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The basics of the new Companies Act

7 April 2011 2,789 views 2 Comments

The new Companies Act and Regulations will come into force April 1, 2011. This means that no new Close Corporations (CCs) can be incorporated after the due date and existing CCs will need to comply with the new reporting and filing requirements. How will the New Companies Act impact on the small and medium enterprises (SMEs) and why has the Government chosen to enforce new

regulations?

In South Africa, SMEs are the backbone of the private sector and contribute to 80% of the total employment. Furthermore, SMEs account for 42% of employment in the formal economy. Besides the formal sector, close to 2 million informal businesses operate in the country. According to a survey in Gauteng province, conducted by USAID Financial Sector Program (FSP), who provided assistance to the Government in crafting the new Companies Act and Regulations, small business owners have limited knowledge of the benefits of the new regulations and formalities surrounding the new Companies Act.

Gerald Meyerman, former manager in the World Bank, with experience in providing policy advice to governments and corporations in developing emerging markets, says that the new Companies Act, on which he was intimately involved as Policy Advisor with the USAID Financial Sector Program (FSP) since 2009, was a necessary step for Government to promote the growth of SMEs in the country. “SMEs should have the same credibility as larger corporations and contribute to formal employment creation in terms of labour standards”, says Meyerman.

The enforcement of the new Companies Act, as early as 1 April 2011, has two major significances:

• Unlimited growth and potential for SMEs

• The amending of the former Close Corporation Act (1984), who stipulates the CC’s full-cycle regulations from formation to liquidation

The Corporation Act will be amended by the Companies Act as of 1 April 2011 with the following consequences:

• No new CCs will be incorporated after 1 April

• The consolidated version of the amended Close Corporation Act as of 1 April 2011 will still remain available and in force “indefinitely”. See www.fsp.org.za/blog for details.

• The amended act is, however, expected to be phased out and fully integrated in the Companies Act within ten years

What would this mean for existing CCs?

Close Corporation (CC) is today still the preferred incorporation of a small business, according to FSP’s survey. According to the companies and intellectual property database of South Africa, CCs account for 78% of the total registered entities, with an annual growth of 20%. However, the enforcement of the new Act does not stipulate an immediate effect of “upgrading” from a CC to a Company or a disintegration of existing CCs. It enforces, however, that no new CCs will be registered as of 1 April 2011. The new

Act encourages CCs to consider the fully integration into the Companies Act (this will be done as part of a long-term process anyway).

Therefore:

• All existing CCs validly registered with CIPRO before 1 April 2011 will continue to exist

• No new CCs will be registered after 1 April 2011

• Amendments and administration of continuing CCs will be done by CIPC (see further below)

What are the benefits of a Company compared to a Closed Corporation?

• Permits unlimited potential, growth and employment creation as opposed to staying “under the radar”

• Expands the “public oversight” deemed to be less present in a CC

• Laws, administrative processes and fee structures are fully “scaled” and based on the “public interest” in the company

What are the changes brought by the new Act?

The impact of the new Companies Act on the SMEs will be seen in the following sections:

• Categories of companies

• The Companies Intellectual Properties Commission (CIPC)

• Formation

• Dissolution

• Corporate Governance and Accountability

Company Categories. The most applicable company category will be the non-listed for profit company – Private and Personal Liability company. Companies will be structured as follows:

• For Profit: state-owned, private (not listed), personal liability company (not publicly listed), Public Company

• Not for Profit (formerly section 21)

The Companies Act has therefore new approaches to the incorporation of businesses, based on the public interest scale and scalability.

What is the Companies Intellectual Property Commission (CIPC)?

The new CIPC is a merger of CIPRO (Companies and Intellectual Property Registration Office) and OCIPE (Office of Companies and Intellectual Property Enforcement) and will come into effect as of 1 April 2011. Its mission is to educate potential and current SMEs owners on the new Companies Act, advise on the structures most relevant for their businesses and provide the necessary conversions from personal liability company to private company and then public company if necessary and desirable.

Formation of new SMEs. The most common formation of SMEs will be under “Private Company”. The process of registration will entail:

• Simplified and expedient name reservation

• Greater transparency

• Electronic filing of registration documents

• Fees and name reservations prescribed by regulations less or no more than

current CC fees

• New company formation documents – Memorandum of Incorporation (MoI) will replace the Articles of Association

Company Rescue and Dissolution. The existing provisions mentioned in the Close Corporations Act will continue. Chapter 6 “Business Rescue” of the new Act will provide standard formats for informal rescue discussions with creditors. The chapter applies to SMEs, however the procedure might be deemed as too expensive. The new Act seizes the differences between winding up solvent and

insolvent companies. As an example, solvent companies might be wound up and liquidated voluntarily through court orders or special resolutions, while insolvent companies winding up will be court administrated according to the Department of

Justice Insolvency and Business Rescue Bill. The Bill will be scrutinized for SMEs impact to minimize judicial administrative costs.

Corporate Governance and Accountability. Finally, the most important shift in the Companies Act is the governance procedures enforcement consisting of:

• Further protection of shareholders, investors and the public

• Regulation thresholds determined by the annual turnover, size of workforce and the nature of companies activities

• Granted exemptions if not public interested is served for personal liability companies or where directors are also the shareholders of the company

• The accurate keeping and maintenance of accounting records, annual financial statements

• Required audit or independent reviews determined by the company category and thresholds – “minimum standards” set in this regard

• Disclosure of director’s duties to minimize fraud

• Insights into fronting and fraudulent practices

For more information, email info@fsp.org.za. The above article is based on the lecture “From Close Corporation to Company – How will the New Companies Act impact SMEs?” by Gerald Meyerman, Policy Advisor with the USAID Financial Sector Program, at My Business Expo Seminars, an initiative of the National Small Business Chamber (NSBC). Contact NSBC at www.nsbc.org.za.

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