⎯⎯ KRG 200 ⎯⎯

COMPANIES
PART 2
“the Act” refers to the Companies Act

UNIT 4
CORPORATE CAPITAL
GENERAL
▪ This unit deals with distributions - how & when company can lawfully:
i. pay out money to shareholders, holders of securities, to prospective shareholders in order to
assist them to become shareholders, and
ii. give financial assistance to directors or related persons

Solvency and liquidity test (S+L Test)

▪ Act focuses on this test as requirement for distributions (Section 4)
a) Solvent = assets >= liabilities
- Objective test (not factually insolvent).
b) Liquid = appears that company can pay its debts as they become due in ordinary course
of business for period of 12mnths after test is done
- Subjective test (not commercially insolvent).

LAWFUL DISTRIBUTIONS
SECTION 46
= requirements for company to part with its money in favour of shareholders or companies that
form part of the group of companies.
▪ S46 is unalterable provision.
- Can only be altered ito S15(2): imposing on company a higher standard, greater
restriction, longer period of time.

REQUIREMENTS FOR LAWFUL DISTRIBUTION

i. Meets definition of Distribution per Section 1:
a) transfer of money or company property (other than its own shares) to, or for benefit of,
shareholder or that company or another company within the same group:
a. payment of dividends to shareholders
b. paying out cash instead of giving out capitalisation shares (see below)
c. company buys back its own shares
d. companies within a group buy shares from each other
b) where company indebted itself for benefit of shareholder or another company in the group
c) where company writes a debt off through waiver or debt forgiveness owed to it by a
shareholder or another company in the group

⎯⎯ Copyright © Leighton Ferreira ⎯⎯ 1

 ⎯⎯ KRG 200 ⎯⎯

▪ If it meets definition, rules below should be followed 

ii. Rules:
1. Ground in s46 must exist:
a. Board authorised distribution by resolution
- there are some exceptions where special resolution of shareholders is also
required (see S65(11))
b. Legal obligation, or
c. Court order
2. S + L test will be passed
- Immediately after distribution, it “reasonably appears” that company will pass
the test
3. Board must confirm that S + L test was applied, and
4. Board must confirm that it is satisfied (reasonably concluded) that S + L will be
passed
▪ If rules are met, distribution must be carried out within 120 days, otherwise Board must redo S +
L test.
▪ Rules above not met? = unlawful distribution:
- Directors can be held personally liable (section 77) – see below
- Court order restraining company from making unlawful distribution can also be obtained
(section 20)

UNLAWFUL DISTRIBUTIONS (S77)

▪ Director is personally liable if he:
1. Was present at meeting when Board approved distribution, and
2. Failed to vote against distribution, despite knowing it was contrary to S46
- NB: had knowledge at time!
▪ He is then liable for loss/damages/costs sustained by company (S77) only if:
i. After the distribution, company failed S + L test, and
ii. When deciding on distribution, it was unreasonable to conclude that the company
would satisfy the test
▪ AMOUNT director is liable for?:
= amount the S + L test was exceeded by
less
amounts recovered from recipients of distribution
E.g. Entity can safely pay dividends of R10 (“safe amount” - pass S+L test) but board approved
R25. Entity was able to recover R5 from a shareholder. Thus, board is liable for:
= R25 (approval) – R10 (safe amount) = R15 (exceeded) – R5 (recovered) = R10

▪ NB: distribution prohibited by S46 is not void unless court declares it void.
- I.e. the distribution is still made, only consequence is that directors can be held liable.

⎯⎯ Copyright © Leighton Ferreira ⎯⎯ 2

 ⎯⎯ KRG 200 ⎯⎯

PRACTICE QUESTIONS
Question 1:

Jim successfully incorporated VirusFree Ltd and has been trading for 2yrs. Jim approaches you for
legal advice. He is one of 5 directors. Jim and the other directors want to pay dividends to their
ordinary shareholders. The company’s financial position is as follows: existing assets are valued at
R100 000 and liabilities due immediately are valued at R70 000. The company would be able to
settle its debts as they arise in the next 12 months. This is because the projected value of income
from the business activities of the company over the next 12 months is estimated at R 80 000, and
the projected liabilities of the company due in the next 12 months is estimated at R50 000. Advise
Jim on the amount that may be paid out to shareholders as dividends and explain your answer to
him in such a manner that he will be able to determine the allowed amount on his own in future.

