The Companies Bill was signed into law on 8 April 2009. Once in force, the New Companies Act will repeal the current Companies Act, 61 of 1973, which has been South Africa’s primary corporate legislation for over 30 years, and is set to radically change South Africa’s corporate landscape.
The new statute introduces a new regime for rescuing companies, which is largely based on Chapter 11 of the US Bankruptcy Code. Chapter 11 is reorganisation, as opposed to liquidation, and recognises that it is sometimes the case that the value of a business is greater if sold or reorganised as a going concern than the value of the sum of its parts if the business’s assets were to be sold off individually. The Act also promotes the enforcement of the legislation by substantially reducing most of the ineffective criminal sanctions and by replacing them with a combination of more potent administrative and civil remedies.
Entrepreneur spoke to Lindie Engelbrecht, CEO of the Institute if Directors, to find out more about what this part of the Act means for small-to-medium size businesses.
What does the New Companies Act say about bad payers?
The Act does not say anything about slow payers per se. It does state that where a company is financially distressed, the board has an obligation to commence business rescue proceedings. Once the company is in business rescue, their creditors have to continue supplying the company as long as it is on better terms than before business rescue has been implemented. It is, however, problematic; if, for example, the terms were 60 days and have been reduced to 30 days, the company may still not be able to pay within 30 days.
What is the motivation behind these amendments to the New Companies Act?
The motivation is to create an avenue for the rescue of a viable business; in the past, a business in financial trouble would undergo liquidation or judicial management. In my view, neither approach worked successfully as both creditors and employees would invariably suffer losses. The amendments allow for a business to be rescued, if possible, for the benefit of all concerned.
The pro’s and cons for SMBs?
The pro’s are that you have a mechanism to save your business if it is still viable. There is also no time limit on the business rescue and liquidation cannot commence until the business rescue has either been completed or has failed. The cons are on the supplier side – you may start supplying to a company without knowing that they are under business rescue. How can SMBs best prepare themselves to deal with the new legislation? Businesses need to inform their boards of the full implications of the Act as there are many other issues over and above business rescue that have more severe consequences. They also need to employ a good company secretary or outsource the function as there is a host of preparatory administrative work that must be performed.
The companies act lowdown
Why it’s more important than ever to vet your customers
- The new Companies Act was signed by the president on 8 April 2009 and gazetted on 9 April, in Gazette No. 32121 (Notice No. 421).
- In early February, the Department of Trade and Industry issued a statement to the effect that the Bill would come into effect in a staggered manner. It is expected, however, that all the provisions of the Bill should be in operation by late 2010.
- In terms of the legislation, a company’s board may voluntarily begin rescue proceedings. The board can place the company under supervision if it “has reasonable grounds to believe” that the company is financially distressed but that there “appears to be a reasonable prospect” of rescuing the business.
- With a total of 3 300 liquidations recorded in 2008, according to Statistics South Africa, it’s clear now more than ever that it’s vital to set up and maintain an effective debtor system and to ensure that you obtain accurate and up-to-date credit information on all customers before you extend credit to them.