Financial Assistance to Directors

Kiyaam Bekko | SchoemanLaw Inc

Category: Commercial Law

Directors often receive loans and financial assistance from companies. When a Board grants financial assistance to directors, it must adhere to the provisions of section 45 of the Companies Act 71 of 2008 (Companies Act).1 This section of the Act deals with direct and indirect assistance a company may extend to its directors and related parties.  

Before a company may consider providing financial assistance to a director, the board must satisfy specific requirements  which is discussed hereunder before assistance may be approved.  

The underlying rationale is to prevent the board from acting against the interest of shareholders by burdening the company with commitments for the benefit of directors. 

What is Financial Assistance? 

Section 45(1) of the Companies Act describes financial assistance as, amongst other things:  

the lending of money; guaranteeing a loan or other obligation; and securing any debt or obligation.  

It is essential to bear in mind that 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 45(1)(b)).2 

Financial assistance is, however, not limited to  company directors only. Section 45(2) of the Act extends the list of parties the board may authorize 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. 

Compliance Considerations  

The board is only authorized to provide financial assistance if the assistance is pursuant to the following: 

- to a special resolution (adopted within the previous two years approving the financial assistance); 

- an employee share scheme;  

- the company would satisfy the solvency and liquidity test immediately after providing the financial assistance;

- the terms under which financial assistance is given are fair and reasonable to the company; and  

- any conditions or restrictions respecting the granting of financial assistance set out in the company’s Memorandum of Incorporation have been satisfied. 

The company's solvency and liquidity requirements are met where: 

the fair value of it's assets is equal to or exceeds the fair value of the liabilities; and the company will be able to pay its debts as they become due and payable within twelve (12) months from the date the liquidity test is performed. 

Conclusion  

Any Financial assistance offered that does not comply with Section 45 of the Act is considered void. In addition, directors can be personally liable for non-compliance with the provisions of Section 45. Finally, a Board should get legal advice when there is uncertainty as to whether a transaction falls within the scope and practice of Section 45. 

Kiyaam Bekko | SchoemanLaw IncAttorneywww.schoemanlaw.co.za