The CIPC opens with an aggressive gambit

The Companies and Intellectual Property Commission (CIPC) was established as a juristic person under Section 185 of the Companies Act, 2008, (the Act). It has tremendous powers, but it must be impartial and act without fear, favour, or prejudice. Once it decides to launch an investigation, it can issue a summons to any person for information, and it has the authority to enter and search under a warrant.

Included in its objectives is enforcing compliance with the act and applicable legislation. As the CIPC goes about its business of administering the registration of companies and other juristic persons and overseeing the protection of intellectual property, it generally isn’t in the spotlight. It makes the occasional application to a court to have a director declared a delinquent director.

A week ago the CIPC hit the headlines when it issued a Compliance Notice to the PIC directors in regard to PIC’s equity investment in Ayo of R4.3 billion.

The Compliance Notice states that the commission believes on reasonable grounds that the PIC Board of Directors has contravened the Companies Act (namely section 76), and prescribes the remedies to “bring the company’s conduct into compliance with the act”. These remedies direct that the board of directors must:

• Recover the capital investment of R4.3 billion made to Ayo within 15 days; and
• Recover any interest that may have accrued on this capital investment.

Read: PIC inquiry: R4.3bn Ayo deal approved in record 3 weeks

The CIPC’s administrative action in issuing the Compliance Notice raises a number of questions:

1. The PIC invests according to a mandate, which includes investing in socio-economic transformation and investing across Africa. The PIC has some underperforming investments as detailed in the Isibaya Investment Schedule as at March 3, 2017, submitted to Parliament. The PIC also invested in Steinhoff. Will CIPC be issuing compliance notices in regard to all the under-performing investments?
2. When the PIC made the investment in Ayo, it would have had sight of Ayo’s pre-listing statement, which detailed the book value of AYO as well as details of a then-recent share issue to the B-BBEE Consortium of R1.50 per share. The PIC, however, paid R43 per share. Why did CIPC wait a year to issue the notice?
3. In the compliance notice, the CIPC included a schedule described as “Ayo in its various corporate incarnations declared turnover to the CIPC”. What is the CIPC’s point? Is it of the view that turnover figures drive the valuation of shares in a listed company? Does CIPC not lay any credence on pre-listing statements and audited annual financial statements?
4. How does the CIPC propose that the PIC retracts its investment in Ayo? Further, the CIPC appears to be under the impression that an equity investment earns interest, or should earn interest?
5. The compliance notice was issued under Section 76. Whereas Section 76 addresses the standards to be expected of directors, in that a director must act in good faith and for a proper purpose, and in the best interests of the company (which is the PIC), and with the required degree of care, skill and diligence that may reasonably be expected of a person in such a position, section 76 doesn’t provide for a penalty nor a remedy.
6. Section 77 (not used by the CIPC) provides for the liability of directors and prescribed officers. But if a director is to be held guilty of an offence, surely the CIPC would have to make an application to the Court in this regard?
7. Section 22(1) (not used by CIPC) of the Act states that a company must not carry on its business recklessly, with gross negligence and with intent to defraud any person, or for any fraudulent purpose. A director will be liable for any loss resulting from the company carrying on business in this manner. However, trading recklessly is trading while insolvent, which doesn’t apply to the PIC.
8. However, without casting any aspersions on Ayo, would a bad, even perhaps a reckless investment, fall within the scope of this provision? Would this include making an investment where there is no reasonable prospect of a return on that investment, and where the capital of that investment would be lost?
9. Section 214 (not used by CIPC) provides that a person is guilty of false statements, reckless conduct and non-compliance if the person was knowingly a party to any act or omission by a company calculated to defraud a creditor or employee of the company, or a holder of the company’s securities, or with another fraudulent purpose. This would surely relate to the directors of a company, which solicits investments based on a false promise or false statements. How many compliance notices have the PIC issued in this regard?
10. Section 104 (1) (not used by CIPC) provides that any director of a company that issues a prospectus, including the promoter and the person who authorised the issuing of the prospectus, “is liable to compensate any person who acquired securities on the faith of the prospectus for any loss or damage the person may have sustained as a result of any untrue statement in the prospectus, or in any report or memorandum appearing on the face of, issued with, or incorporated by reference in, the prospectus”. An untrue statement will include an omission. An untrue statement could be narrowly or widely defined. Would it include an overly optimistic forecast? Or an overly optimistic view of a future crucial merger, which fizzles out? Will the board of directors of the PIC claim it relied on an untrue statement?
11. Various state-owned entities have not only not complied with requisite acts, but they have also squandered money on irregular, fruitless, and wasteful expenditure. Will the CIPC be making an application to court to have the directors declared delinquent? Will the directors be made to pay back the losses?

Read: More questions raised over PIC governance processes

Now that President Cyril Ramaphosa has put the country on track of undoing wrongs, and everyone has been following the various inquiries and commissions with shock, horror and anger, has the CIPC been spurred on to start enforcing compliance more rigorously? Issuing the Compliance Notice has created a stir, but is it backed up by the Companies Act?

Perhaps the CIPC will now issue Compliance Notices to all the parties that have been flouting the act in one way or another. Meanwhile, the PIC will no doubt bring an application in terms of Section 172 of the act to the Companies Tribunal of South Africa for a review of the Compliance Notice issued by the CIPC. We have not heard the end of this matter.

Read: CIPC notice to PIC will set precedent – Iraj Abedian

Note: The compliance notice is obtainable on the PIC Commission of Inquiry website.