It is common practice in business today that a company provides financial assistance to certain of its directors or prescribed officers. It is certainly not uncommon to find that companies may lend money to its directors or prescribed officers, guarantee a loan or other obligation or secure a debt or obligation for directors or prescribed officers of the company.

However, Section 45 of the Companies Act 71 of 2008 (the Act) has very particular requirements that a company must comply with in order to provide financial assistance to its directors and prescribed officers.

The aforementioned may be seen by companies and directors as merely more “red tape” that a company must comply with before it can get on with business.

Section 45 of the Act has, however, been provided with very sharp teeth in order to ensure compliance, as Section 45(7) of the Act states unequivocally that the directors of a company will be personally held liable for any loss, damage, cost or expense sustained by a company as a direct result of a decision by the directors contrary to Section 45 of the Act.   

What does Section 45 of the Act require

In order to avoid the personal liability directors may face as a result of non-compliance with Section 45 when providing financial assistance to directors and prescribed officers of the company, one must consider what the Act requires as opposed to what is generally attended to in practice by companies.

Firstly the Act states that the directors of a company may authorise the company to lend money to its directors or prescribed officers, guarantee a loan or other obligation or secure a debt or obligation for directors or prescribed officers of the company. Such authority may, however, be limited in the Memorandum of Incorporation (MOI) of the company and, as such, directors must, in the first instance, ensure that the MOI does not limit their authority or, in the event that it does, what such limitation entails.

Secondly, Section 45 itself lists a number of matters the board of directors must attend to before the board will be empowered to authorise financial assistance to be provided to its directors or prescribed officers.

Any financial assistance authorised by the board to the directors or prescribed officers of the company must be pursuant to a special resolution adopted by the shareholders of the company within the previous 2 years. Such special resolutions can only be forward looking and cannot ratify financial assistance already provided by the company.

Furthermore, the special resolutions of the shareholders of the company must adequately describe the type of financial assistance provided, the amount, and the specific recipient or category of recipient of the financial assistance.

The directors of the company must further satisfy themselves as to the solvency and liquidity requirements in terms of the Act and that the terms of the financial assistance are fair and reasonable to the company.

Section 45(5) of the Act requires that notice of the resolution of the board of directors of the company must be given to every shareholder (unless every shareholder is also a director)  and to any trade union within 10 business days (or 30 business days after the end of the financial year, in any other case) if the total value of all financial assistance, together with any previous resolution during the financial year, exceeds one tenth of 1% of the company’s net worth at the time of the resolution.      

Non-Compliance with Section 45 

Any resolution to provide financial assistance or any agreement in respect of such assistance, is void to the extent that such financial assistance is contrary to Section 45 of the Act or any provision of the MOI of the company.  The consequence is that the directors of the company will be personally liable for any loss, damage, cost or expense sustained by the company as a result of the director approving the resolution or agreement despite knowing that the resolution or agreement was contrary to Section 45 of the Act.

Particular difficulty relating to Section 45

Matters of particular concern in respect of Section 45 are that the special resolution of shareholders must be forward looking and authorise financial assistance for the ensuing 2 years. As such, any loans or financial assistance provided during the course of the financial year which were not made pursuant to such special resolution of shareholders cannot be ratified by shareholders and will expose directors to personal liability for such financial assistance.

A further complication lies therein that your auditors will only be alerted to such financial assistance provided contrary to Section 45 after the financial assistance has already been granted and cannot be ratified anymore.

Conclusion

Compliance with Section 45 requires pro-active action by the company in order to avoid the directors being held personally liable. It requires careful consideration and forward planning in order have the necessary authority in place to ensure that the board is in position to make decisions regarding the granting of financial assistance to directors and prescribed officers.

Should your company provide such financial assistance on an ongoing basis, we suggest that a special resolution of shareholders approving financial assistance in terms of Section 45 is sought at each AGM, thereby resulting in a “roll over”of the approval. Thereafter, the directors should test for solvency and liquidity each time financial assitance is provided, and attach the calcuation to the directors’ resolution approving the fiancial assistance.

Phillip Kruger

Legal Advisor, Johannesburg