South Africa: EXCON: Has The President Gone Too Far?

Last Updated: 24 July 2012
Article by Ehrhard Furstenburg

Most Read Contributor in South Africa, September 2018

The recent amendment to Regulation 10 of the Exchange Control Regulations has possibly opened a proverbial constitutional can of worms. The meaning of 'capital' was defined to include registered or unregistered intellectual property. In addition, 'exported from the Republic' is now defined as including 'the cession of, the creation of a hypothetic or other form of security over, or the assignment or transfer of any intellectual property right, to or in favour' of a non-resident. The result, in terms of Regulation 10(1)(c), is that no person may enter into any transaction whereby intellectual property or any right to intellectual property is directly or indirectly exported from South Africa without prior Exchange Control approval.

The Currency and Exchanges Act 9 of 1933 ("the Act") was intended to regulate legal tender, currency, exchanges and banking. Most of the Act has been repealed, except Section 9 which empowers the President to 'make regulations in regard to any matter directly or indirectly relating to or affecting or having any bearing upon currency, banking or exchanges'. The Afrikaans term used in the Regulations for the latter term is 'wisselkoerse', which can be translated as 'currency exchange rates'.

The question now is whether the regulation of intellectual property falls within the ambit of the Act and if not, whether the widening of the ambit by way of a Regulation is both lawful and constitutional. This necessitates revisiting the meaning of 'capital', which according to most tax and intellectual property experts, had been dealt with by the Supreme Court of Appeal in Oilwell v Protec (295/10) [2011] ZASCA 29.

Ambit of exchange control

The purpose of the Act and the Exchange Control Regulations is, inter alia, to regulate South Africa's currency exchange rate, which in turn is, inter alia, affected by the country's balance of payments. Broadly speaking and having regard to the basic principle of supply and demand, the exchange rate is regulated by ensuring the timeous repatriation into South Africa of foreign currency acquired by residents and to prevent the loss of foreign currency resources. To this end, the President is empowered to make regulations in regard to any matter directly or indirectly affecting such currency exchange rates.

Would regulating exchange rates not include any and all transactions, irrespective of whether it relates to 'capital' or not? Put differently, would the relinquishment of something (whether capital or simply an asset) or income from that 'thing' (such as royalties) not result in the loss of foreign currency and affect exchange rates? Our courts were called upon to adjudicate this question in two cases.

The court in Couve v Reddot 2004 (6) SA 425 (W) followed a wide approach in interpreting 'capital'. The court held that 'capital' meant anything with a monetary value and that the words 'directly or indirectly' in relation to 'export' were used by the Legislator to denote the widest possible meaning. The rights in and to patent applications and the right to receive royalties had a monetary value and consequently constituted 'capital'. The indirect effect of the assignment of such rights to a non-resident constituted the export of capital.

However, the Supreme Court of Appeal rejected such a wide interpretation and held in the much debated Oilwell-case that there had to be a difference between 'capital' and 'assets'. It referred to the Afrikaans term of 'kapitaaluitvoer' which means the movement of money offshore, but concluded that intellectual property was territorial and could therefore not be exported based on the fact that patents (the object in dispute in the Couve-case) do not create a right to royalties, but rather that the royalty agreement creates such rights.

Intellectual property is by its very nature territorial incorporeal property granting its owner certain territorial rights thereto. The transfer of ownership takes place by way of assignment, when the rights in and to such intellectual property is transferred. Such 'right' would, in my view, be akin to the property itself. Accordingly, the export of that right resulting in the loss of income associated with such right, would most likely (at least indirectly) affect the South African currency exchange rate. In other words, where a resident relinquishes its right to royalties, it would certainly affect the country's currency exchange rate. On the other hand, a sale of intellectual property would of course lead to foreign currency flowing into South Africa.

The amendment of Regulation 10 bridged the divide created by the Oilwell-case, but it remains to be seen whether our courts will accept the President's view of his role and powers in exchange control. Even if intellectual property falls within the ambit of the Act, certain provisions in the Act would still need to pass the Constitutional test.

Constitutionality of delegated legislative authority

Section 9(3) of the Act provides that the president 'may, by any such regulations, suspend in whole or in part this Act or any other Act of Parliament or any other law relating to or affecting or having any bearing upon currency, banking or exchanges'. This provision in effect empowers the President to override any other act by way of regulation, that is, delegated legislation. However, such Regulation would need to be tabled in Parliament in terms of Regulation 9(4). It is however not clear what the effect of the tabling is.

Prior to South Africa's constitutional dispensation, the validity of some aspects of Section 9 of the Act were indeed considered. In R v Parsotam 1949 (4) SA 315 (N), dealing with the criminal sanctions imposed under Section 9(2), the court ruled that the purpose of that section was to 'empower the Governor-General [President], if he thinks fit, to apply any of those sanctions himself instead of the sanctions being enforced in the normal way by the courts of law.' In S v Bedford 1979 (3) SA 656 (D) the court, in dealing with the declaration of foreign assets by residents in terms of Regulation 7(1), held that residents owning or being entitled to sell foreign assets may become relevant to currency matters over which the Treasury has control. In addition, the court in R v Rathanji and another 1950 (4) SA 170 (N) approved of the President's powers and highlighted that the field covered by currency, banking and exchanges includes the whole of the national economy.

However, although in terms of Section 84(1) of the Constitution of the Republic of South Africa, 1996, the President has the powers entrusted by the Constitution and legislation, he is not empowered to make laws. The legislative authority is vested in Parliament and can only be assigned to another sphere of government (that is, provincial or national) in terms of Section 44(1) of the Constitution. In this regard it is interesting to note the Constitutional Court's ruling in Executive Council, Western Cape Legislature, and Others v President of the Republic of South Africa and Others 1995 (4) SA 877 (CC) where the court held that Constitutional control over delegated legislative authority goes to the root of a democratic order and 'adherence to the prescribed forms and procedures and insistence upon the executive not exceeding its powers are important safeguards in the Constitution.'

The delegated legislative authority of the President in terms of the Act remains a contentious issue which will undoubtedly have to be resolved by the Constitutional Court. Watch this space.

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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