September 7, 2021
“Creditors have better memories than debtors” (Benjamin Franklin)In these hard times of pandemic and economically destructive unrest, an unfortunate number of businesses face collapse, and many will opt for the “first aid for companies” option of business rescue. Creditors coming out of that process with a shortfall (only the luckiest creditors are likely to emerge with full settlement) will naturally look to any personal suretyships they hold to cover that shortfall. A recent SCA (Supreme Court of Appeal) decision has brought welcome clarity to the question of whether – and in what circumstances – such personal suretyships will survive the business rescue process. Both directors and creditors need to understand the outcome, and to act accordingly.
Sued for R6m, a CEO’s defence crumbles
- A company CEO (Chief Executive Officer) signed a personal suretyship in favour of a creditor supplying the company with petroleum products.
- When the company fell upon hard times it was placed into business rescue. Eventually a business rescue plan was adopted, the rescue process was terminated, and the creditor sued the CEO for the shortfall on its claim of just over R6m.
- The CEO’s main defence was that his liability as surety was an “accessory obligation” – in other words, if the creditor’s claim against the principal debtor (the company) fell away, he should be released from his liability as surety.
- But, held the Court, although a principal debtor’s discharge from liability does indeed ordinarily release the surety, our law allows the creditor and the surety to agree otherwise.
- And the suretyship agreement in this case did just that. It contained “unobjectionable” and “standard” terms which included a specific agreement by the surety that he would remain liable even if the creditor “compounded with” the company by accepting a reduced amount in settlement of its claim. Nor was there any mention in the business rescue plan of its effect on creditor claims against sureties (it could, for example, have provided specifically for sureties to remain on the hook, or to be released). But the deciding factor remained that the wording of the suretyship was such that the creditor did not abandon its claim against the surety by supporting the business rescue plan.
- Bottom line – the CEO goes down over R6m, and the creditor has another shot at emerging unscathed from the mess.
September 21, 2020
“O Wonder! …O Brave New World” (Shakespeare)
Regrettably the pandemic still shows no sign of going away any time soon, and the social distancing it has brought to our “new normal” leaves companies with a dilemma. How can you comply – safely and lawfully – with the Companies Act’s stringent requirements for the holding of Annual General Meetings and (where needed) interim General Meetings?
The good news is that our South African legislation has for many years allowed the holding of company meetings via electronic communication.
The savings in cost, efficiency and convenience have now – courtesy of the lockdown – been experienced first-hand by many a company and its stakeholders, and a Google search reveals a multitude of AGMs held recently via Zoom or similar platforms (there are also several proprietary platforms specializing in shareholder meetings).
The benefits of meeting virtually are such that even after Covid-19 is no more than a bad memory many of us will continue doing so in place of the traditional “face-to-face all in one place” gatherings.
Expect also an upsurge in hybrid physical/virtual meetings as things get safer.
The formal requirements
- Comply strictly with all the Companies Act’s requirements in regard to proper notice, conduct and minuting of meetings and decisions.
- Observe all the legal requirements set out in ECTA (the Electronic Communications and Transactions Act) in regard to identification of originator, accessibility, storage, retrieval etc.
- Shareholder meetings can be conducted entirely by electronic communication unless prohibited by your MOI (Memorandum of Incorporation) but if you want to avoid any uncertainty have your lawyer draw your MOI to clearly allow them.
- How you hold the virtual meeting is important, the requirement being that “The electronic communication employed ordinarily enables all persons participating in that meeting to communicate concurrently with each other without an intermediary, and to participate reasonably effectively in the meeting.”
- Notice of the meeting – over and above the normal requirements for notice, “the notice of that meeting must inform shareholders of the availability of that form of participation, and provide any necessary information to enable shareholders or their proxies to access the available medium or means of electronic communication”.
- It’s then over to shareholders (or their proxies) to arrange their own access at their own expense, although good practice might be to assist with technical and perhaps even financial support where necessary. Any suggestion of an infringement of shareholder rights could come back to haunt you.
