ODR 320 Exam
Summaries
Theme 4: Companies
Marissa Badenhorst 2019
, ODR 320 Theme 4: Companies (Exam Summaries 2019)
STUDY UNIT 5: CORPORATE
FINANCE
CHAPTER 10
Prescribed Sources of reference:
• Chapter 10: The Law of Business Structures pages 183 - 209
• Sections 4, 44, 45, 46, 47, 77, 218
• Chapter 2 Part D of the Companies Act
• Gradwell (Pty) Ltd v Rostra Printers 1959 (4) SA 419 (A)
• Lipschitz v UDC Bank Ltd 1979 (1) SA 789 (A)
DISCUSS FINANCIAL ASSISTANCE BY A COMPANY AND THE REQUIREMENTS THAT
SHOULD BE COMPLIED WITH.
• Section 44 of the Act regulates the situation where a company provides
financial assistance for the acquisition of the company’s securities
o Why is statutory regulation necessary? This regulation prevents the abuse that
becomes possible when persons with insufficient funds or credit facilities of
their own purchase the shares of a company, gaining control of the
company, and use the funds of the company to pay for the shares acquired
by them
▪ Includes related + interrelated companies, not only the company itself
o What is the object of such regulation? To ensure that corporate funds are used
for proper corporate purposes
▪ A person who purchases shares in a company must do so out of his
own funds and not by misusing the funds of the company
Regulation (section 44):
• The board may authorise the company to provide financial assistance by way of a
loan, guarantee, the provision of security or otherwise to any person for the purpose,
of or in connection with, the subscription of any option, or any securities, issued or to
be issued by the company or a related or inter-related company, or for the purchase
of any securities of the company or a related or inter-related company
o The MOI of a company may however provide otherwise
▪ Financial assistance by way of a loan, guarantee, the provision of
security or otherwise = considered direct financial assistance
• Despite any provision of a company MOI to the contrary, the board may not authorise
any such financial assistance unless certain requirements are satisfied
o The board must ensure that any conditions or restrictions respecting the
granting of financial assistance set out in the company MOI have been satisfied
• A decision by the board of a company to provide financial assistance is void to the
extent that the provision of that assistance would be inconsistent with the Act or the
MOI
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, ODR 320 Theme 4: Companies (Exam Summaries 2019)
• The provision of unlawful financial assistance may result in liability on the part of any
director who was party to the transaction
The meaning of financial assistance
• Section 44(1) → Financial assistance does not include lending money in the ordinary
course of business by a company whose primary business is the lending of money
• Section 44(2) → Financial assistance includes a loan, guarantee, the provision of
security or otherwise
• Assistance must be given to someone and cannot exist in a vacuum
o For the assistance to qualify, the assistance must be financial
o The following therefore ≠ constitute financial assistance:
▪ Providing documents or information relating to the transaction in
question; responding to requests for information relating thereto;
providing access for the purpose of inspection of records, restructuring
of the board of directors; concluding bona fide service contracts; by
facilitating a transaction; when the direct object of the transaction is
simply to give another person what he is in any event entitled to even
where the transaction involves a net transfer of value; payment of a
debt which is due and payable; where the seller of shares is given
security by the company for the repayment of a loan made by him to
the company; etc.
