The Companies Act – Section 45
THE COMPANIES ACT – SECTION 45: LOANS OR OTHER FINANCIAL ASSISTANCE TO DIRECTORS
There are a few aspects of Section 45 that must be considered in specific circumstances
Section 45 of the Companies Act 71 of 2008 refers to the following:
“(2) Except to the extent that the Memorandum of Incorporation of a company provides otherwise, the board may authorise 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).”
Relevant parties to which Section 45 is applicable
Although the heading of Section 45 refers to loans or other financial assistance to directors, the section applies to all related parties included in section 45(2). Section 2 of the Act defines related and inter-related persons and control.
Section 45 is applicable to the following:
- a director and 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 of the above parties.
Financial assistance is described as the lending of money, guaranteeing of a loan or other obligation and the securing of any debt or obligation but does not include the lending of money in the ordinary course of business.
Within this definition, certain other transactions with the relevant parties noted in the Act should be considered, for example:
- Subordination agreements
- Loans for personal expenses including company credit cards to directors
- Loans with unreasonable terms
- Providing any form of security, not only cash
Financial assistance not in compliance with Section 45 is considered void. Directors can be held personally liable for non-compliance matters and consequences. It is therefore recommended that legal advice be obtained when there is any uncertainty as to whether a transaction falls within the ambit of Section 45 and meets the relevant requirements.
Draft Companies Act Amendment Bill of 2021
Per the Companies Act Amendment Bill of 2021, the following technical proposed changes were open for public comment:
“Certain requirements in section 45 regarding the provision of financial assistance by a holding company to its subsidiary are deleted. This is in recognition of the fact that the protections contained in section 45 are not required for the provision of financial assistance by a holding company to its subsidiary and gives rise to an unnecessary compliance burden.”
Status: There is no effective date determined for the Companies Act Amendment Bill of 2021.
Other compliance considerations
Other requirements as per the Act that need to be met in order for the financial assistance to be compliant with Section 45, are as follows:
- Financial assistance must comply with the MOI of the company
- Financial assistance must be pursuant to an employee share scheme or must be supported by a shareholders special resolution adopted in the previous 2 years (this cannot be ratified after the financial assistance was provided)
- A solvency and liquidity test must be performed before the financial assistance is provided
- The board must inform all shareholders and unions of the financial assistance
How is the Solvency and Liquidity Test satisfied?
➢ The fair value of the assets is equal or exceeds the fair value of the liabilities; and
➢ The company will likely be able to pay its debts as they become due for a period of 12 months after the date on which the test is performed