SUMMARY OF COMMENTS ON THE COMPANIES BILL 2018 REVIEW
2.1 General Comments
1. Lack of Policy Framework to Direct Businesses –
Related to the above, the Bill does not take into account socio-economic issues that affect businesses in Ghana. Example, there have been calls to bring informal sector into the formal sector for tax inclusion and the preparation of the new Companies Bill offers a good opportunity to achieve that purpose. But the Companies Bill seeks to restate positions of the Companies Act, 1963 which failed to clarify the indigenous and cost to other infant MSMEs and compliance of the various dictates of companies.
2. Holistic Review of Laws Affecting Business Entities –
There is the need for all the laws related to business establishments and operations to be reviewed in a holistic manner and synchronized. That is the Companies Bill should not be looked at in isolation but must be done together with the Registration of Business Names Act, 1962 (Act 151) and the Incorporated Private Partnership Act, 1962 (Act 152).
3. Registrar General’s Departments / Office of the Registrar of Companies – the Companies Bill seeks to create a new office solely for the registration of companies. Whilst this is laudable idea, it is important to emphasis that failure to provide the needed resources including capable officials to ensure that the Companies Bill is effectively implemented, will not yield any result. Rather it is our recommendation that this option should be a unit in the office of the Registrar General’s.
4. Tier System of Companies –
The establishment requirements, compliance issues, and other related provisions of the Companies Bill apply to small and big companies without any distinction between them. In addition, the complexity of the incorporation requirements, applying across board, to both small and big companies hinder small business owners from incorporating into a formal business entity. One mechanism to attract informal sector into the formal sector, is to consider the creation of segregated types of companies which attract informal business owners. For example having Tier 1, Tier 2, Tier 3 etc companies with different legal regime for each tier. The above will require different compliance requirements for the different tiers of companies. Based on the above, a tier system of private companies limited by shares can be created.
5. Restriction on Number of Members/Debenture holders of Private companies - the Bill should create exceptions, for example, for churches that incorporate as private companies limited by guarantee and associations of more than 50 members who want to incorporate to carry on business but which do not necessarily want to incorporate a public company, especially where the entity do not intend to advertise for purchase of shares or public deposit or any public involvement. The fundamental issue that needs to be addressed is that it is not prudent to maintain the 50 members limitation which may have been reasonable in 1963 and not in today’s environment without allowing any exception. Due to functionalities and the highly competitive nature of doing business, we recommend the threshold should be increased to not less than 100 members.
6. Reduction of the age of subscribers (shareholders) and directors to 18 years - what is not clear is if the reduction of the age of subscribers and directors under the Companies Bill does amend also the general position under Contract Law that a minor (who is someone below 21 years old) has no capacity to enter into a contract, thereby lowering the age limit to 18 instead of 21. If not, there is implication for the reduction of the age under the Bill in terms of validity of such contracts signed by the directors below 21 years of age (example the validity of such contracts may be challenged). Another implication if the contracting age and the age of subscribers/directors are not synchronized, is that, such subscribers/future directors cannot enter into pre-incorporation contracts on behalf of the proposed companies; neither can they act as promoters.
2.2 Specific Comments
7. Abolishing of the Ultra Vires Doctrine – one highlight of the Bill is the statement in the memorandum to the Bill that ultra vires doctrine or principle has been totally abolished. It is suggested that the ultra vires doctrine as in the 1963 Act should be maintained to ensure that businesses conduct the business for which the entity is registered for as stated in its incorporation document.
In addition, the fundamental question is whether the indication in the memorandum that the ultra vires doctrine has been abolished is not entirely true given that the Bill allows the court to grant injunction to prevent transactions subject to issues of fairness to the third party. Also, members and debenture holders can prevent such ultra vires act under section 219. Section 150 (which deals with Presumption of Regularity) also does not protect such transactions when the third party knows the transaction is ultra vires or ought to know or fails to be diligent when he/she is put on notice.
The stated objectives of an incorporated institution should be clearly identified and limit the functions and operations of such incorporated institutions to the stated objectives and functions.
(a) The change of name from Regulations to Constitution is likely to confuse business entities. The suggestion is that the name Regulations should be maintained. Other jurisdictions who has amended their companies legislation multiple times maintain the terminologies that the user of the code are familiar with and the Companies Bill should also maintain the terminology especially if the substance of the document is not affected to warrant the change of name.
(b) The Bill also requires the Constitution to conform to the form of constitution (Regulations) in the Bill under section 27(1). It gives the Registrar power to refuse to register the constitution even though the substance of the Regulations/Constitution satisfies the requirements of the Companies Act. The insistence on the form over the substance should be avoided.
