Section 45 of the Companies Act 71 of 2008 (“the Act”) is headed “Loans or Other Financial Assistance to Directors”. Despite the misleading heading of this section, it creates not only a mechanism for the provision of financial assistance by a company to a director but also to other connected or related natural or juristic persons.
“Financial assistance”, in the context of this provision, includes the lending of money, guaranteeing of a loan or other obligation, and the securing of a debt or obligation. It does not include money that is lent in the ordinary course of business by a company whose primary business is the lending of money and does not include any advance given in order to cover anticipated legal or other anticipated expenses.
On 1 October 2021, the Department of Trade, Industry and Competition (DTIC) published the Companies Amendment Bill, 2021 (“the Bill”) for comment. Amongst a suite of proposed changes to the Act, the Bill made two amendments to section 45 specifically, which would alter the position on intra-company financial assistance.
Section 45 in its current form
In order to put the proposed amendments into their proper context, it is necessary to consider section 45 of the Act in its current format.
Except to the extent that the company’s Memorandum of Incorporation (MOI) provides otherwise, section 45(2) permits the board of a company to authorise the provision of financial assistance, whether directly or indirectly, to:
- A director or prescribed officer of the company or a related or inter-related company; or
- A related or inter-related company or corporation; or
- A member of a related or inter-related corporation; or
- A person related to any such company, corporate, director, prescribed officer or member.
The granting of financial assistance in terms of section 45(2) attracts a host of administrative pre-requisites which must be adhered to. Importantly, the board may not authorise any financial assistance unless the assistance is pursuant to a legitimate employee share scheme, or has been authorised by a special resolution of the shareholders which was adopted within the previous two years. This shareholder approval can take the form of specific approval for assistance to the individual or company or can be a general category of potential recipients, where the specific recipient falls within that category.
Prior to the approval of any financial assistance, the board must ensure that the company will satisfy the solvency and liquidity test immediately after imparting the funds. The solvency and liquidity test is set out in section 4 of the Act and states that a company will satisfy the solvency and liquidity test at any particular time if:
- The assets of the company, fairly valued, equal or exceed the liabilities of the company, fairly valued; and
- It appears that the company will be able to pay its debts as they become due in the ordinary course of business for a period of 12 months.
The board has a responsibility, in terms of the Act, to ensure that the proposed terms in respect of the financial assistance are fair and reasonable to the company and that any conditions or restrictions in respect of the granting of financial assistance set out in the company’s MOI have been satisfied. The importance of this responsibility cannot be understated, as any resolution that is inconsistent with the company’s MOI or the provisions of section 45 is void. If the resolution is declared void, a director of the company, who was present at the meeting and failed to vote against the provision of financial assistance could be held liable for any damages resulting out the resolution’s invalidity.
Once the board adopts a resolution permitting the provision of financial assistance, the company must provide written notice of that resolution to all shareholders (unless the shareholder is also the director of the company) and to any trade union that represents its employees. If the financial obligation contemplated in the resolution (together with any other resolutions adopted in that financial year) exceeds “one-tenth of 1 percent of the company’s net worth at the time of the resolution” notice must be given within 10 business days after the board adopts the resolution. In any other case, notice must only be given within 30 business days after the end of the financial year.
As becomes abundantly clear on a cursory glance of the provisions in section 45, there are a number of administrative hurdles that must be satisfied prior to any financial assistance being approved and disseminated. This was a significant consideration in the proposals set forth in the Bill.
Companies Amendment Bill – Proposed Amendments to Section 45
The first proposed amendment is that the aforementioned heading of section 45 be replaced by the heading “Financial Assistance” thereby substituting a much more appropriate title that accords more accurately with the contents of the provision. This is a straightforward amendment that greatly assists any person, including legal practitioners, in their orientation of the Act.
Of more significance is the fact that the Bill also proposes the insertion of a subsection (2A) to follow section 45(2), which would read:
“The provisions of this section shall not apply to the giving by a company of financial assistance to, or for the benefit of its subsidiaries“.
As a result of this inclusion, the financial assistance requirements as set out in section 45 of the Act would no longer apply in instances where a company wishes to provide financial assistance to its own subsidiary. This creates an exemption in respect of intra-group financial assistance and removes much of the overly onerous administrative burden on holding companies that intend to grant intra-group financial assistance.
The Bill will pave the way for holding companies to provide financial assistance to, or for the benefit of its subsidiaries without having to fulfill the pre-requisites set out in section 45 and without the risk of the resolutions or agreement being declared void for non-compliance with the Act.
By way of explanation, the DTIC published an explanatory note giving its motivations and explaining its grounds for the proposed changes. The explanatory notes to the Bill state generally that the amendments aim to promote the “ease of doing business” and strive not to be “over burdensome on the conduct of business”, therefore “providing greater flexibility to companies in certain circumstances” by eliminating excessive administrative burdens. This general objective is mirrored in the proposals for the amendment to section 45.
In respect of section 45 specifically, the explanatory note provides that the requirements regarding the provision of financial assistance by a holding company to its subsidiary are deleted and that this is in recognition of the fact that the protections contained in section 45 are not required for the provision of financial assistance by a holding company to its subsidiary as these give rise to an unnecessary compliance burden.
To further underline the development intended by the amendment, the DTIC emphasises that the prohibition of the provision of financial assistance by a company to its subsidiary did not have any commercial rationality and results in an unnecessary and costly burden. The elimination of this burden should facilitate the ease of doing business in an area of a company’s business operations which carries a high level of significance and will practically and positively impact on a company’s ability to operate its affairs.
Should the proposed amendments in the Bill be brought into force, a holding company providing financial assistance to its subsidiary would no longer have to comply with the requirements set out in section 45. This will assist holding companies wishing to assist their subsidiary. Where a subsidiary wishes to assist its holding company, it will still be beholden to the requirements set out above.
Article by M. Schaefer with input from Fairbridges Wertheim Becker’s corporate and commercial department.