South Africa: Oilwell Gone Wrong

Last Updated: 7 June 2011
Article by Conor McFadden

Despite a recent decision of the Supreme Court of Appeal, exchange control approval will still be required in respect of the assignment of intellectual property to a non-resident.

The Supreme Court of Appeal was recently called upon to, in essence, rectify a trade mark register to reflect Oilwell (Pty) Ltd ("Oilwell") as proprietor of the trademark 'Protec' instead of Protec Auto Care Ltd ("Auto Care"), a company incorporated in the United Kingdom.

In 1998 Oilwell and various other parties concluded an assignment agreement in terms of which, inter alia, Oilwell assigned the trade mark 'Protec', to Protec International Ltd ("International") a company incorporated in Guernsey.

As a consequence of relations between the parties to the assignment deteriorating and International running into financial trouble, the trade mark was assigned for a second time to Auto Care by International.

In its application to the Gauteng North High Court Oilwell argued that its assignment of the trade mark 'Protec' to International was governed by Regulation 10(1)(c) of the Exchange Control Regulations, 1961 and as a consequence of non compliance with that regulation the assignment was void. Oilwell relied on the decision in Couve v Reddot International (Pty) Ltd as support for its contention.

Before the Supreme Court of Appeal, one of the issues was whether the original assignment between Oilwell and International was governed by Regulation 10(1)(c) of the Exchange Control Regulations, 1961 ("Regulations").

Regulation 10(1) of the Regulations provides as follows:

Restriction on export of capital

  1. No person shall, except with permission granted by the Treasury and in accordance with such conditions as the Treasury may impose:

    1. export from the Republic during any period of twelve months a total quantity of goods which exceeds in value twenty rand or such greater amount as the Treasury may determine, if:

      1. no payment for such goods has been or is to be received in the Republic from a person outside the Republic; or
      2. such goods are exported at a price which is less than the value thereof; or
      3. the period within which payment for such goods is to be made exceeds six months from the date of shipment from the Republic or such shorter period as an authorised dealer may determine in respect of such goods;

    2. take out of the Republic goods, including personal apparel, household effects and jewellery which has a value in excess of six hundred rand or such greater amount as the Treasury may determine;
    3. enter into any transaction whereby capital or any right to capital is directly or indirectly exported from the Republic.

In determining the ambit of the Regulation the Supreme Court of Appeal took into account the fact that:

  1. the long title of the Currency and Exchange Act, 1933, under which the Regulations were promulgated, indicated that its scope was to amend the law relating to legal tender, currency, exchanges and banking and that 'exchanges' referred to exchange rates; and
  2. the section of the Act under which the Regulations were promulgated empowered the head of state to make regulations 'in regard to any matter directly or indirectly relating to or affecting or having any bearing upon currency, banking or exchanges.'

In the Couve decision Jajbhay J pointed out that the term capital was not defined and considering the wide wording of the provision and the general objects of the Regulations "capital is anything (or everything) with monetary value)."

In our view the definition ascribed to the term capital by Jajbhay J was exceptionally and unnecessarily wide.

However, the Supreme Court of Appeal's has accepted a very narrow definition of 'capital' as referring to 'cash for investment, money that can be used to produce further wealth' and that 'capital is not the thing that for the time being represents capital in the sense of being things in which the capital has been laid out.'

Despite the narrow definition, the Supreme Court of Appeal immediately after defining capital held that capital also refers to issued share capital. This finding is inconsistent with the court's own definition quoted in the paragraph above.

In my view, the court should have adopted the definition of capital in an economic sense, viz that capital is capital, capital goods or real capital in the sense of being factors of production.

The court's definition of capital in Regulation 10(1)(c) does not fit in with the scheme of Exchange Control. As most legal practitioners are aware exchange controls are imposed in order to manage South Africa's balance of payments position. A country's balance of payments position is split into a current account and a capital account and exchange controls apply to both accounts. In fact, the present exchange control measures were initially introduced to block the repatriation of the proceeds of non-resident securities as a result of the deterioration of the capital account of South Africa's balance of payments.

Furthermore, if one has reference to section 9 of the Currency and Exchanges Act, No. 9 of1933 the Governor General (the President) is empowered to make regulations in regard to any matter directly or indirectly relating to, affecting or having a bearing upon, inter alia, currency. Accordingly, the externalising of funds indirectly through the export of capital assets instead of cash or shares is definitely a matter indirectly affecting or having a bearing upon South Africa's currency, the rand. In this regard the Oilwell decision appears to result in the following anomalies:

  1. intellectual property may be assigned abroad without exchange control approval required for the assignment (even though the subsequent payment of royalties to the intellectual property owner requires exchange control approval in terms of Regulation 3(1)(c); and
  2. exchange control restrictions apply to exports on the current account of the balance of payments but not on the capital account.

The main purpose of exchange control, implemented legally by way of the Regulations, is to ensure the timeous repatriation into the South African banking system of foreign currency acquired by South African residents, whether through transactions of a current or capital nature and to prevent the loss of foreign currency resources through the transfer abroad of real or financial capital assets held in South Africa.

In light of the above it is unlikely that the status quo, abolition of exchange control as a requirement for the export of incorporeal capital assets as a consequence of the Oilwell judgment, can be maintained.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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