POPI in a Nutshell

Introduction

The new Protection of Personal Information Act (POPI) was signed into law in November 2013. POPI is legislation similar to the UK’s Data Protection Act and aims to give effect to the constitutional right to privacy as enshrined in section 14 of our Consitution. POPI therefore prescribes some “rules” in terms whereof businesses will need to process all personal information (that qualifies as “personal information”in terms of POPI) in future.

POPI is not a bad thing. If you read about POPI on the internet, the picture may seem a bit gloomy. There is unfortunately also a lot of wrong information available on POPI on the internet. We therefore urge you to speak to someone with the relevant knowledge to assist you with interpreting the way in which POPI will apply to your particular business.

Implementation

It is important to understand that while POPI has been “signed into law”, therefore meaning that it is an Act (and no longer a Bill that may still change), the majority of provisions are not yet in force. This means that the majority of povisions cannot yet be enforced.

A commencement date will be published in the government gazette and after a one year period from the commencement date, all businesses will need to comply with the POPI requirements (unless the one year period is extended). In effect this means that there will be a “one year compliance period” for businesses to get their ducks in a row. Don’t be fooled by this….There is no quick fix for POPI and businesses should consider this as a “longer term” project. Therefore, the time is most definitly right to start your compliance project (if you have not done so).

POPI conditions

POPI is priciples based. This mean that POPI does not necessarily bed down hard and fast rules in all circumstances. No, POPI rather prescribes certain principles (similar to “good business practices” but with the intention to compel businesses to implement these practices) that all businesses will need to adhere to.

In further articles we will discuss the different conditions in more detail, but by way of summary you can consider the following:

  • In terms of POPI you need to identify the reason why you want to use the personal information and then only use it for those specific reasons. POPI refers to this as the “purpose of use”. The reason for this rule is that a person should be able to know for what reason you will use his or her information.
  • In certain circumstances you may only use (the Act talks about “process”) personal information if you have consent to do so. But note that you will still be able to use information in some instances even if you do not have consent.
  • You need to implement meassures to ensure that you do not lose personal information or share it with other businesses not entitled to have it.
  • People have the right to ask you what information about them you hold.
  • When you market products or services to people, they always have the right to opt out. In some instances you will not even be able to market to people at all without their consent.
  • POPI has implications for transborder flow of information (this will be important if you store information cross border or make use of cloud service providers for example).
  • POPI very specifically requires certain measures from you when you use service providers that will process personal information on your behalf.
  • POPI requires from you to deal with children’s information and “special information” (as defined in POPI) in a very specific manner.

Conclusion

POPI should not be a threat to your business. You can rather embrace this and use it as a differentiating factor, considering that your competitors may not yet be compliant.

Yes, penalties of up to R 10 000 000 could be imposed, but our view remains that reputational risk is a real factor that should also be considered. If you have not started your compliance project, the time is now. You can contact Jana van Zyl at jana@dommisseattorneys.co.za for more information.

Automotive Industry Code Of Conduct In Terms Of The Consumer Protection Act

For the first time ever in South African legal history the status of a “private” document is being elevated and given the status of law. The Consumer Protection Act 68 of 2008 (CPA) makes this possible by providing for “Industry Codes of Conduct” to regulate the application of the Act within a specific industry once so published as an Industry Code of Conduct. After a number of drafts, the legislature finally published the South African Automotive Code of Conduct (the Code) in the government gazette. The Code will have the same legal effect as the CPA itself or its accompanying Regulations.

The main objective of this Code is to give effect to the Consumer Protection Act, regulate the relationships between the role players conducting business within the Automotive Industry and, most importantly, to provide for a scheme of alternative dispute resolution between consumers and industry role players. The Automotive Industry will include importers, distributors, manufacturers, retailers, franchisors, franchisees; suppliers, and intermediaries who import, distribute, produce, retail or supply any of the goods listed in the Code. These goods include, for example, passenger -, recreational -, agricultural -, industrial -, or commercial vehicles. It furthermore includes trucks, motor cycles, quad cycles, and many more.

In broad terms, the Code will bring significant changes to the manner in which the Automotive Industry handled consumer complaints in the past. The Motor Industry Ombudsman of South Africa (MIOSA) has been established to assist in resolving disputes that arise in terms of the CPA when it comes to any goods or services provided by a role player within the Automotive Industry. MIOSA is an independent non-statutory body that has been afforded recognition under section 82 (6) of the CPA, meaning that MIOSA is an “accredited industry ombud” for the Automotive Industry. The objective is for MIOSA to consider and dispose of complaints in a manner that is procedurally fair, informal, and economical.

