/ 29 April 2011

Revamped Companies Act sets a whole new ball game

Revamped Companies Act Sets A Whole New Ball Game

The leaders of scandal-prone parastatals will have to tread more carefully from next week when the 2008 Companies Act, effective from May 1, increases the responsibilities of directors. The new legislation will allow any person to claim damages from directors and adds to the fiduciary duty they carry.

This means that directors who allow a company to trade in financial distress or insolvent while — unable to meet its debts — can be held personally liable, says Eric Levenstein, the director of Werksmans Attorneys.

Whereas the SABC’s much-publicised financial and governance problems have resulted in some directors jumping ship, apparently to protect their reputations, in future similar situations could see its directors facing damages claims from unpaid creditors, such as the film industry. In turn, directors will have to be far more prudent about the board appointments they accept, lest it leads to court action down the line.

The parlous state of the public broadcaster and its 2008 meltdown highlighted the dangers of political interference in state-owned corporations, particularly when corporate governance structures are eroded. So far the SABC’s financial crisis remains the most visible potential consequence of the practice of appointing leaders based on their political standing rather than on their practical experience.

But directors in other parastatals will now have to pay more attention should their organisation attract the same fate as the SABC because such a fate would hurt not just their reputations but potentially their own pockets too. SAA, for example, has had to embark on several turnaround programmes because of bad decisions and inept management.

Most commentators have welcomed the last-minute decision to postpone the implementation of the Act but have added that the new legislation is a sorely needed overhaul of existing laws — one that will largely make it easier for companies to do business.

Slashing the red tape
More modern legislation and greater alignment with international practice will slash red tape for companies. The Act will also allow businesses to trade their way out of financial distress, thus saving jobs and assets.

But, because the overhaul is so comprehensive, it is expected that businesses will need time to familiarise themselves with the new requirements to comply fully.
The new Act was expected to be made effective on April 1 but on the day before the department of trade and industry said the presidency still had to “apply its mind sufficiently” before giving its assent to the Companies Amendment Bill, which aims to rectify inconsistencies and errors in the Act.

“It is important to acknowledge that the parliamentary process in regard to the Companies Amendment Bill was only finalised on 24 March 2011, following a rigorous and inclusive consultative process that resulted in the incorporation of recommendations from stakeholders. “The parliamentary process took slightly longer than anticipated,” the department said in explanation. The president has since signed the legislation and the department confirmed it would be effective from May.

This is the first major legislative ­overhaul of the current Act, which was promulgated in 1973. According to Johan Erasmus, the accounting and auditing senior manager at Deloitte, that Act was written in a style typical of the apartheid government, spelling out every aspect of company law in minute detail.

Levenstein says the business rescue provisions are among the most important changes the new Act will usher in. Under this procedure, companies in financial distress can trade their way out of their predicament.

This replaces the old judicial management system and brings South African provisions into line with Chapter Eleven bankruptcy protection in the United States, as well as administration procedures in the United Kingdom and Australia.

Companies in financial distress or their creditors can file for business rescue, which will prompt a business rescue practitioner — often a lawyer or chartered accountant — to be appointed to manage the company until it is in safer waters. This means the business has a chance to recover profitability, pay off debts and, if possible, avoid job losses.

In contrast, says Levenstein, liquidation closes down a company and holds a fire sale of all assets, and creditors see only a dividend payment and have to write off most debts. “It gives a company an alternative to liquidation, which was not available before,” he says.

Company rescue
For a company to be rescued successfully, as envisaged by the Act, creditors must agree to suspend their claims to give the business a chance at turning around its fortunes. “Business rescue can’t work unless there is a moratorium on legal proceedings, with certain exemptions. That was the biggest problem with the judicial management system there was no moratorium and so a creditor could get greedy and force his claim,” he says. In addition, the practitioner can also cancel contracts that are unfavourable to the company.

Statistically, small businesses and start-ups are the ones most likely to fail but, Levenstein says, the business rescue provisions will probably benefit bigger companies that have access to finance.

“Banks are more exposed [with bigger companies] so they are more likely to want to put in more money and give it a chance. Of course, no creditor wants to throw good money after bad but that is a decision each creditor and bank must take,” he says.

One concern that emerged from the parliamentary debate on the Amendment Bill is that the regulatory authority — interpreted by many as revenue services – may be regarded as an exceptional creditor and allowed to press its claim on the company. “How will one creditor get paid and not others?” Levenstein asks.

This is particularly problematic because creditors must agree to the business rescue plan, which could be unlikely if one creditor is favoured over another.
Business rescue procedures are likely to create an entirely new industry, he says, as there are “very lucrative” tariffs prescribed for business rescue practitioners, who can also agree on a fee with the company and its creditors. Liquidators, by contrast, were bound by the tariffs prescribed in the Insolvency Act.

The Companies Commission, now known as the Companies and Intellectual Property Registration Office (Cipro), will issue licences to business rescue practitioners. Firms that specialise in business turnaround may also be appointed as practitioners.

Erasmus says the new Act will make it easier for companies to do business. “They have simplified the old corporate law and made it simpler to understand, using plain language throughout,” he says. The new Act is also more flexible — it provides, for example, 56 instances for companies to contract out of the Act, within certain parameters.

“There will be things that are difficult to interpret for companies. But it will be much less onerous for small businesses, while larger businesses will need to look at their conduct,” says Erasmus, adding that the new law is “completely in line” with the King III report on corporate governance. The Act now allows companies to store records electronically, for example, rather than sending out hard copies to each shareholder.

Erasmus says business is still waiting for accompanying regulations that detail how compliance with the law should be achieved. “If you don’t give the regulations long enough in advance, it seems unfair. Even one month is very short when you have a whole new piece of legislation to comply with,” he says, “particularly in light of the increased liability directors face.”

Initially, companies had a year to prepare for the new Act, but the legislation has been adjusted extensively with the Companies Amendment Bill. Regulations were first issued in December 2009 and reissued last year with vast differences. It is still not clear what the final legislation and regulations will require from companies. But on the whole, says Erasmus, the Act is a positive development that will be far less onerous for companies than the present legislation.