Lenders often ask which of s44, 45 and 46 of the Companies Act, No. 71 of 2008 (Companies Act) are applicable in particular circumstances. The applicability of these sections is considered in the following example (surety example) which occurs frequently in funding transactions: the lender lends money to one company in a group of companies (borrower) and obtains suretyships for the borrower's obligations from some or all of the other group companies (each a surety).
Section 45 deals with the giving of financial assistance by a company 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"'. The section stipulates that a company may give the applicable financial assistance provided that a number of requirements are met. From the borrower's perspective and in the surety example it is a related or inter-related company in relation to each surety, each surety will provide financial assistance to the borrower by executing the suretyships and, accordingly, s45 applies.
Section 46 deals with distributions and provides that a company 'must not make' a distribution unless certain requirements are met. Section 1 of the Companies Act defines a 'distribution' to include both a cash distribution and the "incurrence of a debt or other obligation by a company for the benefit of one or more holders of any of the shares of that company or of any company within the same group of companies". Section 46(4) provides that if a distribution takes the form of an incurrence of a debt or an obligation, the requirements of s46 'apply at the time that the board resolves that the company may incur that debt or obligation'.
In the surety example the provision of a suretyship by each surety amounts to the acceptance of an obligation by the surety and if the borrower is the surety's holding company, the obligation is accepted for the benefit of a shareholder of the surety. The execution of each suretyship is accordingly a distribution as defined in s1 of the Companies Act and accordingly, s46 applies.
There is some debate around the situation where the borrower is a sister company of the surety. Here the obligation of the surety is accepted for the benefit of a company which is in the same group of companies as the surety's shareholder. Interpretation difficulties arise in the wording of paragraph (b) of the definition of 'distribution' where the incurrence of the obligations is for the 'benefit of one or more holders of shares of that company or of another company within the same group of companies'. If the underlined portion means the obligations are incurred for the benefit of any other company in the same group of companies, then clearly it constitutes a distribution and s46 applies. However, if this means the obligations are incurred for the benefit of shareholders of another company in the same group of companies, then the incurrence of a debt for the benefit of a sister company does not necessarily constitute a distribution (for instance if the sister company itself does not have another subsidiary). The likely (and conservative) interpretation would be the former, not least because otherwise the application of s46 could be easily circumvented by a company transferring money to another group company which is not a shareholder of another group company.
Less clear is the applicability of s44. This section deals with the provision of financial assistance by a company to any person for the purpose of any acquisition of securities by that person in either the company or in a related or inter-related company in relation to the company. The rules and requirements for the authorisation by the board of the company for the giving of such financial assistance are the same as under s45.
Section 1 of the Companies Act defines 'securities' as 'any shares, debentures or other instruments, irrespective of their form or title, issued or authorised to be issued by a profit company'. The definition of 'securities' refers to shares, debentures and other instruments. It is not entirely clear what 'other instruments' are but, at least at common law, a 'debenture' is simply a written acknowledgment by a company in respect of monies borrowed. (The Companies Act does not define 'debenture'). Accordingly, if a lender lends money to a company, the loan arguably constitutes a 'security' under the Companies Act.
In the surety example the borrower will issue a security (the loan) to the lender, each other company in the group will provide a suretyship to the lender, the suretyships will constitute 'financial assistance', as envisaged in s44, given by the surety to the lender for the purpose of the subscription (by the lender) for securities in the borrower, and in such circumstances s44 applies.
Accordingly, in the surety example, each of s44, s45 and s46 apply.
(In terms of the literal rule of interpretation, the words used in the legislation are interpreted in their ordinary, literal, grammatical meaning. The ordinary meaning of words would not be followed where it would lead to absurdity or to such results that would not have been intended by the legislature. The above literal interpretation of 'securities' to include loans may have consequences that the legislature did not intend, for instance that securities must be evidenced by certificates or be uncertificated (s49 to 56). However, until the Companies Act is amended to the contrary, or the courts interpret the definition of 'securities' differently, the above (literal) interpretation of 'securities' would be prudent).
In practice, where there is doubt as to whether both s44 and 45 are applicable, the requisite (s44 and 45) resolutions do not need to refer to s44 and/or45 and accordingly, provided the resolutions comply with the requirements of those sections, the resolutions will satisfy both s44 and 45.
One should bear in mind that s44, 45 and 46 were written to deal with various different situations and they will accordingly not always overlap as comprehensively as they do in the surety example.
By Izak Lessing, Director, Finance and Banking practice, Cliffe Dekker Hofmeyr