A recent Supreme Court of Appeal judgment in South Africa provided clarity regarding what actions would be considered financial assistance (if it is closed list or examples of items). The court dealt with a number of issues, but for purposes of this article, we focus on (i) the court's ruling regarding the activities that have been listed in Companies Act as financial assistance being an exhaustive list; and (ii) application of the board's mind when passing its resolution to approve the financial assistance and the consequence for failure to comply with certain provisions of section 45.
As a summary, section 45 relates to the provision of loans or other financial assistance to directors or prescribed offices of a company or of inter-related company. It also includes inter-company loans between related and inter-related parties. When doing so, a company has to be authorised either pursuant to – (i) an employee share scheme; or (ii) a special resolution of the shareholders adopted within the previous two years approving the financial assistance.
Additionally, and most importantly, the board must have considered the financial assistance and been satisfied that –
- immediately after providing the financial assistance, the company would satisfy the solvency and liquidity test;
- the terms under which the financial assistance is proposed to be given are fair and reasonable; and
- any conditions or restrictions set out in the company's memorandum of incorporation relating to the provision of financial assistance have been satisfied.
If a company does not pass these resolutions, the Companies Act provides that the provision of such financial assistance would be void (not voidable, as it cannot be ratified).
On 13 December 2022, the SCA delivered its judgment in Constantia Insurance Company Limited v The Master of the High Court, Johannesburg and Others1 (the "Constantia SCA Case").
In the Constantia SCA Case, the Court considered whether the indemnity provided was considered financial assistance. By doing so, the provisions of section 45 were scrutinised based on the word "includes", which the Court stated generally denotes a term of extension, where the primary meaning of the term that is defined is well known and the word "includes" introduces a meaning or meanings that go beyond that primary meaning.
The Court found that in section 45 this was not the case, as all matters listed (and excluded) fell within the primary meaning. Therefore, the intention of section 45(1) is to determine the ambit of the term with certainty (i.e. it provides a closed list).
However, notably the section still refers to directly and indirectly. On this basis, the indemnity in question in the Constantia SCA Case was considered to be financial assistance as it indirectly secured obligations within the meaning of section 45(1)(a). As a result, the Constantia SCA Case has determined that "includes" was not intended to set out an open-ended list resulting in a number of other potential actions that are not listed being interpreted to fall within the ambit, but rather that the ambit is as listed in the section.
Furthermore, the Court in the Constantia SCA Case made it clear that the purpose of the provisions of section 45(1) is to ensure that the board has applied its mind to the facts and satisfy itself that it is appropriate for the company to place its assets at risk when providing such financial assistance. The Court noted that formal and procedural requirements must be distinguished from substantive requirements in establishing the validity of a resolution or agreement. In this distinction it was made clear that the board passing its resolution in accordance with section 45(3)(b) and thus being satisfied on the matters being considered is a substantive requirement.
In contrast, the requirement for the company who passed the financial assistance resolution to provide written notice to shareholders of the company in terms of section 45(5) of the Companies Act is procedural. Accordingly, failure to meet this requirement would not result in the financial assistance being void.
In summary, the key take-aways from the judgment are -
- that a board of directors failure to consider and satisfy themselves to the terms of financial assistance and passing the required resolutions would result in the provision of such financial assistance being void; and
- section 45(1) list of financial assistance is intended to be a primary closed list of items which would constitute financial assistance in the context of section 45.
Authored by Deepa Vallabh and Ildiko Gyarmati.