WELCOME TO AUE 1601 Legal Aspects in Accountancy

WELCOME TO AUE 1601 Legal Aspects in Accountancy

Presenters : Messrs Ambition Motha, Thabo Matsimela & Frederik van Niekerk Department of Auditing

MOTIVATION - GET GOING “I learned that courage was not the absence of fear, but the triumph over it. The brave man is not he who does not feel afraid, but he who conquers that fear. ’’ By Nelson Mandela

AUE 1601 -OUTLINE FOR TODAY’S BROADCAST § Outline of this module § Companies Act & Regulations – syllabus & examples of exam questions & other § Exam technique § 15 Minutes break § Exam technique applicable to this module § Companies Act & Regulations – further example of exam questions & other § End of session

AUE 1601 § Responsible lecturers: Mr FN van Niekerk Mrs C Roets § Contact details E-mail: aue 1601@unisa. ac. za Tel: (012) 429 -4489

STUDY PACKAGE Ø Study guide (from 2013) Ø Tutorial letters 501 – 503 (2012) Ø Tutorial letters 101, 102, 103, 104, (if there are errata 105), 201 & 202 (visit my. Unisa to download) Ø Companies Act 2008, as amended Ø Companies Regulations Ø Announcements on my. Unisa

WHAT IS THIS MODULE ALL ABOUT? The module is all about the Companies Act and Companies Regulations. The Close Corporations Act forms part of the syllabus but you will not be examined thereon. For those who for the first time see an Act, it consists of sections. The numbers you will find in the Act are the section numbers. Every Act has definitions that explains certain words or phrases used throughout the Act – it is therefore wise to study the meaning of the words/phrases included in the definitions.

The Regulations are regulations in addition to related provisions in the Companies Act. It may indicate the specific forms required to be lodged with the Commission (ie when a company amends its memorandum of incorporation). We are not interested in the form names or numbers for examination purposes. It also includes other additional requirements to be read together with the requirements in the Act. It includes cross references to the Companies Act section it relates to.

T/letters 501 to 503(2012) § There is currently no study guide as we are in the process of writing it § The Companies Act 71 of 2008 as amended and the Companies Regulations will be examined § Study the sections in the tables provided in the Tutorial letters (study guide from 2013), taking into account possible additions or errata in Tutorial letters 104 or 105 and any announcement on my. Unisa § As to the Regulations, refer to the slide in this presentation, tutorial letters and or announcements in this regard

TUTORIAL LETTERS 501 – 503 (2012) Ø Work through the T/letters (study guide from 2013), study references and do activities, bearing in mind any announcements which may narrow down or add to sections to be studied Ø Take note of the different levels of mastery you are required to achieve in this module – refer T/letter 501, points 1. 2 & 1. 3. 2 (study guide from 2013), in order to determine level of questions expected to be expected in the exam

TUTORIAL LETTER 102 Ø Attempt the additional questions under exam conditions without looking at the key/solution Ø Mark/evaluate your attempt Ø If the 1 st attempt result is not what you expected, you must determine where the problem lies Ø If you cannot solve the problem yourself, you must make contact with us

my. Unisa § Tutorial letters (under the heading “official study material”) § Past exam papers (not in 2012 as it is a new module) § Discussion forums § Announcements § Assignment results § Prescribed textbooks § Schedule (assignment due dates & exam dates)

Companies Act & Companies Regulations Presented by Ambition Motha and FN van Niekerk

Important!! You must be able to apply the following Companies Act sections and related Regulations on level 2 (except for sections 49– 56 and 95– 97, 99– 111 which are on level 1) and be prepared to be examined on them. T/LETTER TOPIC SECTION 501 501 501 1 2 2 501 501 501 DESCRIPTION General overview of the module Relevant definitions Interpretation Categories of companies Incorporation and legal status of companies 3 4 – 1 2– 6 8 11, 13, 15– 16 & 19– 22 24 and 27– 30 35– 43 & 46– 48 4 49– 56 57– 65 95– 97, 99– 111 Securities registration and transfer Governance of companies Public offerings of company securities Company records Capitalisation of profit companies

T/LETTER TOPIC SECTION DESCRIPTION 502 5 66– 78 Directors 502 6 84– 85 Application and general requirements regarding enhanced accountability and transparency 502 6 86– 89 Company secretary 502 6 90– 93 Auditors 502 6 94 Audit committees 502 7 44– 45, 112, 115 Transactions 503 8 79 -83, 128 -155, Business rescue, compromise with creditors, winding 159, 162, 163, 168 up and deregistration of companies -184 503 9 185– 204, 503 9 213 -216, 218, 219 Offences, penalties and miscellaneous matters 503 10 - Regulatory agencies Schedules 2, 3 & 5 to the Companies Act and other legislation applicable to companies

