As the transitional period for all pre-existing companies has come to a close, the question for many business owners remains: What happens if my Memorandum of Incorporation (MOI) wasn’t registered by 30 April?
It is important to remember what the intention of the transitional period was. In terms of this arrangement the legislator granted companies a two-year period during which they had to ensure that their initial founding documents were in agreement with the provisions of the Companies Act of 2008. Business owners could, inter alia, register their MOI with the Companies and Intellectual Properties Commission (CIPC) free of charge.
Although it was highly anticipated that the grace period would be extended we were surprised to see, as 30 April 2013 approached, that no extension was granted.
In this article we would like to address questions you might still have concerning your company’s MOI.
What happens after 30 April if I haven’t yet registered an MOI?
Firstly, it is important to bear in mind that it is not compulsory for a pre-existing company to convert its initial founding documents to an MOI. Pre-existing companies that have not registered an MOI with the CIPC will continue to be governed by their old memorandum and articles of association until such time as these initial founding documents are converted to an MOI. The government will not arbitrarily assign an MOI to your company if you haven’t done so by 30 April.
It is, however, important to note that the company will only be governed by the initial founding documents to the extent that the provisions of these documents are consistent with the 2008 Act. All provisions that are inconsistent with the 2008 Act, will be deemed void and the provisions of the Act will prevail.
In essence your founding documents might:
- contain void provisions; and/or
- contain unnecessary information and requirements.
While an MOI could have been registered with the CIPC at no cost during the transitional period, a charge of R250 applies for all registrations that are done after 30 April.
What are the implications of not having an MOI, for the audit requirements of my company?
In terms of the provisions of the 2008 Act, with certain exceptions companies might, based on their Public Interest Score, qualify for alternatives to an audit, i.e. either an independent review or, in very limited circumstances, a compilation.
However, if a company’s Articles of Association specify that an auditor shall be appointed, that company, governed by its Memorandum and Articles of Association, shall appoint an auditor and an audit shall be performed for the company in terms of the requirements of Chapter 3 of the 2008 Act. In essence, this is a statutory audit with much more stringent requirements. The most significant of these requirements is Section 90(2)(b)(iv) which stipulates that, in the case of a statutory audit, no accounting or secretarial services shall be performed by the appointed auditor.
Accordingly, in order to avoid the application of certain requirements of Chapter 3, either of the following has to be performed:
- Registration of the new MOI with the CIPC in terms of the 2008 ActThis will ensure that the company is allowed to use alternatives to an audit, based on its Public Interest Score.Should the company elect to have an audit performed even if it is not required in terms of the Act, based on its Public Interest Score, such audit will be deemed a voluntary audit.In the case of a voluntary audit the requirements of the 2008 Act are far less onerous and the most significant provisions of Chapter 3 will not be applicable.
- Amendment of the Articles of Association (the deemed MOI) by means of a special resolution registered with the CIPC.It is advised that in both the following circumstances a special resolution be passed by the shareholders in order to remove the requirement regarding the appointment of an auditor, from its Articles of Association:
- All companies that are still in the process of formalising their MOI before the expiration of the transition period; and
- Companies of which the old Memorandum and Articles of Association will be deemed the MOI after the transition period.It is also important to note that either option (i) or (ii) above should be performed before your company can exercise any of the following options:
- Voluntary audit (i.e. not statutory in terms of Chapter 3);
- Independent review; or
- Compilation (in the case of owner-managed businesses).
What are the risks for me as a director for not putting in place an MOI?
As mentioned earlier, you are allowed to use your old Memorandum and Articles of Association, so there are no implicit risks for you as a director of a company following this route. Note, however, that in this case you are using a MOI (in terms of the old Act) and that you may not be certain which of its provisions apply and which are deemed void.
Theoretically, there is also no risk for third party claims against a company for not having an MOI. However, because the directors might not always know what their responsibilities are, due to the fact that certain provisions are stipulated in the act and not in the deemed MOI (old memorandum and articles), they might incur liability in instances of non-compliance.
We therefore do not recommend that companies use their old memorandum and articles but urge them the get their MOI in place in terms of the 2008 Act as soon as possible. Ultimately, saving the cost is not just worth the risk for both you and your company.
During the last few months we have assisted numerous clients to successfully register their MOI with the CIPC.
Should you require assistance in this regard you are most welcome to contact Christa Swart, our corporate governance department (email@example.com) or your relationship director.