By Prof Graham PaddockProf Graham PaddockThe new Companies Act that came into effect on 1 May 2011 has been described as “a revolution for South African corporation law”. While this replacement legislation is arguably the most important statute that exists from a South African commercial law perspective and is certainly a fresh start for company law, in my view it is an evolutionary development rather than a revolutionary one.

The provisions of the new Act and its Regulations, Forms and Notices, all of which are available online in Paddocks Club, updates South African company law and brings it in line with that of our major trading partners. Our company law has always been closely modeled in that of the United Kingdom, as has that of Canada, Australia and other Commonwealth countries. The new legislation integrates the best practices of these analogous jurisdictions, most notably Canada, with South African common law and commercial requirements. It also takes into account the recommendation of the King Commission reports and thus signals a fundamental shift in corporate governance principles.

The Act is much more accessible than its predecessor, being drafted in plain language and logically structured. My principle interest in the Act is its effect on Homeowners Associations that were established as section 21 (now “non profit”) companies. In this article I will give a very brief overview of this newly implemented legislation.

First, some highlights:
1. While the Close Corporations Act will remain in force for as long as it is needed to cater for existing CCs, it will be amended so as to incorporate the new features of the Companies Act. No new CCs can be formed.
2. The new Act provides a simpler approach to corporate structures. There will only be Profit Companies (of which there are just a few types) and Non Profit Companies. All new companies will have a single fundamental governance document, a Memorandum of Incorporation.
3. Directors are more strictly responsible and their responsibilities and liabilities are more clearly set out.
4. There is a requirement for “plan language” in company communications
5. There is provision for electronic communication and online meetings.
6. A local variation of the “business judgment” rule has been introduced.
7. Most of the sanctions for non-compliance with the requirements of the new legislation are civil, not criminal.

Looking further at the issue of accessibility, the Act consists of 225 sections (the previous legislation had twice as many) and they are clearly labelled. The government has created a really impressive Commission website: www.cipc.co.za, at which all the legislation, forms and many guidance documents are available.

The South African version of the business judgment rule is worth looking at in detail. The Act provides that a director is protected against actions for breach of the duties of care, skill and diligence and the duty to act in the best interests of the company in relation to a matter where that director has:
(a) taken reasonably diligent steps to become informed about the matter,
(b) either had no conflict of interest in relation to the matter or complied with the rules on conflicts of interest and
(c) had a rational basis for believing, and did believe, that his decision was in the best interests of the company.
In acting as such, a director may rely on information given by and actions taken by persons such as employees and advisers who that director reasonably believes to be reliable and competent.
These provisions mark a step towards greater accountability on the part of directors – no more initialing at the bottom right of each page without looking at the content, at least not without risk!

As to structure, the Act is divided into 9 Chapters and it has 5 Schedules. The Regulations are divided into 8 Chapters and they have 3 Annexures. Finally there are a set of Forms and Notices. Given the very wide scope of commercial and non-commercial activity that is governed by the new Companies Act, it is as compact as it could reasonably be. No one said it was going to be really short, so we each need to identify the bits that apply to our activities and read them.

For the directors of home owners’ associations, I suggest the following initial readings:

In the Preamble & Chapter 1: Interpretation, Purpose and Application I suggest you first look at Part A: Interpretation and focus on section 1. Definitions and 5. General interpretation of Act. Then in Part B: Purpose and application, read sections 8. Categories of companies and 10. Modified application with respect to non-profit companies.

In Chapter 2: Formation, Admin. & Dissolution, head for Part C: Transparency, accountability and integrity of companies and go through section 24 to 34. These cover important issues of company records, information and returns. In Part F: Governance of companies, I suggest that you hunker down and read sections 57 to 78. These cover internal company governance issues such as member’s rights, meetings and directors – all important material.

Have a quick look at Chapter 6: Business Rescue and Compromise with Creditors (the new procedures that replace the previous Judicial Management provisions) and then in Chapter 7: Remedies and Enforcement, go to Part B: Right to seek specific remedies and look at sections 162 an 163. Chapter 8: Regulatory Agencies and Administration of Act deserves a quick look and then in Chapter 9: Offences, Miscellaneous Matters and General Provisions I suggest you go to Part A: Offences and penalties and read sections 214 to 217.

Of the Schedules to the Act, I suggest that you read both Schedules 1 and 5 carefully. In the Regulations I suggest that you should look Chapter 2 – Formation, Administration and Dissolution of Companies, Part C– Transparency, accountability and integrity of companies. Here regulations 21 to 30 are important, dealing with company offices, records, information, financial years, reporting standards and annual returns. And by the way, all HOAs will have to render annual returns.

Right, so here is what you have to do:
(a) Get access to a copy of the Act, Schedules, Regulations, Annexures, Forms and Notices. Bear in mind that the original Act 71 of 2008 was amended by Act 3 of 2011 just before it came into operation, so make sure you have the amended Act. (All of these documents are accessible online to members of Paddocks Club under the heading HOA in the Library.)
(b) Start by reading the parts identified above – you won’t struggle with the language.
(c) Go to http://www.cipc.co.za/ and look around, read the explanatory texts and bear in mind that the prescribed forms have a lot of embedded explanatory material, so they are worth going through.
(d) Starting now, apply the provisions of the Companies Act 71 of 2008 to your corporate Homeowners Association and bear in mind your new responsibilities as a director under this Act.

Article reference: Paddocks Press: Volume 6, Issue 4, Page 1
Professor Graham Paddock is one of the Course Conveners for the Home Owners’ Association Management course. The next course is due to start on 8 August 2011. For more information please contact Kate on 021 447 4130 or kate@paddocks.co.za.

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