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Companies Act
Feb/March 2012

New Companies Act:

A breath of fresh air?

BEVAN FRANK explores some of the significant changes of the new Companies Act and how they affect small and medium businesses in the sport and outdoor industries

Small and medium enterprises — like many retailers and distributorships active in the sport, outdoor and lifestyle industries — would welcome the changes brought about by the new Companies Act 71 of 2008 as a breath of fresh air. Less red tape, clearer and simplified legislation as well as a lifeline for businesses in distress, are just some of the welcome features of the new Companies Act (referred to as the “Act”).

Rob Davies, Minister of Trade & Industry, has described it as a major piece of legislation and reform that will improve the environment for business operation in SA.

The main purpose behind the law changes was to ensure that the regulatory framework for enterprises of all types and sizes promoted growth, employment, innovation, stability, good governance, confidence and international competitiveness.

The new Act has a modern approach and has been brought into line with international best practice. It has been made less prescriptive than the previous one, making it easier to understand and apply. It has been drafted in plain language and the number of sections has been reduced. The new Act recognises only two types of companies: profit and non-profit organisations.

Some of the major consequences of the new Act and its relevancy for small and medium businesses in the sport and outdoor industries include the following:

Registration of a new company

The registration of new companies is simplified and the reservation of a company name in terms of the old Companies Act is no longer a prerequisite. A company can now be registered with its registration number as its name, until a new name has been registered. Under the previous Act the process of reserving a name could often result in substantial delays.

Phasing out of Close Corporations

Since the new Act came into operation on 1 May 2011 one can no longer register a new close corporation (CC). However, pre-existing close corporations will continue and amendments to the founding documentation will still be made by the submission of CK documentation to the Companies and Intellectual Property Commission (CIPC) — previously known as the Companies and Intellectual Property Registration Office (CIPRO).

Good news for Sports Trader readers is that the conversion from a close corporation to a company has been simplified. To convert a CC to a company under the Act, the CC just files a specific notice of conversion along with an amended Memorandum of Incorporation (which complies with the new Companies Act), the prescribed filing fee, and a statement of consent.

Memorandum of Incorporation

When the Act was changed the legislators aimed to simplify company administration. Under the previous Act, the founding documents of a company consisted of its Memorandum of Incorporation (MoI) and Articles of Association. The Articles of Association is generally a long and complex document that has been of little help in the administration of a company.

Now a company’s founding documentation will only consist of a MoI, which sets out the rights, duties and responsibilities of shareholders, directors and others in relation to the company and may also contain additional provisions applicable to the company that is not included in the Act.

It should be noted that since 1 May 2011 the Articles of Association of an existing company is deemed to be the company’s MoI.

A company has two years (until 1 May 2013) to get its MoI in line with the new Act. Should this be in conflict with the Act during this two-year period, the provisions of the MoI will prevail over that of the Act.

It is recommended that readers make arrangements as soon as possible to amend the MoI in order to comply with the Act.

Auditing of financial statements

One of the crucial aims of the new Act is to encourage greater transparency and accountability in financial reporting as well as promoting sound financial management. Companies need to produce annual financial statements, but only the financial statements of public companies and parastatals have to be prepared by a qualified auditor.

For everyone else, the Act introduces the concept of “independent reviews”, which are reports prepared by independent professional accountants, based on your business’s financial statements. This review provides assurance from the accounting practitioner of your company’s financial health. Private and small businesses can choose to do an audit if they so desire. However, the independent review helps to reduce the burden of compliance and cost of reporting.

Remember that an independent review will not carry much weight unless it is conducted by a registered member of a professional accounting body. Also, the Act stipulates that anyone who prepares financial statements for a company has to abide by international financial reporting standards as set down by the new Financial Reporting Standards Council. Thus the person who prepares your financial statements can be held criminally liable if they are found to have not carried out their duties properly.

Duties of Directors

All directors should act in good faith and for a proper purpose in the best interests of the company. A director needs to act with the degree of care, skill and diligence that may reasonably be expected of a person carrying out such functions and having the same skill and experience of that director.

Personal financial interests are required to be disclosed by directors. Also, directors should not use their position or information gained to make a secret profit or gain for themselves, or someone else.

The duties and responsibilities of directors under the Act also apply to prescribed officers and members of board committees who are not directors. Thus people in management positions are exposed to new obligations and possibly even personal liability.

In other words any ‘prescribed officer’ i.e. a board director, committee member or other relevant person should be completely aware of their duties and the fact that they can be held to be personally liable for certain business losses.

While the Act does have a strong focus on corporate governance, it does also introduce a new defence for directors who face liability. There is a way out for directors if they can prove that they took sufficient steps to be informed, that their decisions were objective and in the best interests of the business, and that they ultimately acted with the necessary skill, care and diligence that is required of them.

Company Records

The Act contains specific requirements for company records and registers. Documents and records do not necessarily have to be in written form and electronic retention of records is allowed. Documents should be kept for seven years. Under the new Act there are several records that have to be kept:

  • A copy of the MoI

  • Copies of all the reports presented at an AGM, annual financial statements, and accounting records for the current financial year and for the previous seven completed financial years of the company

  • Notices and minutes of all shareholders meetings

  • Minutes of all meetings

  • A register of directors

  • Securities register (profit companies only)

  • Register of company secretary and auditors

  • Business Rescue Schemes

    Another welcome aspect of the new Act is the Business Rescue Scheme, which is aimed at trying to resuscitate struggling companies instead of putting them under liquidation or judicial administration. Thus, a company can be given a second chance at survival!

    Any affected person, such as an employee or manager, can apply to court to place a company under “business rescue”, if they have sufficient reason to believe that the company can be worked back into shape.

    It should be noted that once in business rescue, a company can continue trading but with a moratorium on most legal proceedings against it. Thus guarantees and suretyships cannot be enforced, and no property held by the company can be repossessed during this time.

    Once a business rescue application is approved, a practitioner is appointed by the court to formulate a plan that includes proposals for rectifying the financial distress, plus any conditions that must be met. Once reviewed, amended and approved by all affected parties and company management, this plan is then binding. The practitioner also takes over the management role of the company. If, at any time during this process it becomes clear that the business cannot be saved then it will go into liquidation.

    The Department of Trade & Industry has described the new Companies Act as providing a simplified framework on compliance issues, hopefully reducing the regulatory burden on smaller businesses and helping to encourage responsible and sustainable entrepreneurship. Thus small, medium and to an extent, larger businesses, should benefit by this long-awaited piece of legislation.

    This article should not be construed as legal advice and it is suggested that Sports Trader readers contact their own legal practitioners as and when necessary in order to ensure their compliance with the new Companies Act.

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