In a far-reaching decision of the Supreme Court of Appeal (SCA) in Oilwell v Protec handed down on 18 March 2011, the court held that an assignment of a trade mark by a South African resident to a non-resident without obtaining prior Exchange Control approval was not a breach of the Exchange Control Regulations.
The Financial Surveillance Department of the South African Reserve Bank (the FSD) – the new name for the Exchange Control Department of the Reserve Bank – has, for some time, had the policy that no intellectual property (IP) could be exported without its prior approval. In the Oilwell case, arising from a dispute, Oilwell sought to have set aside an assignment of a trade mark to a non-resident on the grounds that it was a breach of regulation 10(1)(c). In a nutshell this regulation provides that, without the FSD's approval, no person may enter into a transaction whereby capital or any right to capital is directly or indirectly exported. The court held that an assignment of a trade mark was not an export of capital (in fact, being a South African trade mark, and IP being territorial, the trade mark in fact remained in South Africa and was akin to immovable property).
The court found it necessary to interpret the word "capital" and came to the conclusion that, in a financial sense, it essentially amounted to cash for investment or money that can be used to produce further wealth. Citing certain English authority with approval, it concluded that it was not the thing into which capital had been laid out, i.e. the thing on which the money was spent. The SCA cited the example of a foreigner buying immovable property in South Africa. That would not constitute an export of capital. Even a purchase of goods which were then exported would not constitute an export of capital, in the sense that "capital" was used in regulation 10(1)(c).
It was also argued that the fact that royalties could flow meant that, by sending royalties abroad, there would be an export of capital or the right to capital. The SCA dismissed this argument on a number of grounds, including the fact that royalties represent earnings or income and not capital. The FSD could certainly block the remittance of royalties if they had not given their prior approval for its remittance, but this would be in terms of regulation 3(1)(c), which prohibits anyone from making a payment to a person resident outside South Africa, or placing any sum to that person's credit, without approval; but it did not amount to an unauthorised export of capital.
And finally, the SCA clarified that a breach of the Exchange Control Regulations does not render a transaction void. The reason for this is that a transaction in breach would be liable for harsh penalties, and the court applied the old Roman Law principle that something done contrary to law is not void if the law is content with exacting a penalty for its contravention, especially where rendering it void would have resulted in greater inconvenience than keeping the agreement alive.
Of course, this judgment may well go wider than an export of IP, given the fairly narrow interpretation which has been given by the court to the word "capital" in the context of the regulations.
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