Legal Analysis on Companies Act 2015
INTRODUCTION
According to Sudanese Legal Regime, the Companies Act 1925 was enforced for a long time with no fundamental amendments regardless of the economic, political, social, or investment structural changes in Sudan and the world since 1925.
Companies Act 2015 was enacted by the Sudanese Parliament on 20th of January 2015 and endorsed by the Ex -President of Sudan on 22nd of Feb 2015.
BACKGROUND
The new Law consists of Nine Chapters, and (267) sections as follows:
Chapter one: S. (1) To S. (4)
Including the name of the Act, terms, a provision stating that the Companies Act 2015 Date and effective after three months from it been published in Gazette and rules regarding Exceptions for Governmental Companies.
Chapter Two: consisting of Nine (9) subchapters: S. (5) To S. (38)
Includes types/classifications of companies (Limited – unlimited) (Limited By Guarantee- Limited by Shares), (Private - Public) and ( Holding - Subsidiary), rules and regulations of Registration for new companies, requirements of registrations, definitions for promoters, rules and regulations regarding the Pre- Incorporation Contracts, Legal requirements for Memorandum and Article of Association one of the major changes in the Mechanism of Amendment for the Objects of The Company, also a major change in Companies Act 2015 in How to Amend the Article of Association and which Numbers of Votes needed for that amended.
Chapter two also includes regulations regarding the protection of Minority, and the role of the Commercial Court to apply for that protection. It is worth mentioning that currently, the Commercial Court is only established in Khartoum (Capital of Sudan), which is not acceptable considering that according to Sudanese Constitutional Charter of 2019, Sudan is applying some sort of Federal system and Commercial Courts are expected or should be established in the main cities of Sudanese states or / regions.
Moreover, this chapter includes sections regarding the Foreign Companies and how the foreign company can establish business in Sudan, how the foreign companies can open branch in Sudan, Legal Requirements, and the legal liability of the branch, roles, and responsibilities/duties of the board of directors/meeting protocols / Corporate Governance rules/ fiduciary duties.
Chapter Three: consisting of Two (2) subchapters S. (39) To S. (68) as follows:
Includes: the management of the Company, Board of Directors appointment Procedures, Board Duties and Responsibilities, how to handle conflict of interest, Fiduciary Duties, appointment and Termination of General Manager service, Companies Meetings, Annual General Meeting, Extraordinary Meeting, Meeting Rules and Regulations, Voting rights, Special and normal Resolution.
Chapter Four: consisting of Seven (7) subchapters S. (69) To S. (152) as follows: Including share capital, shares, the Nature and the value of the shares, allotment of shares, increase and reduction of share capital, the role of Commercial Court in reducing the share capital, the responsibility of the Board member for that reduction,
This chapter also includes the Mortgage, Floating Charge, registration of the floating charge, the liability of Non registered floating Charge, submitting of Floating Charge Documents in the Commercial Registrations Department "CRD”,
For the first time Companies Act, 2015 stated the provision of mergers, acquisitions, legal requirements, and procedures of mergers, the Experts reports and Financial Statement which requires to for Merged Companies, in addition to the legal liability for the merged companies.
This chapter also includes provisions concerning the court cases, procedures, and the conditions of Company Inspection by CRD and the role of the Commercial Register General "CRG".
Chapter Five consisting of Two (2) Subchapters S. (153) To S. (163):
includes Financial Sheets, Audit for Financial Sheets, the confirmation process, the role of G.M and BoD with a Special Rules for Holding Companies, The Duty of Company to submit a copy of Audited financial Sheets to Commercial Registrar General (CRG), Company Auditors, Auditors Duties and Responsibilities.
