5.5 CONFUSION IN THE RING FENCING PROVISIONS
If one reads the text of Section 15(2)(b) or (c) the ring fencing provisions deals with the situations where in the MOI there is a term that impedes the amendment or there is a term that prohibits the amendment of a MOI. The act really does not deal with anything else in regard to ring fencing other then preventing changes or reducing requirements of a term. The way it is worded has caused a lot of confusion as when to make use of RF. There also appears to be overuse of RF by many practices where it does not really apply as many practitioners don’t really understand RF.
S 13(3) provides that if the company’s MOI includes any provision contemplated in 15(2)(b) or (c) the notice of incorporation must include a prominent statement drawing attention to each such provision and its location in the MOI. It is necessary to advise the CIPC as to what the RF conditions are. This is done by Special Resolution and by completing form CoR 15.2 and CoR 15.2 Annexure A.
In reading the text books and the Act it appears that the ring-fence provision really was for any kind of restriction placed on the amendment in the terms of the MOI as well as any kind of prohibition, however in practice this seems to have become a lot more.
Carl Steyn in the New Companies Act Unlocked talks about the fact that these ring-fence conditions were used as special purpose vehicles in BEE transactions. This could be used in the case where the special purpose vehicle could be prevented from paying a dividend until the loan or the financing received to acquire a stake in a company was repaid. By making this an RF term in the MOI the financiers could protect their investment by making sure that the RF article cannot be changed and making sure that the directors can’t declare dividends before the loans are repaid.
There is also no definition of the words ring-fencing, which appear on form CoR 15.2A. Ring Fencing is not mentioned in the act.
To this end the CIPC was asked to put out a non-binding opinion in terms of section 188(b) of the Companies Act to actually deal with where the term “RF” should be used as there is quite a lot of uncertainty in regard to its usage. In fact, the CIPC issued a further guide a practice note as I think they got the non-binding opinion wrong which resulted in more RF companies being formed causing much confusion and unnecessary work.
What one does not want is to force the governance of a company into the ring fencing provisions.