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Financial Assistance to Subsidiaries: Restrictions Loosened in Proposed Amendment to Companies Act

Robyn CroslandOn 21 September 2018, the Minister of Trade and Industry (“Minister”) published the Companies Amendment Bill 2018 (“Bill”)for public comment.

The Bill includes a number of amendments to the Companies Act 71 of 2008 (“Companies Act”). These amendments are largely welcomed as they seek to resolve problematic areas in the Companies Act since its coming into effect in 2011. A noteworthy proposed amendment is the exclusion of the restrictions around the provision of financial assistance by a company to or for the benefit of its own subsidiary imposed by section 45(2) of the Companies Act (which section is discussed in more detail below). “Financial assistance” is defined widely as including “lending money, guaranteeing a loan or other obligation, and securing any debt or obligation” and accordingly its application is often triggered.

This article serves as an emphasis and reminder of the requirements to be met for the provision of financial assistance in terms of section 45, and to unpack the proposed amendment.

There are several requirements to be complied with before a company can provide financial assistance. It is worth noting upfront that non-compliance with these requirements results in any board resolution passed to authorise the provision of financial assistance or an agreement for the provision of any such assistance being void. Further, if a resolution or an agreement is void, a director may be held personally liable for any loss, damage or costs sustained by the company if he/she was present at a meeting when the resolution or agreement was approved or participated in the making of such a decision and failed to vote against the resolution or agreement despite knowing that it was inconsistent with the requirements.

Directors making such decisions in relation to the provision of financial assistance are not able to simply argue ignorance of the requirements. “Knowing” is defined as not only the possession of actual knowledge of the matter, but also where a person was in the position in which he/she reasonably ought to have actual knowledge, investigated the matter to the extent that would have provided the person with actual knowledge, or taken other measures which, if taken, would reasonably be expected to have provided the person with actual knowledge of the matter.

Section 45(2) of the Companies Act currently entitles the board to authorise its company to provide direct or indirect financial assistance to the following categories of persons:

  • 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, prescribed officer or member.

The company’s memorandum of incorporation (“MOI”) may limit the board’s authority referred to above. However, despite anything to the contrary in the MOI, the board may not authorise any financial assistance to the above categories of recipients without complying with the following requirements:

  • the particular provision of financial assistance must be pursuant to an employee share scheme (satisfying those requirements of the Companies Act) or to a special resolution of the shareholders, adopted within the previous two years for a specific recipient or generally for a category of potential recipients and the specific recipient falls within that category;
  • the board must satisfy the solvency and liquidity test immediately after the provision of financial assistance. This requires that the company’s assets, fairly valued, are equal to or exceed the liabilities of the company, as fairly valued; and that it appears 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 after the date on which the test is considered;
  • the terms in relation to the provision of financial assistance must be fair and reasonable to the company giving the financial assistance;
  • any and all conditions or restrictions contained in the company’s MOI in relation to the granting of financial assistance must be satisfied; and
  • if the board resolves to provide financial assistance in accordance with the above requirements, the company must thereafter provide written notice of such resolution to the shareholders and any trade union representing the employees, within the applicable time limits set out in section 45.

The Bill proposes the exclusion of the provision of financial assistance to or for the benefit of the company’s “own subsidiary” from the above categories of recipients. It is submitted that the intention is therefore to relieve the company from compliance with the above cumbersome requirements when providing financial assistance to its “own subsidiary”.

However, the term “own subsidiary” is not defined in the Companies Act. The Companies Act defines the term “subsidiary” broadly as being a company that is controlled by another juristic person, one or more other subsidiaries of that juristic person, or one or more nominees of that juristic person or any of its subsidiaries, alone or in any combination (either directly or indirectly through the exercise or control over the exercise of a majority of general voting rights associated with the issued securities of that company; or through the right to appoint/elect or control the appointment/election of, directors of that company who control a majority of the votes at a board meeting). By including the word “own” subsidiary, it appears that the intention is that only direct (rather than indirect) subsidiaries are included within the proposed exclusion.

We expect that the final amendments to the Companies Act (for which no indication as to timing has yet been given), will clarify the intention behind the wording of the proposed amendment.


Robyn Crosland

Robyn has a BA LLB from UCT and was admitted as an attorney in 2014 after having completed her articles at Fasken (incorporated as Bell Dewar Inc.) where she rose to the level of associate. Robyn joined Caveat in 2017 and focuses on corporate and commercial, mergers & acquisitions and transaction work.

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