Once a complaint has been successfully lodged with MIOSA, MIOSA would first play a passive role mediating between the two parties in an attempt to facilitate resolution of the dispute.

Cutting to the chase, all suppliers will be obliged to establish internal complaints handling processes (including an internal complaints handling department, as well as the procedure a consumer could follow when lodging a complaint with the Ombud) coupled with the training of, or at the very least informing, their entire staff about the Act, its Regulations and the Code. Suppliers will also have to adhere to other requirements such as notices that need to be displayed at their premises.

For more information on how this industry code may affect you in your business operations, you can contact Jandré Robbertze at jandre@dommisseattorneys.co.za.

Insights Into Restraints Of Trade

It is a well-known commercial practice for employers to include restraint of trade provisions in their employment agreements despite prevailing uncertainty as to when and how (as well as to what extent) these restraint of trade provisions would be enforceable.

A restraint of trade is essentially an agreement in terms of which one party agrees to some form of limitation to their freedom to carry on their trade, profession or business. Restraint of trade provisions are most frequently encountered in employment contracts, where the employee undertakes not to compete with his or her employer during and/or after termination of his or her services to the employer. There are also other forms of agreements in which these provisions can be encountered, for example, in a sale of business, where the seller agrees with the purchaser not to carry on a similar business in competition with the purchaser within a reasonable proximity of the business premises and for a prescribed period of time. Partnership agreements may also include similar provisions in terms whereof each of the partners undertakes not to compete with the business of the partnership during and/or after leaving the partnership.

In terms of the well-known and oft-cited Appellate Division judgment in Magna Alloys and Research (SA) (PTY) Ltd v Ellis [1984] 2 All SA 583 (A),it was held that restraint of trade provisions are valid and lawful unless the party wishing to escape the provisions of the agreement in question can prove that they are contrary to public policy and therefore unenforceable.

The Magna Alloys precedent necessitates an enquiry as to when restraints of trade will be deemed contrary to public policy (which is by nature a vague concept). Fortunately in the later judgment in Basson v Chilwan and Others [1993] 2 All SA 373 (A) the court laid out several guidelines with which to determine whether or not a restraint of trade agreement is contrary to public policy, as follows:

  • Does the restraining party have an interest deserving of protection, during or after termination of the relevant contract (a “Protectable Interest”)?
  • If so, would that Protectable Interest be prejudiced by the restrained party’s freedom not being limited by the restraint?
  • If the above can be answered in the affirmative, then it furthermore needs to be decided whether the Protectable Interest of the restraining party (seeking to uphold the restraint agreement) qualitatively and quantitatively outweigh the interest of the restrained party to be economically active and productive?
  • Are there any other aspects to be considered to determine whether or not to uphold or reject the restraint?
  • Does the restraint go further than reasonably necessary to protect the interests of the restraining party seeking to enforce the restraint in question?

Generally speaking, according to the Basson judgment, if the answers to the first three questions above are in the affirmative, and the answer to the last question is in the negative, then the restraint of trade is reasonable and consequently not contrary to public policy, therefore making it enforceable against the restrained party. However, if the answers to the first three questions are in the negative and the answer to the last question is in the affirmative, then such restraint of trade would be contrary to public policy and therefore unenforceable. In some instances the court may find that a restraint of trade provision has gone further than is necessary to protect the interest of the restraining party but doesn’t go so far as to render it contrary to public policy. The court may then order that the restraint be partially enforced. By partially enforcing a restraint, the court would restrict its limitation to either a narrower proximity than the one that was initially included in the restraint of trade, or for a lesser period of time than the period that was initially agreed.

