The new Companies Act will provide that a company may be fined for failure to comply with the Act. For example, if your business fails to keep accurate accounting records to enable it to prepare financial statements, the Companies Commission (which will replace our existing Registrar of Companies) may seek to impose an administrative fine of up to 10% of your turnover for the period during which the failure occurred.

In terms of the current Act, the power of the existing Registrar of Companies to impose fines is limited and the amounts of the fines are so minimal that companies may very well laugh it off as money well spent. However, business in South Africa will need to take the incoming regulator more seriously given the provisions of the new Companies Act of 2008. Section 171 of the new Act provides that the Companies Commission may issue a compliance notice to any person who has contravened the Act, which notice may require the person concerned to cease, correct or reverse any action in contravention of the Act. The section also compels the Companies Commission to send a copy of the notice to any specific regulator which watches over the affairs of the company concerned. If, for example, the company is registered as an insurer, the notice will also be sent to the Financial Services Board.

Once the request set out in the compliance notice has been met, the Companies Commission will issue a compliance certificate to that effect. However, should a company fail to comply, the Companies Commission may apply to court for the imposition of an administrative fine or, if appropriate, refer the matter to the National Prosecuting Authority for criminal prosecution. For instance, it is an offence for a person to be involved in the falsification of accounting records and, if found guilty, the person may be fined or imprisoned for up to ten years, or be subject to both a fine and imprisonment. The administrative fine may not be more than the greater of 10% of the company's turnover for the period during which the company failed to comply with the compliance notice and the maximum of not less than R1 million, still to be prescribed by the Minister of Trade and Industry. Factors that will be taken into account when determining the amount of the fine include the nature of the contravention, whether any damages were suffered, the level of profit derived as a result of the contravention and whether the company was previously found to have failed to comply with the Act.

Although these provisions may seem to be a little harsh, they are fair in the sense that a company is given an opportunity to comply with or object to the notice once received. The company can oppose the court application or present mitigating evidence. Ultimately, the decision to impose a fine rests with the court and fines cannot be imposed arbitrarily by the Companies Commission through an administrative process.

It will be interesting to see whether the Companies Commission will actively police the provisions of the new Act and to what extent it will use its enabling powers in future. Should it adopt a similar stance that has been taken by our Competition authorities of late, it will certainly be a watchdog companies would rather seek to avoid by complying with the new law. The negative publicity that such proceedings may attract, together with the time taken to deal with complaints of this nature, are factors that business will need to take into account as those factors may prove to be more harmful than the fine itself. Companies will be well-advised to comply from the outset.

By: Stephen Kennedy-Good, Associate, Commercial Department, Deneys Reitz