Solvency test Assets, fairly valued, are equal to, or exceed, liabilities of the company, or group of companies [sec 4(a)] Liquidity test • The company will be able to pay its debts as they become due [sec 4(b)] • in the ordinary course of business, • for a period of 12 months after the date of the test. These tests are used for the following: • • • Share capital reduction (share buyback) [sec 46 & 48] Share capitalisation [sec 47] Financial assistance for purchase of own shares [sec 44] Financial assistance to directors or related persons [sec 45] Issue of dividends [sec 46] Other compensations

RECORD KEEPING AND FINANCIAL STATEMENTS (sec 29– 30) Each year, a company must prepare annual financial statements within six months after year end [sec 30(1) to (7)]. To determine whether a company should be audited or independently reviewed, please refer to the table below. Type of company Report on financial statements Public companies (Ltd) To be audited State-owned enterprises (SOC Ltd) To be audited Private companies ((Pty) Ltd) Sec 30(2)(b)(i) If desirable in the public interest, having regard To be audited to the social significance of the company as indicated by: –annual turnover –size of work force –nature and extent of activities Sec 30(2)(b)(ii) Ownership structure: – Non-owner managed (not ALL shareholders are directors) To be independently reviewed Audit may be voluntarily determined by MOI Sec 30(2)(b)(ii) Ownership structure: No requirement – All shareholders are directors, or one – Audit may be shareholder holds all the shares. determined by MOI voluntarily

● Accounting considerations What is the public interest score? (Regulation 26) Every R 1 m turnover Every employee average number 1 Point Every security holder Every R 1 m third party liabilities 1

Example of application of the public interest score…. . Wendell and Webb wants to form a private company (A Pty Ltd). Wendell comes from a wealthy family and will provide most of the finance required for the venture. The two of them will initially be the only shareholders and directors of the company but it is expected that over time, a few new shareholders will be found as well as one or two more directors appointed. The company will operate from a factory. Wendell estimates that in the first year of operation they will employ about twenty people (including themselves) and generate a turnover of approximately R 20 million and that liabilities will not exceed R 3 million at anytime). The following question was put to you: Wendell said that he had been told about something called a public interest score and that if your business had one it had to be externally audited. He wanted to know what this was about. Lionel Lester added that he had heard that their company would have to be independently reviewed by an auditor. (13½)

Reference: Section 84, 85 of the Companies Act and Regulations 26 & 28). 1. All businesses have a public interest score. A public interest score is the sum of the points allocated to four stipulated criteria for every company (and CC). 1. 1 one point is allocated for the average number of employees in the business 1. 2 one point is allocated for every R 1 m (or portion thereof) of turnover 1. 3 one point is allocated for every individual who has a direct or indirect interest in the shares of the company. 2. Once a company’s public interest score has been calculated, certain requirements must be met by the company depending on the number of points. For example, a private company with a public interest score of 350 or more will have to be externally audited. 3. As A Pty Ltd will initially have a public interest score (PIS) of less than 100 points (it will only be about 45), the company’s AFS will not have to be externally audited. 3. 1 PIS calculation: Every employee - average number = 20 Every security holder = 2 Every R 1 m third-party liabilities = 3 Every R 1 m turnover = 20 45 4. With regard to the company’s AFS having to be independently reviewed, this would normally apply to a company with a public interest score of less than 100 points but that it would not apply to A Pty Ltd because owner/managed companies, i. e. those where the shareholders and directors are the same individuals, are exempt from this requirement.

Companies Regulations § The Regulations goes hand in hand with certain Companies Act sections. In the Regulations there are references to the section in Act that it relates to. § We are not interested in the names and numbers of any forms to be lodged with Commission. We therefore do not expect you to study every regulation as some only refers to the specific forms required. List of regulations is provided in an announcement.

