What constitutes an ‘employment contract within South Africa’? – s 23(2) of the Companies Act 71 of 2008

April 1st, 2012
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By Heather Brownell

Section 23 of the Companies Act 71 of 2008, which came into effect on 1 May 2011, deals with the situation where a foreign company is required to register as an external company with the Companies and Intellectual Property Commission (CIPC).

The term ‘external company’ is defined in the Act as an entity incorporated outside of South Africa that is carrying on business or non-profit activities in South Africa, subject to s 23(2). Although the Companies Act does not make use of the term ‘branch’, an external company is often colloquially referred to as such.

The effect of the registration of a foreign company as an external company in South Africa is that the foreign company is given legal recognition in South Africa.

Factors triggering an obligation to register as an external company

Section 23(1) requires an external company to register with the CIPC within 20 business days after it first begins to ‘conduct business’ or ‘non-profit activities’ in South Africa.

Section 23(2) stipulates that a foreign company must be regarded as ‘conducting business’ or ‘non-profit activities’ within South Africa if it –

‘(a) is a party to one or more employment contracts within the Republic; or

(b) subject to subsection 2A, is engaging in a course of conduct, or has engaged in a course or pattern of activities within the Republic over a period of at least six months, such as would lead a person to reasonably conclude that the company intended to continually engage in business … within the Republic.’

Section 23(2A) provides that, when applying s 23(2)(b), a foreign company must not be regarded as ‘conducting business activities within’ South Africa solely on the ground that the foreign company is or has engaged in one or more of the following activities –

‘(a) holding a meeting or meetings within the Republic of the shareholders or board of the foreign company, or otherwise conducting any of the company’s internal affairs within the Republic;

(b) establishing or maintaining any bank or other financial accounts within the Republic;

(c) establishing or maintaining offices or agencies within the Republic for the transfer, exchange, or registration of the foreign company’s own securities;

(d) creating or acquiring any debts within the Republic, or any mortgages or security interests in any property within the Republic;

(e) securing or collecting any debt, or enforcing any mortgage or security interest within the Republic; or

(f) acquiring any interest in any property within the Republic.’

Section 23(2)(b) and s 23(2A) need to be read together. Section 23(2)(b) describes in broad terms the circumstances that would be regarded as conducting business in South Africa. Section 23(2A) qualifies s 23(2)(b) by setting out those activities which, if conducted in isolation, would not as a result of a single activity result in the requirement to register as an external company.

So if a foreign company is engaged in any one of the s 23(2A) activities, that in itself will not necessarily conclusively evidence the intention to continually engage in business. The activities listed in s 23(2A) could, however, be indicative factors that the company is ‘conducting business’. Each of the activities listed in s 23(2A) that the foreign company is engaged in or is conducting in South Africa would have to be considered in the light of its broader activities in South Africa to determine whether or not the foreign company is conducting business for the purposes of s 23(1).

If the activities of a foreign company in South Africa fall within the ambit of s 23(2)(a), this immediately triggers the obligation on that foreign company to register as an external company. However, the provisions of s 23(2)(b), read with s 23(2A), are somewhat more subjective, requiring a weighing up of an aggregate of factors, as opposed to an empirical obligation to register as an external company.

Against the backdrop of the provisions of s 23(2), below I discuss a hypothetical scenario that requires consideration as to what the legislature intended by these provisions.

Hypothetical scenario

A foreign company, Consulting Co, which is registered in Italy, enters into a services contract with South African manufacturing company, SA Co. In terms of this services contract, Consulting Co will provide SA Co with an individual, Ms Morlani (who is in the employ of Consulting Co and has specialised skills), for a period of 12 months to assist SA Co in an area of its business requiring these specialised skills. Ms Morlani has a work permit to work in South Africa for these 12 months only. Ms Morlani signed an employment contract with Consulting Co, in Italy, many years before. The services contract is the only ‘business’ Consulting Co does in South Africa. Consulting Co will not have an office in South Africa. When this services contract comes to an end, Consulting Co has no legitimate expectation that SA Co will want to renew it, at which time Ms Morlani will return to Italy. SA Co will pay Consulting Co offshore, so there is no need for Consulting Co to open a South African bank account. Consulting Co pays Ms Morlani from Italy.