Chapter Six: consisting of Eight (8) subchapters S. (164) To S. (254)
Generally, it’s about Company Winding up (Liquidation) including the types of Winding up as still the same as Companies Act 1925 (1) By Court, (2) Voluntary Winding Up, (3) Winding up Under the Court supervision, also the Mode of Winding Up, The Court Cases where the Company liquidates for its debts (s. 166), the role of the Liquidation Court, the role of the CRG to appoint the liquidator and the liability of Contributories. This chapter includes rules and regulations for the Liquidators, the appointment of Liquidators, the power of Liquidators, The Monitoring of Liquidators by the Court, the powers of the Liquidation Court, Dissolution of company ….. etc.Furthermore, this chapter includes the condition precedent under the voluntary winding up which should apply prior to request of winding up: i.e. introduced of a new regulation in respect of personal liability to the Board Members in some voluntary winding up declaration (S.203), consequences of winding up, the rights of the companies' creditors in case of winding up, the power of Court in voluntary winding up.
This chapter includes the provision, Cases, Procedures, and Liability of contributors in the winding-up under the Court Supervision.
Chapter Seven S. (255) To S. (256):The power of the CRG to remove the Companies from the Companies Registrar whether internal or a Branch of a Foreign Company, the cases, and the procedures of this removal.
Chapter Eight S. (257) To S. (260):
This chapter includes the power of CRG to enact a punishment Regulation and the role of the Court to apply such punishment.
Chapter Nine S. (261) To S. (267):
General Sections for regulation to Companies.
The main points of the Companies Act 2015 Compared to Companies Act 1925 and English Companies Act 1925 are as follows:
New Rules for Corporate Governance:
The new act introduced new terminologies as in S. (3) including the followings terms:
- General Manager: New Definition for the GM: “The first executive person in the company”.
In my view, this term can be applied to CEO position / Manager Director and other similar positions if the Memorandum and Articles of Association provided him / her the executives powers and authorizations which provided to the General Manager.
- Cheque: The Companies Act 2015 act “referred to the definition in the Financing Instruments Act 1995”.
- Promoter: a new definition as: “Means a person who exercises registration authorities and other powers conferred upon him under the provisions of this Act or on behalf of him”
- Accounting standards: and regulations for Islamic Financial Institutions.
- Bankrupt: the act was referred to as the “Insolvency Act 1929”.
In my view, the new Companies Act 2015 didn't provide an express reference to the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standard, however the AAOIFI standard are expected to be applied for the Account standard as defined above. On a relevant note, I noticed that the legislator and the Ministry of justice missed amending this definition in the new 2021 laws changes (LAW No 9 of 2021- concerning Dual Financial System) which introduced conventional and commercial Financial and banking system to Sudan for the first time since 1983. And pursuant to this Dual Financial System the legislator should expect that some corporate could choose not to apply the Islamic Accounting Standards and hence, it should not be a compulsory standard.
Equality between Companies:
The No Permission needed to proceed Litigation against Governmental Federal /State (Public Companies),:
The new Companies Act 2015 support the Supreme Court Decisions regarding the legal Notice (Summons) for Governmental (Federal and/or State) companies, according to Companies Act 2015 S. (4/4) removed the (Governmental companies) from the List which needs special permission from Minister of Justice as a Pre -Trail Permission to proceed litigation against such companies as was mentioned in S. 33(4) from the Civil Procedures Act 1983, this permission was criticized many times by lawyers, and Court Decisions.Moreover, the Companies Act 2015 removed the (Governmental companies) from the List which needs special permission from the Chief of Justice with a copy to Minister of Justice to file execution against the Government as mentioned in S. 231 from the Sudanese Civil Procedures Act 1983.So, pursuant to the legal principle by the Sudanese legal regime “Private Law restricts the Public law”, the Companies Act 2015 added equality between companies in their legal positions to guarantee some sort of fair litigation procedures.
Any person convicted of a Financing Terrorist or Money Laundering crimes cannot join/ establish a company S 5.2:
In my view, this section needs more clarification by the legislator as it is not defined by the Companies Act 2015 what is the meaning of the term Join company, in my personal view the Legislator meant Become a (Board Member or as a General Manager), the Regulator (Ministry of Justice/Commercial Registration Department) should issue a clarification by Internal memos or Article issued by the Minister of Justice concerning this point (and other similar ambitious points) by requiring from the Board member /Shareholder / General Manager and executives to submit a certificate issued from Financial Intelligent Unit (FIU) and Police as well as example upon registration.
