Let’s start by looking at the provision of Section 45, as to who the section applies to.

Section 45 of the Companies Act No 71 of 2008 applies to direct or indirect assistance to:

  1. A director or Prescribed officer of the Company or of a related or inter-related company
  2. A related or inter-related company or corporation
  3. A member of a related or inter-related corporation
  4. A person related to any such company, corporation, director, prescribed officer or member

     

Unless the memorandum of Incorporation provides otherwise.

Focus will not be on explaining definitions of related parties or what constitutes financial assistance. At this stage much focus will be on whether loans and financial assistance provided under this section can be subsequently ratified or not.

Section 45 requires that before a loan or financial assistance can be granted, the Company must have complied with ALL the requirements of this section, being that:

  1. all conditions and restrictions of the Memorandum of Incorporation must have been complied with
  2. It must be pursuant to an employee share scheme or provided in line with a special resolution passed within the previous 2 years
  3. The directors must perform a solvency and liquidity test; they must also indicate if the terms are fair and reasonable
  4. All shareholders and trade unions must be informed by the board regarding the assistance and the terms

 

It should be noted that the above test is not an “or” test, which implies that all requirements must have been met before assistance is provided.

The Act specifically states that it is not possible for companies to try and ratify loans issued under this section, by for example passing a special resolution subsequent to the event at the next meeting. Contravention to this section will deem the assistance void .The loan could still be reversed, but the directors who knowingly approved the loan or assistance will be held liable for all costs and losses the company incurs.

It is advisable that companies conduct proper consultations with their legal counsels/advisors should they experience doubt in applying the above requirements as non-compliance could result in drastic implications for directors who knowingly approved a loan or financial assistance without applying Section 45.

Mpho Ledwaba

Audit Supervisor, Johannesburg