o A distinction is drawn between the ultimate goal of a transaction and its direct
object, and only the direct object is relevant
▪ If a direct object ≠ the provision of financial assistance by the company
for the purposes of or in connection with a purchase of its shares, then
it is irrelevant that the ultimate goal of the transaction was to enable the
person to purchase such shares
o The ‘impoverishment test’ = was used to determine whether a company has
given financial assistance for the acquisition of its shares
▪ Judgement of the Gradwell (Pty) Ltd v Rostra Printers Ltd case gave rise
to the test and involves asking whether the transaction in question has
made the company poorer – if yes – there has been financial assistance
▪ This test has been criticised and reduced to a merely helpful guide, as it
did not make provision for the giving of security or a guarantee, both of
which would not involve a movement of money from a company, but
both of which fall within the ambit of the definition of financial
assistance
▪ In Lipschitz NO v UDC Bank Ltd the Appellate Division referred to the
criticism and held that it was not convinced of the generality of the
acceptance of the impoverishment test. Such an interpretation unduly
narrowed and restricted the terms of the Act which ‘expressly and
unequivocally includes within the meaning of ‘financial assistance’ acts
not necessarily nor even probably involving the impoverishment of the
company’
o Has been held that the issue is whether ‘in a practical and business sense’
financial assistance was given for the purpose of or in connection with the
acquisition of the shares
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, ODR 320 Theme 4: Companies (Exam Summaries 2019)
o Where an agreement ≠ genuine but is disguised in order to hide the true
agreement (which is to provide financial assistance) → the court will give effect
to the true position, e.g. where a company creates a fictitious debt to the seller
or enters into a fictitious service contract with the seller
• Gradwell (Pty) Ltd v Rostra Printers Ltd: Financial assistance will also have been given
where the company purchased an asset at an inflated price or where the asset was
not required for the purposes of its business, even if a fair price was paid
o However, where the asset is bought by the company in the ordinary course of
business in the genuine belief that the purchase is a good commercial
proposition and the seller subsequently uses the proceeds to purchase shares
in the company → there would be no financial assistance
• Where it is a condition of a share sale that the company whose shares are being sold
will pay an excessive rental to the seller iro a lease agreement between the company
and the seller → financial assistance will have been given
The meaning of ‘for the purpose of or in connection with’
• The impoverishment test, although not the sole test to determine what is meant by
financial assistance, may be relevant and helpful in deciding whether such assistance
was given ‘for the purpose of or in connection with’ the purchase of the company’s
shares
• Distinction must be drawn between the ‘purpose’ and the ‘motive’ or ‘reason’ why a
purpose is formed
o Motive ≠ the same as purpose
• The meaning of the words ‘in connection with’ was dealt with by the Appellate Division
in Lipschitz NO v UDC Bank Ltd:
o The meaning of the words was profoundly affected by the concept ‘for the
purpose of’ to which it was an alternative
o The words appeared to have been inserted to cover a situation where,
although the actual purpose of the company in giving financial assistance
might not have been established, the conduct of the company nevertheless
stood in such close relationship to the purchase of its shares that substantially,
its conduct was similar to that of a company that was giving the forbidden
assistance with the purpose described in the section
o The words had been inserted merely to close possible loopholes and not to
create a different type of offence or to prohibit conduct that was not
substantially similar
▪ E.g. Company A, for its own purpose, guarantees B’s overdraft at a bank
so as to enable B to carry on his business of manufacturing certain
equipment which Company A necessarily requires for its business and
which equipment it purchases from B. Company A knows at the time of
giving the guarantee that B, who has confidence in the stability and
management of his company, intends to invest in shares in Company A
the surplus profits he will make as a result of being able to continue his
manufacturing business by reason of the overdraft facilities made
available to him by virtue of A’s guarantee. The guarantee given by A
clearly amounts to the giving of financial assistance to B, but not at all
for the purpose of the purchase of the company’s shares; its purpose
was to enable B to continue producing the equipment required by A.
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, ODR 320 Theme 4: Companies (Exam Summaries 2019)
▪ In such a case there would be no room for finding that, because A knew
of B’s ultimate intention regarding the purchase of shares in the
company, the financial assistance given by A, although not given for
the purpose of purchasing of shares but for a different purpose, was
nevertheless ‘in connection with’ the purchase of shares and was
therefore in contravention of the section
Purchase of or subscription for securities
• Section 44 regulates financial assistance for the ‘purchase’ of or ‘subscription’ for
‘securities’ and not only ‘shares’
o Section 1 of the Act provides that ‘securities’ means any shares, debentures or
other instruments, irrespective of their form or title
▪ The definition is wide and would include notes, derivative instruments,
bonds, debentures and options
• The reference to ‘purchase’ and ‘subscription’ makes it clear that section 44 applies
where a company:
o Assists a person in purchasing a security in the company from the holder of the
security, and
o Assists a person in acquiring a security in the company from the company itself
• Section 44 = concerned only with a purchase or subscription
o If the financial assistance relates to any other transaction, the section ≠
operative
▪ ∴ where the financial assistance relates to the cancellation of a share
sale → section 44 ≠ applicable
Authority for provision of financial assistance
• Section 44(2) provides that, except to the extent that the MOI provides otherwise, the
board may authorise the provision of financial assistance as per section 44
o Section 44(2) thus authorises the authority to provide financial assistance to the
BoD, however the MOI may remove or substitute the BoD’s authority or
restrict/qualify it in some way
o Section 44(4) provides that the board must ensure that any conditions or
restrictions iro the granting of financial assistance set out in the MOI have been
satisfied
Requirements of section 44(3) and 44(4)
• Irrespective of what the MOI says, financial assistance is prohibited unless the
requirements set out in section 44(3) and 44(4) are met:
✓ The particular provision of financial assistance must be pursuant to:
▪ an employee share scheme that satisfies the requirements of section 97,
or
▪ pursuant to a special resolution of shareholders, adopted within the
previous/last two 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
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, ODR 320 Theme 4: Companies (Exam Summaries 2019)
✓ The board must be satisfied that immediately after providing the financial
assistance, the company would satisfy the solvency and liquidity test (section 4
of the Act)
✓ The board must be satisfied that the terms under which the financial assistance
is proposed to be given are fair and reasonable to the company
Board
Pursuant to
satisfied
employee Satisfy
that terms
share Solvency +
are fair and
scheme or Liquidity
reasonable
special Test
to
resolution
company
SECTION 4 SOLVENCY AND LIQUIDITY TEST
(1) For any purpose of this Act, a company satisfies the solvency and liquidity test at a
particular time if, considering all reasonably foreseeable financial circumstances of the
company at that time
(a) the assets of the company, as fairly valued, equal or exceed the liabilities of the
company, as fairly valued; and
(b) it appears that the company will be able to pay its debts as they become due
in the ordinary course of business for a period of
(i) 12 months after the date on which the test is considered; or
(ii) in the case of a distribution contemplated in paragraph (a) of the
definition of 'distribution' in section 1, 12 months following that distribution.”
