Exploring sections 44 and 45 of the new Companies Act : the perils of providing financial assistance

• Jurisdiction: South Africa
• Author: Milton Seligson
• DOI: 10.10520/EJC174139
• Published date: 01 March 2013
• Date: 01 March 2013
• Pages: 1-13
• Published By: Siber Ink

1

© SIBER INK

Exploring Sections 44 and

45 of the New Companies

Act:

THE PERILS OF PROVIDING FINANCIAL

ASSISTANCE

MILTON SELIGSON SC1

ABSTRACT

The new Companies Act 71 of 2008, has been in effect since May 2011 and

regulates in section 44 the provision of financial assistance by a company

for the purpose of, or in connection with, the purchase of or subscription

for securities issued by the company, or a related or inter-related company.

Financial assistance provided by a company to its directors or to a related or

inter-related company (which would include holding and subsidiary compa-

nies) is now governed by section 45 of the new Act.

After outlining the relevant provisions of the 1973 Act by way of back-

ground, the article explores and contrasts the provisions of sections 44

and 45 of the new Act. It analyses and compares the requirements of each

section that must be satisfied in order to validate a decision by the board of

directors of a company to provide financial assistance of the kind covered

by the respective sections. Such requirements include a special resolution

of the company’s shareholders approving such assistance, the board’s satis-

faction that the ‘solvency and liquidity’ and the ‘fair and reasonable’ tests

are satisfied, and that any conditions or restrictions in the Memorandum of

Incorporation relating to the granting of financial assistance by the company

have been met.

The article points out that, though the provisions are aimed at regulating

different types of financial assistance, they may overlap one another in certain

situations. Accordingly, some tricky issues of application and interpretation

can arise.

The article poses a hypothetical illustration where a South African holding

company, ABC wishes to provide financial assistance in the form of a guar-

antee for the obligations of a foreign subsidiary, XYZ, in respect of notes

(which qualify as securities) to be issued overseas by XYZ. In this example,

both sections are potentially applicable. In light of the contrasting language

used in section 45 (which refers to financial assistance to a related or inter-

related company or corporation), the definitions in section 1 of the relevant

terms used, and the different purposes served by that provision and section

44, the article concludes that, whereas section 44 is limited in its application

to domestic South African companies, section 45 also applies to a foreign

subsidiary, which does not qualify as a ‘company’, but does constitute a

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Member of the Cape Bar.