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LEGAL: The Legal Consequences Of Holding Office Under the New Compa

 





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Prescribed officers need to be aware of their potential exposure to criminal and civil liability under the new Companies Act, warns Professional Services Firm PwC.
“Prescribed officers under the new Companies Act must be able to recognise the legal consequences of holding the particular office,” says Carla Budricks, PwC Legal Compliance Officer.

The concept of a ‘prescribed officer’ is relatively new within the corporate regulatory framework of South Africa and not completely comparable to the “officer” referred to in the old Companies Act. An employee meeting the definition of prescribed officer, may inadvertently be regarded as such regardless of the designated title or office, says Budricks. This is why it is vital that anyone who is appointed or holds a position or office in an organisation needs to understand the implications of such a position.

The new Companies Act, which came into effect on 1 May 2011, incorporates the existing common law duties of directors. These duties also extend to prescribed officers. Similarly prescribed officers are bound by the standard of conduct against which directors are measured. Prescribed officers will be liable in accordance with the principles of common law relating to breach of a fiduciary duty, for any loss, damages or costs sustained by the company as a consequence of a breach of that duty. “Prescribed officers and directors may be jointly and severally liable for certain actions,” she says.

The operation of Regulation 38 may include a host of individuals as prescribed officers. A person is a prescribed officer:
• If that person exercises general executive control over and management of the whole, or a significant portion, of the business activities of the company ; or
• Regularly participates in the exercise of general executive control over and management of the whole, or a significant portion, of the business and activities of the company.
The definitions of a prescribed officer contained in the Act and regulations are not of much assistance in determining who the prescribed officers are, but they do create the parameters in which the officers operate, she says. Attempting to list all possible designations by referring to earlier drafts of the Act is also too restrictive. “A case-by-case analysis and factual circumstances will ultimately determine who the prescribed officers are. Furthermore, a person does not have to be employed by a particular company to fall within the definition of a ‘prescribed officer’.”

Best practice dictates that the directors of the company should determine who the prescribed officers are, subject to the approval of the board and audit committee, she says. Directors can be led by a number of considerations in their determination, in addition to the Act and regulations. For instance, in a group of companies, the structure of the organisation or organogram may be indicative of who the various heads of divisions are and to whom they report. Evidence of who the prescribed officers are may also be reflected in the board’s policies on delegation of authority to management.

The following positions may always fall within the ambit of a prescribed officer, provided that they meet the requirements of the definition: a CEO; a senior financial manager in a group structure; a senior financial manager in a company that does not have a financial director; a general manager; regular attendees with decision making powers on the executive committee or management committee.

Budricks says a further implication of the Act for directors and prescribed officers of public and state owned companies is the disclosure of individual remuneration.

Although not a new requirement for some directors, it did not previously apply to prescribed officers under the old Companies Act or the JSE Listings Requirements. The JSE Listings Requirements require listed companies to disclose directors’ remuneration per individual. In practice, the disclosure of directors’ remuneration for listed companies has always been reflected by name. “Disclosure by name underpins the provisions of the new Companies Act, which is intended to encourage transparency and high standards of corporate governance.” It should however be noted that there are divergent interpretations on the topic. The various issues nevertheless highlight the necessity for companies to consider the implications of the Act for prescribed officers in the organisation and for prescribed officers to be aware thereof.


 
 
 
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