On the other hand, the construct of the definition of “financial assistance” set out in section 44 of the Act merely excludes certain forms of financial assistance, such as the lending of money done in the ordinary course of business by a company whose primary business is the lending of money.

Given the lack of a comprehensive definition, the position remains that “financial assistance” in section 44 does not constitute an exhaustive list, that the commercial realities of each transaction are to be examined, and that companies must apply their minds as to whether their actions constitute financial assistance.

It is not uncommon for companies to provide contingent financial assistance, possibly unknowingly, which is subject to the occurrence of a future event, in the form of an indemnity or a guarantee for example. Consider the following scenario: The Subscriber is subscribing for shares in the Target Company. In connection with the Subscriber’s subscription of securities in the Target Company, it indemnifies the Subscriber for any loss suffered in the event that any of the warranties are found to be untrue.

This is a very common commercial construct and, although often overlooked, may arguably (albeit very conservatively) constitute the provision by the Target Company of financial assistance in terms of section 44 of the Act.

Financial assistance in terms of section 44 of the Act

Section 44(3)(a) provides, inter alia, that the board may not authorise any form of financial assistance unless the financial assistance has been approved by a special resolution of the shareholders adopted within the previous two years. The provision of financial assistance can therefore not be retrospectively approved/ratified by shareholders.

Subsection (b) then provides that no financial assistance may be authorised by a board unless:

• the board is satisfied that immediately after providing the financial assistance, the solvency and liquidity test will be satisfied; and
• that the terms under which the financial assistance is proposed to be given, are fair and reasonable to the company.

The solvency and liquidity test in the context of contingent financial assistance

In the context of contingent financial assistance, it raises the question: When must the aforementioned prescribed requirements be met? Is it (i) on signature date; (ii) upon the fulfilment of the conditions precedent contained in the transaction agreement; or (iii) the date a claim arises?

Given that the provision of financial assistance cannot be ratified, the prevailing approach is that the prescribed formalities should be fulfilled before or on the signature date, failing which, the provision of financial assistance, and the transaction itself, would be void. However, given the contingent nature and the potential lapsing of time, it raises an interesting question regarding the validity, and accuracy, of the solvency and liquidity test.

Section 4 of the Act provides that a company will be deemed to have satisfied the solvency and liquidity test if:

• the assets of the company, fairly valued, equal or exceed the liabilities of the company; and
• if it appears that the company will be able to pay its debts as they become due, for a period of 12 months after the date on which the test was considered.

Section 4(2)(b) expressly requires the company to consider, among other things, any reasonably foreseeable contingent liabilities in applying the solvency and liquidity test, yet limits the forward-looking nature of the test to a 12-month period.

In the context of our earlier scenario, it is very common for warranty claims to be brought long after the signature date, in some cases a number of years thereafter. If the prescribed formalities were complied with at the signature date but a warranty claim only arose a number of years after the solvency and liquidity test was conducted, would the financial assistance or the solvency and liquidity test, which would then be a number of years old, still be valid?

Commercially, one would hope that the Target Company would continue to conduct its affairs in such a manner as to ensure that it remains solvent and liquid on an ongoing basis. However, the only legal requirement is that the requisite authorising board and shareholder approvals were obtained for the granting of the financial assistance by the time the financial assistance is “provided”, and the conventional approach in this regard is that this is on the signature date (although it is fair to argue that if there are suspensive conditions to the financial assistance agreement, the financial assistance is only given if and when those conditions are fulfilled). The contingent financial assistance will remain valid beyond the 12-month period, notwithstanding the deterioration of the financial position of the Target Company thereafter.

Accordingly, should a warranty claim arise at any point after the 12-month period, and the Target Company be unable to satisfy its obligations in terms of the indemnity provided to the Subscriber due to its financial position, the warranty claim is valid and the Subscriber’s recourse would possibly be limited to applying for the liquidation of the Target Company.

Conclusion

Ultimately, the company relying on financial assistance in terms of section 44, particularly in the case of an indemnity or guarantee, must ensure that they are alive to the risks that they are assuming due to such reliance.

As is evident, the provisions of section 44 (and 45) of the Act are quite nuanced and companies must be sure to apply their minds as to whether the provision of an indemnity constitutes financial assistance, and ensure that the requisite approvals have been obtained, in advance, or risk the provision of financial assistance, and the transaction itself, being declared void.