Board decisions generally
Unless your MOI says otherwise, your board can make decisions electronically (without a virtual or physical meeting) if the decision is one “that could be voted on at a meeting of the board of that company”. Decisions can be “adopted by written consent of a majority of the directors” after “each director has received notice of the matter to be decided.”
Shareholder decisions generally
Shareholders can also vote electronically on resolutions relating to any business not required by the Companies Act or by the MOI to be conducted at an AGM
Meetings of public company shareholders “must be reasonably accessible within the Republic for electronic participation by shareholders … irrespective of whether the meeting is held in the Republic or elsewhere”.
Bodies Corporate and Home Owners Associations
Community schemes should take advice on whether in their particular circumstances they can/should postpone their AGMs and/or hold them remotely. Bodies Corporate will need to comply with their Rules and Home Owners Associations with their founding documents (either a Constitution or an MOI).
March 30, 2020
“…the default position is that an executive director or a senior employee may not carry on business activities which fall within the scope of his company’s business during the time when he serves as director or works as employee. The default position however changes on resignation.” (Extract from judgment below)
What happens if relations between you and your fellow company directors sour to the extent that a director leaves? Can he or she immediately open up a new business in direct competition to you?
A recent High Court decision both addresses that knotty question, and highlights a quick and easy solution.
Fishing for business: “Big Catch” claims R24m
- Big Catch Fishing Tackle (Pty) Ltd markets and hosts fishing and fly fishing tours in both local and international waters.
- The company’s two directors and shareholders fell out, culminating in one director accusing the other of serious breaches of his duties as director.
- Although hotly disputing any wrongdoing he resigned his directorship (under, he says, duress and coercion). He remains a shareholder.
- Big Catch is now suing the ex-director for some R24m in “past” and “future” damages, relying on disputed claims of improper or unlawful conduct which include the channeling away of business from Big Catch, misappropriating stock, diverting payment of commissions and acting recklessly and without authority. Whether or not these allegations will be proved eventually will only be determined when the main case finally goes to trial.
- What is of interest to us at this stage is Big Catch’s interim application to the High Court to interdict the ex-director and his new business (Upstream Fly Fishing) from competing with Big Catch.
Ex-director off the hook
- Directors have a range of fiduciary duties towards their companies. They must at all times act in good faith and in the best interests of the company. They must avoid conflicts of interest. They cannot compete with the company nor make secret profits. “The default position”, as the Court in this case put it, “is that an executive director or a senior employee may not carry on business activities which fall within the scope of his company’s business during the time when he serves as director or works as employee.”
- Big Catch had to convince the Court that those duties survive resignation unchanged. But, held the Court, that “default position” changes on resignation and “the director or employee does not commit a breach of his fiduciary duty merely because he takes steps to ensure that, on ceasing to be a director or employee, he can continue to make a living even by setting up a business in competition with his former company or by joining a competitor and then pursuing opportunities similar in nature to those targeted by his former company.”
- Although a director’s fiduciary duty does indeed survive departure, “the content of that duty does not remain the same … The duty will only be breached after resignation if it involves the use of confidential information or violates an interest of the company that is worthy of protection in some other way” (emphasis supplied).
- In other words, a company cannot simply say “our ex-director is breaching an ongoing fiduciary duty towards us”, it must go further and actively prove a right to protection. Big Catch in this case being unable to make out its case, the Court dismissed the application with costs and the ex-director is off the hook, at least for now.
Big Catch’s big mistake – no restraints of trade
Round 1 therefore to the ex-director; a victory made easier by Big Catch’s failure to put restraints of trade in place for all its directors and senior employees.
As the Court put it “…in the absence of a restraint of trade, the onus shifts to the director’s former company to justify the interdict both in law and in fact” and “…a company that wishes to prevent a director or employee from competing with it after resignation should either do so by way of imposing a reasonable restraint of trade or it will have to persuade a Court that it has an interest worthy of protection, such as confidential information, client lists or connections, that justifies an interdict.”