Section number in Act Regulation number 8 13(1) & 16 27, 28 28(1)(b) 29(4) 30(2) & (7) 35 50 66(10) 72(4) 84 & 85 26 & 27 15 25(3)-(6) 26(1)(b) & (c) 27 28 29(1)-(10) 31(3) & (5) 32 38 43(1) 26, 27, 28

Exam Paper § One scenario with all questions based on the scenario/Different scenarios with one or more questions based on that scenario. Similar to assignment questions § Topics include the Companies Act and the Companies Regulations. § No question on the Close Corporations or any other Act § No multiple choice questions, just essay type of questions

COMMON ERRORS IN EXAMS & ASSIGNMENTS Students do not identify/are not able to identify all the related Companies Act sections that are applicable to a specific scenario. They therefore lose many valuable marks! A certain skill is involved in identifying the key issues from a scenario, relating to the Companies Act, and discussing them. You will need to practice answering questions to develop this skill. It is essential that you only review the solutions after you have attempted answering the questions blind, to ensure that you develop this skill.

THE RELEVANT LEGISLATION MAY BE TESTED IN THE FOLLOWING WAY: ● A question may be asked, in which a certain scenario is given and you are required to evaluate the legality of any transactions/schemes that are contemplated or were implemented. You may also be required to give advice regarding alternatives and/or further requirements that have to be met. WE SUGGEST THAT YOU APPROACH QUESTIONS AS FOLLOWS: Questions that require advice on or the evaluation of a given situation: ● Identify ALL transactions/events referred to in the scenario. (Continued)

Approach to questions (continued) ● Determine which requirements of the relevant acts relate to each transaction/event. These requirements may relate to … - powers of the entity (memorandum of incorporation; sections of the Act) - specific authorisation required (for example, special resolution; ordinary resolution) - special preconditions (pass the liquidity and solvability test) ● Reproduce theory that is applicable to each transaction/event. ● Apply theory to the facts given in the question. ● Conclude on the legality of each transaction/event. ● Make recommendations or discuss alternatives (if required by the question).

Examination Techniques

Introduction § § § 3 – 5 weeks before the exam The night before the exam The day of the exam During the exam After the exam

3 – 5 Weeks before the exam § § § Draw up a serious revision timetable 8 – 10 Hours per week for each course Plan to study when you are most alert – morning people and evening people

3 – 5 Weeks before the exam § Keep normal living patterns § Work through past exam papers and T/letter 102 § Avoid people who panic easily

3 – 5 Weeks before the exam § Keep a positive attitude § Organise responsibilities

The night before the exam • Gather exam equipment • Use relaxation / stress management techniques • Have enough sleep

The Day of the exam • Eat a good breakfast / lunch • Leave plenty of time for your journey • Do not discuss anything regarding your studies with fellow students

During the exam § Read each question, including the scenario and required part

Quick Test Read all of the following questions and answer appropriately. 1. What is your name? ________________ 2. What is your student number? ____________ 3. Answer only question 10. What is the time? _______ 4. Who is your best friend? ______________ 5. What colour shirt do I wear? ____________ 6. Will you study hard? ________________ 7. When should your assignment be in? _________ 8. What is your lecturer's telephone number? _______ 9. What does IAEP stand for? _____________ 10. The only thing you need to do for this test is to put up your hand when you reach this question. __________

During the exam § Calculate your time § Write legibly and double space your writing

During the exam § Write enough!! § Start each question on a new page § Keep to your time limit

After the exam § Avoid exam post mortems § Plan to spend time to unwind

§ GOOD LUCK § WISH YOU SUCCESS IN THE EXAM

10 minutes Break AUE 1601 Legal Aspects in Accountancy

LAYOUT OF CO’S ACT § 9 Chapters § 5 Schedules

LAYOUT OF CO’S ACT § Chapter 1: Interpretation, purpose and application § Chapter 2: Formation, administration and dissolution of companies § Chapter 3: Enhanced accountability and transparency § Chapter 4: Public Offerings of company securities

LAYOUT OF CO’S ACT § Chapter 5: Fundamental transactions, takeovers and offers § Chapter 6: Business rescue and compromise § Chapter 7: Remedies and enforcement § Chapter 8: Regulatory agencies and administration of Act § Chapter 9: Offences, miscellaneous matters and general provisions

LAYOUT OF CO’S ACT § § § Schedule 2: Conversion of CC to company Schedule 3: Amendment of laws Schedule 5: Transitional arrangements

OUTLINE CO’S ACT § Parts of the Co’s Act that we examine more. § Some of the more important sections (refer to level of knowledge required) § Application of knowledge

Chapter 1 Part A s 1 -6 Interpretation § s 2 Related and inter-related persons and control relationship between: Individuals & individuals Individuals & juristic person Juristic & juristic person § s 3 Subsidiary relationships control majority voting rights or appoint directors § s 4 Solvency and liquidity test Solvency: A>= L & Liquidity: pay debts 12 months

