Tread Carefully: Inter Company Loans, Guarantees or Company Credit Cards for Directors

Section 45 of the Companies Act: Tread carefully when considering inter company loans, subordination agreements, guarantees or even company credit cards for directors. In most group company structures, provision of finance in between group companies is a usual occurrence, even if merely at financial year end. Finance in this scenario under the Companies Act, 2008 casts a wide net though. Consider that payment of a liability such as operating expenses and salaries, providing security for another group company, intercompany accounts and potentially even company credit cards for directors who use them for personal expenses could be considered as finance. Our courts have recently dealt with whether an existing finance arrangement, if slightly changed, becomes a new financial arrangement requiring fresh compliance with the Companies Act.

Written By of Cowan-Harper-Madikizela Attorneys

The Companies Act regulates the provision of direct or indirect financial assistance by a company to a related or inter-related company or corporation, one of its members or a person related to them as set out in Section 45.

This type of transaction will be void if it is inconsistent with the provisions of section 45 and the Company will have no legal claim against the other party for the recovery of funds. This section goes further and provides that not only will the transaction and /or resolution be void, but the director or directors may be personally liable.

Therefore, it is imperative that a board and CFO of a company familiarise themselves with Section 45 and ensure full compliance with the Companies Act as it is evident that the consequences of financial assistance that has been improperly granted are far-reaching and it should be noted that it is not possible to ratify a resolution that is void.

The recent High Court decision of Trevo Capital Ltd and Others v Steinhoff International Holdings (Pty) Ltd and Others (2833/2021) [2021] ZAWCHC 123 (2 July 2021) (Steinhoff) considers Section 45 of the Act and adopts a broad purposive approach to its wording. The Steinhoff case examines the circumstances in which financial assistance, previously approved by the board in terms of the Act, is considered "new" financial assistance requiring fresh board approval. The case may be of further importance to South African companies seeking to authorize the provision of financial assistance to, or for, the benefit of related or inter-related foreign corporations.

Section 45(2) of the Companies Act provides that

“[e]xcept to the extent that the Memorandum of Incorporation of a company provides otherwise, the board may authorize the company to provide direct or indirect financial assistance to … a related or inter-related company or corporation … subject to subsections (3) and (4)”.

The court in the Steinhoff case concluded that a foreign company does fall within the ambit of section 45(2). Unfortunately, Section 45 does not define financial assistance, instead it refers to financial assistance to include the lending of money, guaranteeing of a loan and securing of any debt or obligation. This is evidently not a closed list, however it provides an indication of the types of transactions which would be considered as financial assistance. The term financial assistance extends to an extremely wide variety of transactions and it is advisable that companies seek a legal opinion to determine whether or not a transaction falls within the ambit of section 45. For instance, transactions such as long term loans, intercompany accounts, subordination agreements, guaranteeing of a loan or other obligation and securing any debt or obligation may fall within the ambit of section 45.

It was further found by the court that consideration must be given to a transaction for what it actually is, and is intended to be, and not what it is described as being. the Judge in the matter held 

“that the restatement of a debt on different terms and conditions and involving at least one different party, is in terms of law the creation of a fresh debt”.

This is of consequence as the creation of this fresh debt may require the grantor of the original financial assistance, in terms of section 45, to repass the new authorizing resolutions and therefore comply with section 45 afresh.

Section 45 of the Companies Act lays down guidelines that financial assistance must be given to

  1. a specific party or a certain category of parties,
  2. in specific circumstances,
  3. for specified purposes and
  4. which prior shareholder authorization does not extend past a two-year period.

Therefore it is important that the Board of a Company consider the parties, terms, circumstances as well as the purpose of the financial assistance, if there is a change in any of the aforementioned in a transaction, it would be prudent to pass new financial assistance resolutions and one must be cautioned against having regard to only the quantum of the original debt.

Section 45 contains several requirements which have to be met when the board grants financial assistance, among the requirements is the board being required to apply a solvency and liquidity test and ensuring that the terms of the financial assistance are fair and reasonable.

With reference to the solvency and liquidity test, the board must be satisfied that, immediately after providing the financial assistance, the company would satisfy the solvency and liquidity test as set out in Section 4 of the Act. The solvency and liquidity test requires that

  1. the assets of the company, fairly valued, are equal to or exceed the liabilities of the company; and
  2. it appears that the company will be able to pay its debts in the ordinary course of business, as and when they fall due for a period of 12 months after the date on which the test is applied.

The court found that the board when undertaking the solvency and liquidity test is acting reasonably when relying on the financial information that is before it when approving the financial assistance.

The applicants had unsuccessfully put forward an argument that in hindsight and with due consideration given to the fact that some of the members of the board ought to have been aware, or should reasonably have been aware that the Company was not in a financial position to meet the
solvency and liquidity test. The court confirmed that the board members must make a determination based on the financial information presented to them at the time at which the decision is taken.

In light of the findings Boards of Directors must be cognizant of what might be considered as a restatement of debt requiring new compliance with the provisions of section 45, and in addition thereto it must be borne in mind that financial assistance granted by domestic companies in favour of foreign corporations, does fall within the application of Section 45 of the Companies Act.

Section 45 of the Act should be an important consideration to companies when deciding to provide financial assistance as there are detrimental consequences for advancing financial assistance which is non-compliant with section 45 of the Act.

Dominic Steyn

Share This Article

© 2021 - 2024. Cowan-Harper-Madikizela Attorneys
All Rights Reserved.