Johannesburg, South Aftrica -- (SBWIRE) -- 03/13/2013 -- South African law firm Webber Wentzel considers the implications of section 45 of the Companies Act, No. 71 of 2008. This section specifically regulates the circumstances under which company funds can be used to issue loans to directors.

In William Shakespeare's Henry V, King Henry rallies his troops to charge once more into the fight at the Battle of Harfleur with the battle cry "Once more unto the breach, dear friends, once more; Or close the wall up with our English dead".

The breach that Henry is referring to was a gap in the wall of the city of Harfleur, which the English army held under siege. Henry was encouraging his troops to attack the city again, even if they have to "close the wall with English dead". This passage came to mind after spotting another gap; this time relating to a breach of the Companies Act, No. 71 of 2008 (the Act).

Section 45 of the Act is the equivalent of section 226 of the previous Companies Act, No.62 of 1973 (the previous Act), which regulated circumstances under which company funds could be used to issue loans to directors. Section 45 in turn regulates, to the extent that the Memorandum of Incorporation (MOI) of a company does not, the manner in which the board of directors may authorise the company to provide direct or indirect financial assistance to certain persons.

The persons, in respect of whom the granting of financial assistance is regulated, are listed in section 45(2). These include a director or prescribed officer of the company or of a related or interrelated company (as defined); a related or interrelated company or corporation; a member of such a resulted or interrelated company or corporation; or a person related to any such company, corporation, director, prescribed officer or member.

Section 45 provides that the board of a company may not authorise the granting of any financial assistance unless a special resolution enabling the particular provision of financial assistance has been adopted by the shareholders within the preceding two years. Such a resolution must relate to a specific recipient or a category of recipients falling within the section 45(2) category.

In terms of section 45(1), financial assistance includes instances of lending money, guaranteeing a loan or other obligation, and securing any debt or obligation. Though the section incorporates a list of exclusions, the use of the word "includes" is noteworthy; indicating that it is not an exhaustive list (Jooste, 2010). Section 45 therefore applies to a broader range of transactions than its predecessor.

A resolution by the board of a company to provide financial assistance or an agreement with respect thereto is void to the extent that it is inconsistent with section 45 or the MOI of the company.

Section 45(7) states that if a resolution or an agreement is void and if the director failed to vote against the resolution or the agreement, whether at the board meeting at which the resolution was considered or if the decision was made by way of a round robin resolution, despite knowing that the financial assistance was inconsistent with section 45 or the MOI, he or she is liable to the extent set out in section 77(3)(e)(v).

Section 77 sets out in detail the manner in which directors may be held liable for breaches of the Act. Section 77(3)(e)(v) provides that a director of a company is liable for any loss, damages or costs sustained by the company as a consequence of the director having failed to vote against the "provision of financial assistance to a director for a purpose contemplated in section 45," despite knowing that the provision of financial assistance was inconsistent with the section or the company's MOI.

In respect of section 45, the liability provision in section 77(3)(e)(v) relates to the provision of financial assistance to a director only. Section 45 prohibits the giving of financial assistance to the prescribed officers and related parties too, and not only to directors. A director is only liable in terms of section 77(3)(e)(v) for the provision of financial assistance to a director and will not be liable for the provision of financial assistance to any of the prescribed officers and related or interrelated parties.

It is accordingly submitted that this omission is a major oversight inasmuch as section 45 prohibits giving financial assistance to prescribed officers and related or interrelated parties in contravention of the section and the MOI but does not sanction the breach thereof. It seems that the misleading title of section 45, "Loans and other financial assistance to directors," may have been determinative.

On closer inspection, section 77(3)(e)(v) has been the subject of an amendment by the promulgation of the Companies Amendment Act, No. 3 of 2011.

One wonders when the Companies Second Amendment Act is due for promulgation. Until then, in the wise words of King Henry, once more unto the breach, once more, before they close up the hole with an amendment.

About Webber Wentzel
Webber Wentzel is a leading law firm in Africa, being consistently ranked at the top by a diversity of international ratings agencies in 2012.

The firm has a staff complement of approximately 800 people (including almost 150 partners and more than 450 professionals in a variety of legal disciplines) in offices in Johannesburg and Cape Town.

Its client base includes many of South Africa’s Top 100 companies in banking & finance, insurance & legal liability, media, telecommunications & intellectual property, mining, oil & gas, private equity, and property law.

Webber Wentzel is a full service corporate law firm offering expertise in various legal areas including Dispute Resolution, Mergers & Acquisitions , Project Finance and Tax.

Webber Wentzel’s strategy is to help clients wherever they do business. Work in Africa represents a growing area of practice and, together with a network of best friend law firms; the firm has assisted clients in cross-border deals in most of the countries in sub-Saharan Africa.

Webber Wentzel has entered into a collaborative alliance with global law firm, Linklaters, which is recognised for its leading African practice having worked on numerous landmark transactions in almost every country on the continent over the past 30 years. The alliance will see the two firms working closely together for the benefit of clients in Africa.

The firm is also associated with ALN, a group of leading law firms in Africa.

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