Litigation Funding: An Affordable Way of Accessing Justice

a4_bIn the life-span of a business, there will almost certainly be a protracted legal process. To a small or medium-sized business, this can prove ruinous as legal costs can be prohibitive.

Current solutions

You can sell your claim but the trade-off is only getting a small fraction of the claim.  Or you can ask your lawyer to fund your side of the case using the Contingency Fees Act – but only if you can find an attorney prepared to use this approach.

The Litigation Funder

This concept has gained traction overseas and is worth seriously considering. In this model, the litigation funder pays all legal costs in return for 40-55% of the claim. Before you recoil at this amount remember that 50% of the claim is way more preferable than 100% of nothing.

Requirements to attract a Litigation Funder

  • The case is strong in law and backed by good, preferably written, evidence
  • The person or entity being sued is solvent and is very likely to remain so
  • You are fully committed to the claim and are prepared to see it through to the end.

Other positives

The litigation funder will be as keen as you to see a successful result and can manage this process for you. This leaves you more time to focus on your business.

If your opponent is well-resourced and intimidating, having a litigation funder will dissuade it from dragging out the case until you run out of funds. It could also persuade the other party to settle the case.

Litigation funding has been successfully used overseas and thus there is no reason that it won’t be equally successful in South Africa.

Ask your accountant for advice if you want to pursue this.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Sectional Title Owners Beware: Your Body Corporate Must Have Adequate Reserves

a3_bRecent legislation has been passed which obliges trustees of sectional title schemes to set up a reserve for repairs, maintenance and asset replacement of the common property. This is in addition to the current administration requirement to cover future operating expenses.

If you are involved with bodies corporate you need to pause and consider this legislation – it could hit your pocket and will take time to understand as it places increasing onus on trustees and by extension all stakeholders.

How will it affect me?

The new common property reserve fund will depend on the size of the scheme’s common property assets – for example, if there are items like lifts, large buildings etc then your exposure will be greater.

The higher the body corporate’s cash position and/or investments the lower the financial exposure you will have.

To illustrate this, look at the body corporate’s annual financial statements and see what cash and/or investments they have.  If the cash/investment is enough to cover a full year’s expenditure, your financial exposure should be low as the trustees on the body corporate will be able to create the reserve by using the current cash/investments.

How is the reserve fund determined?

The Act lays down requirements for the reserve fund – the minimum amount is 15% of last years’ payments to the administration fund (sectional title schemes have been required for some time to have a fund for operating costs called the administration fund).

In terms of the reserve fund, the trustees must draw up a detailed plan to be presented at the Annual General Meeting (AGM). This needs to show, inter alia, each capital item and forecast future repairs and replacement of the capital item for the next ten years.

As an example take a lift and assume its economic life is twenty years and the replacement cost is R1 million and the lift is ten years old. Annual maintenance is R10,000. Then the trustees will need to provide R10,000 (annual maintenance) plus R100,000 (ten years to replacement) = R110,000 per annum to the reserve fund.

This plan is then approved at the meeting.

This is clearly a substantial undertaking – make sure you understand how this will work.

Other matters

  • The reserve funds are to have separate bank accounts
  • Financial statements of bodies corporate are to be audited
  • No proxy may represent more than two owners
  • Fidelity and public liability insurance needs to be taken out
  • Valuations of the scheme are to be done every three years
  • In general meetings motions are carried by majority vote. The majority is based on the participation quota of each member i.e. voting is by value
  • A new Ombud Service, which applies not just to sectional title schemes but also to all “Community Schemes” including Home Owners Associations and the like, has been set up to provide a dispute resolution process for anyone affected by a dispute in the scheme
  • All new schemes and rule changes are to be vetted by the Ombud Service. A new set of prescribed rules for bodies corporate came into effect in October last year. They replace existing rules and new and existing bodies corporate need to implement these new rules. The only exception is where bodies corporate have customised rules for their body corporate and these rules do not conflict with the new rules.

There have been significant changes to the governing of bodies corporate. Speak to your accountant if in doubt as it may require additional funding by you.

Remember that whilst you may need to pay now to set up the reserve, in the longer term this will even out and will substantially reduce the need to raise special levies.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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There’s Plenty of Good News Out There!

a2_b“When you’re chewing on life’s gristle,

Don’t grumble, give a whistle!