Payment of dividends constitute distributions which means that the company has to satisfy the
solvency and liquidity test set out in section 4 prior to authorising the distribution. Solvency test:
the assets, fairly valued, must equal or exceed the liabilities, fairly valued. Liquidity test: the
company will be able to pay its debts as they become due in the ordinary course of business for a
period of 12 months. In the example, the amount of R30 000 will not cause the company to fail the
solvency and liquidity test.

Question 2:

The board of X Ltd repurchases the company’s shares from existing shareholders for a total amount
of R5 million. The repurchase is authorised at board meeting attended by 3 of the 5 directors.
Immediately after transferring the R5 million to its shareholders, the company’s liabilities exceed its
assets. It was unreasonable, at the time that the share repurchase was decided on, to conclude that
the company’s assets would exceed its liabilities after the share repurchase was effected. In fact, an
amount of only R2 million could have been distributed without causing the company to go into
factual insolvency. X Ltd is thereafter able to recover only R1 million from the selling shareholders (ie
the shareholders from whom X Ltd had repurchased the shares). Discuss whether X Ltd has a legal
remedy to recover its losses.

Issue 1: was repurchasing of the shares lawfully done? Because a remedy is only needed if the
repurchasing was not done lawfully.

Legal position: A share repurchase is a type of distribution, which means that the BOD must
authorize the distribution + apply (and the company must ‘pass’) the solvency and liquidity test set
out in section 4 of the Companies Act. Make sure that you know the requirements – reasonable,
satisfied, etc.

Application to facts and finding: As the company failed the solvency and liquidity test (the liabilities
exceeded the assets immediately after the repurchase) the repurchase/distribution was unlawful.

Issue 2: The remedies available to the company to recover its losses

Legal position: The directors are personally liable to the company for its losses provided that they
‘knew’ that the distribution is unlawful (or were in a position where they reasonably ought to have
known), were present when the distribution was authorised and failed to vote ‘no’. The fact that it
was unreasonable at the time the decision was made – there is no indication in the facts that the S
+ L test was done at all and merely not foreseeing insolvency is not enough. The directors are liable

⎯⎯ Copyright © Leighton Ferreira ⎯⎯ 3

 ⎯⎯ KRG 200 ⎯⎯

for the following amount: The amount actually distributed minus the amount that could have been
distributed without contravening the test minus the amount recovered by the company.

Application to facts and finding: The 3 directors who were present at the meeting are personally
liable (joint and several) to X Ltd for its losses: R2mill (R5mill (actual amount) minus R2mill (safe
amount) = R3mill (exceeded amount). Exceeded amount minus R1-mill (recovered amount) =
amount liable for).

Question 3:

Sam, Josh, Leanda and William are directors in DVD World Ltd. Sam, Josh and William are also
shareholders in the company. William lent an amount of R2 000 000.00 to DVD World Ltd upon
incorporation. The Board wants to pay out a dividend to shareholders. Are there any requirements
that must be met prior to paying a dividend to shareholders?

A company must only make a distribution if it satisfies the requirements in terms of section 46: It
must be authorised by the board of directors by resolution (not a special resolution – not to be
confused with section 45 below); it must further reasonably appear that the company will satisfy
the solvency and liquidity test immediately after the distribution; a board resolution is also required
acknowledging that the board has applied the solvency and liquidity test; and reached the
reasonable conclusion that the company will satisfy the solvency and liquidity test immediately
after the distribution. The transaction must be completed within 120 days.

REPURCHASE & ACQUISITION OF SHARES

▪ This part deals specifically with:
1. Lawful repurchase of own shares by company, and
2. Acquisition of shares by company in its holding company
- 1 & 2 above are both distributions, hence S46 RULES (above) should 1st be complied with.
- But SECTION 48 then contains additional rules for them 
*S48 does not apply to shareholders’ appraisal rights remedy – S164 (see Unit 2)

1. LAWFUL REPURCHASE OF SHARES

▪ “authorised shares” = max number of shares that company is permitted by its MOI to issue.
- Available, but not yet issued.
▪ “issued shares” = authorised shares sold or given to SHs.
- Money received & duties owed to SHs.
▪ When company buys back shares, it goes from issued back to authorised.

