You have to give it to the gung-ho BEE commissioner, she really is gung-ho. And before you take exception to the title it’s a pun on Zodwa Ntuli’s name. To a certain extent, she is a breath of fresh air – her writing is consistent, well thought out and comprehensible. This is a not a standard feature of many (or any) dti employees. Her first practice note of this year deals with the complicated issue of the modified flow through principle and promotion to a level 2 supplier as a result. I would like to think that my last post on this subject inspired her to get her pen and spellchecker into action. In effect the commissioner is saying that if you use the modified flow through principle to get to 51% black ownership then you may not benefit from the enhanced level recognition. I think there is merit to this theory. And the thought behind the note is worthy of consideration but it remains an opinion. In fact, the commissioner prefaces this note (as she does with all of them) with the following disclaimer.
- This Practice Guide is issued as a non-binding guide purely to assist with the interpretation to ensure consistency in the application of the Act. Should this Practice Guide not be clearly applicable to your specific set of facts at any given time, you are advised to approach the B-BBEE Commission for a nonbinding advisory opinion, which will be more specific to your set of facts.
She informs us that this opinion is not a legal opinion, but we could expect her to use this line of argument should it get to the point where it needs to get legal
- This Practice Guide does not constitute a legal document or a ruling of the B-BBEE Commission on the issue concerned. Further, although this Practice Guide is not binding on the B- BEE Commission, it does set out the approach that the B-BBEE Commission is likely to take on any matter relating to the recognition of third party procurement spend for consistency.
If you noticed the veiled threat in paragraph three (underlined) then steel yourself for the ultimate threat in paragraph 14
- Therefore, the B-BBEE Commission in accordance with the requirements to advice on the interpretation of any provision of the Act as per section 13F(1)(a) and (3)(b) (ii) of the B-BBEE Act, hereby concludes that the modified flow through principle cannot be used to benefit from the enhanced recognition status reserved for 51% and 100% black owned EMEs and QSEs. Any contrary advice would be regarded as a misrepresentation of Entity B’s B-BBEE status which is an offence in terms of section 13O (1) (a) of the Act.
What she is now saying is that she really DOES HAVE the legal weight to exercise this opinion, contrary to her earlier disclaimers, and if you offer contrary advice then it’s an offence in terms of section 13O (1) (a) of the Act. In other words
(1) A person commits an offence if that person knowingly—
(a) misrepresents or attempts to misrepresent the broad-based black economic empowerment status of an enterprise
And if this isn’t threatening enough she seems to suggest in the remaining paragraphs that verification agencies MUST follow this opinion and could be fined if they don’t.
This is a problem. In the first two paragraphs she tells you that this is an opinion and has no legal backing. She then tells you that any opinion contrary to her opinion, which might also not be backed by legal opinion, is in fact contrary to her opinion and an offence in terms of the act. She’s way out of line here, she’s not a legislator and cannot arbitrarily decide what an offence in terms of the act is. This is a threat and a violation of the rule of law – something the misruling party is rather adept at. The only way we’ll ever know whether this is an offence is if she attempts to prosecute a company for this in terms of that section.
A contrary opinion based on the codes themselves as they are written
So here is a contrary opinion and it carries exactly the same amount of weight as Zodwa’s. She can attempt to prosecute me in terms at section 13)O, but this would be a gross violation of my constitutional rights.
The modified flow through principle is discussed in paragraph 3.4 of statement 100. It only applies to black voting rights and black economic interest; women, designated group etc voting rights and economic interest cannot benefit from the modified flow through principle. 3.4.3.1 one explains the levels of ownership here
Where in the chain of ownership, black people have a flow through level of participation of at least 51%, and then only once in the entire ownership structure of the measured entity, such black participation may be treated as if it were 100% black
Statement 000-5 provides for enhanced recognition for levels of black ownership. 4.3 and 5.3 deal with EMEs and QSEs respectively. It’s the same sentence repeated and says
A(n) EME/QSE which is at least 51% black owned qualifies for level two B-BBEE recognition level
This is absolutely clear – if a company is 51% black owned (take a look at my last post to get your head around this definition) and it turns over less than R50m it is a level 2 contributor. There are no qualifications in the codes, we can the safely assume that the modified flow through is an acceptable method to measure black ownership. The commissioner argues in paragraph 13, not incorrectly, that the modified flow through principle is not in keeping with the intent of the act
While we do recognise that the Codes have not explicitly provided limitations of the applications of the modified flow through principle in claiming the enhanced recognition status for black owned and controlled EMEs and QSEs, it must not be applied to circumvent the policy objectives. Therefore, it is the effect of the application of the principle that in our view limits its application to the extent that it would undermine the objectives of the Act.
She cannot, however, attempt to change the code by means of an opinion. This can only be done in terms of section 9(7) of the Act
(7) A code of good practice remains in effect until amended, replaced or repealed.
If you choose to go the modified flow through rule and follow the rules and procedures and you turnover less than R50m then you may enjoy the enhanced level recognition. There is nothing in the codes of good practice that says you can’t. We wait with bated breath for Zodwa’s first prosecution in terms of this.
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