Committee members ...Take your seats, please

Dr Johan Erasmus

30 November 2010

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Companies Amendment Bill, 2010Transitional arrangements

Audit requirement

Clarity required on various scenarios: Private company with financial year end of 28 February Public company with financial year end of 31 December

Financial reporting standards

Disclosure requirements and content of annual financial statements.

Audit committee

Approval of the financial statements

Annual general meeting

Distribution of summarised financial statements

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Companies Amendment Bill, 2010Transitional arrangements

Provisions of the 1973 Act

Provisions of the 2008 Act

Provisions of the 1973 Act or 2008 Act

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Companies Amendment Bill, 2010Transitional arrangements

Auditor rotation

Section 92 of the Act determines that the same individual may not serve as the auditor or designated auditor of a company for more than five consecutive financial years

Chapter 3 will apply to the following companies:

public companies

state owned companies

private companies, personal liability companies or non-profit companies if the company is required by this Act or the Regulations to have its annual financial statements audited

every year, or otherwise, only to the extent that the company’s Memorandum of Incorporation so requires, as

contemplated in section 34(2).

Effect on:

Public companies (widely held in terms of 1973 Act) – account for number of years in terms of CLAA?

Private companies (not subject to auditor rotation in terms of the 1973 Act) – counting only from 2011?

Transitional arrangement required

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Companies Amendment Bill, 2010Audit exemption

Audit exemption

Section 30(2A) provides for an exemption for owner-run companies to have either audited or independently reviewed statements

Removal of the exemption from subsection (2), to a new subsection (2A) lead to unintended consequences:

If all the shareholders in a holding company are also directors, it means that the holding company is exempt from an audit, where the rest of the group may still be subject to an audit

Have to consider the public interest requirement – company may employ large number of employees, or act in the public interest? Size vs activity criteria

Proposal:

Reincorporate subsection (2A) into subsection (2) – thus, if a company is required to be audited in terms of section 30(2), it must be audited (exemption will only apply in respect of independent review

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Companies Amendment Bill, 2010Reckless trading

Insolvent circumstances Factual insolvency, where the undertaking's liabilities exceeds its assets

Commercial insolvency, a state of illiquidity where a company is unable to pay its debts even though its assets may exceed its liabilities

Case law:

Trading when not able to pay its debts (commercial insolvency) regarded as reckless trading

 Only other meaning that can be attributed to section 22(1)(b) would be a factual insolvency (company’s liabilities exceed its assets)

Practical implications

Proposal:

Section 22(1)(b) be removed, as it may lead to unintended consequences

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Companies Amendment Bill, 2010Section 34

Section 34 and Section 84 regulates the applicability of Chapter 3

Section 34(2) states that a private company, personal liability company or non-profit company is not required to comply with the extended accountability requirements set out in Chapter 3, except to the extent that the company’s Memorandum of Incorporation provides otherwise.

Section 84(1)(c) states that a private company, a personal liability company or a non-profit

(i) if the company is required by this Act or the regulations to have its annual financial statements audited every year, or

(ii) otherwise, only to the extent that the company’s Memorandum of Incorporation so requires, as contemplated in section 34(2)

Section 34 superfluous

May certain companies apply Chapter 3 selectively?

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Companies Amendment Bill, 2010Number of directors

Number of directors

Section 66 determines that public companies and non-profit companies must appoint at least three directors in addition to the minimum number of directors that the company must have to satisfy any requirement, whether in terms of this Act or its Memorandum of Incorporation, to appoint an audit committee, or a social and ethics committee as contemplated in section 72(4)

It is unclear how this section should be interpreted:

will a public company be required to appoint at least nine directors (at least three audit committee members, plus at least three social and ethics committee members, plus three members as required in terms of section 66(2)(b)?

will a public company be required to appoint at least six directors (at least three audit committee members, which directors will also serve on the social and ethics committee, plus three members as required in terms of section 66(2)(b)?

may a private company choose to appoint an audit committee with 2 members – thus, obliged to appoint 3 directors in total?

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Companies Amendment Bill, 2010Social and ethics committee

Social and ethics committee

Section 72(4), which provides for the appointment of a social and ethics committee, is completely silent on the process to appoint, the required composition and the statutory duties and functions of this committee

As the social and ethics committee is required in terms of the Act, more clarity should be provided within the Act itself (rather than Regulations), alternatively, the Act should provide parameters for the Regulations

Proposal:

Section 72 be brought in line with section 94 (regulating the composition, appointment and functions of the audit committee

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Companies Amendment Bill, 2010Void and voidable

Void/voidable

Section 218(1) determines that nothing in this Act renders void an agreement, resolution or provision of an agreement, resolution, Memorandum of Incorporation or rules of a company that is prohibited, voidable or that may be declared unlawful in terms of this Act, unless a court has made a declaration to that effect regarding that agreement, resolution or provision

 Effect:

blatant disregard for the provisions of the Act

be allowed to persist with contravening the Act until a court has declared a particular action to be prohibited, voidable or unlawful

Proposal:

That section 218(1) be amended to indicate that an agreement, resolution or provision of an agreement, resolution, Memorandum of Incorporation or rules of a company that is prohibited, voidable or unlawful will be void, unless or until a court finds reasonable grounds why such an agreement, resolution or provisions of an agreement, resolution, Memorandum of Incorporation or rules of a company should be regarded as lawful

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Companies Amendment Bill, 2010Commencement

Commencement

Section 225 determines that the Act will become effective on a date proclaimed by the President, which date may not be earlier than one year following the date on which the President assented to the Act

Business needs time to prepare for implementation

Bill only to be finalised in February 2011

Regulations to be promulgated in early 2011

Proposal:

Section 225 be amended to indicate that the Act will become effective on a date determined in the Companies Amendment Act, which date may not be earlier than six months after the President assented to the Companies Amendment Act

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