(c) There is no recognition of the status of Shareholders Agreement vis-a-vis the Regulations/Constitution of the Company. Since both essentially play the same role, the Act should recognize this and make provision for instances where shareholders enter into a Shareholders Agreement in addition to the Regulations/Constitutions.
9. Registration of Charges – the registration of charge is now required to be done within 45 days (compare to previous 28 days under the Act). If not done, section 118 maintains the position that it should be done after an application is made to the court and order obtained to effect the Registration. The procedure of seeking court approval for the extension of the time of registration is unnecessary. It is recommended that the power is given the Registrar General to grant or refuse such extension and the charge should take effect from the date of registration (so that any prior charge registered has precedence).
Further it is important that the registration process under the Companies Bill is made consistent with the registration process under the Borrowers and Lenders Act. Under the Borrower and Lenders Act, registration of charges at the Collateral Registry is to be done within 28 days. Where this is not done, the Collateral Registrar (Bank of Ghana) is given the power to grant extension for registration. Alternatively, a single registration process should be adopted to avoid duplication and misunderstanding of registration of charges.
10. Minimum Number of Directors, Residence Requirement and Competence – it is not in all instances that it is prudent for companies to have a minimum of two directors. In practice, a name is added to that of the shareholder just to satisfy the minimum requirement without any further implication. Based on the suggestion of tier system of companies, the requirement of permitting a single director for lower tier companies is preferred.
11. Prohibition of Financial Assistance in Acquisition of Shares – the Companies Bill maintains the position of the Companies Act, 1963 that prohibits companies giving financial assistance directly and indirectly to prospective shareholders in the acquisition of shares of the company. It is suggested that this may rather in some instances prevent companies from accessing funds (including venture capital fund). It is therefore necessary that in some instances financial assistance in acquisition of shares be permitted especially if agreed to by the shareholders and interested third parties such as creditors and debenture holders (whose interest are to be protected by the prohibition).
12. Requirement of adopting International Financial Reporting Standard (IFRS) – the Companies Bill in sections 127(5) and 131(5)(b) provides that financial statements should comply with IFRS. However, there are some inconsistencies with the provisions of the Companies Bill and the IFRS that must be synchronized.
(1) Exclusion of Subsidiary From Consolidation IFRS – under IFRS, a subsidiary is excluded from consolidation when control is lost. However, the Companies Bill section 131(3)(b) provides as follow:
Subject to the approval of the Registrar, consolidated financial statements need not deal with a subsidiary of the company if the company’s directors are of opinion that:
It is impracticable or would be of no real value to the members and debenture holders of the company in view of the insignificance of the amount involved; or
It would involve expense of delay out of proportion to the value to members or debenture holders of the company ; or
The results would be misleading or harmful to the business of the company or any of its subsidiaries; or
The business of the holding company and that of the subsidiaries are so different that they cannot reasonably be treated as a single undertaking
This is inconsistent with the IFRS standard and leave it to too much discretion. It is recommended that this section be deleted and IFRS standard should be applicable.
(2) Transaction Cost on Issue of Shares – under IFRS, Transaction Costs of an equity transaction are deducted from equity. The Companies Bill section 68(1)(a), however, provides that Transaction Costs on issuing of shares are not deducted from the total proceeds of every share issue. These are therefore charged to statement of income. The suggestion is the IFRS should be adopted and the treatment of Transaction Cost under the Companies Bill should be deleted.
13. Filing of Annual Return – The reporting requirements for companies particularly the filing of annual returns with the required financial statements should be looked at to make the reporting requirements more simple to enable the “small” companies comply with the requirement without incurring the huge expenses to engage qualified accountants to prepare accounts and engage qualified auditors to audit the financial statements prior to filing their annual return. This is burdensome on such small companies in terms of their ability to afford such incremental cost to be in compliance.
Notwithstanding the suggestion on defining a small company provided above, such Small Companies which are in specialized industries must comply with all the provisions relating to financial statements contained in their respective industry legislation. The financial burden of meeting the respective financial reporting be it quarterly, semi-annually or annual should be reviewed to grant the MSMEs for other yearly reporting unless the business is seeking public solicitation for support when they stand to meet standard requirements.
14. Qualification of Company Secretary – the Company Secretary plays critical role in ensuring compliance with legal requirements imposed under the Companies Act and the current Companies Bill. The Companies Bill permits a Director to act as a Company Secretary (a position maintained from the Companies Act, 1963). It is recommended that this practice is against good corporate governance principle. The Companies Bill should therefore prohibit acting in such dual capacity.