New Companies Act – Delayed

Implementation of the New Companies Act – Delayed

The Department of Trade and Industry has indicated that it aims to implement the new act on 1 April 2011. It was initially supposed to take effect as of October 2010 but the effective date has been pushed back.

This development is unsurprising as the Companies Amendment Bill has not yet been considered by Parliament and the regulations are still awaited. The delay allows more time to finalise the processes that are required to effectively administer the new legislation and consult the relevant stakeholders. Companies now have a good opportunity to align their business practices with the provisions of the new Companies Act.

The new act will make bold changes to the corporate landscape. It will not only stipulate that directors may be liable for losses that are sustained during a breach of duty (similar to the existing laws), but also that ‘prescribed officers’ may be held liable. This new ‘prescribed officers’ category will impose certain obligations and responsibilities on individuals in management positions who are not directors and therefore also hold them liable for losses during a breach of duty.

The new act also affects the existing share capital regime. It stipulates 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 comes into effect. The draft regulations state that, within five years of the effective date, pre-existing companies’ shares must be converted to shares that have no par value. These conversions need to be proposed by the company’s board, circulated to the shareholders, and approved by special resolution. Shareholders will be glad to know that shares that are to be converted must be preserved. If they are not, the company will be liable for the loss of any such right and will be required to compensate the shareholder.

Under the new act, the status of shareholder agreements has also been altered. In the past, most shareholder agreements have a clause that states that should there be a conflict between the provisions of the shareholder’s agreement and the company’s constitution, the provisions of the shareholder’s agreement will hold force. This is no longer so due to Section 15(7) of the new Act which states that should any provision in a shareholder’s agreement be inconsistent with the new act or the company’s Memorandum of Incorporation, it will be considered void to the extent of the inconsistency. It is thus vitally important that stakeholders ensure that their shareholder’s agreements comply with the new act.

A company can be fined if it does not comply with the provisions of the new act. The Companies Commission will serve a compliance notice to any person or company that is found to contravene the new act informing them that they need to cease, correct, or reverse any action that is deemed to be an infringement of the new act. As per the draft regulations, fines will be imposed based on the annual turnover of the company concerned as long as the fine does not exceed 10% of the company’s turnover during the period in which the infringement occurred (to a maximum amount of R1M). The decision of whether or not to impose a fine rests entirely with the courts and the Companies Commission will not be entitled to impose fines randomly.

The act will also introduce new business rescue procedures that are aimed at restoring insolvent companies to solvency but at the same time protecting creditors’ rights.

Once again, it is of utmost importance that companies review the new act as soon as possible so that they can make the necessary changes before the new act takes effect.