And this’ll help things turn out for the best

And always look on the bright side of life!”

(Monty Python’s Eric Idle)

Lately, all we seem to get is depressing news – potential ratings downgrade, declining employment, corruption scandals and escalating protests.

Despite this good things continue to happen and the trajectory of the nation is, in many ways, upwards.

If you don’t believe it, what about this?

Perhaps the most significant statistic is how is our income per head (GDP is used as a surrogate for this) doing in real terms (i.e. stripping out inflation), as this tells us objectively that people are either better or worse off than previously.

GDP per capita has grown from approximately US$ 9,900 in 1996 to US$12,400 in 2015 – an increase of over 25%. Remember the Rand to $ exchange rate has declined from $1 = R4 to S1 = R14 in this period. Thus, average living standards have increased substantially.

Other figures back this up.  Living Standards Measures (LSMs) have also shown improvement:

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(Source:  SA Institute of Race Relations)

In other words, 38.8% of the population in 2001 lived on R1,300 per month whilst only 10% now do. Today 25% earn R20,500 per month versus 16.3% in 2001. 28.8% of the population have moved from low income to medium/high income in a generation. Along with this there have been large increases of people with access to running water, health care, education and electricity. This is quite some going.

Inflation was 9% when the ANC came to power and it is just on 6% today. The budget deficit to GDP was 7.1% in 1993 and today is 3.9%

In 1995 259,000 Black learners matriculated whilst last year just under 370,000 matriculated. In 1994, 20,610 people (27.8% of all graduates) graduated from tertiary institutions with degrees in science, engineering and technology – last year this figure was more than 55,000 (30% of all graduates).

Thus, if we look beyond the noise, things are going quite well. In a generation, the country has made incredible progress. Don’t forget the recent election – we heard plenty of populism and dire predictions, yet people filtered out the noise when they voted.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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In 2017 There’s No Place for Hedgehogs When Forecasting

a1_b“A fox knows many things, but a hedgehog one important thing” (Ancient Greek poet Archilochus)

Looking into the future is one of the most important aspects of business. We all want to know the business is sustainable and so we do budgets and strategic plans to maximise the organisation’s future performance.

Just how accurate are we when forecasting? This is particularly important as upsets occur more and more frequently – last year the world was stunned by Brexit and by Donald Trump’s victory.

One researcher – Philip Tetlock – has done an enormous amount of research into why most forecasters get it wrong.  He has come up with some good suggestions as to how we can improve forecasting.

Hedgehogs versus foxes 

The philosopher Isaiah Berlin said people’s thinking falls into two categories – those who have one overriding idea and see everything through this idea (hedgehogs) and those who are flexible and will interpret events using a variety of ideas (foxes). Tetlock’s research shows foxes are much better forecasters than hedgehogs. It is better to look at predicting future events dispassionately and not try to distil it into one overall outlook.

Beware: Hedgehogs make better sound bites

Usually, the forecasters you see on TV or at seminars about 2017 are hedgehogs. Learn to recognise them so they don’t clutter your own thinking. They often say “on the one hand the Rand will improve next year” but “on the other hand if there is a ratings downgrade, the Rand will not improve”.

Tetlock’s ten commandments for good forecasters

  1. Focus on areas that are meaningful to your business and are more likely to have high probabilities of being accurate.
  1. If a problem is very difficult, break it down into what you know and what you don’t.
  1. Get the viewpoints of outsiders you respect. You can get bogged down into one way of thinking – speak to different people for a wider perspective.
  1. Stop seeing the world as black or white – you are never 100% right or 100% wrong. Start thinking in terms of probabilities and define an issue as having, say, a 60% chance of being resolved in your forecast period.
  1. Be balanced in your thinking when confronted with new data or events. Learn what is relevant and filter out the “noise”.
  1. Look for the clashing causal forces at work in each problem. As Charlie Munger (Warren Buffetts’s partner) says “I never allow myself to have an opinion on anything that I don’t know the other side’s argument better than they do.”
  1. Strike a balance between being too prudent or too decisive. There is risk in making quick judgments and equal risk in taking too long to get to a resolution.
  1. Acknowledge errors and learn from them.
  1. Team work is better for forecasting. Learn good perspective in managing competing ideas, constructive confrontation and asking good questions.
  1. It’s like riding a bicycle – the more you do it, the better you get.

