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Corporate Control – Financial Assistance

In terms of the provisions of the Companies Act No. 61 of 1973 (“the Old Act”) a prohibition was imposed on the provision of financial assistance when a company purchases its own shares. However, this provision was repealed  with the commencement of the Companies Act No. 71 of 2008 (“the New Act”) and more specifically in terms of the provisions of sections 44 and 45 of the New Act.

The provisions of sections 44 and 45 of the New Act empowers the board of a company to approve the provision of financial assistance except if the company’s Memorandum of Incorporation (“MOI”) provides otherwise. In this context financial assistance can occur in one or more of the following ways: through a loan, giving of a guarantee, provision of securityand subscription to any option issued or to be issued by the company, a related or mutually related company.

Although the provisions of sections 44 and 45 of the New Act enable the provision of financial assistance, there are conditions to be met as determined in sections 44 and 45 of the New Act. These conditions can be summarised as follows:

  • Any restrictions contained in the company’s MOI must be met.
  • The financial assistance must be provided in accordance with a share scheme for employees or as the result of a special resolution passed during the preceding two years, where such financial assistance was approved for a specific recipient or a category of specific recipients.
  • The board must be satisfied that, immediately after the granting of financial assistance, the company will be able to satisfy the solvency and liquidity test as set out in sections 4(1)(a) and 4(1)(b) of the New Act, which determine that:
    1. the company’s assets, as fairly valued, are equal to or exceed its liabilities; and
    2. it should be apparent that the company will be able to repay its debts when they become due, in the normal course of events, for a period of twelve 12 (twelve) months after the date on which the solvency and liquidity test is considered, or, in the case of a distribution, 12 (twelve) months after this distribution.
  • The board must be convinced that the terms and conditions on which financial assistance is going to be provided, are reasonable and fair for the company.

It is, however, also important to take into account that section 45 of the New Act provides that,  when the board of a company has decided to provide financial assistance by means of the signing of a resolution, written notice of the decision must be given to:

  • All shareholders, unless the shareholders are all directors; and
  • All trade unions representing employees.

Notice of this decision must be given within 10 (ten) business days should the financial assistance comprise more than one tenth of the nett value of the company, otherwise within 30 (thirty) business days of the financial year-end of the company.

Failure to comply with the provisions of the New Act will render the transaction null and void. If the transaction is declared null and void the company will have no claim against the party to which the financial assistance was granted for the recovery of any funds. Besides the consequences for the company, section 218(2) of the New Act provides for the directors who voted in favour of the decision to be held acountable in their personal capacity for any damage, costs and/or losses incurred by the company as a direct result of non-compliance with the provisions of sections 44 and 45 of the New Act.