In order to determine whether a restraint would be reasonable, the concept of a Protectable Interest must be considered further, as either parties’ assertion or defence would primarily be dependent on whether there is any Protectable Interest that the restraining party could argue he is entitled to protect. A court would normally only entertain a restraint of trade dispute if it is satisfied that there is indeed a Protectable Interest. There’s no exhaustive list of what constitutes a Protectable Interest, although the judgment in Advtech Resourcing (Pty) Ltd t/a The Communicate Personnel Group v Kuhn and another [2007] 4 All SA 1368 (C), provides the following insights:

  • A Protectable Interest includes the restraining party’s ‘trade secrets’ (meaning any information that is capable of application in trade or industry provided that such information is only known to a certain number of people but not to the public and is of economic value). By way of example, technical processes, chemical formulae, computer software, price lists, credit records and business conversation, constitute trade secrets.
  • However, the mere fact that an employer had provided an employee with training and skill development does not mean that he or she owns the skill provided to an employee. This is illustrated by the following excerpt: “An employee who, in the main, uses his own expertise, knowledge, skill and experience [after leaving employment] cannot be restrained [from doing so]”.
  • Confidential information constitutes a protectable interest.
  • Customer goodwill or trade connections constitute a protectable interest.

Another question that needs to be considered is that of who bears the onus of poof in restraint cases. Most past judgments follow the approach that was laid down in Magna Alloys, in which it was held that the party alleging that the restraint is contrary to public policy, bears the onus of proving the unreasonableness of such restraint. In the new Constitutional dispensation, however, every person has a constitutionally enshrined right to choose and carry on his/her chosen trade, profession or business. With that background, some more recent commentaries have held that the restraint enforcer should bear the onus of proof. Some commentators remark that it does not matter who bears the onus of proof because the guidelines that were laid down in the Basson judgment are decisive.

In conclusion, restraint of trade provisions in agreements are lawful, valid and enforceable provided they are reasonable and not contrary to public policy, and the enquiry into public policy will often centre on a consideration of the Protectable Interest that a restraining party would wish to protect. Beyond this, although restraints of trade are very common in practice, it is notoriously difficult to predict whether a court would determine a particular restraint to be fair and reasonable in the circumstances. We recommend that any party to a restraint carefully consider its terms and limitations, and attempt to negotiate on these limitations if you foresee a time when this restraint may be detrimental to your ability to carry on your chosen trade or business.

The effect of Section 12J of the Income Tax Act on the South African venture capital regime

Section 12J of the Income Tax Act has been the talk of the town in many South African venture capital circles in the last few years, but ironically there has been a lot less action in the market than the government expected when implementing this tax incentive in 2009. This incentive seems very promising on face value, but at the moment there are still less than 10 approved Section 12J venture capital companies in the country. This is an exceptionally low number if we consider how popular a similar venture capital incentive in the United Kingdom has been over the years, which beckons us to take a closer look at the incentive to determine the reason for the market’s reluctance to explore this.

The rationale behind the incentive is quite simply to address the fact that one of the main challenges to the economic growth of small and medium-sized businesses in South Africa, is the inability of these businesses to secure equity finance to fund their growth.

In terms of Section 12J, any South African tax resident that invests in a venture capital company (VCC), approved and registered in terms of Section 12J, can claim income tax deductions in respect of the expenditure actually incurred to acquire shares in such VCCs, subject to certain conditions.

Section 12J VCCs are therefore intended to be a marketing vehicle that will attract retail investors to invest in VCC’s, whereas the VCC makes money by investing in smaller trading companies. These are entities which the VCC’s fund managers deem as having prospects of producing a favourable return on investment. These companies are generally referred to in this context as qualifying investee companies.

However, before a venture capital company can start trading as a Section 12J VCC, it has to apply to SARS to be registered as such, for the purpose of which the company must meet certain preliminary requirements. To meet these requirements, the company must:

  • be a South African tax resident and its tax affairs must be in order;
  • have as its sole object, the management of investments in qualifying investee companies;
  • not control (whether directly or through a related entity) any qualifying investee company in which it holds shares; and
  • be licensed as a financial services provider in terms of section 7 of the Financial Advisory and Intermediary Services Act, 2002.

The major risk for a Section 12J VCC and its investors alike, is that SARS can withdraw the approved VCC status if, during any year of assessment, the company fails to comply with the preliminary approval requirements as listed above. SARS may also withdraw the company’s VCC status, if the preliminary requirements are met but the company fails to satisfy the following additional requirements after the expiry of 36 months from the date of SARS approving the company’s Section 12J VCC status:

  • a minimum of 80% of the expenditure incurred by the VCC to acquire assets must be for shares in qualifying investee companies, and each investee company must, immediately after the issuing of the qualifying shares to the VCC, hold assets with a book value not exceeding R300 million in the case of a junior mining company or R20 million in the case of any other qualifying company; and
  • the expenditure incurred by the VCC to acquire qualifying shares in any one qualifying investee company may not exceed 20% of its total expenditure to acquire qualifying shares, which basically means that the VCC must have at least 5 investee companies in its portfolio.