Bottom line – make protecting your company easy with restraints of trade!
December 19, 2019
The CIPC (Companies and Intellectual Property Commission) has announced that its new “compliance checklist” requirement, voluntary until now, becomes mandatory for all companies and close corporations from 1 January 2020.
You must complete the checklist before submitting your annual return. So firstly check when your due date for the annual return is – for companies you will have 30 business days from the day after its date of registration, whereas for close corporations you will have the two months from the first day of the registration month until the end of the following month.
Then log on to the CIPC website and find what CIPC calls its “new user-friendly service” under “e-Services for Customers”.
If you run into problems take professional advice immediately. You really don’t want to drop the ball on this! If you can’t complete the compliance checklist, you can’t submit your annual return, which will put your company at risk of deregistration because CIPC assumes that your company has stopped doing business.
Deregistration means your company ceases to exist, with drastic negative consequences for your company, for its business operations, and for you personally.
April 7, 2017
Whilst the vast majority of state officials are competent and honest, and deserving of our full support, there will always be a few “bad eggs” to contend with.
We’ve all had our run-ins with state bureaucracy, and where it causes you significant loss of any sort, ask your lawyer if you can sue. Act quickly; a 6 month time limit applies.
Of course first prize is always to avoid the hassle and risk of litigation by motivating an obstructive official into doing his/her job properly in the first place. And whilst threatening to go the legal route should help, there’s a problem here. If you win, government pays your damages and legal costs. In other words, it’s not the errant official who risks having to cough up; it’s you and I as taxpayers.
The good news is that our courts have signalled clearly that they will not tolerate the actions of that minority of state officials who seem to think that they can trample all over our constitutional rights with impunity.
How the “Social Grants Crisis” judgment helps
The Constitutional Court case around the social grants crisis finds the Social Development Minister at risk (as at date of writing) of having to pay the many millions in legal costs at stake in that case “from her own pocket”.
She has to show cause on affidavit why that shouldn’t be ordered, and it will be interesting to see what argument she advances in light of the Court’s reference to her “extraordinary conduct” and its finding that: “The office-holder ultimately responsible for the crisis and the events that led to it is the person who holds executive political office. It is the Minister who is required in terms of the Constitution to account to Parliament. That is the Minister, and the Minister alone.”
Regardless of the outcome, errant state officials and their superiors have now been given an unambiguous warning by the highest court in the land – they risk personal liability for legal costs caused by their dereliction of duty.
In the High Court: The “bull in a china shop” doctor
A recent High Court decision illustrates the sort of unacceptable conduct that will expose a state official to the risk of paying costs personally-
- A specialist radiology practice, operating in an academic hospital, obtained two interim court orders against a provincial Department of Health which had tried to close them down by removing their equipment and locking them out.
- Disputes over the validity of a lease of equipment and over the practice’s rights to treat private as well as public patients led to litigation.
Whilst the litigation was still pending, two senior Departmental officials (both doctors) “decided to act as prosecutor, judge and executioner on the legal issue … thereby taking the law into their own hands”.
- Much “harassment and intimidation” later, the practice’s equipment was unlawfully seized and removed by one of the officials, accompanied by a “platoon” of security guards. In defiance of court orders the Department failed to return the equipment and prevented access to the practice. Most alarmingly the state doctor in question, again with a platoon of security guards, was found to have intruded on a “life-threatening, intricate and complicated procedure” in an operating theatre.
- He had, said the Court, “acted like a bull in a china shop” and is perhaps lucky that an application to have him committed to prison for 90 days for contempt of court could not be pursued.
- And it certainly didn’t help the Department’s case that the radiologists were specialists with “rare skills” who mostly treated public patients, nor that the officials had acted in a “high-handed, arrogant and aggressive manner”, had displayed an “arrogant, foolhardy and recalcitrant attitude”, and had acted “in flagrant disregard of the laws of our country”.