Chapter 1 cont. . . Part B s 8 Purpose and application § s 8 Categories of companies Two types: Profit companies State owned, Pty (Ltd), Inc and Ltd Non-profit companies

Chapter 2 § Part B s 13, 15– 16 and 19– 22 Incorporation and legal status s 13 Right to incorporate company s 15 MOI (memorandum of Incorporation) Shareholder Agreements & Rules of Co s 16 Amendments to MOI s 19 Legal status of company s 20 Validity of company actions

Chapter 2 cont. . . § Part C s 24 and 27– 30 Transparency, accountability s 24 Form and standards for records s 27 Financial year of company s 28 Accounting records s 30 Annual financial statements

Chapter 2 cont. . . § Part D s 35– 43, and 44– 48 Capitalisation of profit companies s 35 -48 Shares, Financial assistance, Loans and Distributions § Part E s 49 -56 Securities registration and transfer (level 1)

Chapter 2 cont. . . § Part F s 57 -78 Governance of companies s 57 Interpretation s 60 -61, 65 Shareholders’ meetings s 62 -64 Notice, conduct and quorum at shareholders’ meetings s 66 -78 Directors

Chapter 3 Enhanced Accountability & Transparency § Part A s 84 -85 Application & registration of secretaries and auditors § Part B s 86 -89 Company Secretary Appointment, duties, resignation & removal § Part C s 90 -93 Auditors Appointment, resignation , rotation & functions § Part D s 94 Audit committee Agm, Ltd or state-owned, >=3 , Directors not day-to-day

Chapter 4 § Public Offering of company securities s 95– 97, 99– 111 (level 1) Chapter 5 - Fundamental transactions (also see transactions in chapter 2, part D - s 44 & 45) § Part A s 112 -115 Disposal of all or greater part of assets or undertaking

Chapters 2&6 – Business rescue & compromise with creditors § Part G s 79 -83 Winding-up of solvent co’s § Part A s 128 -137 Business rescue § Part B s 138 -143 Practitioner's functions & terms of appointment § Part C s 144 -149 Rights of affected persons during business rescue § Part D s 150 -154 Development and approval of business rescue plan § Part E s 155 Compromise with creditors

Chapter 7 § Part A s 159 General principles s 159 Protection of whistle-blowers § Part B s 162 -163 Rights to seek specific remedies s 162 Application to declare director delinquent or under probation § Part D s 168 -175 Complaints to Commission or Panel § Part E s 176 -179 Powers to support investigations & inspections § Part F s 180 -184 Companies Tribunal adjudication procedures

Chapter 8 – Regulatory Agencies (all at level 1) § Part A s 185 -192 Companies and Intellectual Property Commission § Part B s 193 -195 Companies Tribunal § Part C s 196 -202 Takeover Regulation Panel § Part D s 203 -204 Financial Reporting Standard Council

Chapter 9 § Part A s 213 -216 Offences & penalties s 213 Breach of confidence s 214 False statements, reckless conduct & noncompliance § Part B s 218 -219 Miscellaneous matters

Schedules § Schedule 2: Conversion of CC to company § Schedule 3: Amendment of law § Schedule 5: Transitional arrangements

Exam technique applicable to this module § We will work though a question with 1 scenario and 2 questions flowing from that. § Note that the examination paper is normally written over a 2 hour period and that time is of the essence. § Start by reading through the “Required” part 1 st first in order to know what is required and whilst reading the scenario, identify the applicable section(s) & underline words that may influence your answer. To do this, you need to have a very good level of knowledge.

Working through a question ABC Ltd, a leading producer and distributor of fine wines, spirits and ciders. The following extract is from ABC Ltd’s annual financial statements at 30 June 2012: ASSETS Total Non-Current Assets Total Current Assets EQUITY AND LIABILITIES Total Non-Current Assets Liabilities Total Current Liabilities 4 000 2 000 000 6 000 5 000 11 000

Mr Naidoo, the chief executive director, approached you for advice regarding the following transactions: ABC Ltd wants to sell certain fixed assets with a book value of R 3, 5 million at a profit of R 1 million to an independent third party. REQUIRED Marks Discuss the requirements of the Companies Act 71 of 2008, as amended, in respect of the above transaction, assuming that no shareholders opposed this particular transaction. Do not discuss any requirements regarding quorums or voting. (10½)

