Over the past couple of weeks I have had cause to try obtaining some information on particular companies, information that those companies are required to file with the Registrar of Companies. Alas, in a number of cases, companies simply ignore the law, failing for several years to file what the Companies Act refers to as the Annual Return. Section 153 of the Act says that every company, at least once in every year, must file such a return in the prescribed form, made up to the date of the Annual General Meeting (AGM), and containing the particulars set out on the fifth schedule to the Act. The annual return must be signed by a director or the secretary of the company, must be accompanied by the company’s audited financial statements and must be submitted within forty-two days of the AGM.
My experience is that these violations are not limited to the small, family company but also involve some very prominent entities, some of which are connected with public companies. And it is not that the violation is about a period of weeks or months. Some of them have never filed any return, quite a courageous feat that has somehow managed to escape the Registrar’s attention.
The Registrar of Companies is the officer responsible for the regulation of companies and that office in turn reports to the Attorney General and Minister of Legal Affairs. During 2011 the Registrar of Companies in fact caused to be published in the Official Gazette seven Notices, striking off from the register of companies several for non-filing. That is indeed commendable, but how the Registrar has missed striking off NICIL, the 100% state-owned entity whose board of directors, chaired by the Finance Minister and dominated by senior ministers of the government, is a mystery.
The Companies Act prescribes many specific offences provisions as well as general offence provisions. It is the largest statute on the books and the offences provisions can be found throughout the Act. The general offence provision is found in section 522 and provides that contravention of a provision of the Act or regulations made under the Act for which no punishment is otherwise provided for that offence is liable on summary conviction to a fine of ten thousand dollars.
Contravention of specific provisions is an offence punishable on summary conviction to a fine of ten thousand dollars and imprisonment for six months. Here are some of the specific provision offences provided for under the Act:
1. failure to prevent falsification, loss or destruction of the records of the company, or to facilitate detection and correction of inaccuracies in those records;
2. misuse of the list of shareholders or debenture holders obtained from the company;
3. prohibited solicitation and failure to send management proxy circular to the Registrar;
4. failure to provide the information required by the Registrar in connection with insider trading, share registrants and proxies;
5. failure by a proxy holder to comply with the directions of the shareholder appointing him;
6. failure by a registrant to vote without having received instructions;
7. failure by an auditor to attend a meeting for which he was notified by a shareholder that his attendance was required to answer questions; and
8. failure by a director or officer of a company to act on information coming to his attention that a mistake has been detected in the financial statements previously reported on by the auditor.
If the offence is committed by a company, which is of course not a natural person, any director or officer of the company who either permitted or acquiesced in the act or omission to act, is liable to the same penalties as the company.
In the following cases the company is liable on summary conviction to a fine of $10,000:
1. failure by the company to send a form of proxy along to the notice sent to shareholders; and
2. failure to give proper notice to shareholders.
The above are considered regulatory offences under the Companies Act. Other legislation which also provides for offences include the Anti-Money Laundering and Preventing the Financing of Terrorism Act, the Insurance Act, the Securities Industry Act and the Financial Institutions Act. The Criminal Law (Offences) Act and the Summary Jurisdiction (Offences) Act also provide for certain offences by officers of companies including fraudulent accounts, destruction of documents and fraudulent statements.
It is not that there are not many companies which have been complying with the requirements of the Act in relation to the filing of annual returns. But there are others who file an annual return without the audited financial statements, or with very limited financial statements. An explanation I have heard in justification of this limited submission is one of an interpretation which lawyers – grossly incorrectly in my view – put on the language of the relevant section of the Act. I have also heard criticisms of the annual filing requirement that the law is intrusive and that filing audited financial statements is giving away competitive information. That view seems very shortsighted and completely ill-informed about what being an incorporated entity means.
Benefits, but also obligations
As I said in last week’s column, a very important benefit of incorporation is that it creates an entity entirely separate from its shareholders. Even in a one-person company, the liabilities of the company are for the company alone and unless the shareholder or director has guaranteed any liability, the shareholder or director is insulated from suit for those debts. And that is not the only benefit of the company; there is perpetual succession, shares in companies are transferrable, and even the tax laws, or at least some of them, are more favourable to the corporate rather than the personal form.
But in return for those benefits, the promoters, directors and shareholders of the company implicitly recognise and agree to abide with the statutory obligations. Apart from the obligation to file returns annually, there are requirements to have audited financial statements, to maintain statutory records, to hold meetings, etc. No one denies that these carry with them both financial and non-financial costs. But having chosen the corporate form to obtain its considerable benefits, the directors cannot then elect to ignore the attendant obligations.
Our Companies Act is largely a one-size-fits-all model, based largely on the Canadian Business Corporations Act. And while subsequent to the introduction of the Act in 1995, the country passed legislation specific to banking, insurance and public companies, the 542-section Companies Act is still formidable for the small private company. They have a choice: de-incorporate or comply.
The new Attorney General Mr Anil Nandalall has brought some refreshing energy to his office. He needs to turn his attention to the Deeds Registry, the place where the annual returns are lodged and which by law are public records. I am sure that Mr Nandalall is aware of the several letters appearing in the press expressing serious concerns about the lawless state of the Deeds Registry, which I hasten to add has more to do with the political failings and hubris of his predecessor than with the staff of the Registry working under some challenging conditions.
Guyana continues to earn very poor ratings among the 183 countries in the World Bank annual assessment, the 2012 report of which has the sub-title Doing Business in a more transparent world. We need to lift ourselves from the lowly position of 114 and at least stand beside, if not ahead of, our Caribbean counterparts. To do so we need to fix a few things immediately. At this stage the Registry is without a Registrar, the position being held by an acting appointee. The entity needs to address a resource deficit including someone with the capacity to ensure that what is in fact filed meets fully the requirements of the law set out above. My experience suggests that the Registry has no accounting capability to assess whether proper financial statements have been submitted.
Mr Nandalall needs to raise his voice in Cabinet and let his colleagues know that the Deeds Registry will be applying the law without fear or favour and that NICIL, arguably the country’s most serious violator of the Companies Act, will be placed in the firing line. Neither he nor the President should accept a situation whereby a publicly-owned company that annually handles untold millions of public funds should be allowed to get away with such lawlessness.
The penalties for offences under the Companies Act are far too low and even if the law was enforced, they would hardly be a deterrent. They need to be increased substantially but also to be enforced vigorously. It seems desirable that the penalties be made automatic, like the penalties under the tax laws, without the rigmarole of court hearing which would be more costly than the fines collected. It is both an opportunity and a challenge.
But NICIL is only part of a wider, sicker culture. There are many other state-owned entities and statutory bodies that have consistently failed to meet their obligations under the Companies Act, or to have their annual accounts and reports laid before the National Assembly as required by law. Hopefully with a new Speaker of the National Assembly, the Clerk will find the courage to write those ministers who are required to lay reports in the National Assembly. The list of those entities is long and several ministers are guilty of non-compliance.
The violation of the country’s laws by ministers, state companies and statutory bodies tells the rest of the nation that if you can get away with non-compliance then good luck to you. Our private sector, so conditioned to anarchy, needs little encouragement to continue their lawless ways.
Sadly, I have to admit that the accounting and legal professions come close to aiding and abetting when it comes to their clients’ non-compliance with the law.