Consulting Co wants to know whether it is required to register as an external company in South Africa.

Consideration of the hypothetical facts in the context of s 23(2)

Section 23(2)(b)

When applying the hypothetical facts to the provisions of s 23(2)(b), even though the period of the contract of 12 months is more than ‘at least six months’ contemplated in s 23(2)(b), there does not appear to be sufficient basis to argue that Consulting Co is ‘engaging in a course of conduct, or has engaged in a course or pattern of activities within the Republic over a period of at least six months, such as would lead a person to reasonably conclude that the company intended to continually engage in business … within the Republic’. This is because Consulting Co has no intention at the time of concluding the services contract of ‘continually engaging in business’ in South Africa. Furthermore, it has not taken any steps to hold itself out as ‘conducting business’ in South Africa. It has not, for example, set up an office, which would be a factor indicating that it is ‘conducting business’.

On the face of it, the circumstances do not trigger an obligation under s 23(2)(b) to register Consulting Co as an external company in South Africa.

The question as to whether, on the hypothetical facts, s 23(2)(a) triggers an obligation for Consulting Co to register as an external company is discussed below.

Section 23(2)(a): Employment contracts within South Africa

Section 23(2)(a) stipulates that a foreign company must be regarded as ‘conducting business’ or ‘non-profit activities’ in South Africa if that foreign company is ‘a party to one or more employment contracts within’ South Africa.

On the face of it, the legislature intended to regulate circumstances where a foreign company concludes an employment contract with a South African citizen in terms of which the South African will render services to the foreign company in South Africa. In such circumstances the South African employee must be protected in that if his rights are infringed by the foreign company, then he must have a right of recourse against the foreign company in South Africa, that is, not need to have to institute a claim against the foreign company in its primary place of incorporation.

This understanding is based on the rationale for requiring a foreign company to be incorporated in South Africa, which is found in the English case of South India Shipping Corp Ltd v Export-Import Bank of Korea [1986] 2 All ER 219. As the case law on external companies is predominantly English, it is appropriate to look to English law for guidance. Furthermore, s 5(2) of the Companies Act stipulates that: ‘To the extent appropriate, a court interpreting or applying this Act may consider foreign company law.’ In this decision, the Court of Appeal stated that the main object of the legislature in requiring a foreign company to register with the Registrar of Companies is to protect the foreign company’s British creditors by obtaining for them, ab initio, the means of serving process in the United Kingdom (UK), free from the inconvenience of seeking out the foreign company in its country of incorporation, and to place a foreign company for this purpose on the same footing as an English company. One of the various factors the Court of Appeal took into account in requiring the Korean Bank to register as a branch was that it operated from premises in the UK and employed staff in the UK.

The wording of s 23(2)(a) is, however, arguably open to interpretation as to what the legislature intended with its use of the words ‘employment contracts within’ South Africa.

If s 23(2)(a) were to contain the word ‘concluded’, that is, if it read ‘employment contracts concluded within’ South Africa, then it would be clear that the place of conclusion would determine the application of s 23(2)(a). However, the absence of the word ‘concluded’ indicates that the legislature may have intended to cast the net wider than only employment contracts concluded in South Africa.

As there is no definition of ‘employment contract’ in either the Labour Relations Act 66 of 1995 or the Basic Conditions of Employment Act 75 of 1997, such legislation does not appear to provide guidance in interpreting s 23(2)(a). The legislature is in the process of considering amendments to the South African legislation governing labour and employment matters, which amendments may, once promulgated, assist to provide guidance on the interpretation of ‘employment contract’ as contemplated in s 23(2)(a).