The Companies Act 2015 creates new classifications/ types of companies.
- Limited Company s. (5).
- Un-Limited Company. S. (6).
- Company limited by Guarantee s. (7).
The Company Limited by Guarantee is a new model of companies in Sudan which is well known in English Companies Act 2006 S.5 (1) as follows:
“ (1) A company cannot be formed as, or become, a company limited by guarantee with a share capital.
(2) Provision to this effect has been in force—
(a) in Great Britain since 22nd December 1980, and
(b) in Northern Ireland since 1st July 1983.
(3) Any provision in the constitution of a company limited by guarantee that purports to divide the company's undertaking into shares or interests is a provision for a share capital.
This applies whether or not the nominal value or number of the shares or interests is specified by the provision.”
In Sudan, the Guarantee Companies have been founded appropriate for some specialized benefits as mentioned in Section. (6) From Sudanese Companies Act 2015 to support science/arts/charity activities.
The English Companies Act 2006 included some guidance on this respect such as:
4.1.1. Member’s liability is limited by its constitutions to such amount as they undertake to contribute to the assets of the company in the event of its being wound up.
4.1.2. Any profits must be used for the company only, the act prohibited the distribution of any dividends among its members.
4.1.3. A statement of guarantee must be delivered with the application of registration.
4.2. Holding company S. (10)
For the first time, the Sudanese Companies Act 2015 was defined what is Holding Companies mean, according to the new Act the company considers holding company if:
4.2.1. Company members(shareholders) and controls the composition of its Board of Directors; or
4.2.2. holds more than half in nominal value of its equity share capital; or
4.2.3. The first-mentioned company is a subsidiary of any company which is that other subsidiary.
4.2.4. For subsection (4.2.1) the composition of a company’s board of directors shall be deemed to be controlled by another company if, and only if, that other company by the exercise of some power exercisable by it without the consent or concurrence of any other person can appoint or remove the holders of all or a majority of the directorships; but for this provision that other company shall be deemed to have the power to appoint to a directorship for which any of the following conditions is satisfied, that is to say:-
(a) That a person cannot be appointed thereto without the exercise in his favor by that other company of such a power as aforesaid; or
(b) That a person’s appointment thereto follows necessarily from his appointment as director of that other company; or that the directorship is held by that other company itself or by a subsidiary of it.
According to English Companies Act, 2006 certain rules for holding companies are applicable as in S. (1159) which as follows:
Under S. (1159) (1) (a) Where the holding company holds a majority of the voting rights in the subsidiary;
Under S. (1159) (1) (b) Where the holding company is a member of the subsidiary and has the right to appoint or remove a majority of its board directors,
Under S. (1159) (1) (c) Where the holding company is a member of the subsidiary and controls alone, under an agreement with other shareholders or members, a majority of the voting rights in the subsidiary,
Under S. (1159) (1) (d) where the subsidiary of a subsidiary of company which is itself a subsidiary of the holding company.
A company is a wholly-owned subsidiary of another company (which we will call the owing company) if all its members are in one or more of the following categories:
Persons acting on behalf of the owing company,
2. Other wholly-owned subsidiaries of the owing company,
3. Persons acting on behalf of other wholly-owned subsidiaries of the owing company,
Liquidation for holding and/or subsidiaries companies:
By making the Holding company takes liable and or participate in civil liabilities “Company dept” in case of winding up for one of the subsidiaries “depends on the liquidator request to the Winding-up court”. A competent court (Commercial Court of Khartoum) may order to liquidate both the (holding and subsidiaries) as if it is one company and distribute the after-sale price between the debtors. The Commercial Court shall make that order after checking the following elements:
- The management participation of the holding company in the subsidiaries
- The attitude of the holding company towards the subsidiary's debtors.