Additional rules (other than s46)

i. Shareholders must approve (special resolution) if repurchase is from a director or related
person to director (see S65)
- This is an exception to general rule that only Board must authorise distributions.
ii. End result (after repurchase) may not be that the only shares left held by shareholders are:
- held by subsidiaries of company, or
- convertible or redeemable shares

⎯⎯ Copyright © Leighton Ferreira ⎯⎯ 4

 ⎯⎯ KRG 200 ⎯⎯

2. SUBSIDIARY BUYS SHARES IN HOLDING COMPANY

Additional rules (other than s46)
i. all subsidiaries of holding company may only hold =<10% of shares of holding company
ii. subsidiaries may not vote (i.e. not exercise voting rights attached to the shares)
iii. End result (after purchase) may not be that the only shares left held by shareholders are:
- held by subsidiaries of company, or
- convertible or redeemable shares

NON-COMPLIANCE (S48)
▪ Company acquiring shares contrary to S46 OR S48 must, not more than 2 yrs after the
acquisition, apply for court order to REVERSE THE ACQUISITION, and the court may order:
a) the person from whom the shares were acquired to return the amount paid by the
company; and
b) the company to issue an equivalent nr of shares in same class as those acquired, to that
person

Personal liability (S77)

▪ Director is once again personally liable for loss, damages or costs to the company if present at
meeting and did not vote “no’’ while knowing that requirements of S46/S48 had not been
complied with.

*NB to know which company’s directors are liable (e.g. Subsidiary’s directors are liable if they bought
shares in Holding company contrary to Act).

PRACTICE QUESTIONS
Board of directors of Fire and Ice Ltd authorises the repurchase of the company’s shares from
existing shareholders for a total amount of R3 million. The share repurchase is authorised at a board
meeting attended by all the directors of the company: Gift, Jamie, Fazil, Kgosi and Mpho.
Immediately after transferring the amount of R3 million to its shareholders, the company’s liabilities
exceed its assets. It turns out that an amount of only R1 million could have been distributed without
causing the company to go into factual insolvency. Thereafter, Fire and Ice Ltd is able to recover only
R1 million from the selling shareholders (in effect, the shareholders from whom Fire and Ice Ltd had
repurchased the shares).

Question 1: Explain the requirements for a lawful repurchase by a company of its own shares.

The directors must authorise the repurchase but must first satisfy the solvency and liquidity test
which entails that the assets of the company, fairly valued, must equal or exceed the liabilities of
the company, fairly valued and the company must be able to pay its debts in the ordinary course of
business as they fall due after the repurchase, which constitutes a distribution, and the directors
must acknowledge that they reasonably concluded that the company would satisfy the test.

Question 2: Mpho realised that the company would be insolvent after the repurchase, because she
scrutinised the financial records of the company. Therefore, she voted ‘no’ at the meeting, thus
against repurchasing the shares. Explain whether Fire and Ice Ltd or any other stakeholder of the
company can recover the losses from her, and if so, what amount.

⎯⎯ Copyright © Leighton Ferreira ⎯⎯ 5

 ⎯⎯ KRG 200 ⎯⎯

Fire and Ice Ltd will not have a right of recourse against Mpho because she voted ‘no’. The
shareholders will also not be able to hold Mpho liable in terms of section 20(6) because she did not
cause damage to the company through intentional, fraudulent or gross negligence.

Question 3: Fazil realised that the company would be insolvent after the repurchase, because he
scrutinised the financial records of the company. However, he was also a shareholder and wanted to
sell the shares to obtain cash. Consequently, he voted ‘yes’ at the meeting, thus in favour of
repurchasing the shares. Explain whether Fire and Ice Ltd or any other stakeholder of the company
can recover the losses from him, and if so, what amount.

