corporate laws amendment bill
Posted 01 July 2006
* Give legal backing to accounting standards
The amendments to Chapter XI of the Act will impose a uniform accounting standard to ensure that any financial information published by a company is calculated in accordance with generally accepted accounting practice (“GAAP”). This standard will be developed and maintained by a Financial Reporting Standards Council (“the Council”), to be established under the new Chapter XVB.The standard will have to be comparable with the international standards adopted from time to time by the International Accounting Standards Board.
The Department of Trade and Industry (DTI) will be responsible for monitoring compliance with prescribed accounting standards, together with other regulators, such as the Financial Services Board (FSB) and investors. Any apparent non-compliance with standards may be referred for investigation by a team of experts, to be drawn from a newly established Financial Reporting Investigations Panel. If an investigation finds evidence of non-compliance, the Minister may require the company to republish the information, take other remedial action or pay a penalty. If the company fails to co-operate, the matter may be handed over for prosecution in terms of a new offence created by the proposed section 440FF.
As a further safeguard, certain of the options currently permitted by the Act will be retained for limited interest companies, while being repealed for public interest companies. For example, the choice of whether or not to consolidate group financial statements (dealt with under sections 289 - 291 of the Act).
Schedule 4 to the Act has historically served as a detailed specification for disclosure in financial statements. A careful review of this schedule has identified those areas that are dealt with in current statements of GAAP and those provisions that are supplementary to GAAP. The supplementary provisions have been retained for all companies, whereas the other requirements have been retained for limited interest companies only. This has the effect of maintaining a secondary, less onerous standard for limited interest companies.
The amended paragraph 5 of Schedule 4 brings about this distinction. The other amendments to Schedule 4 will eliminate’ various anachronisms and bring about a tighter correlation with GAAP.
* Promote auditor independence
These amendments are incidental to the provisions of the Auditing Profession Act, 2005 (Act No. 26 of 2005) (“the APA”), which aims to address recent failures by auditors to perform an independent assessment of the accounting records and policies of their clients.
By virtue of the new section 268J to the Companies Act, 1973, only auditors registered under the APA may in future be appointed as auditors of companies. The new section 269A of the Companies Act, 1973, requires that auditors be nominated by an audit committee, which will also be responsible for setting the auditor’s remuneration. In terms of the new section 274A, a rotation of auditors will be required. No individual auditor may be appointed to a company for more than five consecutive years. The new section 275A will preclude an auditor from performing certain non-audit services for the company.
A company’s opportunity to remove an auditor, or for an auditor to simply resign and walk away when an irregularity has been detected, is curtailed by the amendments to sections 277; 278 and 280.
The new section 287A makes it an offence for any auditor or other person to be party to false or misleading information in the financial statements of a company.
* Facilitate shareholder diversification
Section 38 prohibits a company from providing financial assistance for the purchase of its own shares. The proposed amendment to section 38 introduces a further exception to facilitate shareholder diversification or BBBEE. A company will be able to offer assistance under the new provision if it complies with the solvency test and if its present shareholders approve the terms of the transaction.
* Further the objective and expedite the procedures of the Securities Regulation Panel
Section 228 currently allows directors to dispose of the assets or greater part of the business of a company by an ordinary resolution of the shareholders. Section 228 is being used more and more often for purposes of effecting a takeover, as an alternative to section 440K which has more stringent requirements.
The first amendment to section 228(1) will require that the disposal of the greater part of assets of the business of a company should from now on require a special resolution. There has also been a certain liberal interpretation of the term “substantially the whole” in relation to the disposal of a business undertaking, in order to avoid the application of section 228(1).
The purpose of the second amendment to section 228(1) is to apply the more objective test already used in respect of assets, namely “the greater part”, also to the disposal of a business undertaking.
* Effect a uniform standard of liability on officers performing duties under the Act
* Indemnify and impose a duty of confidentiality on inspectors
* Abolish the requirement that a copy of the memorandum and articles of a company to be formed, certified by a notary public as a
true copy, be lodged with the Registrar upon incorporation of a new company
* Abolish the requirement that a subscriber to a memorandum and articles of a company to be formed, or a duly authorized attorney or
his or her clerk must personally deliver and uplift that memorandum and articles at the Companies Registration Office.
The Bill also seeks to amend both the Companies Act, 1973, and the Close Corporations Act, 1984, so as to:
* provide for electronic signatures on documents, electronic disclosure of information and electronic certification of registration of certain
documents
* provide for alternative & cost-effective ways of publishing notices of incorporation of new companies and close corporations, name
changes, etc.
* provide for the Registrar to restore the registration of a company or close corporation which has been deregistered due to failure to
lodge an annual return and
* to provide for the auditors of companies and accounting officers of close corporations to disclose certain changes in their particulars
directly to the Registrar.