The Companies Act and Franchises: 10 Steps to Companies Act Compliance

On 1 May 2011, the Companies Act 2008 came into effect, replacing the Companies Act 1973 and the Close Corporations Act of 1984, and heralding a new era for business in South Africa. The new Companies Act aims to reflect socioeconomic and political changes, globally and in South Africa, and specifically emphasizes a need for good corporate governance.

The new legislation will affect all businesses, including franchises. One of the most significant changes is that close corporations could become obsolete in the future. Getting into line with the new Companies Act shouldn’t be a headache, if you implement these ten easy steps to Companies Act compliance.

STEP 1: Know the new company types and company name endings.

Under the new Companies Act, the following companies can be registered:

  • Non-profit Companies [NPCs] – Companies incorporated for public benefit, for example the SPCA.
  • Public Companies [Ltd.] – Companies which issue shares, which are often listed on a stock exchange, and are liable to shareholders, with management invested in a Board of Directors. Pick ‘n Pay is an example of a public company.
  • Private Companies [(Pty) Ltd.] – A private company may be founded and managed by just one Director (known as a One-Man Company), and must have at least one shareholder but no more than 50. For example, Murray and Roberts Steel (Pty) Ltd.
  • Personal Liability Companies [Inc.] – In this form of enterprise, current and previous directors may be held jointly and severally liable for any debts and liabilities which occur during their time in office. Most often in South Africa, this form of enterprise is used for firms of professionals – lawyers, tax consultants, doctors and the like. For example the South African pathology laboratory Drs Du Buisson, Kramer, Swart, Bouwer Inc.
  • State-owned Companies [(SOC) Ltd] – companies which are either state-owned enterprises, for example Eskom, or those owned by a municipality, like Durban Solid Waste.

Says Eugene Honey, of Bowman Gilfillan Attorneys*, the two most common forms of enterprise for franchises in South Africa are CCs (close corporations) and (PTY) Ltds (private companies).

STEP 2: Check your franchise’s current company status.

Is your franchise currently operating as a:

  • Close Corporation [CC], or
  • Private Company [(Pty) Ltd]?

As a franchise owner or operator, you should have this information to hand, but if you don’t, check your company status with the Companies and Intellectual Properties Commission (CIPC).

STEP 3: Consider the changes to CCs

If your franchise operates as a CC, or you’re considering opening a CC for a new franchise opportunity, you need to familiarize yourself with the impact that the Companies Act will have on close corporations:

  • Under the new Companies Act, close corporations are, effectively, being phased out.
  • As from 1 May 2011, no new CCs will be registered
  • Existing CCs will be maintained, for the time being.

For more information on how the Companies Act is affecting CCs, read What’s to Become of Close Corporations.

STEP 4 Convert a Close Corporation to a Company

Says the CIPC, the private company will replace the CC as the preferred form of enterprise for small businesses. While the Act doesn’t currently force the change, if your franchise is currently operating as a close corporation, you might want to consider converting your existing CC into a private company.

  • If you make the conversion within three years, the conversion fee will be waived.
  • While the Close Corporation Act has not yet been repealed, it will run concurrently with the Companies Act 2008 for an experimental period, after which a final, informed decision on the fate of CCs will be taken.

STEP 5: Get a MOI

If you’re operating as a private company [(PTY) Ltd], make sure that you replace your current Memorandum and Articles of Association with a Memorandum of Incorporation (MOI).

STEP 6: File Your Annual Returns

Both CCs and Private Companies need to file annual returns to the CIPC, to ensure that they are in possession of your latest company information. Remember that:

  • The annual returns fees are now based on turnover, and range from R100-R3000.
  • Manual annual returns are no longer accepted – instead, CIPC now supports the electronic filing of annual returns.

STEP 7: Know Director’s Duties and Responsibilities

Explains consultancy firm, Grant Thornton, directors have a fiduciary duty (that is, a legal obligation to act in the best interests of another party) towards the company, and in this fiduciary capacity, a director acts as an agent on behalf of the company, and as a trustee of company assets. Holding such a position, then, directors have a duty to:

  • Act in good faith
  • Act only within their powers, and to use this power for company, and not personal gain
  • Take reasonable care and exercise independent judgement in decision-making.

It’s important to note that directors can be held liable for breaches of director’s duties and responsibilities. Read Grant Thornton’s Effective Directors Guide.

STEP 8: Get Audited

According to the South African Institute of Chartered Accountants (SAICA) , the Act requires all companies to maintain proper accounting records and all companies (including close corporations) have to prepare annual financial statements within six months of the end of its financial year. These reports must comply with the Financial Standards Council (FRSC). The Act also sets out whether an enterprise must be audited, reviewed or is exempt from audit or review:

  • Private companies must be reviewed
  • Owner-managed private companies are exempt
  • Close corporations must produce an Accounting Officer’s Report, or be audited (if required by regulations made by the Minister of Trade and Industry).

STEP 9: Know about Business Rescue

Chapter Six of the Companies Act 2008 allows for ‘Business Rescue’, which is intended as an alternative to liquidation or judicial management of businesses in financial distress. Business Rescue is defined as ‘proceedings to rehabilitation of a company in financial distress’ by:

  • The temporary supervision and management of a company’s affairs, properties and business
  • A temporary moratorium on the rights of claimants against the company or property in its possession
  • A ‘rescue plan’ which restructures its affairs, business, properties, debts and other liabilities.
  • The appointment of a business rescue practitioner to oversee affairs and proceedings.

STEP 10: Be Aware that Companies Act Compliance will be enforced

The Companies Act emphasizes good corporate governance, risk and compliance (GRC), and all companies, including owner-managed businesses and close corporations need to comply with GRC. Note that:

  • The Companies Act Tribunal will oversee the enforcement of the Companies Act
  • Companies not complying with the new Act could face fines imposed by the Courts of either 10% of annual turnover or R1 000 000, whichever is the greater.

The CGF Research Institute offers online training in GRC – as a first port of call, read the CGF’s Corporate Governance Body of Knowledge.

For further, particular advice on how the Companies Act 2008 will impact on your franchise business, and to determine how well your business complies with the new requirements, please consult a Company Law attorney.

*’Getting the Deal Through – South Africa’ by Eugene Honey, Bowman Gilfillan Inc., from ‘Getting the Deal Through – Franchise 2011: Franchise in 32 Jurisdictions Worldwide’ (Contributing Editor, Philip F. Zeidman).