Applying the BEE Act's Trumping Clause will be interesting

November 23, 2016

 

The B-BBEE Amendment Act contains a 'Trumping Clause' that says the Act outranks another act if they make stipulations about the same thing. Eric Ackroyd, Verification Director at EmpowerLogic uses the topic of determining black ownership under the Mining Charter to highlight the difficulties introduced by the Act's Trumping Clause. 

 
B-BBEE Amendment Act (46 of 2013) came into effect on 24 October 2014. Stipulated in the proclamation, the so-called "Trumping Clause" came into effect a year later, on 24 October 2015. Section 3 (2b) of the B-BBEE Amendment Act states that:

"In the event of any conflict between this Act and any other law in force immediately prior to the date of commencement of the B-BBEE Act, 2013, this Act prevails if the conflict specifically relates to a matter dealt with in this Act."

The practical application of the "Trumping Clause" is expected to be "interesting". Let's take the example of determining black ownership when applying the Mining Charter. 

The Mining Charter stipulates that the Modified Flow Through and Exclusion Principles may not be applied. The Amended Codes of Good Practice, issued in accordance with the B-BBEE Amendment Act, provides for the use of either of these principles and stipulates a methodology to be applied when calculating black ownership.

The Mining Charter is in force at the date of the commencement of the B-BBEE Amendment Act; and the B-BBEE Amendment Act deals with the calculation methodology for determining black ownership; such methodology should be applied when calculating black ownership for purposes of the Mining Charter. This methodology includes the application of either the Exclusion Principle or the Modified Flow Through Principle.

Does the Trumping Clause mean that the Modified Flow Though Principle and Exclusion Principle can be used when applying the Mining Charter?

The Amended Codes makes provision for 51% and 100% black-owned Exempted Micro Enterprises (EMEs) and Qualifying Small Enterprises (QSEs) to obtain a sworn affidavit to confirm both annual total revenue and their calculated black ownership. Such an affidavit is in lieu of a SANAS or IRBA accredited B-BBEE certificate. The Codes further state that any misrepresentation of such information constitutes a criminal offence as set out in the B-BBEE Amendment Act.

The above gives rise to an interesting situation, as the Preferential Procurement Policy Framework Act and its Regulations require a B-BBEE Verification Certificate issued by a SANAS accredited Verification Agency or an IRBA approved B-BBEE Auditor (or for EMEs by an Accounting Officer). It does not accommodate an Affidavit as sufficient evidence.

Does the Trumping Clause mean that an Affidavit must be accepted?

The calculation of black ownership can be very complicated. IRBA B-BBEE Auditors and SANAS Verification Agencies are bound by standards and methodologies that must be applied when calculating and verifying total revenue and black ownership. Further processes have been put in place to ensure that both SANAS Approved Technical Signatories and IRBA Approved B-BBEE Registered Auditors are competent and sufficiently skilled in B-BBEE legislation to ensure specific technical calculation methodologies are correctly applied.

Authentication of percentage '51% black ownership' often presents complexities, especially in the case of naturalisation, as well as the breakdown and definition of '51% black ownership'. The overall recognition of '51% black ownership' takes into account the calculation of Net Value, using the time-based graduation factors, outstanding acquisition debt and accepted valuation methods such as DCF, P/E or NAV, otherwise known as Discounted Cash Flow, Price Earnings or Net Asset Value.

These complexities give rise to the following conundrum of "How does the deponent of an affidavit confirm that the information presented in the affidavit is true and correct?", and "Does a Commissioner of Oaths have the specific skills required to verify Accounting Standards on Revenue Recognition and B-BBEE Legislation on calculating 'Black Ownership'?"

Should an affidavit prove to be incorrect, the deponent may be found guilty of Perjury, which is a criminal offence. Furthermore, the deponent will be guilty of an Offence as defined in the B-BBEE Act. Where an organisation relies on an affidavit to make a significant decision, such as the appointment of a '51% 'Black' Owned Supplier' or an Enterprise Development Beneficiary, a significant loss may be incurred should the affidavit be incorrectly deposed. The 'Trumping Clause' does not protect against or underwrite such a loss.

Organisations should, when considering relying on an affidavit or deposing such an affidavit, take the following into consideration when such matters are significant to the decision process:

1. The complexity of the deponent's Ownership structure; 
2. The deponent's authority to make the declaration; and 
3. The complexity of revenue transactions, among others.
 
It is vital to acknowledge that an affidavit may, in fact, not provide sufficient and appropriate evidence of '51% black ownership' or revenue recognition.