The role of beneficial ownership reporting obligations and the reckless trading provision to prevent front companies in terms of the Companies Act 71 of 2008
Author: Neha Dhana
Affiliations: LLM candidate, University of Witwatersrand
Source: Journal of Corporate and Commercial Law & Practice, Volume 8 Issue 2, 2022, p. 29 – 54
The corporate form has the potential to be abused by natural persons. A front company is an example of such abuse. A front company is an incorporated company that is used as a vehicle to conduct illegal activities. The natural persons that control this front company and ultimately benefit from proceeds derived from the illicit conduct conceal their identity by hiding behind the company’s separate legal personality to escape civil and criminal liability. A report indicates that billions of rands are obtained through illegal activities perpetrated against the corporate form in South Africa. This means that natural persons can successfully misuse the corporate form as a front. For this reason, it is imperative that a legal framework is in place to circumvent the formation and operation of front companies. Foreign jurisdictions such as the United States of America and Kenya deter front companies by recognising beneficial ownership and placing a reporting obligation on beneficial owners to reveal themselves to a regulatory body. The abuse of the corporate form as a front is a company law issue and ought to be regulated by the South African Companies Act 71 of 2008 (Companies Act). However, the Companies Act does not recognise beneficial ownership per se. The Companies Act recognises beneficial interest only in relation to persons that exercise a legal right held in securities. It is argued that to prevent front companies in South Africa, the Companies Act should be amended to fully recognise beneficial ownership and place a report obligation on these persons to reveal themselves to the Companies and Intellectual Property Commission. It is further argued that the statutory remedy, the reckless trading provision, should be expanded to apply to beneficial owners to act as an instrument to prevent the operation of front companies.