1. Introduction
- The importance of complying with the financial assistance provisions contained in section 44 and section 45 of the Companies Act 71 of 2008 (“Companies Act”) cannot be overstated. The failure to do so has the potential to render transactions void, which may be devastating for the parties subject to such transactions. Furthermore, the directors of a company providing financial assistance may be held personally liable for the loss, damages and costs suffered by the company as a result of failing to comply with the financial assistance provisions of the Companies Act.
- Imagine a scenario where you are a director and a shareholder in a well-established company. In 2012 you entered into a number of related agreements with third-parties, which transactions resulted in such third-parties becoming fellow shareholders of the company. The value of the transaction is in the millions. In 2016 the transaction agreements are declared void as a result of the company failing to comply with the financial assistance provisions of section 44 of the Companies Act. Not only is your company now left in disarray, but you also cannot enforce the restraint of trade provisions contained in such agreements. As a result, the third-party shareholders incorporate a competitor company using your valuable proprietary information to conduct its business.
- Alternatively, imagine you are a prominent investor in which you advance over R100 million to Company X in exchange for a convertible bond. As security, Company Y (being a member in the same group of companies as Company X) provides a contingent payment undertaking (“CPU”) similar to a guarantee. Then, third-party creditors of Company Y who are prejudiced by the existence of the CPU apply to court to declare the CPU void on the basis that the financial assistance provisions of section 45 of the Companies Act were devoid of compliance. The court agrees with such third-party creditors and the CPU is declared void, leaving you in an extremely vulnerable position as your hefty investment is compromised through lack of security.
- Although such situations are disastrous, the fact is that they occur in practice. The first scenario above is taken from the case of Booysen v Kohrs,[1] whilst the second scenario is taken from the case of Trevo Capital Ltd. v Steinhoff International Holdings (Pty) Ltd.[2]
- Suffice it to say, it is important when entering into a transaction to ensure that the financial assistance provisions do not apply, and if they do, that the requirements therein are satisfied.
2. What is Financial Assistance?
- Section 44 and section 45 of the Companies Act deal with financial assistance.
- Section 44 of the Companies Act defines “financial assistance” as a loan, guarantee or the provision of security or otherwise by a company to any person for the purpose of, or in connection with, the subscription of any option, or any securities, issued or to be issued by such company or a related or inter-related company.[3] Therefore, the financial assistance contemplated in section 44 of the Companies Act will apply to transactions whereby, for example, a company lends money to a purchaser or subscriber of shares and/or furnishes security in respect of the transaction. Section 44 only applies where the transaction involves the purchase of, or the subscription for options or securities (such as shares) in the company concerned.[4]
- Section 45 of the Companies Act defines “financial assistance” as lending money, guaranteeing a loan or other obligation, and securing any debt or obligation.[5] The heading of section 45 is somewhat misleading as it refers to “Loans or other financial assistance to directors”, however, the company may provide such financial assistance to:[6]
- a director or prescribed officer of the company or a related or inter-related company; or
- to a related or inter-related company or corporation; or
- to a member of a related or inter-related corporation; or
- to a person related to any such company, corporation, director, prescribed officer, or member.
- Financial assistance contemplated in section 45 will apply to, for example, transactions whereby a subsidiary will guarantee a loan advanced by its holding company to a third-party.
- The financial assistance contemplated in both sections is not applicable to, inter alia, lending money in the ordinary course of business.
3. Requirements
- There are a number of requirements that must be met in order for a company to validly provide financial assistance. Both section 44 and section 45 contain similar requirements, as follows:
- Unless the memorandum of incorporation (“MOI”) of the company provides otherwise, the board must authorise the company to provide the financial assistance;[7]
- Such financial assistance must be pursuant to an employee share scheme which satisfies the provisions of section 97 of the Companies Act or the shareholders of the company must pass a special resolution, adopted within the previous two years, which approves the provision of such financial assistance;[8]
- The board must be satisfied that the company will pass the solvency and liquidity test;[9]
- The board must be satisfied that the terms under which the financial assistance is proposed to be given are fair and reasonable to the company;[10]
- The board must ensure that any conditions or restrictions pertaining to financial assistance in the MOI have been satisfied;[11] and
- In respect of section 45 financial assistance, written notice of the board resolution approving such financial assistance must be provided to all shareholders, unless every shareholder is also a director, and to any trade union representing its employees: (i) within 10 business days after the board adopts the resolution if the total value of the loan, debt, obligations or assistance contemplated in that resolution, together with any previous such resolution during the financial year, exceeds 1% of the company’s net worth at the time of the resolution; or (ii) within 30 business days after the end of the financial year, in any other case.[12]
4. Consequences of Failing to Comply
- A decision by the board or an agreement regarding the provision of financial assistance is void to the extent that it is inconsistent with section 44 or section 45 of the Companies Act.[13]
- Furthermore, where a resolution or agreement pertaining to the financial assistance is void, then any director who approved the agreement or resolution or failed to vote against such decision, despite knowing that the provision of such financial assistance was inconsistent with section 44 or 45 of the Companies Act, is liable to the extent set out in section 77(3)(e)(iv) of the Companies Act (relating to a contravention of section 44 of the Companies Act) or section 77(3)(e)(v) of the Companies Act (relating to a contravention of section 45 of the Companies Act).[14] In such instances, the director will be personally liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of approving the resolution or agreement or failing to vote against it.[15]
5. Conclusion
- The aforegoing highlights the importance of companies complying with the financial assistance provisions of the Companies Act. The failure to do so has the ability to leave the company in disarray with financial ruin being a possibility. Furthermore, directors of the relevant companies must tread carefully as failing to do so could lead to personal liability.
- This is a complicated area of the law. Although this report sets out the requirements to be fulfilled in order to comply with the financial assistance provisions, the resolutions and agreements forming part of such transactions must be carefully drafted. As a result, it is of pivotal importance that you seek professional advice when contemplating transactions involving financial assistance.
- For any further assistance, please feel free to contact us.
By: Darren Anderson
[1] (59732/2016) [2016] ZAGPPHC 871 (22 September 2016). Note: the court did not discuss any severability clause relating to the restraint of trade in question.
[2] (2833/2021) [2021] ZAWCHC 123 (2 July 2021).
[3] Section 44(2) of the Companies Act.
[4] Delport Henochsberg page 189.
[5] Section 45 (1) of the Companies Act.
[6] Section 45(2) of the Companies Act.
[7] Section 44(2) section 45(2) of the Companies Act.
[8] Section 44(3)(a) and Section 45(3)(a) of the Companies Act.
[9] Section 44(3)(b) and Section 45(3)(b) of the Companies Act. See section 4 of the Companies Act 71 of 2008. The board must be satisfied that the assets of the company, as fairly valued, equal or exceed the liabilities of the company, as fairly valued and the company will be able to pay their debts as they become due in the ordinary course of business for a period of 12 months after the date on which the test is considered.
[10] Section 44(3)(b)(ii) and Section 45(3)(b)(ii) of the Companies Act.
[11] Section 44(4) and Section 45(4) of the Companies Act.
[12] Section 45(5) of the Companies Act.
[13] Section 44(5) and Section 45(6) of the Companies Act.
[14] Section 44(6) and Section 45(7) of the Companies Act.
[15] Section 77(3) of the Companies Act.
