Financial assistance to directors – the Companies Act 71 of 2008

• Jurisdiction: South Africa
• Pages: 165-188
• Published date: 15 August 2019
• Citation: 2010 Acta Juridica 165
• Date: 15 August 2019
• Author: Richard Jooste

Financial assistance to directors – the

Companies Act 71 of 2008

RICHARD JOOSTE*

Transactions between a company and its directors, which benef‌it the company

at the company’s actual or potential expense, are to an extent regulated by

ss 37, 226 and 297 of the current Companies Act 61 of 1973. These provisions

are f‌lawed and this article examines the corresponding (but by no means

equivalent) provisions of the new Companies Act 71 of 2008, which is

expected to be brought into force in 2010. The article seeks to show that the

new provisions are also unsatisfactory. It reveals that the provisions are in

certain respects too far-ranging and that, in others, treat directors too leniently.

The article also exposes problems of interpretation which impact signif‌icantly

on the effectiveness of the new provisions. The article demonstrates that the

provisions need legislative attention.

I INTRODUCTION

Those in control of a company are in a position of power, a position that

has the potential for abuse, particularly where the company provides the

controllers with loans or security. In recognition of the potential for

abuse, the 1973 Companies Act

1

contains a number of provisions:

• prohibiting certain loans and provisions of security (s 226);

2

• imposing a strict liability on directors in certain circumstances (s 37);

and

• requiring special disclosure in the annual f‌inancial statements of

certain transactions (ss 37, 295 and 296).

The corresponding (but by no means equivalent) provisions of the

Companies Act 71 of 2008

3

are to be found in s 45 and s 30(4)(a) read

with s 30(6). Section 45 attempts to regulate certain transactions by

prohibiting them unless certain requirements are satisf‌ied.

4

Section 30(4)

* BA, BCom (Hons) (Taxation) LLB (Cape Town)Diploma in Comparative Legal Studies

LLM (Cantab).Attorney of the High Court of South Africa and Professor of Law, University of

Cape Town.

1

Act 61 of 1973, hereinafter referred to as ‘the CompaniesAct, 1973’.

2

For an analysis of s 226 see RD Jooste ‘Loans to Directors – AnAnalysis of Section 226 of

the CompaniesAct’ (2000) 117 SALJ 269.

3

Hereinafter referred to as ‘the newAct’.

4

Section 45(2). In explaining why s 226 of the Companies Act, 1973 permitted the

transactions prohibited by s 226 in certain circumstances, Stegmann J held in S v Pourolis 1993

(4) SA 575 (W) at 589E that exceptions are provided ‘presumably on the basis that in the

excepted circumstances there are suff‌icient safeguards to establish a likelihood that the use of the

company’sassets for the benef‌it of its directors or managers or of companies controlled by them,

will also be of benef‌it to the company and not at its expense’.

165

2010 Acta Juridica 165

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requires disclosure in a company’s f‌inancial statements of the particulars of

certain transactions.

This article seeks to analyse the new provisions. In doing so compari-

sons will be made with the corresponding provisions in the Companies

Act, 1973 where it is deemed appropriate.

For ease of reference, s 45 is quoted in full:

45 (1) In this section, ‘‘f‌inancial assistance’’ –

(a) includes lending money, guaranteeing a loan or other obligation, and

securing any debt or obligation; but

(b) does not include –

(i) lending money in the ordinary course of business by a company

whose primary business is the lending of money;

(ii) an accountable advance to meet –

(aa) legal expenses in relation to a matter concerning the company;

or

(bb) anticipated expenses to be incurred by the person on behalf of

the company; or

(iii) an amount to defray the person’s expenses for removal at the

company’s request.

(2) Except 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 director or prescribed off‌icer

of the company or of a related or inter-related company, or to a related or

inter-related company or corporation, or to a member of a related or

inter-related corporation, or to a person related to any such company,

corporation, director, prescribed off‌icer or member, subject to subsections (3)

and (4).

(3) Despite any provision of a company’s Memorandum of Incorporation to

the contrary, the board may not authorize any f‌inancial assistance contem-

plated in subsection (2), unless –

(a) the particular provision of f‌inancial assistance is –

(i) pursuant to an employee share scheme that satisf‌ies the require-

ments of section 97; or

(ii) pursuant to a special resolution of the shareholders, adopted within

the previous 2 years, which approved such assistance either for the

specif‌ic recipient, or generally for a category of potential recipients,

and the specif‌ic recipient falls within that category, and

(b) the board is satisf‌ied that immediately after providing the f‌inancial

assistance, the company would satisfy the solvency and liquidity test.

(4) In addition to satisfying the requirements of subsection (3), the board

must ensure that any conditions or restrictions respecting the granting of

f‌inancial assistance set out in the company’s Memorandum of Incorporation

have been satisf‌ied.

(5) If the board of a company adopts a resolution to do anything contem-

plated in subsection (2), the company must provide written notice of that

166 MODERN COMPANY LAW FOR A COMPETITIVE SOUTH AFRICAN ECONOMY

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