- The Court confirmed both orders against the Department with a punitive attorney and client scale costs order, but the real victory for the public lies in the Court’s clear indication that – had it been asked to do so – it would have ordered the errant officials to pay the legal costs personally.
So the next time a “bad egg” bureaucrat abuses your rights . . .
When you bump heads with one of the “bad eggs” try this – have your lawyer formally warn him/her (and their superiors) that you will do everything you can to hold them personally liable for all your costs. Our courts are behind you!
January 10, 2017
“My best entrepreneurial advice is to start” (Dave
Morin, entrepreneur, angel investor, CEO and co-founder of social network Path)
What is a private company?
7 advantages of private companies…..
A company has “perpetual succession” – it survives the death/incapacity/insolvency/exit of the directors and shareholders. That carries a host of practical benefits, including making it a possible estate planning tool.
Transferring ownership and management is easy – shareholders and directors change but the company lives on.
Directors and managers have limited liability. Note however that directors and senior managers can be held personally liable in cases of reckless or fraudulent trading, non-compliance with statutory duties and the like – the “new” Companies Act in particular has imposed a whole new set of duties and risks in this regard. Bear in mind also that that your limited liability falls away to the extent that you sign personal surety for company debts.
Shareholders are in general not liable for the company’s debts, although they do risk liability for some tax debts e.g. if they control or are regularly involved in the management of the company’s financial affairs.
It is generally easier to raise funding for a company than it is for a sole tradership or partnership.
Similarly, a company is adaptable to both small and large businesses, so if you are starting off small but planning to grow substantially, consider using a company from day one.
- Tax: Sometimes an advantage ….. see below.
… and 3 disadvantages
Formation: Unlike sole traderships and partnerships, companies require formal registration and compliance with various formalities. Factor the attendant delay and cost into your plans. Using a shelf company can reduce the hassle but make sure you buy it from a reputable business.
Costs of administration: Prepare for a higher administrative and regulatory burden than with your other choices. Factor in both the time and financial costs of complying with the host of legal requirements, statutory returns and general red tape associated with companies. Find out up front for example whether you are going to have to pay for a full audit or independent review every year.
- Tax: Sometimes a disadvantage ….. see below.
The tax angle
The bottom line is this – take full professional advice on both the legal and the tax implications of using each type of entity before choosing.
October 5, 2016
SARS has launched a new TCS (Tax Compliance Status) system. See “How to Access Your ‘My Compliance Profile’ (MCP) via SARS eFiling” on the SARS website for a comprehensive guide on how to use it –
- To view your current tax compliance status (colour coded red for non-compliant,green for compliant),
- To remedy any non-compliance, and
- To challenge your compliance status if you disagree with it.
August 4, 2016
“You can’t fight city hall” (old idiom decrying the futility of trying to fight a bureaucracy)
You challenge the accuracy of a services account from your local municipality, thus: “Your meter must be wrong, no way was my consumption that high”. The reply: “We’ve tested the meter and it works fine. Pay up or face disconnection”.
Off to court you go. Can you “fight city hall” and who has to prove what?
August 4, 2016
“Privacy, like other rights, is not absolute. As a person moves into communal relations and activities such as business and social interaction, the scope of personal space shrinks” (Extract from judgment below)
All companies – big and small, public and private – must keep registers of their shareholders and directors. And, as the SCA (Supreme Court of Appeal) made clear recently, even “private” companies’ registers aren’t private at all.
July 5, 2016
“Alone we can do so little; together we can do so much” (Helen Keller)
So what exactly is a partnership? We talk loosely about our “partners” in various contexts, but it is important to understand how the law views the concept in a strictly business situation. In broad terms a partnership is an association of between 2 to 20 people/companies/trusts who agree to pool resources (such as money, property, services, skills etc – whatever is agreed upon) and to operate a jointly-owned business, trade or profession for profit. Partnership assets are jointly owned by the partners and profits are split between them as agreed.