- Any other related actions.
- In case the two companies combine their business.
However, the Companies Act 2015 didn't define what means by (Combine the business or ) (Attitude) which is something that needs more clarification to avoid any ambiguity in the Law.
Practically speaking interpretation of these terms may cause disputes in the future as it is not sharp terms and leads to conflict!
For the first time, the Companies Act 2015 defines who is a promoter unlike the Companies Act 1925, moreover, the new Act makes liabilities for the promoter Actions as in S. 12.
Pre - incorporation contracts: New Section regarding regulation for the Pre - incorporation contracts s. 13 and the legal liability for such contract.
The Companies Act 2015 grants the Ministry of Justice the final approval for registering new companies. (15).
In the previous practice under the Companies Act 1925, if the investors intend to establish a petroleum company, a preliminary approval from the Ministry of Mining is required to procced, however now the company will register, and then it applies for a license to work for some business activites.
How to amend the Memorandum of Association?
Another major change in the new Companies Act 2015, (shareholders/Members) of the company has the final approval to amend the Memorandum of Association the purpose (objective) of the company as follows:
- By a special resolution.
- If there is no objection from 15% from shareholders in three weeks after the amendment has been made (minority protection rule).
- In case there is an objection, shareholders can apply to a competent court which can (refuse and/or agree totally or partially to the amendment).
- The amendment shall be published in the Gazette in addition to any Economical newspaper for three days with a notice to CRD.
In the 1925 Act, the amendment must be upheld by the Commercial Court. Which is not the applicable anymore by the new Law .
Remove the Similarity as a reason to reject the Proposed Company Names:
This is another huge change in Companies Act 2015 is in s. (25/2) the name of the company the new Act 2015 removes the similarity as a reason for refusing the Proposed names.
CRG has the power to refuse any misleading name or any name contrary to the provisions of any law, In the previous Companies Act, 1925 the CRG has the power to refuse any similar names or so nearly resembling such a name as to be calculated to deceive, except when the existing company, association, or firm is in course of being dissolved and signifies its consent in such manner as the Registrar requires.
Practically speaking, this amendment is very useful for lawyers and investors, in my opinion, the CRD should have a new E-system to categorize the companies according to their activities or owner(s) or unique serial numbers so, to differentiate similar names by different owners or activities in the future.
Companies Act 2015 state a special rule for alteration of the company name as in S. (26):
It is subject to CRG approval to publish the new name in the gazette and any economical newspaper (for three days). The change of name is prohibited in the last six months before liquidation (the section itself needs more clarification). In case of the wrongful / omission.
New Formalities for more Transparency:
New Sections, according to Companies Act 2015 any company when registered must put the registration number / its Legal Name / in all papers, receipts/ and must show the amount of paid share capital as in S.27.
How foreign companies can open a new Branch in Sudan:
the new Companies Act 2015 made new regulation concerning opening branch of a foreign company as in (S. 33) the branch must work in the same activities of the foreign company, and the branch activities must be allowed by foreign company memorandum of association, s.34 foreign companies have right to open a new branch in Sudan for purpose of performing a specific contract S.35 made requirements for registering a new branch in Sudan.
Board of Directors membership Requirements:
Companies Act 2015 contains a new requirement for the board of Directors membership as in S. 40 which came as follows:
- For a Not adult person – after the custodian written permission.
- Not allowed for incant person.
- Not allowed for any person convicted with a money laundry or financing terrorist crimes or any crime related to (Fiduciary duty).
No preference shares in 2015 Act:
Companies Act 2015 remove the preference shares as a type of shares (the law committee mentioned that it is against sharia principles)
16. Roles and responsibilities/duties of the board of directors:
A new details for rules/ regarding the / meeting protocols / Corporate Governance rules/ fiduciary duties as in S.39 to S. 68.
Rules for Mergers & Acquisitions:
A new section regarding Mergers as in S. 121, section stated two ways for merger either by Acquisition or by establishing a new Company with the special requirements as in S .122 to S.130.