Extension to a ‘related or inter-related’ company
• Section 44 of the Act applies not only to financial assistance by a company for the
acquisition of securities in itself, but also of securities in a related or inter-related
company
DISCUSS THE CONSEQUENCES OF CONTRAVENING THE REQUIREMENTS FOR THE
PROVISION OF FINANCIAL ASSISTANCE.
Consequences of contravention of section 44
• Voidness
o Section 44(5) of the Act → a board decision/agreement to provide financial
assistance is void to the extent that the provision of that assistance would be
inconsistent either with section 44 or conditions iro the MOI
• Criminal consequences
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, ODR 320 Theme 4: Companies (Exam Summaries 2019)
o Section 44 of the Act → no criminal liability provision. A punitive sanction that
appears possible is a fine of an administrative nature flowing from a failure to
comply with a compliance notice issued by the CIPC
• Liability of directors
o Section 44(6) of the Act → a director who participates in an unlawful provision
of financial assistance may be liable for any loss, damages or costs sustained
by the company as a direct or indirect consequence thereof
• Shareholders’ remedies
o Section 44 of the Act → Does not provide shareholders with any remedy.
However, there are two general remedies which shareholders could use when
faced with an unlawful provision of financial assistance by their company:
① Section 20(6) of the Act: Each shareholder of a company has a claim
for damages against any person who causes the company to do
anything inconsistent with the Act or with a limitation/restriction or
qualification in the MOI, unless that action has been ratified by the
shareholders
② Section 218(2) of the Act: Any person who contravenes any provision of
the Act is liable to any other person for any loss or damage suffered by
that person as a result of that contravention
LIST TYPES OF TRANSACTIONS THAT ARE INCLUDED AND EXCLUDED FROM THE
AMBIT OF FINANCIAL ASSISTANCE.
Financial assistance to directors and others
• Those in control of a company’s finances are in a position of power which thus
creates the potential for abuse – especially where the company provides the
controllers with loans or security
o The Act recognises this potential for abuse and thus regulates certain
transactions by allowing them ONLY IF:
▪ certain requirements are satisfied, and
▪ requiring disclosure in the company’s financial statements
Financial assistance
• Financial assistance is defined in section 45 of the Act and includes:
o Lending money
o Guaranteeing a loan or other obligation
o Securing any debt or obligation
• The definition excludes:
o Lending money in the ordinary course of business by a company whose
primary business is the lending of money
o An accountable advance to meet:
▪ Legal expenses wrt a matter concerning the company
▪ Anticipated expenses to be incurred by the person obo the company
o An amount to defray the person’s expenses for removal at the company’s
request
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, ODR 320 Theme 4: Companies (Exam Summaries 2019)
• What forms may financial assistance take?
o The definition ≠ exhaustive ito the forms that financial assistance may take
and transactions such as donations, sales at discounted prices and leases at
favourable rentals and giving of abnormal credit appear to be ‘financial
assistance’
Who must be financially assisted?