Solution The transaction is in fact the selling of the greater part of the ABC Ltd's assets, (1½) since the book value of the assets that will be sold (R 3. 5 million) is more than 50% of the book value of the total assets (R 6 million). (1½) ABC Ltd’s MOI must provide for such transaction. (1½) In terms of section 112, ABC Ltd may not dispose of all or the greater part of its assets unless the disposal has been approved by a special resolution of its shareholders; and (1½) section 112 also provides that the notice convening the meeting of shareholders for considering the special resolution must be delivered within the prescribed time and in the prescribed manner to each shareholder of ABC Ltd. (1½)

Solution (continued) Each such notice must be accompanied by. . . • a written summary of the precise terms of the transaction to be considered at the meeting; and (1½) • reference to the provisions of section 115 (the specific authority required); and (1½) • reference to section 164 (indicating the shareholders' rights, should the special resolution be passed, but where there are dissenting shareholders, which is not the case here). (1½) Any part of the assets of a company to be disposed of, as contemplated in section 112, must be fairly valued, as calculated in the prescribed manner, as at the date of the proposal, in accordance with the financial reporting standards. (1½) Maximum marks (10½)

Working through a question ABC Ltd, a leading producer and distributor of fine wines, spirits and ciders. The following extract is from ABC Ltd’s annual financial statements at 30 June 2012: ASSETS Total Non-Current Assets Total Current Assets EQUITY AND LIABILITIES Total Non-Current Assets Liabilities Total Current Liabilities 4 000 2 000 000 6 000 5 000 11 000

QUESTION BASED ON SAME INFORMATION AS PREVIOUS QUESTION ABC Ltd is experiencing severe cash flow problems. The company decided to attempt a strategy to attract investors and to increase the satisfaction of current shareholders and to discourage any disinvesting. Mr Naidoo proposed to declare a dividend at the end of the financial year to successfully accomplish the company’s goal. The board of directors approved the decision with no director opposing the decision. REQUIRED MARKS Evaluate the requirements of the Companies Act 71 of 2008, as amended, in respect of the above transaction. Answer the question in the format of Theory (7½ marks) and secondly the Application thereof (6 marks).

Declaring of a Dividend Theory In terms of section 46, ABC Ltd must not make any proposed distribution unless … (a) The distribution • is pursuant to an existing legal obligation of ABC Ltd, (1½) or a court order; or (1½) • the board of ABC Ltd, by resolution, has authorised the distribution; (1½) (b) It reasonably appears that ABC Ltd will satisfy the solvency and liquidity test (1½) immediately after completing the proposed distribution; and (1½) (c) The board of ABC Ltd, by resolution, has acknowledged that it has applied the solvency and liquidity test, and reasonably concluded that the

Solution (continued) Application ABC Ltd does not satisfy the solvency requirements after making the dividend distribution, because considering all reasonable foreseeable financial circumstances of ABC Ltd, (1½) the liabilities (R 11 000) of ABC Ltd fairly valued, exceed the assets (R 6 000) of the company fairly valued. (1½) ABC Ltd is not liquid, since the current liabilities (R 5 000) exceed the current assets (R 2 000). (1½)

Solution (continued) Based on the information provided the dividend distribution will be illegal, since it does not satisfy the solvency and liquidity requirement, thereby constituting a breach of section 46 of the Companies Act. (1½) Any director of ABC Ltd is liable to the extent set out in section 77(3)(e)(vi) if that director was present at the meeting when ABC Ltd’s board approved a distribution and failed to vote against the distribution, despite knowing that the distribution was contrary to section 46 – which is the case here. The directors also did not apply their duties regarding the application of the solvency and liquidity test properly, otherwise the distribution would never have been approved. (1½) Maximum marks (6)

AUE 1601 EXAMINATION PREPARATION CHECKLIST Yes No q Did I work through Study Guide (2013)/T/letters 501 -503? q Did I study all the study references? q Did I read all the announcements on my. Unisa? q Did I practice questions more than once? IF YOUR ANSWER IS YES Then you are able to score 75% No tricks, No catches.

MOTIVATION - GET GOING "Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our light, not our darkness that most frightens us. We ask ourselves, Who am I to be brilliant, gorgeous, talented, fabulous? Actually, who are you not to be? You are a child of God. Your playing small does not serve the world. There's nothing enlightened about shrinking so that other people won't feel insecure around you. We are all meant to shine, as children do. We were born to make manifest the glory of God that is within us. It's not just in some of us; it's in everyone. And as we let our own light shine, we unconsciously give other people permission to do the same. As we're liberated from our own fear, our presence automatically liberates others. " By Marianne Williamson

AUE 1601 Legal Aspects in Accountancy ALL THE BEST WITH YOUR STUDIES