THE COMPANIES ACT 2017 IS NOW IN EFFECT, WHAT THEN?
ON June 7, 2018, Minister of Commerce, Trade and Industry, Christopher Yaluma signed the Companies Act (Commencement) Order, 2018 which brought into effect The Companies Act, 2017 (The “Act”).
The Companies Act (Commencement) Order, 2018 means that the Companies Act, 1994 ceases to exist at least for any new actions. The repealed Companies Act, 1994, which provided a legal framework for the corporate sector for the past 24 years in Zambia had been due for revision for numerous years, at least given the various motions and changes that have taken place in the business environment, some of it as a consequence of technological advances and the impact of global changes.
The major focus of the Act is the development of the economy by encouraging entrepreneurship, enterprise efficiency, flexibility and simplicity in the formation and maintenance of companies. It also has enacted a number of measures designed to strengthen the regulatory framework and introduced a softer regime for companies meeting the small category classification.
The Act continues with its role of providing for the incorporation, categorisation, management, and administration of different types of companies incorporated.
It is important however to understand that while the Act provides for a new regime for the corporate sector and other stakeholders, those actions that were concluded or executed in line with the old ordinance of the Companies Act, 1994 and that remain in force without amendments, following the Companies Act (Commencement) Order, 2018 will remain effective as though implemented in line with the Act.
A few major regulations forming part of this Act are important to note. The Act introduces a) Mandatory audit rotation rules, b) the beneficial owner model c) Recognition of small private company criteria and d) defined the duties of the directors and company secretary/qualification of the company secretary.
a)Mandatory audit rotation rules
Firstly for all companies other than those meeting the small private company classification is that the Auditor’s Rotation requirement is now mandatory. Section 257(3) provides that an auditor may be reappointed by an ordinary resolution by the company at the annual general meeting, but cannot be appointed continuously for a period exceeding a total of six years.
What this bill has introduced in terms of audit mandatory rotation in Zambia for all companies in the country (that do not fit the small private company criteria) is a very novel idea given the few countries that have gone this route before.
In fact the only best known implementation of such mandatory rotation rules for all companies is Indonesia, while a large number of countries such as Argentina, Brazil, Canada, Singapore, South Korea and Spain all initially implemented mandatory audit firm rotation but have either partially or wholly withdrawn from the concept.
Similarly, Australia, Hong Kong, Japan, Malaysia, Mexico, New Zealand, Russia, Sri Lanka, Switzerland, Thailand and the United States did investigate the idea but rejected it.
It is important to note that mandatory firm rotation is still much a debate topic and has an increasingly take up in the world with the current focus on transparency and investors’ protection. At the same time, the few take ups in the world have mainly implemented this with respect to Public Interest Entities (PIES) such as Parastatal companies, listed companies and regulated companies.
As an example, the profile of take up in Asia suggests most countries have adopted mandatory partner rotation, only Bangladesh, China, India, Pakistan, Singapore and South Korea have introduced mandatory firm rotations for PIES such as listed companies, banks and government entities in the case of China. India introduced mandatory firm rotation for banks, privatised insurance companies while Singapore introduced it to the local banks.
Indonesia as noted is the only country to introduce mandatory audit rotation for all companies and is about the only one in the world. Hong Kong, Japan, Malaysia, Philippines, Sri Lanka, and Taiwan have not adopted mandatory audit rotation while they have adopted mandatory partner rotation of an average of 5 years.
The EU, for example, introduced mandatory rotation rules, however, these are specific to PIEs rather than all companies. Notwithstanding that, the EU’s 10 years maximum rule is contrary to the 6 years mandatory rotation maximum time being advanced by the Act.
In the South African on June1, 2017, the Independent Regulatory Board for Auditors (IRBA) issued similar rules prescribing that auditors of PIEs must comply with mandatory audit firm rotation (10-year maximum period) with effect from April 1, 2023. Notice the long transitional period, 10 years in force period and the specification to PIEs.
Now that the Act is law, it will be interesting to look back six years from today to see the cost benefit of this measures and whether Zambia will form part of the case study of the efficacy of mandatory audit rotation measures for all companies.
b)Beneficial owner model
Another new regulation brought forth by the Act is one which probably had its genesis from the abuse occasioned in the mining sector. In this case a holding company could own shares in a mining outfit in Zambia and at the time of transferring shares of the mining entity, a foreign shareholder would only transfer shares in the holding company in a foreign land thereby depriving the country of the tax attributable to the transferring of an interest in mining rights.
To address such issues the Act now require identification of the ultimate owners of the shares in a company in Zambia. In this case the Act will require that identification of the beneficial owners of the shares and the registered owners of the shares. This is in recognition that the registered owner of shares may be different from those whose interest the shares are meant to benefit.
So who is the beneficial owner? The Act defines the “beneficial owner” as a natural person who either directly or indirectly, through any contract, arrangement, understanding, relationship or any other means ultimately owns, controls, exercises substantial interest in, or receives substantial economic benefit from a corporate; or exercises ultimate and effective control over a legal person or legal arrangement.
The Act goes further to note that the terms “beneficially own” and “beneficial ownership” shall be construed accordingly.
In terms of the application of this law, the Act makes it mandatory for a company to maintain a register of beneficial owners and this will be replicated by the Registrar of Companies who will also maintain a register of beneficial ownership.
There is an additional duty imposed on the Registrar to ensure that the beneficial ownership of shares is known, ascertained and verified before the shares can be registered and transacted in.
c)Recognition of small private company criteria
Given the number of measures introduced in the Act, it was necessary and important for the Act to exclude some of the regulations from impacting small private companies otherwise the cost of doing business for small businesses would have been exorbitant.
To that end, the Act recognises small private companies must be excluded from the most stringent regulations. The regulation of small private companies is not as rigorous as those applicable to other companies regulated under the Act.
As an example the Act excludes small private companies from the requirements to appoint and undertake an audit. This was not explicit in the previous Act. There are other simplification as it relate to the directors and company secretary requirements.
The Act however has not yet prescribed the numerical value to be assigned to the small private company, but I suspect this will be done by statutory instruments from time to time. The Act has however defined a small private companies as any business enterprise whose total investment, excluding land and buildings, annual turnover and the number of persons employed by the enterprise, does not exceed the prescribed numerical value.
d)Defined the duties of the directors and company secretary
The final point that I thought was important to bring out is the specificity addressed in this Act with respect to the duties of the directors and company secretaries in a company and who is qualified to take up the positions of company secretary.
The Act in section 83 enumerates the qualification of a person who is eligible for appointment as company secretary as a legal practitioner, a chartered accountant or a member of the chartered institute of secretaries who is also resident in Zambia.
To the extent that the Company Secretary is a body corporate, it is required to be incorporated in Zambia and must have an officer who qualifies for appointment as a company secretary as described earlier.
The Act also makes it an offence to carry on business for more than sixty days without a company secretary and introduces an offence for each officer of the company which could be about three thousand penalty units.
There are other various new regulations that have been introduced, legal and compliance department must carry out an exercise to update their compliance checklist. It is worth noting as I have written in the previous articles, that this new regulatory environment means that compliance must be a top agenda of the Chief Executive Officer and perhaps for the board because liability in the current regulatory environment is permeating the officers of the companies who were previously a reserved pool. About the author:
Kelvin Chungu is an Assurance and Advisory professional and is contactable on +260-976377484.