• The persons who may not be provided with financial assistance, unless the
requirements of section 45 are satisfied, are described as follows by using Company X
as the company providing the assistance:
o A director or prescribed officer of Company X
o A director or prescribed officer of a company related or inter-related to
Company X
o A company or corporation that is related to or inter-related to Company X
o A member of a corporation that is related to or inter-related to Company X
o A person related to Company X or related to any of the abovementioned
persons
• The ‘related’ and ‘inter-related’ relationships are defined in Section 2 of the Act:
RELATED AND INTER-RELATED RELATIONSHIPS
• Section 2 = An individual is related to another individual if they are separated by:
o No more than two degrees of natural or adopted consanguinity or affinity
▪ First parentela = spouse + children
▪ Second parentela = parents + siblings
• Section 1 + Section 2 = inter-related:
o “when used in respect of three or more persons, means persons who are
related to one another in a linked series of relationships, such that two of the
persons are related in a manner contemplated in section 2(1), and one of
them is related to the third in any such manner, and so forth in an unbroken
series”
▪ 3 or more persons related to one another in a linked series of
relationships such that two related in the 1st or 2nd parentela
• Section 2(1) = Related
o An individual is related to another individual if they: (N-N)
▪ Are married, or live together in a relationship similar to a marriage, or
▪ Are separated by no more than two degrees of natural or adopted
consanguinity of affinity
o An individual is related to a JP if: (N-JP)
▪ The indiv directly or indirectly controls the JP
o A JP is related to another JP if: (JP-JP)
▪ Either of them directly or indirectly controls the other or the business
of the other
▪ Either is a subsidiary of the other
▪ A person directly or indirectly controls each of them, or the business
of each of them
• Section 45 is thus aimed at financial assistance provided not only to individuals but also
to certain companies and corporations
o Section 45 casts its net very wide due to the wide definition of ‘related’ and
‘interrelated’ persons
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, ODR 320 Theme 4: Companies (Exam Summaries 2019)
o However → the extent of its scope is toughened to some extent by section 2(3)
which enables a court, the Companies Tribunal or the Panel to exempt any
person from the operation of section 45 if there is sufficient evidence that the
‘related’ or ‘interrelated’ relationship is such that the person acts independently
of the related or inter-related person
▪ E.g. if a company makes a loan to its subsidiary or to a director thereof
(his sole directorship), because the company acts independently of the
subsidiary and the director, it is possible that the company may be
exempted from the operation of section 45 by invoking section 2(3)
▪ Although section 2(3) provides relief, the onus remains on the company
to prove that it is acting independently and the directors will have to
apply their minds to determine whether a particular transaction falls
within the ambit of section 45 or not
ABC Ltd
Director or
R/IR company Member of
prescribed Person R/IR
or corporation corporation R/IR
officer
Director or
prescribed Person R/IR to
officer of R/IR other options
company
The requirements of section 45
• Requirements must be satisfied to avoid a contravention of section 45, despite
anything to the contrary contained in the MOI
o The reqs are those prescribed by section 45 and the MOI
▪ The MOI may also prohibit/restrict the provision of financial assistance
generally or particular transactions that constitute financial assistance
• The requirements are:
✓ The financial assistance must be pursuant to an employee share scheme or
pursuant to a special resolution
✓ The solvency and liquidity test must be satisfied
✓ Written notice to shareholders and any trade union representing its employees
must be given by the board if it adopts a resolution to provide financial
assistance
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, ODR 320 Theme 4: Companies (Exam Summaries 2019)
Written
notice to
Pursuant to
shareholders
special
+ trade union
resolution or Solvency +
representing
employee Liquidity Test
employees if
share
board
scheme
adopts
resolution
EXPLAIN THE LIABILITY OF DIRECTORS PERTAINING TO A RESOLUTION TO PROVIDE
FINANCIAL ASSISTANCE THAT HAS BEEN DECLARED VOID.
The consequences of contravening section 45
• Contravention of section 45 has no criminal consequences
o A resolution by the board to provide financial assistance or an agreement wrt
provision of any such assistance = void to the extent that the provision of that
assistance would be inconsistent with the Act or a
prohibition/condition/requirement re financial assistance in the MOI
• The Act imposes liability on any director who:
o was present at the meeting when the board approved the
resolution/agreement, or
o where no formal meeting was held, participated in the making of such a
decision by way of a ‘round robin’ resolution
• The liability arises if the director failed to vote against the resolution despite knowing
that the provision of financial assistance was inconsistent with section 45 or the
Company MOI
o Liability thus hinges on a subjective inquiry into the director’s knowledge at the
relevant time
o What will the director(s) be liable for? → liable for any loss, damages or costs
sustained by the company as a direct/indirect consequence of the voidness of
the resolution or agreement
• If the board of a company has made a decision contrary to section 45 the company
or any director who has been or may be held liable may apply to a court for an order
setting aside the decision
o Prescription: The proceedings to recover any loss, damages or costs may not
commence more than 3 years after the act/omission that gave rise to the
liability took place
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