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Exchange control: Oilwell does not end well

20 June 2012   (0 Comments)
Posted by: SAT Technical
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By Ben Strauss (DLA Cliffe Dekker Hofmeyr Tax Alert 15 June 2012)

South Africa (SA) imposes exchange controls. Recently, the policy and practice of the SA government has been to relax these controls. I welcome this trend: I think exchange controls frustrate foreign investors and limit unreasonably the rights of SA residents to trade. So it is regrettable when the government reverses this trend.

Exchange controls are governed by the rules and regulations issued under the Currency and Exchanges Act, No 9 of 1933. The SA Reserve Bank administers the controls.

An important rule is that a SA resident may not export 'capital' without approval from the SA Reserve Bank.

A year ago, in the case of Oilwell (Pty) Limited v Protec International Ltd & others 2001 (4) SA 394 (SCA), which involved the transfer of intellectual property rights by a resident to a non-resident, the Supreme Court of Appeal held that the term 'capital' in this context must be interpreted restrictively to mean cash and money; the term must not be interpreted to include goods, in particular, intellectual property rights. (For more on that case, see our Tax Alert of 25 March 2011, which can be found by clicking here.)

However, the SA government has now by presidential fiat overturned certain aspects of the Oilwell ruling. From 8 June 2012, the President changed the exchange control regulations by inserting a new Regulation 10(4) which reads as follows:

"(4) For the purpose of sub-regulation (1)(c) –

(a) 'capital' shall include, without derogating from the generality of that term, any intellectual property right, whether registered or unregistered; and

(b) 'exported from the Republic' shall include, without derogating from the generality of that term, the cession of, the creation of a hypothetic or other form of security over, the assignment or transfer of any intellectual property right, to or in favour of a person who is not resident in the Republic."

One effect of the change is that SA residents who wish to, say, sell and transfer intellectual property rights in SA like trademarks, copyright and patents to non-residents must obtain exchange control approval. Similarly, any non-resident who wishes to obtain security over intellectual property rights in SA must obtain approval.

What are the implications if approval is not obtained? What is clear is that the SA resident will be committing a crime and, among other sanctions, may be fined.

What, however, is still not clear is what the implications are as between the parties to the transaction. In the Oilwell case, the court held that a transaction that falls foul of a prohibition in the exchange control regulations is not invalid. The court however, further held as follows:

"This does not mean that in the absence of Treasury consent the transaction is enforceable without more. Parties who enter into a contract that may conceivably be hit by the Regulations are, unless the contract provides otherwise…, both obliged to take the necessary steps to obtain The Treasury's consent (something expressly agreed to by the parties). This must be so because of the supposition that the parties negotiated in good faith and intended to enter into an effective contract. There is nothing preventing The Treasury from consenting to a transaction ex post facto. This means that the transaction absent consent is not void at the behest or election of one of the parties to it.

A party faced with a claim based on a transaction which that party believes is covered by the Regulations can therefore not rely only on the lack of consent to avoid the claim. The defendant may in appropriate circumstances file a dilatory plea pending the determination by The Treasury of its application for the necessary consent. Once The Treasury refuses to grant consent, the defendant would be entitled to resist the claim on that ground. If performance took place without consent, neither party may claim restitution. It would then be for The Treasury to invoke [the applicable Regulations] to undo the effect or proposed effect of the transaction." (Footnotes are omitted.)

As two commentators have pointed out, the decision of the court in this respect is contradictory "in that the non-automatic enforceability of an agreement for which approval was not obtained could force a party into a position where she in any event must seek approval": (Max du Plessis and Stephanie Luiz Going offshore: The assignment of a trade mark and the meaning of 'capital': Oilwell (Pty) Ltd v Protec International Ltd, The South African Law Journal Vol 129 Part 1).

Again, it is unfortunate that the SA government has felt it necessary to extend its exchange control 'tentacles' (to use the word of the commentators referred to above). In my view, speaking as a lawyer, exchange controls should be abolished, once and for all.


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