As we move further into an age of uncertainty, understanding Tetlock’s philosophy can help your business navigate into the future.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Minimum Wages for Domestic Workers Increased

a5_bThis year’s new minimum wages for all domestic workers are set out in the table at the end of this article.

Who is covered?

  • All domestic workers in South Africa working in a private household
  • People employed by employment services
  • Independent contractors who are doing domestic work
  • A person doing gardening in a private home
  • People who look after children, sick or old people and people with disabilities in a private home
  • A person driving for the household

But excluding

  • Domestic workers employed on farms
  • Domestic workers employed in activities covered by another sectoral determination or bargaining council agreement (such as contract cleaning workers).

Are you in Area A or Area B?

Area A includes most major metropolitan areas; Area B is all other areas.   See the full lists on the Department of Labour website http://www.labour.gov.za/DOL/downloads/legislation/sectoral-determinations/basic-conditions-of-employment/domesticwages2016_2017.pdf

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This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Mandatory Audit Firm Rotation is in the News – Will it Apply to You?

a4_bThere have been many articles in the financial press over mandatory audit firm rotation (MAFR). This followed an announcement by the Independent Regulatory Board for Auditors (IRBA) that they intend to implement MAFR in South Africa.

MAFR is intended to strengthen auditor independence to enhance audit quality. There is no universal acceptance or rejection of MAFR, and it has been controversial in some of the countries where it has been introduced, including countries that have introduced it only to have it repealed later; hence the heated nature of some of the discussions and articles.

Currently, the IRBA has initiated a public consultation process (due to end on 20 January 2017) on its plan to introduce MAFR in 2023 for listed companies only. These JSE companies will have to rotate auditors every ten years.

Thus, it is at least several years off and, although media reports led many small companies to worry that they would be caught in the net, it will in fact only impact listed entities.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Don’t Miss Your Deadline for Employment Equity Reports

a3_bFailure by “designated” employers to lodge their employment equity reports on time risks severe penalties, with first offenders risking a fine of the greater of R1,5m or 2% of turnover (increasing to the greater of R2,7m or 10% of turnover for serial offenders).

Lack of enforcement in the past (apart from a few high-profile exceptions) has perhaps lulled non-compliant employers into a false sense of security but the Labour Minister has threatened a major crackdown and if you missed the 3 October 2016 deadline for manual/postal submission, you would be well advised to remedy that immediately.

Follow the process for electronic submission by the online deadline of Sunday 15 January 2017.  Go to the Department’s “Employment Equity Online Reporting for 2016” https://ee.labour.gov.za/dmiso/ page for details.

Must you report?

Reports must be submitted by all employers who fall into either of these categories –

  • All employers with 50 or more employees or
  • Employers with fewer than 50 employees who are designated in terms of the turnover threshold applicable as per the following table –

a3Getting this wrong could cost you dearly.  Seek advice in any doubt.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Beware of Trump’s Victory – Hard Economic Times Loom for SA

a2_bDonald Trump will soon be the 45th President of the United States. So far he is still threatening to implement his populist campaign promises (e.g. partially repeal Obamacare, tear up trade agreements and deport 11 million illegal immigrants) and has appointed a hard-line conservative to a senior position in the White House.

The American economy and how South Africa will fare

The most critical issue for us is the economy. So far, it does not look good. Trump has promised the US corporate tax cuts and a massive infrastructure program. Global markets are worried about this, particularly emerging markets, like South Africa. These programs will see the US deficit increase from the current 80% of GDP to well over 100%.

US long term interest rates have sharply spiked upwards since Trump won. The well-known economist Henry Kaufman has predicted that the thirty five year bull market for low long term interest rates is over. This is because Trump’s policies threaten to revive inflation in the United States which will push up interest rates to dampen inflationary expectations. In turn, this will encourage investors to reduce their exposure to higher risk emerging market bonds, resulting in a sell-off of emerging currencies – to date the Rand has lost more than 8% to the US$.

To protect their currencies, emerging markets will raise interest rates which will reduce the potential for economic growth. This is not good news for South Africa as our economy will only grow 0.5% this year and if this is reduced in future years, we face more tax increases, lower employment and social unrest.

