LOA SUBMISSION: COMPANIES AMENDMENT BILL

The LOA would like to make the following comments and requests for clarification regarding the Bill. We hope that they can still be accepted at this stage, as we did not know what the deadline for comments on the Bill was. We also understand that the Bill has been amended recently and therefore the sections referred to in our comments may not align with the current version of the Bill as we have not had an opportunity to reconcile the two, and apologise for any confusion this may cause.

Proposed Amendment of Section 218(1)

We would like to request clarity about this proposed amendment. On a strict reading of the words to be inserted in the introductory sentence of section 218(1), together with paragraph (a), a body corporate is to be prohibited from directly or indirectly taking part, or being concerned, in the management of a company.

This would mean that body corporates would no longer be able to provide assistance to companies with regard to the management of some of their activities. This would be a drastic intervention in the way business has always been conducted in this regard. Umpteen existing contracts in this regard would be affected. We believe this is not what the lawmaker really has in mind.

Where a company itself does not have the required expertise, for the management of certain of its activities, it has to obtain expert assistance from outside the company. More often than not, such required expertise has to be obtained from body corporates, which specialise in the fields concerned.

The directors of a company have a legal duty to obtain that expertise from outside the company, if the required expertise cannot be located within the company. And, in many cases, such expertise is available only from specialist body corporates.

A simple example is that of a company that runs a transport business. The director who supervised the transport business dies. The remaining directors do not have sufficient knowledge, experience and skills to supervise the transport business. The company cannot find a suitable person to join the company as a director or executive manager to supervise the transport business. The company has no option but to mandate an independent contractor to assist in managing the transport business. The best independent contractor the company can find for this purpose is a body corporate, which specialises in providing transport management services. Why should the company be prevented from obtaining this expert assistance from this specialist, simply because it operates as a body corporate?

We do not believe the intention of the lawmaker is to excise this common and long-standing business practice of companies obtaining expert assistance, for the management of certain of their activities from specialist body corporates.

The long-title of the Bill states that the intention is to prevent companies from having "delinquent directors to serve as directors or in the management of ... companies". What this says, is that companies should not have delinquent directors who are involved in their management. The proposed amendment of section 218(1), however, seems to go much further than this. It says, ostensibly, on a strict reading, that a body corporate as such, even if it can in no way be said to be delinquent, may not be involved in any way in the management of a company.

Where a company, which requires expert assistance regarding the managing of certain of its activities, contracts with a body corporate to provide that expert assistance to it, that body corporate, merely because of the fact that it is a body corporate, and not a natural person, cannot be regarded as a delinquent that should not provide assistance regarding the management of the company.

The position has always been that a body corporate cannot be appointed as a director of a company. That much is clear. But, body corporates were always able to provide, and do provide, management assistance to companies.

It is not clear why, if a company requires expert assistance regarding the management of certain of its activities, it would be able to mandate a natural person, as an independent contractor, to provide that assistance to the company - but be prohibited from obtaining the same expert assistance from a body corporate. Body corporates are often far better equipped to provide such expert assistance, having much larger resources.

What the lawmaker wants to achieve, we believe, is to prevent unfit persons, namely those mentioned in paragraphs (b), (c) and (d), from being involved in the management of companies - but not to prohibit body corporates from providing management assistance to companies. It seems that the additional words in the introductory sentence of section 218(1) were inserted mainly for purposes of the new paragraph (d) - and that they were not meant to encompass body corporates.

Section 218(1), we submit, probably is meant to read along the following lines: "Any of the following persons shall be disqualified from being appointed or acting as a director of a company or, except for a body corporate, shall be disqualified from directly or indirectly taking part, or being concerned, in the management of a company".

We would greatly appreciate it if clarity about this aspect, which is of huge importance in the normal and healthy functioning of business, along the lines we have suggested could be provided.