It is then necessary to consider whether it was the legislature’s intention that any services rendered in South Africa in terms of an employment contract must fall within the ambit of s 23(2)(a). Should s 23(2)(a) be interpreted so widely as to make an employment contract to which a foreign company is party, which employment contract was not concluded in South Africa, and where the employee is not a South African citizen, nor a permanent resident nor domiciled in South Africa, subject to s 23(2)(a) because for a period the employee will be rendering services in terms of such foreign employment contract in South Africa?

The hypothetical facts discussed above fall within this scenario.

If an individual who has concluded an employment contract in a foreign jurisdiction, and who is required to render part or all of the services in South Africa, wishes to sue the foreign employer in South Africa (instead of in the foreign jurisdiction), the South African court will look to a number of factors to determine whether or not the contract is a ‘foreign employment contract’. The court would consider the following type of factors in determining whether the contract is a ‘foreign employment contract’:

  • What the contract itself stipulates in relation to the law governing the contract.
  • Where the contract was concluded.
  • Who is paying the employee.
  • Who the services are being rendered to.
  • Where the services are being rendered.

If, after applying the above factors, the court finds that the contract is a ‘foreign employment contract’, then the South African court is likely to find that is does not have jurisdiction to apply South African law to the employment contract.

If the South African courts do not have jurisdiction in respect of a particular foreign employment contract, which could be the case even if services are being rendered in South Africa, then it is arguable whether it could have been the legislature’s intention that such a foreign employment contract should trigger an obligation on the foreign company to register as an external company with the CIPC (in the absence of the foreign company having an obligation to register as an external company in terms of s 23(2)(b) read with s 23(2A)).

In the context of the above discussion, it appears unlikely that it was the legislature’s intention to capture all ‘employment contracts’ in respect of which services are rendered in South Africa within the ambit of s 23(2)(a). In my view, this section must be interpreted in the light of the broader s 23(2), which requires a foreign company to register as an external company if the foreign company is ‘conducting business’, as opposed to a foreign company that is merely rendering a service in South Africa.

Section 23 does not require a foreign company that contracts with a South African company to register as an external company merely as a result of such contractual relationship. The test to trigger such obligation to register relates to whether the foreign company is continually engaging in ‘business activities’ or ‘non-profit activities’ in South Africa. On the hypothetical facts, the contractual relationship between Consulting Co and SA Co may have been concluded in either Italy or South Africa. The employment contract between Consulting Co and Ms Morlani is governed by the laws of Italy. The fact that Ms Morlani is providing services to a client of Consulting Co, being South African company SA Co, should not (on the facts) be of any particular concern to the South African legislature.

There appears to be sufficient basis, in the absence of any case law on this matter, to interpret the words ‘a party to an employment contract within South Africa’ to mean employment contracts where the contract is in respect of employment to be rendered by an employee in South Africa (particularly if the employee is a South African), where the employer is a foreign company and the employment contract is subject to South African law. If, however, an employment contract is concluded in terms of the laws of a foreign jurisdiction, the mere fact that the employee may render certain services to the foreign company in South Africa should not, simply for that reason, make it fall within the ambit of such foreign company being ‘a party to an employment contract within South Africa’.

On the facts of the hypothetical scenario, for the reasons discussed above, I am of the view that the rendering of services by Ms Morlani to SA Co, in her capacity as an employee of Consulting Co, should not trigger an obligation in terms of s 23(2)(a) for Consulting Co to register as an external company in South Africa.

In the absence of further guidance from the legislature or case law, there is no straightforward clear-cut answer to the interpretation of what constitutes an employment contract within South Africa for purposes of s 23(2)(a). In interpreting the application of s 23(2)(a), the facts of each case must be considered in the context of s 23 as a whole.

Heather Brownell BLC LLB (cum laude) (UP) LLM (commercial law) (Unisa) Cert in Energy Law (Wits) is an associate director in the corporate law advisory practice of KPMG in Johannesburg.

This article was first published in De Rebus in 2012 (April) DR 38.

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