What happens when a Section 12J VCC loses its status as such? Well, SARS can include in the VCC’s income in the year of assessment during which the status was withdrawn, an amount equal to 125% of expenses incurred to issue shares.

If you consider the fact that venture capital investments are generally regarded as high-risk, relatively illiquid investments, the picture seems even less rosy for investors if the drastic consequences of non-compliance looms as an additional risk to their investments.

However, in the 2014 National Budget Review, the government announced that it will propose one or more of the following amendments to the VCC regime:

  • making tax deductions permanent if investments in the VCC are held for a certain period of time;
  • allowing transferability of tax benefits when investors dispose of their VCC equity investments in VCC’s;
  • increasing the total asset limit for qualifying investee companies from R20 million to R50 million, and that of mining companies from R300 million to R500 million; and
  • waiving capital gains tax on the disposal of assets by the VCC.

These new changes are to be welcomed and have certainly sparked renewed interest in the market, which is still wide open for those that are willing to enter this relatively untapped opportunity. Whether the proposed reforms are substantial enough to give this incentive the required momentum to ignite the South African venture capital industry as intended by the government remains to be seen.

Prescribed Rate of Interest Lowered to 9%

The Prescribed Rate of Interest Act, No. 55 of 1975 (“the Act”) prescribes the maximum (and minimum) interest rate that a creditor can claim on interest-bearing debts in instances where an applicable interest rate has not been agreed by the parties contractually, or is not regulated by another law, or is not governed by a trade custom.

Previously the prescribed interest rate was 15.5% per annum, and a typical example of where this would find application was a judgment debt where one of the prayers in a summons would typically include “interest at 15.5% per annum from date of judgment”. This prescribed interest rate of 15.5% has however been lowered to 9% with effect from 1 August 2014. This means that all interest-bearing debts that started to bear interest on or after 1 August 2014 and which fall within the ambit of the Act, will bear interest at 9%. The amendment to the interest rate will not apply retrospectively and the rate applicable to debts that started bearing interest before 1 August 2014 will remain at 15.5%.

So let’s look at situations where the rate of 9% per annum will apply: A typical example would be where parties agreed to a date of repayment for a specific amount of money, and the party under the obligation to pay the agreed amount by the agreed date, then fails to pay in terms of the agreement – meaning that the debtor is “in default” or in “mora”. Another example where this “mora interest” will also apply is where parties didn’t agree on a date for repayment, but one party has demanded repayment from the other – thus putting the other “in mora”.

As the interest so charged is simple interest, one cannot compound the interest annually (i.e charging interest on interest). The interest is simply calculated with regard to the original capital amount that was owed.

It is important to realise that this rate is a peremptory provision, which prescribes 9% (previously 15.5%) as both a minimum and a maximum, if the interest rate is not governed by other agreements or laws, and the debt was not intended to be interest-free. One must however remember that nothing prohibits parties from agreeing to a different rate contractually – provided that no other legislation regulates the specific agreement (an agreement in terms of the National Credit Act will be an example where another law regulates the applicable interest rate allowed).

Build your own Blackstone: legal aspects to consider

The global economic meltdown of recent years has turned the financial environment on its head, I don’t expect anyone reading this to disagree with that. However, as the well-spoken Sir Winston Churchill would remind us: “Difficulties mastered are opportunities won,” which stirs us to explore ways in which the current economic climate can be utilised to generate sustainable growth. One such opportunity is private equity, which has become quite a buzzword in the global financial space over the years. Private equity funds like the US based Blackstone Group have sailed very well through the waves of economic turmoil over the last few years.

The copybook private equity deal can be illustrated by the following example of the ideal leveraged buy-out transaction, obtained from David Carey and John E. Morris’s highly recommended book “King of Capital”:

Company X generates R1 million of cash annually and Company A is interested to buy Company X for R10 million. If Company A were to buy Company X using its own cash, it would earn a 10% return on its investment on an annual basis. Not bad, but considering the risk involved this would be a relatively low-yield return. However, Company A can opt to only use R1 million of its own cash and R9 million borrowed from a bank or other funder. As security for the loan from the bank Company A cedes and pledges to the bank the Company X shares to be acquired and pays interest of R600 000 per year using Company X’s proceeds to repay the loan to the bank. After paying the interest, Company X is left with R400 000 generated per year. Company A has then effectively acquired an income bearing asset by investing R1 million of its own money and earning R400 000 returns per year on such investment, constituting an annual return of 40% on its capital investment. Hence the label “leveraged buyout.” The ideal company to acquire, is therefore one that looks likely to produce enough cash to cover the interest on the debt needed to acquire the company.

