Corporate Law - The Companies Act, Act 71 of 2008

Queries continue to be received by the EAAB regarding the consequences of the implementation of the Companies Act, 71 of 2008. As readers of AGENT will, no doubt, already be fully aware, the 2008 Act repealed the previous Companies Act in its entirety (save only for chapter 14 of the old Companies Act which deals with insolvent companies). It is intended, for the purpose of this article, merely to provide a brief overview of some of the most important aspects of the new Companies Act insofar as they affect estate agents in particular.

Close Corporations

Since many existing estate agency enterprises presently operate as close corporations it should be underscored that the new Act neither provides for the registration of close corporations nor permits, as was previously the position, the conversion of companies into close corporations. It is, accordingly, suggested that all estate agency enterprises which currently operate as close corporations should consider obtaining professional advice on the conversion of those close corporations into companies, notwithstanding the fact that the standing of all existing close corporations will not immediately be affected by the new Act.

Memorandum of Incorporation

The new Act provides for a Memorandum of Incorporation (“MOI”) which does away with the previous Memorandum and Articles of Association. The MOI of a company takes precedence over any shareholders’ agreement while a shareholders’ agreement is rendered void to the extent that such agreement conflicts with the provisions of the MOI.

Pre-incorporation Contracts

While pre-incorporation agreements can continue to be concluded it is no longer required that such agreements be disclosed in the MOI. Persons concluding pre-incorporation agreements on behalf of a company to be incorporated will be held jointly and severally liable with the company for compliance with such agreements should the proposed company either not be incorporated or should the company, once it has been duly incorporated, reject the agreements in question. The company, once incorporated, will be deemed to have ratified any pre-incorporation agreement within three months after its incorporation unless, however, the board resolves otherwise.

Extended personal liability of Directors

Section 77 of the Act extends personal liability to the directors of a company under circumstances where such directors have: acted in the name of the company without possessing the necessary authority to do so; acquiesced in the carrying on of the business of the company despite being aware that such conduct was reckless and/or negligent and/or fraudulent;

  • been a party to an act or omission calculated to defraud a creditor, employee or shareholder or having any other fraudulent purpose; and
  • signed, consented or authorised the publication of financial statements which were false or misleading.

Directors will, however, be excused from personal liability if it they can show that they acted honestly and reasonably in the circumstances. It is, in the circumstances, strongly suggested that all estate agency companies should both investigate and consider the taking out of appropriate directors’ and officers’ insurance in order to protect themselves against the incurrence of any such personal liability.

Fundamental Transactions

Estate agents operating as companies should be aware that the disposal of all, or the greater part of, the assets or undertaking of a company constitutes a fundamental transaction. As opposed to the provisions of old Companies Act a fundamental transaction is defined in the new Act to mean: the disposal of more than 50% of the gross assets, at fair market value, of the company irrespective of the liabilities of the company; and which disposal was sanctioned by a special resolution of the shareholders of the company under circumstances where the specific terms of the proposed transaction were previously circulated to shareholders and, also, specifically noted in the special resolution.

The quorum requirement for the passing of a valid special resolution must, of course, be fulfilled. In the case of a company a special resolution is a resolution that is adopted with the support of at least 75% of the voting rights exercised on the resolution or any such different percentage, not less than 75%, as may have been provided for in the MOI. A company will be required to apply to court for the sanctioning of a proposed fundamental transaction where at least 15% of the votes are against the adoption of the required special resolution. A court may, furthermore, rescind a fundamental transaction should that transaction be manifestly unfair to any class, or holders, of the securities of the company or should the voting have been materially tainted.

The solvency and liquidity test

Companies must, at all material times, ensure that they pass the solvency and liquidity test insofar as the assets of the company, fairly valued, should equal or exceed the liabilities of  the company, fairly valued, while the company is a going concern in that it is able to settle all debts for at least the following twelve month period. Should a company, at any given stage, fail to pass the solvency and liquidity test, the directors of the company may incur personal liability for any losses incurred by creditors of the company.

Pre-existing Companies

The new Act provides for certain transitional arrangements in respect of companies that were previously incorporated under the old Companies Act. Directors of pre-existing estate agency companies should take special cognisance of the fact that the provisions of the new Act will supersede any conflicting provision in pre-existing constitutional documents of a company after 30 April 2013. The new Act, furthermore, substantially increases the powers of directors, which may be limited or removed by shareholders. It is suggested that pre-existing estate agency companies consider the possibility of proactively amending their MOIs to simplify the running of the company. Any changes necessitated to the documentation of pre-existing companies must, in any event, have been finalised by 30 April 2013 and it may be worth the while for pre-existing companies to seek professional assistance in ensuring compliance before this date.

Courtesy: The EAAB - Estate Agency Affairs Board

“Redressing the Past, Building the Future and Guiding the Real Estate Business towards Professionalism”

It is apparent, therefore, that the CPA could conceivably have severe implications not only for landlords, property developers and business owners but also estate agents and commercial- and business brokers.

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