Archive for the 'Director liability' Category

Companies Act 2008: What happens after 30 April?

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:

  1. 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.

    OR

  2. 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.

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Should you require assistance in this regard you are most welcome to contact Christa Swart, our corporate governance department (pty@asl.co.za) or your relationship director.

 

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Requirements for declaring a dividend

A recent development has been the implementation of The Companies Act 71 of 2008. This act is an improvement on the previous legislation and imposes more rigorous measures on directors when it comes to declaring dividends. Due to the consequences of contravening this act, we would like to make you aware of your extended responsibilities so that you can protect not only your business, but yourself.

Compared to the 1973 Act, the 2008 Act has much more stringent requirements for declaring a dividend to shareholders.  The new Act imposes a greater burden on directors to ensure that the dividends are declared in the correct manner and procedure.  The consequences of not doing so could result in the possibility of a director being held personally liable for the amount the company paid out in terms of a dividend declared and paid in contravention of the Act.

The 2008 Act also extends the liability to include an alternate director, prescribed officer*, a person who is a member of a committee of the board or the audit committee (irrespective of whether or not the person is also a member of the company’s board).  These persons are subject to the same duties of care, skill and diligence as a director on the board, particularly in relation to Section 46, which requires that the dividend must be:

  • Authorised by a board by resolution; and
  • Immediately after giving effect to the resolution, it reasonably appears that the company will satisfy the solvency and liquidity test; and
  • The board resolution acknowledges that the board applied the solvency and liquidity test; and
  • The board reasonably concluded that the company will satisfy that test immediately after completing the proposed distribution.

So what is the solvency and liquidity test?

The assets (as fairly valued) of the company must be equal to or exceed its liabilities (including reasonably foreseeable contingent liabilities) and it must appear that the company will be able to pay its debts as they become due for the following twelve months after the date of the distribution.

The test will be an accounting exercise, as the Act states how the various values are to be calculated and what assets and liabilities are to be taken into account.

Liability for contravention of Section 46

A director will be liable for loss, damages or costs sustained by the company as a direct or indirect consequence of being present at a meeting, or for knowingly consenting to or failing to vote against, the resolution approving a distribution, despite knowing that the distribution was contrary to Section 46. Liability is joint and several with any other person who may be liable for the same act.  Just by being present at a meeting means that you are required to either vote for or against the dividend.  You cannot abstain from voting.  If you abstain you may still be liable.

Dividends declared but not yet paid before 1 May 2011   

Should a company have declared dividends but not yet paid them out before 1 May 2011 (when the new Act came into force), then the company will need to re-authorise them in terms of the 2008 Act’s requirements.

New dividend tax – implemented 1 April 2012

The new dividend tax was implemented on 1 April 2012.  Dividends tax will be levied at a rate of 15% on the amount of any dividend paid by a company.  The recipient of the dividend (the shareholder) will be liable for the dividend tax, but subject to certain exemptions, the company declaring and paying the dividend is obliged to withhold the tax from the amount of the dividend paid and pay the tax to SARS, by the last day of the month succeeding the date of payment.  There are certain persons which are exempt from the dividends tax, the most noteworthy being a South African resident company.

*A prescribed officer is a person, who, despite not being a director on the board, and irrespective of any title given to him or her:

  • exercises general effective control; or
  • regularly participates to a material degree

over the management of the whole or significant portion of the business and activities of the company.

Given the importance of adhering to the correct corporate governance practices, we would like to assist you in making sure that your company is functioning optimally and within the law. Arnold Scholtz or Pieter Aucamp will assist you further should you have any more questions. They can be contacted on 021 840 1600 or respectively at arnold@asl.co.za and pieter@asl.co.za


Round Robin Resolutions

The Companies Act of 2008 introduces flexibility regarding the manner and form of both directors and shareholders meetings, that represents a more practical approach to formal documented decision making. It is imperative that both directors and shareholders take note of these changes and implement it accordingly.

Shareholders meetings

Section 60 allow for resolutions to be validly adopted by a written resolution and not at a meeting of shareholders, known as a “round robin” meeting.  If the “round robin” resolution is supported by the same number of voting rights as would have been required at a shareholders meeting, then it is valid.  For example, an election of a director that could have been conducted at a shareholders meeting may instead by conducted by “round robin”.

There are some instances where decisions cannot be taken in this manner, for example matters that must, in terms of the 2008 Act or the Memorandum of Incorporation (MOI), be decided at an annual general meeting (AGM).  An exception is where a special resolution has been discussed at an AGM.  Then that special resolution may be taken either at the meeting, or by a subsequent “round robin” resolution unless the MOI specifies that such a decision must be taken at the AGM.

The requirements for “round robin” resolutions are:

  • The resolution must have been submitted for consideration to the shareholders beforehand, and the matter is voted on in writing within 20 business days after the resolution was submitted to them; and
  • Within 10 business days after adopting the resolution, in terms of a round robin, the company must deliver a statement describing the results of the vote, consent process, or election to every shareholder who was entitled to vote on, or consent to the resolution.

Reference should also be made to Regulation 7 and Table CR.3 in the Regulations which sets out the deemed delivery dates and times for different methods of delivery.  The calculation method for business days is set out in section 5(3) of the 2008 Act.

Directors meetings

Section 74 allows for Directors to also make use of substantially similar written round robin resolutions for decision making.  A decision adopted by written consent of the majority of directors given in person or by electronic communication is valid, provided each director has received notice of the matter to be decided.

A drawback of “round robin” resolutions is that there is no, or only a limited opportunity for debate on the matter.  There is no specific indication as to whether a shareholder (in the case of shareholders meetings), or indeed, a director (in the case of a directors meeting) could object to the method of decision-making and insist on a meeting being held.

A shareholder could exercise his rights under to relief from oppressive or prejudicial conduct under section 163 of the 2008 Act.

If you would like to act on the relief as provided and start formalising decisions by “round robin” resolutions, you are welcome to contact Christa Marais at 021 840 1600 or christama@asl.co.za for further information or assistance.

Directors could be liable for company’s tax debts

Although companies or close corporations, as legal entities in their own right, bear the responsibility of debts incurred, and although directors, shareholders and members of these entities generally are not personally liable for such debts if the entities should become incapable of settling them, the Tax Administration Bill, 11 of 2011, contains several provisions in terms of which directors, shareholders and members can incur personal liability for such entities’ tax debts. Section 180 of the bill stipulates as follows:

  • A person is personally liable for any tax debt of the taxpayer to the extent that the person’s negligence or fraud resulted in the failure to pay the tax debt if (a) the person controls or is regularly involved in the management of the overall financial affairs of a taxpayer, and (b) a senior SARS official is satisfied that the person is or was negligent or fraudulent in respect of the payment of the tax debts of the taxpayer.

Accordingly, personal liability is not limited to income tax, but extends to “any tax debt”; the trigger for such personal liability is “negligence or fraud”; such negligence or fraud must have been the cause of the failure to pay the tax debt; potential personal liability extends to any person who “controls or is regularly involved in the management of the overall financial affairs of a taxpayer”, and a senior SARS official must be “satisfied” that such negligence or fraud occurred.


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