In this article, we intend to discuss some of the most fundamental legal considerations in structuring a private equity fund between third party South African resident investors (excluding strictly regulated investors such as pension funds, collective investment schemes and other financial institutions as defined in the Financial Services Board Act, 1990, as these will require more rigorous regulatory measures to be complied with) and South African fund managers.

Private companies are usually not preferred as investment vehicles for private equity funds, as it can be quite a daunting task to create a capital structure in a company that is flexible enough to accommodate the goals of a private equity fund. For instance, the shareholders of a company usually contribute capital to a company in proportion to their shareholding, which is not ideal if investors intend to reserve the discretion as to whether they intend to invest in a particular opportunity or not. As discussed below, flexibility in the structure applied is key to ensuring that the fund is positioned to act on the opportunities presented to it by fund managers.

The most common private equity fund structures in South Africa are investment clubs, bewind trusts and limited liability partnerships (also called en commandite partnerships). Further details on these options are as follows:

i)                    Investment clubs

Investment clubs have only in recent years become more popular in South Africa. These may be seen as vehicles by which investment opportunities are presented in a closed environment, rather than being an investment vehicle in its own right. The basic framework in this case, is that fund managers would source suitable investment opportunities for the club, which opportunities may then be invested in by the members of the club at their discretion. The club members may include high-net-worth individuals or other entities, which pay annual membership fees to fund managers. The membership fees are applied to fund the fund managers who quit their day jobs to actively look for investment opportunities. Members do not make any capital commitments toward the club, subject to the rules of the club, unless they opt to participate in a particular opportunity. The rules of the club should record the type of investment vehicle to be used when investments are made by club members, the options are discussed below.

ii)                  Bewind trusts

Those readers that are familiar with the concept of trusts under South African law will understand this quite easily. The trusts used on a day-to-day basis in South African business and estate planning are mostly discretionary trusts. In these trusts, the trustees obtain ownership of trust assets, but only in a fiduciary capacity (which means they own and manage assets for the benefit of the beneficiaries). Bewind trusts are different in the sense that the trustees merely hold and manage assets on behalf of the beneficiaries. Therefore, ownership of trust property remains vested in the beneficiaries and never in the trustees.

These trusts are created by means of trust deeds and are subject to the regulatory control of the Master of the High Court in the same manner as discretionary “family trusts”. From a private equity perspective, the fund managers will be the trustees of such a trust, administrating the trust property (shares and claims in investee companies) for the benefit of the pool of investors, as beneficiaries. In this scenario the trust will have certain rules that apply to provide a discretionary framework for fund managers (trustees) to guide the private equity activity in accordance with the investors’ risk appetite and other financial considerations.

It is of course possible to form an investment club as indicated above, which is presented with investment opportunities by the fund managers. The investing club members are then plugged into the trust structure once they decide to act on a particular investment opportunity. Such club members will then become the beneficiary of the trust, created to pursue the particular opportunity. The benefit of this structure is that the beneficiaries may be ring-fenced to be exposed to certain investment opportunities only. As indicated above, “club members” need not commit any capital unless they want to act on a specific investment opportunity.

iii)                Limited liability partnerships

Limited liability partnerships are more common in the private equity world and are created like any other partnership, except for the requirement that the parties must expressly agree to form such partnership. The fund managers (called general partners in this context) manage the funds of the partnership and are the public face of the partnership. The investors are called en commandite or “silent” partners, contributing capital to the partnership to enable the general partners to invest in opportunities in terms of the partnership agreement. The silent partners’ limited liability lies therein that their liability to creditors is limited to their investment in the partnership and nothing more. The general partners’ liability to creditors is, however, not limited in this manner. The silent partners are therefore mostly on the background and share in the profit or loss of the trust in proportion to their respective capital contributions to the partnership.

