Big changes as the Companies Act gains a hold

The Companies Act, 1973 is an outdated piece of legislation that has become a burden to the South African corporate environment.

The result is a new piece of legislation known as the Companies Bill, 2007.

This new legislation has been in the pipelines since the need for more accommodating company law was first raised in 2002. Nearly 400 pages in length, the Bill is a continuation of the ideas presented in the Discussion Document for the Reform of Company Law, first published on 23 June 2004.

Astrid Ludin, Deputy DG of Consumer and Corporate Regulation, Department of Trade and Industry, said that "Company law should promote the competitiveness and development of the South African economy." Speaking at the DTI Conference on South African Company Law for the 21st Century, Ludin outlined the major goals and objectives of the new legislation. It was designed to encourage entrepreneurship, promote innovation and investment, enhance the efficiency of companies and their management teams, encourage transparency and high standards of corporate governance and make company law compatible with best practice jurisdictions around the world.

Keeping things simple

At the heart of the new legislation is a simpler definition of what constitutes a business. The bill identifies three types of business enterprises. The first is a not for profit company, which will replace the existing section 21 companies.

The second category will be known as 'widely held companies' (WHC) - and the final category will be referred to as 'closely held companies' (CHC). The Companies Bill, 2007 contains an entire section on the criteria that will be used to correctly assign individual companies to one of these groups.

There is a distinct possibility that the Companies Bill, 2007 will replace the existing legislation applicable to Close Corporations. Most Close Corporations will fit the CHC definition - and successful implementation of the bill will render Close Corporation defunct. Said Ludin, "A key question is whether we have succeeded in developing a bill that will make the Close Corporations Act redundant."

It is envisaged that as many as 99% of South Africa's companies will fit the definition of a CHC. Most brokers, financial advisers and intermediaries currently operating in the financial services industry will probably fall into this category too.

Another significant development in this Bill is the introduction of a framework for business rescue, to replace the existing regime of judicial administration for failing companies. This will result in struggling companies being run from within under independent supervision - with legal intervention an option at the request of affected stakeholders.
 
At odds with other regulatory bodies

There are a number of proposed changes with regards requirements for financial reporting and the auditing of financial results. One of these proposals is that CHCs will not be required to have their books audited on an annual basis.

This raises a number of concerns - not least of which is whether the softer audit requirements for small companies as proposed in the Bill goes against the Financial Services Board's (FSB) need for closer scrutiny of financial service providers. The FSB has been campaigning for closer scrutiny to ensure compliance with various consumer protection bills and to prevent financial misrepresentation. The recent Fidentia makes a strong case for continued and rigorous independent financial assessment - regardless of company size.

At the same DTI conference, Department of Trade and Industry DG Tshediso Matona said that the Bill was "a facilitating and enabling framework for all 1.7 million South African corporations." He noted that "company Law is a key indicator of our national competitiveness - weighed up by potential investors."

The provisions contained in the Bill are still open for further discussion - though limited changes are likely to be made. We will wait with interest to see how many further changes are made before the Bill is finally signed into law. It certainly seems the business environment in which we operate will change significantly in the coming years.

Editor's thoughts:
The financial service industry is snowed under by the paperwork that accompanies the various regulatory requirements in force at the moment. Do you think the financial and time savings from not having to conduct an audit would warrant the risk of further financial scandals? Send your comment to gareth@fanews.co.za.