First anniversary since the inception of the Companies Act, 2008
1 May 2012 marks the first anniversary since the inception of the Companies Act, 2008. It also means that companies that existed prior to the act now have only one year left to become new act compliant, should they have not already done so.
Since the act came into force, the Companies and Intellectual Property Commission (CIPC) has come into existence and begun to fulfill its functions. It has issued practice notes, guidance notes, explanatory notes and a number of non-binding opinions, in addition to handling numerous filings for the incorporation of new companies and the amendments to existing company records.
Various issues have been identified in practice, as well as some unforeseen consequences, often typical of new legislation. Our courts have begun to examine and pronounce on some of these points, most notably in relation to business rescue.
It’s still early days, where academic authority is lean, but what is clear when it comes to the South African business community is that the ‘show must go on’ solutions must be found and implemented, and this is certainly what is happening in practice.
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Memorandum of incorporation
The memorandum and articles of association of a pre-existing company are deemed to be that company’s memorandum of incorporation (MOI) and are known by that name.
However, from 1 May 2011, the Transitional Provisions set out in Schedule 5 of the act prevail. Despite anything to the contrary in the MOI, the provisions in the act apply to:
- the duties, conduct and liabilities of directors;
- the rights of shareholders to receive any notice or have access to any information of every pre-existing company;
- meetings of shareholders or directors, and adoption of resolutions; and
- fundamental transactions, takeovers and offers in Chapter 5 unless exempted by that chapter.
Until 30 April 2013, any other conflict between the provisions of the MOI of a pre-existing company and the act will be resolved in favour of the MOI. After two years, the act will prevail. Now, only one year remains to see that important rights are not lost.
Companies that have not yet done so are advised to adopt a new MOI that is compliant with the act. With the backlogs that are currently being experienced at CIPC, steps should be taken immediately. The deadline is 30 April 2013!
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It is no longer possible to draft a new shareholders agreement that prevails over conflicting constitutional documents. Such conflicts will be resolved in favour of the MOI (the old memorandum and articles).
However, until the end of April 2013 conflicts between an existing shareholders agreement and the MOI will still be resolved in favour of the shareholders agreement. But this reprieve will cease if there is any change to a shareholders agreement within the initial two years. This means that changes to shareholder agreements will need to be carefully considered, to ensure that all amendments to align the agreement with the MOI are made at the same time.
To avoid conflicting provisions of a shareholders agreement being void from 30 April 2013, shareholders must act soon, rather than later, to revise their shareholders agreements.
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CIPC and the Tribunal
CIPC prepared for more than 18 months to ensure that its systems were ready for the implementation of the act on 1 May 2011. CIPC has recently put systems in place that will enable electronic registration of companies. It has also committed itself to defined turnaround times. CIPC did experience system problems in April 2012 which caused it to grant extensions to the filing of annual returns.
CIPC replaced CIPRO and, in addition to its administrative functions, it has increased powers to enforce compliance with the act. Some of these powers include being able to issue and enforce compliance notices, impose penalties and refer offences under the act for prosecution.
CIPC has over the past year issued a number of notices and non-binding opinions clarifying some issues and problems that have arisen with the implementation of the act. These are all available on CIPC’s website at www.cipc.co.za.
The filing/registration requirements for special resolutions have come under the spotlight. Under the 1973 act special resolutions needed to be registered by CIPRO to become effective. The 2008 act does not contain a similar requirement and, save for very limited instances, special resolutions do not have to be filed at CIPC. This change created some confusion. In a non-binding opinion CIPC is of the view that “filing” requires more than the mere delivery of the requisite documents to it. These must be accepted by the issue of a certificate before the amendment becomes effective. Although the act no longer refers to the registration of special resolutions and merely refers to filing, in practice CIPC will reject filings if it is of the view that, for example, the amendment to the Memorandum of Incorporation is inconsistent with the act.
The Companies Tribunal is a new body introduced by the act. The Tribunal adjudicates on applications, makes orders provided for in the act and assists with the resolution of disputes by voluntary alternative dispute resolution in any matter arising under the act. Any aggrieved person, including a shareholder, can lodge a complaint against the company or a director with the Tribunal.
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As was previously the case with CIPRO, CIPC is empowered under the act to deregister companies that fail to file their annual returns. On deregistration, the association of persons constituting the company ceases to have its corporate personality, resulting in serious consequences where business is continued.
Due to system failures and backlogs at CIPC, an extension has been granted for the filing of annual returns and CIPC waived late filing penalties up to 31 March 2013.
All outstanding annual returns must be filed immediately. Applications to restore the status of finally deregistered companies must be processed with immediate effect. We also recommend that clients check their own status as well as confirm that parties with whom they do business are in fact still registered.
External companies are excluded from the definition of a “company”. Therefore fewer provisions apply to external companies. One of the consequences is that section 82, which deals with the deregistration of companies, is not applicable to external companies and there is accordingly no provision under the act which provides for the deregistration of external companies.
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Companies with limited capacity (SPVs)
Existing special purpose vehicles or other companies with conditions restricting their purpose and activities must file a notice to this effect with CIPC sooner rather than later. Limitations on a company’s capacity traditionally set out in the memorandum or articles relied on the doctrine of constructive notice for their enforceability. Third parties dealing with a company were deemed to have knowledge of that company’s limited capacity.