The type of vehicle chosen depends on numerous factors, including the track record of the fund managers, investors’ appetite for risk and as always, the relevant tax considerations. Eventually the parties should ensure that a structure is implemented that protects investors optimally, whilst still enjoying enough flexibility to enable investors to get involved in suitable investment opportunities in their discretion.

“Opportunity comes like a snail, and once it has passed you it changes into a fleet rabbit and is gone.” ~ Arthur Brisbane

Look for a firm of attorneys that are willing to invest

Four years ago, I left a large legal firm to start my own practice with an ambitious goal that had nothing to do with developing a large firm of my own.  I wanted to move away from that model so that I could move closer to my clients. Overall, it’s a more rewarding way to work.

The simple fact is that successful law practices are the ones who actually care about how their clients’ legal issues affect the clients’ business and their personal lives. Some attorneys would be quick to argue that we’re not in the business of holding our customers’ hands, but that’s the very reason why it’s important for us to do so – just like any other service industry, going the extra mile is what really distinguishes you from the rest. It might mean that you have to listen and advise clients on matters above and beyond what you have been contracted to do – even personal matters. It will probably mean that you will invest time and resources without being able to bill for it. But it will also mean that when you do send your bill, your client won’t see it as a grudge payment.

Legal issues should always go beyond going to court, filing papers and signing the necessary documents. The best use of an attorney’s services is to bring them into your boardroom. Not only will you gain a legal perspective and guidance on the matters affecting your business, you will also gain an objective viewpoint. This is especially important when shareholders aren’t present at meetings. Your attorney will be the one who acts as their voice and custodian, and offer up an outsider’s angle on decisions that are being made.

It doesn’t matter if you are at the helm of a start-up that is trying to raise funds or at a large corporate that hopes to expand with private equity, your lawyer should be at your side for the long haul. When he or she constantly has his head in your business, you are not only sure that you’ll receive the most appropriate advice, but also all the associated benefits that comes with working with someone who is passionate about what you do, and willing to lend their expertise to achieving your goals.

I tell my associates that the three most important qualities of any attorney is Availability, Affability and Ability – in that order of importance. The image of the evil genius lawyer might have been popularised by television, but it is not necessarily whom you want to engage with. It’s important to work with someone who really understands what you do, and who is readily available to help you do it.

Bring your attorney into the loop, the boardroom and your business. If you partner with the right one, you’ll both be in it for the long haul.

Buying a Distressed Company – Bargain or Burden?

Things you need to know before buying a distressed company

Every now and then an opportunity comes along that looks very hard to resist. If you’re a seasoned entrepreneur, this might come in the form of a company that, although in such distress that the shareholders want out, still has genuinely valuable assets or a viable business model.

Buying the company at a discount and then selling off its assets is one way to turn a profit from such a situation. Another option is to buy the company and turn it around. This can be especially tempting when the company has liabilities that may prevent it from showing a profit for some time, which can translate into a considerable tax advantage.

Deals like this are not for the inexperienced or fainthearted – or for those who tend to get carried away by their own enthusiasm. Unfortunately, this perfectly describes most entrepreneurs – seeing the upside and getting swept up in your own enthusiasm is practically part of the job description. This is why you need a team of lawyers, accountants and other advisers on your side to provide a reality check.

The first rule of buying a company in distress is: Never, ever go soft on due diligence. Hire the most paranoid team you can find and have them tear the place apart. There are bound to be skeletons in various closets, and you want to shine clear, cold daylight on all of them.

The primary objective of the due diligence is to make sure there are no liabilities in the business that you’re unaware of, and no unquantifiable risks. It’s always the stuff you don’t know about that will trip you up, so do whatever is possible to ensure you know everything.

We usually ensure that a Purchaser has recourse to the amount paid to the Sellers (such as by retaining all or a portion of the purchase price, or placing it on escrow).  The big thing to beware of is any material risk that could expose you to a liability greater than the price you’re paying for the company. You can always ask for warranties from the sellers that they haven’t withheld any relevant information – but the warranty indemnity probably won’t be more than the purchase price.

You also need to beware of any evidence that the previous management has not been running the company properly in the past. If there is any suggestion that they’ve been playing fast and loose, SARS can re-open tax assessments from previous years – and then the entire basis for your purchase could be undermined.

Which brings us to the second rule of buying a company in distress: Get the best tax advice you can afford. The really interesting structures often have tax advantages – and if your goal in buying the company is to enjoy the tax advantage, you had better be sure it really exists.

