nomad.cloud | director's guide
by Franco Cronje
Companies in South Africa are governed by the Companies Act no. 71 of 2008 and the Companies Regulations 2011. A Company is a separate legal entity which is managed by directors which is appointed by the shareholders of such company.
The shareholders are the owners of the company with the directors being the managers so appointed by the shareholders. The directors of a company therefore has to manage the company in accordance with the requirements of the respective acts ensuring that
- They do not cause harm to the company;
- They must act in the best interest of the company;
- They ensure no conflict of interest between the company and the directors.
It is important to note that a person can be a director, employee, shareholders or creditor of a company all with separate and identifiable rights. Owners of private companies being shareholders and directors commonly mistake their roles thinking that it is one and the same thing.
The Director's Guide is structured in a logical and sequential way so as to guide.
- The formation of a company is dependent on the type and requirement of the person forming such a company. A company has the same legal powers and capacity as an individual unless the Companies Memorandum of Incorporation (MOI) provides otherwise [sec 19(1)].
- Two main categories of companies can be formed namely profit and non-profit companies (sec 8(1) & 8(2)].
- Profit companies are classified as follows:
- Private Companies – (Pty) Ltd
- Personal liability Companies – Inc
- Public Companies – Ltd
- State Owned Companies – SOC
- Non-profit companies are classified as: Non-profit – NPC.
- A non-profit must be formed for a specific reason and is subject to a modified application [sec 10 + Schedule 1).
- Profit companies may be incorporated by a person or a SOC [sec 13(1)]. Non-profit companies must be incorporated by at least 3 persons, a SOC or a juristic person.
- A name must be reserved thereafter a notice of incorporation must be completed and signed and filed with the CIPC. This is to inform the CIPC that a company is being registered [sec 13(2) to (4) read with regulation 14]. Only then is a company in existence.
- A MOI is a document that sets out the rights, duties and responsibilities of shareholders, directors and others within and in relation to a company [sec 1 and 15].
- A MOI can either be the standard form as provided by the CIPC or a long form (customised). Any inconsistencies between the MOI and the Act will ensure that the MOI is void and the Act will take precedent.
- The newly incorporated company is managed by its board of director/s. If more than one director is appointed a single director cannot act on behalf of the company unless authorised to do so [sec 66(1)].
- Private and personal liability companies must have at least 1 director where as a public or non profit company must have at least 3 directors [sec 66(1) & (2)].
- A company must not carry on its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose. [sec22 (1)].
- Reckless trading refers to the fact that a company is trading whilst being insolvent and not being able to pay its creditors. In such a case a director has an obligation to consider business rescue proceedings or liquidation, otherwise the director may be held liable.
- The funding of a company is mainly through equity or debt. Equity refers to the shares and a company's MOI must set out the classes of shares, number of authorised shares and the nominal value of each class of share.
- Each class of shares must have a distinguishing designation and specific rights, preferences and limitations associated with that class.
- Each issued share of a company, regardless of its class, has associated with it one general voting right unless provided otherwise by the Companies Act or as determined by the company’s MOI [sec 36 & 37].
- Debt funding may be obtained by the company pursuant to approval by the board of directors, subsequent to establishing the need and repayment of such a loan.
- Directors may also advance loans on behalf of the company.
- Advancing loans are subject to the solvency and liquidity test [sec 45]. The solvency and liquidity test is important as it talks to the financial and economic sustainability of a company. The Companies Act applies the solvency and liquidity test in a number of provisions, for example:
- When a company declares a dividend.
- Buys back its own shares.
- Provides financial assistance for the purpose or in relation with the acquisition of its own shares.
- Undertakes an amalgamation or merger.
- The solvency and liquidity test must be applied before any financial decision is made.
- A company satisfies the solvency and liquidity test at a particular time, if considering all reasonably foreseeable financial circumstances of the company at that time, the assets of the company as fairly valued, equal or exceeds the liabilities of the company, as fairly valued [solvency]; and it appears that the company will be able to pay its debts as they become due in the ordinary course of business for a period of 12 months after the date on which the test is considered or it appears that the company will be able to pay its debts as they become due in the course of business for twelve months following a distribution [liquidity] [sec 4].
- Any third party deals with your company in good faith and presumes that the company has complied with all formal laws and regulations.
- The company can therefore never say that for example the meeting where a person was authorized to buy something was invalid and therefore it is not bound by the contract.
- A company must keep accurate and complete records [sec 28]
- File an annual return every annum to stay active [sec 33]
- Complete a compliance checklist, if applicable audit or independently review the annual financial statements [sec 30, 30(7) & regulation 27, 28, 29]
- Inform the CIPC of any changes to the directors or the address of the company by filing the respective COR form.
- Companies including directors in their personal capacity may be held criminally liable for [sec 214 & 215 (2)(e)]:
- Falsifying company records.
- Providing false and misleading information.
- Defrauding the public or providing untrue statements.
- Failing to comply with compliance notice.
- A director of a company may incur legal liability in the event that the company incurred loss or damage as a result of said director [sec 77(3)]. Actions which may include:
- Acting on behalf of the company without the necessary authority.
- Trading recklessly.
- Being a party to an act or omission by a company calculated to defraud.
- Party to false and misleading financial statements.
- Party to a prospectus or written statement that contains an untrue statement.
- Is/was present at a meeting and failing to vote against an unauthorized or inconsistent provision of the Companies Act.
SOC, listed and private companies who within the previous 2 of the 5 years have had a Public Interest score in excess of 500 points must appoint a Social and Ethics Committee to oversee and monitor the company's social responsibility [Regulation 43(5)].
- A company can be voluntary closed or liquidated by passing the respective resolutions and informing the CIPC of such [sec 79, 80, 81]. Should a company trade recklessly it should be placed under business rescue in terms of chapter 6 of the Act.
- An insolvent company not being able to correct its course under business rescue may be liquidated [chapter 14 of the Companies Act of 1973, Item 9 of Schedule 5 of the Companies Act of 2008].