Under the 2008 act, the doctrine of constructive notice applies to those restrictive conditions if they are highlighted to the world at large by filing a notice with CIPC and the adding of the suffix “(RF)” to the company’s name. Third parties dealing with such companies are therefore aware from the name of the company that there are restrictive conditions and are then deemed to have knowledge of the restrictive conditions.
Pre-existing companies were required, as soon as possible after 1 May 2011 to file a notice of those restrictive provisions with CIPC. The doctrine of constructive notice will only apply under the act from the date on which the notice is filed. All pre-existing SPVs that have not filed the notice and updated their MOIs need to do so as a matter of urgency, after which “(RF)” will be added to their name.
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Distributions (including dividends)
All dividends and other distributions by a company need to comply with section 46 of the act. The most typical distributions are dividends declared by a company to its shareholders, although the definition of “distributions” extends to other forms of payments or transactions by a company in favour of its shareholders. For example share repurchases, a payment in lieu of a capitalisation share, the incurrence of a debt or other obligation by a company for the benefit of its shareholders and the forgiveness or waiver by a company of a debt owed by a shareholder are all distributions.
A distribution may only be made pursuant to an existing legal obligation or a resolution of the board of directors of the company. In both cases the board of the company will need to confirm by resolution that the board of directors has applied the solvency and liquidity test, namely a financial assessment that the company will be solvent immediately after the proposed distribution as well as a forward looking assessment that the company will be able to service its debts in the coming 12 months.
If any distribution does not comply with these provisions the distribution may be declared void and the directors of the company may be personally liable.
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Section 45 of the act, although headed “Loans or other financial assistance to directors”, also covers loans between companies in the same group. This has been confirmed by CIPC in a non-binding opinion. More specifically, the section regulates “financial assistance”, which includes lending money and the provision of security by a company to a “related or inter-related company”. Companies are related through ownership or control. Thus a holding company is related to its subsidiary, as are co-subsidiaries to one another, to name but a few examples of how companies may be “related” or “inter-related”.
Any form of related company financial assistance (save for some specific exceptions) requires the approval of the company by way of a special resolution of the shareholders. The company providing the financial assistance must be both solvent and liquid after the transaction. The terms of the financial assistance must be both fair and reasonable to the company providing the financial assistance.
Notification of the financial assistance must be given to shareholders and to trade unions representing employees of the company concerned.
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The act requires certain companies to disclose particulars relating to the remuneration and benefits received by or payable to a broad category of persons, primarily comprising the directors and public officers of the company or group company, in their annual financial statements (AFSs). One year on and there is still uncertainty as to exactly who needs to disclose what.
For disclosure purposes, the word "remuneration" includes fees paid to directors for services rendered to the company, salaries, bonuses, performance-related payments and expense allowances. It also includes any financial assistance given to a director or any person related to the director to acquire an interest in the company.
This disclosure requirement applies to companies that must be audited. All public and state-owned companies must have their AFSs audited. All other companies will have to audit their AFSs if certain criteria set out in the regulations are met, or they may voluntarily elect to do so. According to a non-binding albeit doubtful opinion issued by CIPC, private companies and personal liability companies that must in terms of the regulations but not the act have their AFSs audited need not disclose the particulars of directors’ remuneration and other benefits in their AFSs.
Companies that are required by the act or the regulations to be audited must file their AFSs with CIPC when filing their annual returns. CIPC has waived this requirement for companies, other than public and state owned companies, until 31 March 2013.
The shareholders must approve directors’ remuneration in a special resolution passed within the previous two years.
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Social and Ethics Committee
State-owned companies, public listed companies, and any other company with a public interest score above 500 points incorporated before 1 May 2011 should have appointed a social and ethics committee by the end of April 2012. Most private or public companies from mid-size will have public interest scores in excess of 500 points. The committee must comprise at least one non-executive director and two other directors or prescribed officers.
The functions of the committee are wide-ranging. Its main function is that of monitoring the company’s activities having regard to the company’s legal responsibilities for social and economic development, good corporate citizenship, the environment, health and public safety, consumer relationships, and labour & employment.
Compliance is obligatory unless an exemption was applied for before the end of April 2012 or the company is a subsidiary of another company that has a social and ethics committee that will perform the required functions. CIPC is empowered to convene a shareholders meeting to appoint a social and ethics committee or issue a compliance notice in the event that the board fails to do so. Non-compliance can lead to an administrative fine or prosecution.
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Recent case law indicates that our courts will not lightly grant an order placing a company into business rescue. To quote Welman v Marcelle Props: “Business rescue proceedings are not for terminally ill …corporations. Nor are they for the chronically ill. They are for ailing corporations, which, given time, will be rescued and become solvent.”
The court in Investec Bank v Bruyns ruled that the statutory moratorium in favour of a company in business rescue cannot be relied upon by the surety, meaning that a creditor may proceed against a third party surety for the debts of the company, even when the company is in business rescue.
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Security for costs
Our courts addressed the issue of security for costs in Haitas v Port Wild Props. The 1973 act granted a court the discretion to order a plaintiff company to furnish security for its opponent’s costs if there was reason to believe that it will be unable to pay such costs if ordered to do so. The 2008 act is silent on this issue. The Court found that it is in the interests of justice to require an impecunious and insolvent corporate plaintiff to furnish security. It would be unfair to allow such a plaintiff to proceed to trial while not on risk.
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