If the due diligence confirms there is no SARS debt or other debt you can’t compromise, and that you have identified all the risks –then there is a chance you have a real opportunity on your hands. If you are confident that you can turn the company around and make it work, the rest is up to you.

Consumer rights in terms of the CPA

The Consumer Protection Act 68 of 2008 (CPA) provides for extensive protection of consumer rights. In preceding legislation we have seen provisions that also relate to consumer rights – these include for example the National Credit Act 38 of 2005 (NCA) and the Electronic Communications and Transactions Act 25 of 2002 (ECT Act).

The big difference however is that the consumer protection provisions of the NCA and ECT Act only apply in very specific instances – for example the NCA only applies to credit transactions and the ECT Act only applies to electronic transactions. The CPA on the other hand is different: the default position is that the CPA will apply (allowing consumers to rely on the CPA rights), unless an applicable exception exists. These exceptions are limited.

Generally speaking consumers have the following rights in terms of the CPA:

1. Right to equality
This right provides that consumers cannot be discriminated against on one of the discrimination grounds listed in the Constitution.

2. Right to privacy
The Constitution makes provision for the right to privacy in section 14 of the Constitution. The CPA gives effect to this right by providing for some privacy protection when it comes to direct marketing.

3. Right to choose
The CPA provision of the consumer’s right to choose extends to the consumer’s right to return goods.

4. Right to disclosure of information
The CPA aims to assist consumers by forcing suppliers to provide consumers with adequate information in order for them to make informed decisions.

5. Right to fair and responsible marketing
The CPA places a lot of emphasize on marketing activities. Suppliers must be fair in their marketing material and may not mislead consumers.

6. Right to fair and honest dealing
In terms of the CPA, a consumer can expected to be treated fairly and honestly.

7. Right to fair, just and reasonable terms and conditions
Similar to the NCA, the CPA provides for a list of terms that

8. Right to fair value, good quality and safety
Consumers are entitled to receive goods or services that are of good quality, in good working order and free of any defects.

Consumer rights will not mean much if they cannot be enforced. The CPA therefore makes provision for various forums through which the consumer can address alleged breach of the CPA – without necessarily going to court. Not all of these forums are operative as yet, however the National Consumer Commissioner has been appointed and the National Consumer Commission have received complaints from unsatisfied consumers as from 1 April 2011.

Be sure that you know your consumers’ rights. And be sure that you know when an opportunistic consumer is using the CPA to try to enforce rights that he or she does not have in terms of the CPA.

Forfeiture Provision Of The NCA Declared Unconstitutional

The Cape Town High Court delivered a judgment during April 2012 (Opperman vs Boonzaaier and Others Case No. 24887/2010) in terms whereof section 89(5)(c) of the National Credit Act 34 of 2005 (“NCA”) was declared unconstitutional. The majority of the Constitutional Court has now confirmed the order of invalidity.

Background factual information:
Opperman lent Boonzaaier roughly R 7 million in terms of three written loan agreements. Boonzaaier was unable to repay the debt and during the subsequent application for his sequestration, the question was raised whether section 89(5)(c) was unconstitutional. In terms of
this section a credit provider loses his right to claim back money which has been lent to a consumer if he was not a registered as a credit provider when making the loan. Section 40 of the NCA requires a person who is a credit provider under at least 100 credit arrangements or to whom the total principal debt owed in terms of all outstanding credit agreements exceeds R 500 000.00, to be registered as a credit provider in terms of the Act. If such a credit provider fails to register, the credit agreement would be void. In this case, Opperman was not registered as a credit provider as he was not aware of the requirement of registration.

Constitutional Court Judgment
The majority of the Constitutional Court found that section 89(5)(c) resulted in “arbitrary deprivation of property in breach of section 25(1) of the Constitution”. It was further confirmed that the deprivation was not a reasonable and justifiable limitation of the right to property, because the said section compelled a court to declare an agreement such as the one in this matter to be void and compelled the court to order that the unregistered credit provider’s right to restitution be cancelled or forfeited to the state. No discretion is allowed under section 89(5)(c) and by removing a credit provider’s right to claim restitution, he is being deprived of property. In light of the above, the section was found to be unconstitutional. This judgment will no doubt be viewed as a welcome relief to credit providers who, in good faith, lend large amounts of money without being aware of the requirement that they register as a credit provider under the NCA.