Fire and Ice will have a right of recourse against Fazil because he voted yes, knowing that the
company would not be able to satisfy the S + L test. He will be held liable for the difference
between the unlawful amount (R 2 million) and the amount recovered (R 1 million). He can be held
liable for R 1 million (Section 77). The shareholders can also hold him liable for damages in terms of
section 20(6) because of he acted intentionally, which can be deduced from the facts.

FINANCIAL ASSISTANCE TO DIRECTORS & OTHERS

“FA” = Financial Assistance

SECTION 45 - Requirements for a S45 Financial Assistance:

1st. “Financial Assistance” given by company

i. Lending money, or
ii. Company stands as surety, or
iii. Company puts up property as security
▪ S45 does not apply to companies who give FA as part of business (e.g. credit provider), nor for
anticipated expenses (money given before actual debt/expense is incurred).

2nd. Given to specific person:

i. Director (or director of related company), or
ii. Prescribed officer, or
iii. Related/inter-related person to the director/company (whether natural or juristic)
▪ Thus, it includes:
- Natural persons:
- E.g. Company lends money to its director
- E.g. Company lends money to its Subsidiary’s director
- Juristic persons:
- E.g. Parent company lends money to its Subsidiary
- Person related to director or company:
- E.g. Amy holds 60% of shares in AB Ltd (thus she controls AB ltd). AB ltd lends
R10k to Amy.
- E.g. Company loans money to its director’s wife.

⎯⎯ Copyright © Leighton Ferreira ⎯⎯ 6

 ⎯⎯ KRG 200 ⎯⎯

3rd. Employee share scheme or Special resolution

▪ The FA must be “founded” or “authorised” by one of two grounds:
i. Employee share scheme
= a scheme devised by a company to incentivise staff by making it possible for them to
acquire shares in the company.
ii. Decision by shareholders with following characteristics:
a. Special resolution, and
b. Taken within 2 years preceding the giving of the FA, and
c. Approved FA, and
d. Must have specified who may receive it:
- Either specific person (“John”), or
- Category of recipients (e.g. “directors or majority shareholders”) and that
specific recipient falls within that category (e.g. “John is a director of the
company or Amy is a majority shareholder”)

4th. S + L test is passed

- Board must be satisfied that the test would be satisfied IMMEDIATELY AFTER the
financial assistance is provided.
5th. Fair and reasonable terms to the company
- E.g. an interest free loan may not be fair to the company.

6th. Any additional conditions in MOI complied with

7th. Written notice of resolution

- Board must inform shareholders or trade unions of adopted resolution of FA.

NON-COMPLIANCE
= decision of FA is VOID to extent that it violates provisions of S45 or MOI.
▪ And director once again personally liable (s77) for loss, damages or costs to company if present
at meeting and did not vote “no’’ while knowing that requirements of S45 or MOI had not been
complied with.

PRACTICE QUESTION
Question 1: Andrew wishes to obtain loan from Zeta Ltd. Zeta makes loan of R10 000 to Andrew. The
directors of Zeta Ltd know, at time of making the loan, that Andrew is a director of one of its
subsidiaries, Little Zeta Ltd. Discuss, with reference to legal principles and decided cases: (i) whether
the transaction constitutes financial assistance within the meaning of s 45 of the Companies Act 71
of 2008; and (ii) any formal requirements that the company must comply with in order to give
financial assistance within the meaning of s 45 of the Companies Act 71 of 2008.

There must be financial assistance given to a specific person such as a director, etc. This is a loan,
which forms part of the definition of “financial assistance” in section 45. It is given to a director of a
company related to the company (a subsidiary as per section 2) providing the financial assistance.
Therefore, it falls within the scope of section 45. The assistance must be given in terms of an
employee shareholder scheme or a special resolution of the shareholders approving the assistance
that was taken within the two years preceding the giving of the financial assistance and the
recipient must either have been identified specifically or must fall within the category of recipients

⎯⎯ Copyright © Leighton Ferreira ⎯⎯ 7

 ⎯⎯ KRG 200 ⎯⎯

for whom financial assistance was approved in the special resolution. The board must be satisfied
that immediately after providing the financial assistance, the company would satisfy the solvency
and liquidity test; and the terms under which the financial assistance is proposed to be given are
fair and reasonable to the company. If there are any additional conditions or restrictions in the
MOI, this must be honoured. Written notice of the resolution to provide assistance must be given to
the shareholders and trade unions.