Derivative Claim:
A new major change regarding the right of shareholders to bring a case on behalf of the Company in specific circumstances as in S.146 to S.151.
This means despite the legal personality of the company, shareholders in certain conditions have the right to sue on behalf or in the name of the company, this type of court case called in English Law “Derivative Claim”, kindly look at (Schiowitz v IOS LTD (1971) 23 DLR (3RD )102 at p.121; Estmanco (Kilner House) LTD v Greater London Council).
A derivative claim is brought by a member of a company to enforce the company’s rights, for specific causes. The “Derivative Claim” was enacted as an exception to the proper claimant principle. The first practice of this s Derivative Claim was in United States, and then English law followed it in Companies Act 2006 S.260 (1).
Criminal Procedures against companies will not be stopped by the liquidation order:
The Winding Up order will not stop the criminal procedures;
it is one of the major changes in the Companies Act 2015 is that the Winding Up orders (Procedures) won't stop the Criminal Suits (Procedures) against the Company. The last companies act 1925 s. (160) was criticized many times by lawyers, legal practitioners, and even the Supreme Court, the supreme court recently decide in many different cases that the Winding-up procedures won’t stop the criminal case Procedures against the company, this decision was adopted by the Companies Act 2015 in s. (171)
Practically speaking, in the new Companies Act this term considers as a great development, previously such practice pursuant to the Companies Act 1925 companies / Businessmen were stopping all kinds of Claims (Civil / Criminal) especially Criminal Cases, and was resulted with instabilities to Commercial Transactions.
New Qualifications for official Liquidators:
Companies Act 2015 make certain qualifications for official Liquidators: as in S.178, the qualification is must have a degree in Accounting, or Licensed Auditors/ or for the person who has practiced in law fields for at least fifteen (15) years / the Company Auditors Cannot be its Liquidators unless the court makes orders to contrary to above-mentioned requirements.
Companies ACT 2015 stated clear powers for the Official Liquidators as in s. 180
21. “No receiver will be appointed for any Assets under the custody of Liquidators”:
This is another good new addition into the Companies Act 2015 S. (181/3) regarding the Custody of the properties owned for the company under liquidation, the section makes clear rules to avoid any duplications of Claims regarding the same assets
Opening Bank Accounts for Winding Up:
For purpose of organizing the Winding Up procedures, the court has the right to open Bank Account with certain conditions as in S. 195 -196
Criminal Liability for Board Members who Ratify Voluntary Winding Up:
This is a new major change, in S.203(1):
- Board members before one month from issuing the Voluntary Winding-up Board resolution they must sign an Authenticated declaration mentioning that they make calculations for company obligations and the Company Assets can pay all the company’s financial commitments in a period not more than one year from the beginning of the winding-up procedures, they must also attach an (Audited) list with all company Assets in addition to the liabilities.
- This declaration with the attachment must submit to the CRG in a period of not less than fifteen (15) days after the starting up of the Winding-up.
- The criminal liability issue will be arising after one year from the beginning of the voluntary winding up and the company liabilities are more than the company Assets.
- In such cases, the board members might be convicted with not more than (Seven) (7) years imprisonment in addition to a fine Subject to Court Discretion.
Any floating charge will be consider null and void in case it was executed three months before the Winding Up unless it is proved that the company at that time of execution such charges (mortgage) was in a good financial position.
Another new change which introduced to the new Companies Act 2015 that the Government Debts (with not commercial nature) have priority in payment by the liquidators / Winding up court in case of winding up but the claimed debts should not exceed (25%) from the total company's debts amount, as in S.239.
Civil and Criminal liability for BoD members and General Managers in some certain circumstances as mentioned in S. 240 to S.0.246
Sources:
- Company Law, Mayson, French, Ryan. (25th) Ed. 2009 p. 535.
- Sudanese Companies Act 1925.
- Sudanese Companies Act 2015.
- English Companies Act 2006.