The Companies and Intellectual Properties Commission (commonly abbreviated as the "CIPC") recently implemented a new annual compliance duty on companies which has been referred to as the "CIPC Compliance Checklist".
This new obligation requires that South African companies, which have their annual financial statements audited or independently reviewed, declare their corporate compliance status to specific sections of the Companies Act in the form of a prescribed checklist as a prerequisite to filing their annual return each year.
The filing entails that a response be submitted on 24 set questions. These questions cover compliance with a broad spectrum of company law and corporate governance matters during the previous calendar year, including the keeping of company secretarial, accounting and other statutorily prescribed records as well as the completion of required corporate approvals relating to previous share trading transactions, rights issues, share buy-backs, fundamental transactions and company governance generally.
Exposure to penalties, deregistration as well as possible offences and fines
Failure to complete the CIPC Compliance Checklist timeously will prevent a company from lodging its annual return. This in turn may lead to late payment penalties for the annual return as well as place the company at risk of being placed in automatic deregistration by the CIPC should it fail to attend to its annual returns for two or more consecutive years.
To revive a "deceased" company after it has been finally dissolved in this way can be a time-consuming exercise requiring an application to the Registrar for reinstatement. Accordingly, we advise ensuring that annual returns (and accordingly the CIPC Compliance Checklist filing) be completed timeously to avoid these complications.
Furthermore, in terms of sections 214(1)(b) and 215(2)(e) of the Companies Act, 2008, it is a criminal offence to knowingly submit false or misleading information to the CIPC. "Knowingly" is defined broadly in the Companies Act, 2008. It includes either actual knowledge or that the person was in the position in which they reasonably ought to have: had actual knowledge or acquired knowledge by taking reasonable steps or other measures which would have provided the person with actual knowledge. A breach of this provision can lead to imprisonment for up to 12 months, a fine up to R40,000 or both of the aforegoing.
Some practical challenges and criticisms
The sections to which the questionnaire refers are often transaction specific and so do not speak generally to a compliance obligation of a company. It is not always clear as to what extent a response is required of the company concerned. For instance, a particular section may only contain rights or compliance duties which are dependent on certain facts or events which may not be relevant to the particular company. In other cases, a particular section would apply to a number of transactions in the preceding year. If the intention is that the response must cover each and every transaction concluded in such preceding year, this could necessitate that a full corporate due diligence be conducted in the case of some companies which have coordinated a number of corporate restructures or changes to shareholding for various shareholders. Such an extensive exercise is not practical or feasible for many businesses, especially entrepreneurs which naturally see a number of share trading, financing and other structuring transactions as they establish and grow their business.
Each question refers to compliance within the "previous calendar year" which is not a defined term in the Companies Act. Annual return filings become due on the anniversary of incorporation of a company as opposed to a calendar year, which makes the questions unclear as to the period of assessment. Furthermore, some companies may be in arrears of their annual return filing, in which case it is not clear whether the responses need to look back in time to the year on which the annual return applies or can be based at the actual time of completion when bringing the annual returns up to date.
There are also a number of other criticisms in the market which have been made against the new filing process, including how the CIPC would handle interpretational differences on the Companies Act, 2008. The CIPC has issued some standing non-binding opinions on the interpretation of certain sections of the Companies Act which can help guide companies and legal practitioners in some instances where there has been uncertainty in the market. However, there are still often differing views on a number of sections which remain prevalent in commercial practice. It remains to be seen how answering the question posed based on one's own reading will be treated by the CIPC, especially if the Registrar takes up an opposing view. Accordingly, one should seek advice as and when needed.
Another dilemma which faces legal practitioners and providers of company secretarial services is whether completing the CIPC Compliance Checklist may expose such practitioners, firms and/or other entities to liability for the responses provided by a client to the questions posed. The practitioner or other provider assisting in the process will naturally need to rely on information as being provided by a client at face value and in this way will often act as a mere conduit of information on behalf of the client. That said, however, if a law firm or other provider was involved in any previous transaction work or provided opinions on which it received information or otherwise came into its knowledge (or ought to have been reasonably aware) of a previous non-compliance event, submitting a false or misleading response to the Registrar will likely expose that firm to liability for allowing such a response.
Is the CIPC overstepping its powers?
The CIPC is a creature of statue and accordingly may not extend its powers beyond those provided for in the Companies Act and the regulations pursuant thereto.
The Companies Act, 2008 and regulations as promulgated in 2011 have not been amended or replaced so as to provide for this new compliance duty on companies. There does not appear to be any enabling legislation to impose a pre-checklist phase as part of authorising an annual return. The new mandatory filing requirement, which blocks compliance from the annual return filing, may accordingly be outside of the scope of the powers of the CIPC (i.e. referred to as a "jurisdictional error of law") and could be open to challenge as being invalid (i.e. ultra vires) from an administrative law perspective.
Despite the interpretational challenges and possible room for challenge on the legality of the CIPC's new filing requirement, companies will need to comply with the new requirement to avoid complications and possible deregistration and/or penalties being levied by the CIPC.
Our company secretarial team can assist you in completing the CIPC Compliance Checklist or to otherwise help advise on the particular compliance questions as and to the extent needed.
Please note that the legal topics informally discussed here are general discussions of certain aspects and therefore certainly not intended as legal advice. We look forward to discussing your particular case with you.