FINANCIAL ASSISTANCE TO BUY SHARES

SECTION 44
▪ = company giving (i) FA to someone (ii) with purpose of, or in connection with, subscription of
securities (e.g. shares).
- Company helps person to buy shares in the company, or in a related/inter-related
company.
- Shares can then be bought directly from company or from existing shareholder.
- S44 does not apply to companies who lend money as part of business.
▪ NB: it must be HELP from company for person to purchase shares (e.g. a loan).
- Not help :
- person uses his dividends received from company to purchase more shares (he
received what is due to him).
- Help :
- company buys asset that it does not need to provide the seller with the cash to
buy shares in the company.
- company stands surety for the loan of a debtor and the loan is to buy shares in
the company.

▪ Difference between S44 & S45 (above):

S44 S45
Recipient of FA Irrelevant Director or related person
Purpose of FA To acquire shares Irrelevant

REQUIREMENTS
1st. Board resolution authorising the FA for the specific purpose
2nd. Employee share scheme or Special resolution
- *Exactly the same as S45 requirements above

3rd. S + L test passed

4th. Fair and reasonable terms to the company
5th. Compliance with any conditions or restrictions in MOI
- MOI can add to S44, or prohibit S44 transactions completely, but cannot take away
only a few requirements.

NON-COMPLIANCE
= decision of FA is VOID to extent that it violates S44 or MOI.
- E.g. All requirements are met, R20k FA given, but MOI states max R15k may be given: R5k void.

⎯⎯ Copyright © Leighton Ferreira ⎯⎯ 8

 ⎯⎯ KRG 200 ⎯⎯

▪ And director once again personally liable if requirements are met (S77).

PRACTICE QUESTIONS
Question 1

Themba wishes to subscribe for shares in XYZ Ltd at a purchase price of R60 000. Themba obtains a
loan from Absurd Bank Ltd. XYZ Ltd passes a mortgage bond over its property as security for
Themba’s loan, on the understanding that Themba will use the loan amount of R60 000 to subscribe
for shares in XYZ Ltd. Themba repays the loan in full to Absurd Bank Ltd three months later, and XYZ
Ltd is released from the mortgage. Discuss, with reference to legal principles and decided cases
whether the transaction constitutes financial assistance for the company’s shares within the
meaning of s 44 of the Companies Act 71 of 2008.

In this case there is direct financial assistance, because XYZ Ltd has given security for
Themba’s loan. The assistance is for the purpose of the subscription for shares in XYZ Ltd. This
transaction falls within section 44.

Question 2

Andrew wishes to subscribe for shares in Zeta Ltd. Zeta Ltd makes a loan of R10 000 to Andrew,
which Andrew uses to subscribe for the shares in Zeta Ltd. The directors of Zeta Ltd know, at the
time of making the loan that Andrew intends to use the funds loaned to him to acquire shares in the
company. Discuss, with reference to legal principles and decided cases:

(i) whether the transaction constitutes financial assistance for the company’s shares within the
meaning of s 44 of the Companies Act 71 of 2008; and

(ii) any formal requirements that the company must comply with in order to give financial assistance
within the meaning of s 44 of the Companies Act 71 of 2008.

There are two requirements under s 44: There must be financial assistance and it must be for
purpose of/in connection with acquisition of shares in the company. This is direct financial
assistance because it is a loan. The purpose of the loan is for subscription for the company’s
shares, therefore it falls within s 44. It must be authorised by the board; authorised by way of a
special resolution which approved the assistance for the specific recipient or generally for a
category of recipients within the previous two years; satisfy the solvency and liquidity test; fair
and reasonable terms and comply with any restrictions in the MOI.

Sources:
- New Entrepreneurial Law, 2nd edition, LexisNexis
- Companies Act 71 of 2008

⎯⎯ Copyright © Leighton Ferreira ⎯⎯ 9