4 August 2021 by and Corporate & Commercial Alert

Section 45 financial assistance: The pitfalls, perils, and importance of getting it right as highlighted by the recent Steinhoff court case

In The Sound of Music, we are reminded in the song Do-Re-Mi to “start at the very beginning, a very good place to start”. When it comes to discussing financial assistance in terms of the Companies Act 71 of 2008 (Companies Act), the “beginning” might not be the best place to start. In order to highlight its importance, the best place to start would actually be at the very end, the consequences which arise when the provisions of the Companies Act which regulate financial assistance are not complied with.

Financial assistance is governed by sections 44 and 45 of the Companies Act, this article will, however, be limited to a discussion of section 45 of the Companies Act. As a starting point, where financial assistance (as contemplated in section 45) has been provided in a manner which is inconsistent with provisions of section 45, it is void. Section 45 goes on to provide that if the resolution or agreement granting financial assistance is void, the director or directors may be personally liable in terms of section 77(3)(e)(iv) of the Companies Act should the director or directors have been (i) present at the meeting when the board approved the resolution or agreement, or participated in the making of such a decision in terms of section 74 and (ii) failed to vote against the resolution or agreement, despite knowing that the provision of financial assistance was inconsistent with this section or a prohibition, condition or requirement contemplated in section 45(4) of the Companies Act.

Ultimately, the consequences of financial assistance that has been improperly granted are far-reaching. With this in mind, the recent high court decision of Trevo Capital Ltd and Others v Steinhoff International Holdings (Pty) Ltd and Other (2833/2021) [2021] ZAWCHC 123 (2 July 2021) (Steinhoff) is relevant. In this article, we wish to highlight how the Steinhoff case confirmed (i) that financial assistance granted by domestic companies in favour of foreign corporations does fall within the application of section 45 and (ii) that where the general terms, conditions and identity of the parties to an original debt change, directors who have previously authorised financial assistance need to be conscious that fresh financial assistance resolutions may be warranted in terms of section 45 of the Companies Act.

Section 45 and foreign companies

In the Steinhoff case, the court concluded that where financial assistance is granted to a foreign company, a broad and open interpretation is adopted to the wording of section 45 to require such financial assistance to comply with the provisions of the Companies Act. To briefly contextualise this, section 45(2) of the Companies Act provides that “[e]xcept 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 related or inter-related company or corporation … subject to subsections (3) and (4)” (own emphasis). Despite “foreign company” being defined in the Companies Act, it is absent from section 45(2). Notwithstanding this, the court concluded that a foreign company does fall within the ambit of section 45(2) by virtue of the reference to the word “corporation”. In drawing this conclusion, the court held that the reference to “corporation” must be given a wide and inclusive meaning to include foreign companies. Secondly, that the purpose of section 45 is to prevent “a company’s directors abusing their powers by providing financial assistance to external entities or persons on terms which have insufficient regard to the interests of the company’s creditors and shareholders”, which, when read with the general purposes set out in section 7 of the Companies Act, justify an expansive interpretation being given to section 45(2).

’Fresh’ financial assistance

In order to aide our discussion on the importance of the Steinhoff case in the context of changes to financial assistance, it would be best to make use of a brief example: Company A has borrowed a sum of money from a lender. As security for this, Company B (which is a wholly owned subsidiary of Company A and therefore a ‘related person’ for the purposes of the Companies Act), has agreed to provide a guarantee in favour of the lender for the amounts advanced to Company A. Prior to concluding the guarantee, Company B’s board of directors would have to have complied with section 45 of the Companies Act, by passing the necessary financial assistance resolutions. Should there be a change in the parties, quantum, terms or conditions of the original debt advanced to Company A, Company B would at that stage need to consider whether new financial assistance resolutions will need to be passed by the board of Company B.

In this regard, the Steinhoff case looms large. As a departure point, it was emphasised that courts must consider a transaction for what it actually is, and is intended to be, and not what it is described as being and the court cautioned against viewing the applicability of section 45 too narrowly. It was held “that the restatement of a debt on different terms and conditions and involving at least one different party, is in terms of law the creation of a fresh debt”. Ultimately, as a matter of principle, it is the issue of new financial assistance and/or the creation of ‘fresh debt’ or fresh obligations which may drive the application of section 45. This is because the creation of this fresh debt may require the granter of the original financial assistance, in terms of section 45, to repass the new authorising resolutions. When considering this ‘fresh debt’/’fresh obligations’ interplay and whether, especially in the context of a change to the terms or parties to the financial assistance, financial assistance resolutions need to be repassed, according to the Steinhoff case, the following must be considered –

  • Section 45 of the Companies Act lays down guidelines that financial assistance must be given to (i) a specific party or a certain category of parties, (ii) in specific circumstances, (iii) for specified purposes and (iv) which prior shareholder authorisation does not extend past a two-year period. What this means is that, when considering whether new financial assistance resolutions are required to be passed, directors cannot only consider the extent of the financial obligations which were previously authorised. Each of the parties, terms, circumstances and purpose of the financial assistance warrant consideration. Put differently, the consideration of whether a change in the terms of the debt require fresh financial assistance resolutions cannot be considered by only having regard to the quantum of the original debt, or in the context of our above example, the limit on the financial obligations of Company B’s guarantee. There are other relevant factors such as the “actual or potential recipient and the terms of such assistance”.
  • When considering whether new financial assistance resolutions should be passed, regard must also be had to whether the directors, at the time that they passed the original financial assistance resolution, “envisaged or authorised” the company to negotiate new terms in the debt or amend the parties to the debt. Where this was neither envisaged nor authorised, the financial assistance resolutions would likely be required to be repassed.

The consequences of advancing financial assistance in a manner which is non-compliant with section 45 of the Companies Act are perilous and there are numerous places in section 45 where parties may trip up. Ultimately, when considering the applicability of section 45 of the Companies Act in a transaction, parties would be best placed to bear in mind that financial assistance granted by domestic companies in favour of foreign corporations, does fall within the application of section 45 of the Companies Act and that where the general terms, conditions and identity of the parties to an original debt change the relevant parties will need to be conscious that fresh financial assistance resolutions may be warranted in terms of section 45 of the Companies Act.

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