Common and recurring practical questions under the Companies Act, 2008
Since the Companies Act, No 71 of 2008 (Companies Act) came into force on 1 May 2011, legal practitioners have grappled with a number of issues brought about by this new legislation. We are now more than two years into the new company law regime. In this edition of Corporate & Commercial Matters we share several of the common issues and questions that have arisen in practice, and share some of the suggested answers or solutions to these.
The provisions of s45 of the Companies Act have been the topic of much debate. Some still do not believe (or do not want to believe) that the section applies to intra-group financial assistance such as loans and cross-guarantees.
The financial assistance must be approved by the board (which must consider solvency, liquidity, fairness and reasonableness) and by a special resolution of the shareholders.
Ever since the section appeared in the Companies Bill there has been much debate as to the category of recipients referred to in s45(2), especially as the heading of s45 reads “Loans and other financial assistance to directors” whereas the text of the actual section goes considerably far beyond that. It is probably safe to say that, for the most part, the market has (perhaps grudgingly) accepted that financial assistance to related companies (e.g. group companies) is regulated by s45. But then come all of the practical and administrative difficulties. Do you have to convene the board to approve every individual piece of financial assistance? And the shareholders? How does one practically implement this section having regard to the fact that in some group structures financial assistance is given across the group on a very frequent basis?
What should be borne in mind is that the test in s45 is whether the board is satisfied that the financial assistance in question complies with s45(3). It is a subjective test (although when looking at the solvency and liquidity test in s4 of the Companies Act there are objective parameters. For instance there must be ‘fair’ valuations of assets and liabilities, and all ‘reasonably foreseeable’ contingent assets and/or liabilities must be taken into account). But the fact remains that the test in s45 is subjective. How the board obtains this satisfaction is not prescribed in the Companies Act. It is a practical question to be addressed by each individual company having regard to the nature of its business and operations.
For instance, the board of a company may very well be satisfied, after applying itself to the question, that if the company were to advance intra-groups loans in aggregate of up to say R5 million over the course of the ensuing four months at a particular interest rate (if any), such would not jeopardise the solvency and liquidity of the company as contemplated in s4 of the Companies Act and would be fair and reasonable to it. There should not be a problem with the board passing a more ‘general’ authority within such parameters it deems fit, without having authorise each and every transaction. Therefore, it is submitted that it is not necessary that each and every portion of financial assistance needs to be individually approved by the board. Whilst it may be argued that the requirement in s45(3) that the board must authorise the ‘particular’ provision of financial assistance implies otherwise, it is submitted that the word ‘particular’ must find its meaning within the context of the statute. To satisfy the requirement of the ‘particular’ financial assistance being authorised, it should be competent for the board resolution to authorise financial assistance within specified and objective parameters as may be practicable, as outlined in the suggestions below.
Suggestions on financial assistance
Set a framework within which a committee or other authorised delegate (e.g. CFO) can function.
Note, however, that s45 states that it is the board that must ultimately be satisfied that the giving of the financial assistance will not cause the funding company to fail the solvency and liquidity test and that the terms of the financial assistance are fair and reasonable to the company. Any delegation of the board’s functions in this regard will not absolve the board of ultimate responsibility. It is in this light that a board must take a view as to what degree or level its involvement and oversight is necessary in the granting of specific financial assistance.
In light of the above, the following suggestions can be made when crafting the company’s board resolutions with respect to financial assistance under s45 (and these can be applied to shareholder resolutions as well):
- Limiting the amount or maximum exposure of the financial assistance (i.e. by placing a monetary ‘cap’ on the value of the financial assistance authorised);
- Limiting the time period for which the authorisation is valid;
- Limiting the type of financial assistance (e.g. loans, guarantees, etc.);
- Describing on a high level what sort of terms may attach to the financial assistance (e.g. interest rates, any ‘guarantee fees’ payable by a subsidiary which may be a beneficiary of a parent guarantee);
- Requiring that there be specific oversight by the audit committee (if any);
- Naming the entities that may be recipients of the financial assistance; and
- Limiting the purpose of such financial assistance (e.g. operational requirements, guarantees in respect of bank loans, etc.)
Another practical step which has been taken by some company groups in light of s45 is to establish a single treasury company which deals with all inter-company financial assistance. Such an arrangement may have limited benefits but, depending on the structure and its implementation, it may help to alleviate the administrative and logistical issues of having to obtain s45 approvals in every one of the group companies.