What about commodities?

The stimulus package will initially benefit commodities such as iron ore and copper. If the package translates into economic growth, this will help South Africa’s major commodities such as platinum. So far platinum has dropped since Trump’s election, indicating that US economic growth beyond the stimulus package may be low. Gold, our other major commodity export, has also dropped as rising interest rates dampen demand.

Protectionism

Trump has also promised to repeal free trade agreements, heralding a return to the economic nationalism of the 1930’s. Our economy is an open one and has benefited from lower tariffs, whilst growing protectionism will reduce the prospect of economic growth.

So what?  And will it actually happen?

Difficult times since the global financial crisis of 2008/9 have undermined the post Second World War economic consensus which has bought prosperity to the world. The problem with rising protectionism is that it does not bring economic prosperity but instead increases the potential for populism, which is already a rising trend globally.  

Despite this, there were similar gloomy forecasts when George Bush was elected in 2000. Bush turned out to be positive for the African continent as he launched a successful crusade to fight AIDS and encouraged more open trade with the USA.

Remember also that power is institutionalised in the United States and Trump as President could well be prevented from introducing many of his proposed controversial initiatives.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Directors Don’t Like Goodbyes

a1_b“Parting is such sweet sorrow” (Shakespeare)

One of the predicted negatives from the Companies Act (the Act) and the King Codes was it would be difficult to find directors. The Act and King Codes put extensive liabilities on directors, encouraged annual appraisal of directors, term limits for directors and recommended strong codes of conduct to ensure directors fulfilled their fiduciary roles.

Non-executive directors seemed particularly vulnerable as they are not part of day-to-day operations, have to wade through extensive board packs before each meeting and attract the same liabilities as executive directors.

It thus seems intuitive that directors would be reluctant to serve with the introduction of all these governance measures.

The predictions were wrong – directors are staying put

Research done in the United States contradicts this and shows that directors are keen to remain in office for as long as possible. It seems the prestige and access to high-power networks outweighs the negatives.

Directors in America feel more than one in three directors should be replaced but the research shows that only 15% of directors were appointed in the last two years.

Which directors should you replace?

  • The first category is directors who arrive at meetings unprepared – these reportedly account for 25% of boards of directors.
  • Second is the one upmanship category. They always have to show up other members leading to dysfunctional boards.
  • Next come those who don’t speak up. Many of these feel the chief executive (CEO) should go but don’t say a word about it.
  • Then there are the over-controlling CEOs who are afraid of board oversight and divide and rule the members of the board. In similar vein, CEOs who become Chairperson smother the new CEO as they believe only they can effectively run the company.
  • Finally, there is the “old guard” who believe their experience is vital to the board but, over time, lose the ability to think independently and to voice contrary opinions.

You have to question just how effective the governance is in these organisations. Correctly applied, appraisals, strict enforcement of term limits and codes of conduct should weed these categories out.

It would appear that directors agree that weaker members should be replaced, but they do not see themselves as being a weak link – it is always the other director who should go.

It is important that governance is not just a box-ticking exercise. There is a strong argument that new blood brings new energy and ideas to a board of directors. Jack Welch, the long time CEO of General Electric, maintained that getting rid of non-performers greatly enhanced the organisation.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Inflation’s different effects on different income groups – The danger for South Africa

a5_bEach month Statistics SA releases the inflation figure (CPI). Currently it is 5.9% which is a considerable improvement on February’s 7%.

What is interesting is the CPI figure is a composite of five quintiles of income groups – from the poor to the affluent.

 What do the quintiles show?

They show that for the wealthy the CPI is 5.8% but for the poor the figure is 8%. Effectively the poorer sections of the community are far more exposed to inflation. The main culprit is food prices which are increasing by 11.3%. This has a greater relative impact on the poor than the more wealthy.

Perhaps this helps to explain the rising tide of service delivery protests and the general discontent the country is facing.

 Inequality is increasing, and that’s dangerous

We know that South Africa is one of the most unequal societies in the world and in the medium to long term this is unsustainable. Intuitively, the inflation figures show that inequality is not decreasing but continues to rise.

Whilst we speculate about the various political machinations and student protests that daily hog the headlines, let’s not forget that failing to address inequality will come back to haunt us all.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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