Keeping it in the Family

Introduction
For decades, perhaps in some cases even close to a century, family businesses have formed the backbone of the Guyana economy. Some of these, like Psaila Bros., Rodrigues Limited, the Wright Brothers (Russian Bear) Bettencourts, Elias and Sons, D. M. Fernandes Ltd., R. B. Gajraj and Sons Limited, Jaikaran’s Drug Store, may have faded out of national memory. Some are in transition such as A. Mazaharally & Sons Ltd., A. Amerally and Sons Ltd., Toolsie Persaud Limited., A.H. & L. Kissoon Ltd. and Rahaman Soda Factory Ltd. We recall too the name B. & J. Khan and Daughters suggesting no sons.

Then there are a few family businesses which have survived but are not particularly active such as C.R. Jacobs and Ltd. and Central Garage Ltd. Of the still surviving and active family businesses John Fernandes Limited is perhaps the most successful, and prominent, growing into, by acquisition and organic growth into a conglomerate although A. Gafoor & Sons Limited has grown into a huge operation in its chosen line of business. And let us remember too that Banks DIH Ltd started as D’Aguiar Bros Limited and that Bookers itself that once was the B in British Guiana was once Booker Bros.

Why some of those family businesses succeeded while others failed requires much more than a newspaper column and would make an interesting study for the resourceful student of the University of Guyana. Indeed, such a study would make for a good book.

Continue reading Keeping it in the Family

Corporate lawlessness

Introduction
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.

Offences
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.

Other offences
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.

New AG
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.

Conclusion
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.

Wanted: Charities and NGO legislation

Introduction

As civil society in Guyana has taken – or rather been given – an increasing role in public-spirited tasks such as fighting floods, AIDS, poverty and discrimination – perceived and real – providing legal aid or cheap meals for the poor, those civil society organisations seeking to formalise and institutionalise themselves face more than the usual challenges of resource limitation and fundraising. Despite the fact that many of these organisations are in fact doing or complementing the work of the state, they come up with one formidable hurdle which could be so easily removed by the state. The sad fact is that there is no legislative enabling environment for the promotion of civil society, while the tax laws effectively discourage giving and fundraising through creative business initiatives. Just consider how the tax laws would treat a not-for-profit entity that decides to carry on a business to raise funds to be used exclusively in financing its charitable work. The laws will treat the surplus on the business in the same way as it would any for-profit organisation, while disallowing the expenditure on the charitable activity as not being “wholly and exclusively incurred in the production of income”!

By contrast, countries ranging from Azerbaijan and Afghanistan to Malta, Mexico, Uzbekistan, Venezuela and Zimbabwe have either enacted or advanced legislation to facilitate that type of entity known by such names as non-governmental or not-for-profit organisations. Guyana therefore lags behind all these countries in NGO/civil society legislation which for all practical purposes is simply non-existent, although the reality is less clear, certainly more confusing and does not lend itself to simple determination.

State of uncertainty

The Civil Law Act of Guyana passed in 1916 provides that the law relating to charities shall be the law of England. The problem is that the charities law of England has changed beyond recognition since 1916, and indeed, as recently as 2006 the House of Commons consolidated and updated the law into the Charities Act 2006. That act defines charities by reference to the provision of benefits to the public over some thirteen purposes, including the arts, education, health, animal welfare, sports, environmental protection and the promotion of human rights, and makes comprehensive provisions for such charities. It is unlikely that anyone would suggest that English charity law would now apply in Guyana, but that itself is a strong reason for our own National Assembly to fill this yawning gap in our legislation.

One of the results of this failure is the perennial question that often confronts the person considering the establishment of a not-for-profit organisation – whether to go the route of the Companies Act 1991 or the Friendly Societies Act Cap 36:04 of the Laws of Guyana. For the benefit of all those persons called on to make the decision, this column compares in a simple straightforward way these two principal pieces of legislation for their suitability as the appropriate vehicle to carry out their business as NGOs. Another vehicle, the Co-operative Societies Act, is excluded, since only societies for the economic advancement of their members may be established under that act.

Friendly Societies Act

Companies Act 1991

1. Scope

Limited to the types of society specified, or extended by Minister

Generally unlimited

2. Regulator

Registrar of Friendly Societies

Registrar of Companies

3. Minimum Fees to Registrar

$1,000

Approximately $30,000

4. Role of Minister in establishment

May limit the application of the Act

None

5. Minimum number

Seven

One

6. Age limitation

Under 16 not allowed

Anyone can be a member but an incorporator must be at least 18

7. In case of refusal to register

Appeal to Minister

No provision

8. Legal Status

Body Corporate

Body corporate

9. Whether branches are permitted

Yes

Yes

10. Constitution

Must contain provisions relating to matters in Third Schedule of the Act

Must meet the requirements of the Companies Act but otherwise may contain any other provision

11. Audit

Must submit accounts to Registrar for audit or other person appointed to audit

Audit by person holding a practicing certificate from the Institutes of Chartered Accountants of Guyana

12. Reserve Fund

Mandatory

No requirement

13. Investment of surplus funds

Government or Post Office Savings Bank or Commonwealth Government or Land + Buildings

No restriction

14. Ability to Enter into Contracts

Yes

Yes

15. Loans

Must be out of separate funds established by contribution

Subject to rules set out in the Companies Act 1991

16. Taxation on Income

Automatic exemption under the Corporation Tax Act

Fully taxable unless expressly waived in a Tax Act or subsidiary legislation

An unsatisfactory winner

It would seem that there is a compelling case for organisations whose objectives fall within the Friendly Societies Act to register under that act rather than the Companies Act.

It is true that there have been far more complaints about the administration of the Friendly Societies Act compared with the Companies Act and that there is considerable scope for ministerial intervention under the Friendly Societies Act, but it is also true that there has been little evidence of any minister acting unreasonably under the act, rendering any fear baseless.

This however is not a reason for our legislature to continue to ignore the need for specific charities and related legislation that takes account of the increasing role and contribution of such organisations in the social sector in Guyana.

Such legislation ought to take account not only of the entity in its role as provider of charitable services and as a recipient of donations but also of the contributors – individuals and corporate – to such organisations.

For example, individuals who no doubt represent a significant element of total contributions can claim no deduction for any donations made for any charitable or public purpose.

On the other hand, companies are allowed to deduct donations under Deeds of Covenant and those made to the Government of Guyana for public purposes or to any prescribed organisation of a national or international character.

The retention of the status quo represents an insensitivity that is clearly undesirable and counterproductive.

Next week: The Private Sector Commission’s amazing position on the Value-Added Tax.