Background

The Companies Act, No. 71 of 2008 came into effect on 1 May 2011 (the Companies Act). The Companies Amendment Bill was published for comment on 21 September 2018 (the Bill).  Included among the amendments proposed in the Bill is an amendment to the financial assistance prohibition that we believe will provide welcome relief for many companies. We consider below the current provision and the changes proposed in the Bill. Dentons has previously commented more generally on the Bill (click here). Companies wishing to discuss this further should contact their usual Dentons partner. 

The Current Financial Assistance Prohibition

Section 45 of the Companies Act does exhaustively define financial assistance but refers to the lending of money, guaranteeing of a loan or other obligation, and the securing of any debt or obligation. Financial assistance does not apply to the lending of money in the normal course of business, where the primary business of the company is to lend money, and it also excludes certain accountable advances.

The Companies Act concerns itself with the provision by a company of direct or indirect financial assistance to the following parties:

  • a director or prescribed officer of the company or of a related or inter-related company; 
  • a related or inter-related company or corporation; 
  • a member of a related or inter-related corporation; or
  • a person related to any such company, corporation, director or prescribed officer. 

Such financial assistance may only be given if it is not contrary to a company's memorandum of incorporation and:

  • the provision of financial assistance is pursuant to a qualifying employee share scheme under the Companies Act OR a special resolution of the shareholders adopted within the previous two years which approved such assistance, either for the specific recipient or generally for a category of potential recipients;
  • the board of the company is satisfied that, immediately after providing the financial assistance, the company would satisfy the solvency and liquidity test and that the terms of the financial assistance are fair and reasonable to the company.

If the board of a company adopts a resolution in terms of which financial assistance would be provided, it is required to provide written notice of such to shareholders and any representative trade union within:

  • 10 business days if the total value of the assistance aggregated with previous assistance in the same financial year exceeds 0.1% of the company's net worth; or
  • 30 business days after the end of the applicable financial year end. 

What Constitutes Financial Assistance? 

As mentioned above, the Companies Act does not provide an exhaustive definition of what might constitute financial assistance. This could include a variety of transactions and it will be important for a company to obtain a legal view as to whether any proposed act falls within the definition of financial assistance. Broadly, the following transactions are likely to be considered to be financial assistance:

  • providing long-term loans;
  • intercompany accounts;
  • cash management or clearing accounts set up for a group;
  • transactions with related parties that are unreasonable or unfair, e.g. excessive credit terms;
  • subordination agreements;
  • providing a guarantee or surety for another party's debt;
  • pledging an asset as security or another party's debt;
  • settlement of a liability on behalf of another party and recovering this at a later stage;
  • exchange of assets and the exchange does not take place simultaneously; or
  • company credit cards to directors who use the cards for personal expenses, even if these are repaid.

The above list is not exhaustive and companies should always consult their usual Dentons partner for specific advice. 

The Proposed Amendment 

The Bill proposes the amendment of section 45 by removing the requirement for shareholder approval where financial assistance is being provided by a holding company to its own subsidiary. This would decrease the burden on a company and its shareholders for one of the most commonly encountered forms of financial assistance. However, financial assistance that will be provided by a subsidiary company to another subsidiary company or to its parent company will still require a special resolution of the shareholders.

The amendment is intended to align the financial assistance prohibition with best international practice in company law and to decrease the regulatory burden on shareholders by removing unnecessary corporate actions. It amends section 45 in a way that certainly more directly aligns the financial assistance prohibition with the Companies Act's original intent to promote enterprise efficiency. There are some who may argue that, if a decision to provide financial assistance to a subsidiary is material, shareholders should still be given the opportunity to vote on it. However, where sufficient shareholders of a company feel so strongly that they should be given such a vote, there is always the option of including such a requirement in a company's memorandum of incorporation. Overall, we believe this amendment should be viewed positively as one of the most significant and helpful proposed amendments to the Companies Act and it will provide welcome relief for many companies when enacted into law.

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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.