Implementation of the New Companies Act delayed

The implementation of new Companies Act will be delayed. It was initially mooted that the new law would be effective from October 2010 this year, but the Department of Trade and Industry has now indicated that it aims to implement the new Act on 1 April 2011. This is not surprising as the Companies Amendment Bill, which cleans up the Act, has yet to be considered by Parliament, and the regulations are still awaited. The delay will allow additional time to finalise all processes required to effectively administer the new legislation and consult stakeholders. Companies will also have an opportunity to bring their business practices in line with its provisions.

The new Act introduces sweeping changes to our corporate regime. It provides that a director may be held liable for losses sustained for a breach of duty. Although this is similar to our existing company laws, the new Act includes “prescribed officers” amongst the company’s employees who may be similarly responsible. The category of prescribed officers will expose persons in management positions who are not directors to new obligations and possible personal liability.

The new Act also alters our existing share capital regime. It provides that a share does not have a nominal or par value and a pre-existing company may not authorise any new par value shares after the Act coming into force. The draft regulations state that every share of a pre-existing company must be converted to a share having no par value within five years of the effective date. Such a conversion must be proposed by the board, distributed to the shareholders and approved by special resolution. Shareholders may take comfort from the fact that rights associated with any shares that are to be converted must be preserved or the company will be required to compensate its shareholders for the loss of any such rights.

The status of shareholder agreements under the new Act has also shifted. Traditionally most such agreements contain a clause stating that if there is a conflict between the provisions of the shareholders agreement and the company’s constitution, then the provisions of the shareholders agreement will prevail. Section 15(7) of the new Act, however, provides for just the opposite. If any provision in a shareholders agreement is inconsistent with the new Act or the company’s Memorandum of Incorporation, it will be void to the extent of the inconsistency. Stakeholders will need to ensure that their shareholders agreement conforms to the new Act.

As far as compliance is concerned, a company may be fined for failure to adhere to the new provisions. The Companies Commission may issue a compliance notice to any person who has contravened the new Act, requiring the person concerned to cease, correct or reverse any action in contravention of the new Act. The draft regulations have clarified that the administrative fines for failure to comply with the Act will be based on the annual turnover of the guilty company, provided that the fine does not exceed the greater of 10% of the company’s turnover during which the failure occurred or a maximum of R1million. Although these fines may appear to be harsh, the decision whether to impose a fine ultimately rests with the courts and the Companies Commission will not be entitled to impose fines randomly.

The Act introduces radical new business rescue procedures aimed at restoring insolvent companies to good health but at the same time making inroads into creditors’ rights.

Companies will be well advised to review the new Act and assess how it will affect their business. April 2011 is not far off.