We attach, as Annexure A, further comments on amendments to sections 218 and 219 and section 9.1.4.cA

 

 

 

 

 

 

 

LOA Comments on the Companies Amendment Bill, 2004

 

Section 9.1.4.cA

We welcome this new section prohibiting the court from granting an order to remove the name of a member from the sub-register unless such person was a party to or had notice of the fraud or illegality in connection with the transfer of the uncertificated securities. The effect hereof is to secure title of bona fide purchasers thereby enhancing the integrity of the market. Once title has passed to a bona fide purchaser/acquirer his title would be unassailable. Under these circumstances the true owner would lose title to the securities and would have to be content with a claim against the fraudulent party. An order for rectification of the sub-register would only be successful if it is brought while the fraudulent party himself or someone with knowledge of the irregularity is still registered as the owner in the relevant sub-register.

Amendments to sec 218 and 219

These amendments are to the effect that:

Disqualified directors and officers are not only prohibited from accepting an appointment as director but are also prohibited from being concerned with or participating in any way in the management of the company. In our view this is merely an unequivocal restatement of the law and was for all intent and purposes already covered by sec 218.2;

A new disqualification is added namely the removal from office in terms of an Act of Parliament on grounds that the person is no longer fit and proper to serve in a position of trust due to theft, forgery, corruption or any act of dishonesty. This would for example cover removal under the Long-Term Insurance Act, the Banks Act and in terms of the new Security Services Bill;

The Registrar of the Court granting the order is obliged to inform the Registrar of Companies of such order;

The Registrar shall keep and maintain a register of persons thus disqualified and allow inspection thereof;

Acting as a director or in any way participating or being concerned with the management of the company would not only constitute an offence but would also lead to personal liability on the part of that person for the debts of the company. Co-director or other officers of the company who knew or could reasonably be expected to know of the disqualification are likewise guilty of an offence and may incur personal liability for company debts.

Although this amendment is generally welcomed the following needs to be pointed out:

The head note "Disqualification of directors and others" as amended is incorrect. The intention is to expand the circumstances under which a person can be disqualified and to better define the consequences of such disqualification. It does not seek to disqualify individuals other than directors. Certain negative consequences would befall directors and officers of a company who knowingly allow unqualified persons to act as directors or to participate in the management of the company. They might be held personally liable for the debts of the company and would be guilty of an offence, but are not in itself disqualified from acting as a director merely as a result thereof.

The principle of making co-directors and officers of a company criminally accountable for the acts of disqualified directors is supported. We are however concerned that knowledge and even the lack of knowledge due to negligence on the part of the director or officer might lead to criminal liability, notwithstanding the fact that the officer or director might have been unable to prevent the disqualified person from acting in contravention of sec 218 or had a reasonable suspicion but was unable to obtain the necessary information and consequently refrained from taking steps in fear of reprisal. In our opinion the test should be actual or imputed knowledge on the part of the directors or officer coupled with a failure to take reasonable steps to prevent the director from so acting.

It is to be noted that once a co-director or officer has been convicted, he will himself become disqualified as the offence would be one "in connection with the promotion, formation or management of a company" as contemplated in sec 218.1.d.iii.of the Act.

The same considerations apply as to the personal liability on the part of a co-director of officer of the company for the debts of the company. Only those directors and officers who could have prevented the disqualified directors participating in the management of the company should incur personal liability.

Requiring the Registrar of Companies to keep a register of disqualified directors and to notify companies with offending directors, bolsters effective enforcement of these provisions. The Registrar of the Court who has issued a disqualification order in terms of sec 318 is further required to notify the Registrar of Companies of all such orders. Unfortunately directors and other persons who are no longer regarded as fit and proper to hold office and who are removed from office by their respective regulators do not suffer the same fate. To ensure even-handed treatment the relevant regulator who is responsible for the determination that a particular individual is no longer fit and proper (for example the Registrar of long-term and short-term insurance, the Registrar of Banks and the Registrar under the Securities Services Bill) should likewise be required to notify the Registrar of Companies.