act is to reduce regulatory burden and cost to
business, and that the above interpretation was not
intendedRegulations to be issued by the Minister in this regard
will regulate the scheme of independent review.
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*Issues
Licensing of Business Rescue Practitioners (Section 138(1) and
(2)) The formulation of these two subsections are inconsistent with
each other in that, the expression regulated authority as used in
subsection (1) has a defined meaning, and does not extend to the
type of entity contemplated as being designated by Minister in
terms of subsection (2)The current formulation makes it impractical
for this section to be implemented because there is currently no
entity that satisfies the criteria contemplated in both subsections
The amendment seeks to ensure that the scheme adopted will allow
for appointment of business rescue practitioners with minimum
prescribed qualifications who may fall outside the regulated
professionsThe Companies and IP Commission will license those
persons who are not subject to a regulated authority, and ensure a
simple and efficient process subject to vetting and approval is
followed
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*Issues Conversion of Par Value SharesParliament in the Act
intended to do away with Par Value Shares and in this regard have
them converted within certain period to phase them out
completelyThe Act intended the phasing out mechanism to be a
subject to be discussed and agreed upon by the Minister of Trade
and Industry and Minister of Finance and expressed through
regulations There is a concern that the conversion process might
attract tax implication and loss of voting rights it is proposed
that the Act merely abolish the system and not allow further
issuing of par value sharesThe Bill proposes the amendment to
Schedule 5, Item 6 of the Act to remove paragraphs that may attract
the implication mentioned above from a tax perspectiveRegulations
should therefore be in accordance with the amendment
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*Issues Empowering Minister to regulate Public Offerings
Section 95 of the Act seeks to regulate Public Offerings of
company securities
In this regard there is no provision giving the power to the
Minister to issue regulations to regulate this regime and this
might result in uncertainty and different interpretation by
courts
The Bill amends the provision to empower the Minister to issue
Regulations to regulate the scheme accordingly
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*Issues Void and Voidable resolutions provisionsSection 218 of
the Act provides that nothing in the Act renders an agreement,
resolution, or provision thereof that is prohibited void or
voidable unless a court declares it voidThe phrasing of this
provision makes it unclear which contracts are void or voidable as
the terms mean different thingsThe Bill amends the provision to
provide clarity in terms of contracts that are voidable after the
court of law has so ordered
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*Issues Legislation taking precedent over the Companies Act
Section 5 of the Act provides for certain legislation such as
the Banks Act and the PFMA to take precedent over the Companies Act
in the event of conflict between themThere is an omission that
occurred in that the Municipal Finance Management Act (MFMA), which
is a provincial version of the PFMA has not been includedThe Bill
amends the provision to provide for the inclusion of the
MFMARecommendations for a general exemption for all laws relating
to financial or tax without a proper assessment being undertaken on
their implications was not agreed to.
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Thank You!!!