23.1 SECTION 46 (1) (b) (c)
This section uses the words “it reasonably appears that the company will satisfy the solvency and liquidity tests” and the board has acknowledged that it has applied the test.
However, in regard to s 44 and s 45 different words are used and in both the instances of ss 44 and 45 the transaction must meet certain requirements one of which is “the board is satisfied that the company would be in compliance with the solvency and liquidity test.”
Does this mean that if the board is satisfied no matter how unreasonable they are in the way they apply the test or does it mean that if they are satisfied that the requirements for this section is met?
There appears to be no reason why there is this slight difference of wording which will cause quite a bit of inconsistency, the problem with these tests is that it is based on the predictions of the directors especially in regard to the solvency situation. The Act in itself does not really supply much help except in Section 4, the boards enquiry must be carried out from any financial information contained in accounting records and financial statements. The board must consider a fair valuation of the company’s assets and liabilities including any reasonable foreseeable contingent assets and liabilities irrespective of whether or not arising as a result of the proposed distribution or otherwise. It may consider any other valuation of the company’s assets and liabilities that is reasonable in the circumstances. In determining the company’s assets and liabilities the board must take into account any reasonable foreseeable contingent assets and liabilities to give a true picture of the company’s solvency and liquidity position.
If the company has property that is shown at cost, could the directors take into account market value? I think yes.
Contingent liability is one that will become due and payable on the happening of a particular event.
S 44 is as follows;-
44. Financial assistance for subscription of securities.—(1) In this section, “financial
assistance” does not include lending money in the ordinary course of business by a company whose primary business is the lending of money.
(2) Except to the extent that the Memorandum of Incorporation of a company provides otherwise, the board may authorise the company to provide financial assistance by way of a loan, guarantee, the provision of security or otherwise to any person for the purpose of, or in connection with, the subscription of any option, or any securities, issued or to be issued by the company or a related or inter-related company, or for the purchase of any securities of the company or a related or inter-related company, subject to subsections (3) and (4).
[Sub-s. (2) substituted by s. 30 (a) of Act No. 3 of 2011.]
(3) Despite any provision of a company’s Memorandum of Incorporation to the contrary, the board may not authorise any financial assistance contemplated in subsection (2), unless—
(a) the particular provision of financial assistance is—
(i) pursuant to an employee share scheme that satisfies the requirements of section 97; or
(ii) pursuant to a special resolution of the shareholders, adopted within the previous two years, which approved such assistance either for the specific recipient, or generally for a category of potential recipients, and the specific recipient falls within that category; and
(b) the board is satisfied that—
(i) immediately after providing the financial assistance, the company would satisfy the solvency and liquidity test; and
(ii) the terms under which the financial assistance is proposed to be given are fair and reasonable to the company.
(4) In addition to satisfying the requirements of subsection (3), the board must ensure that any conditions or restrictions respecting the granting of financial assistance set out in the company’s Memorandum of Incorporation have been satisfied.
(5) A decision by the board of a company to provide financial assistance contemplated in
subsection (2), or an agreement with respect to the provision of any such assistance, is void to the extent that the provision of that assistance would be inconsistent with—
(a) this section; or
(b) a prohibition, condition or requirement contemplated in subsection (4).
(6) If a resolution or an agreement is void in terms of subsection (5) a director of a company is liable to the extent set out in section 77 (3) (e) (iv) if the director—
(a) was present at the meeting when the board approved the resolution or agreement, or participated in the making of such a decision in terms of section 74; and
(b) failed to vote against the resolution or agreement, despite knowing that the provision of financial assistance was inconsistent with this section or a prohibition, condition or requirement contemplated in subsection (4).
[Sub-s. (6) amended by s. 30 (b) of Act No. 3 of 2011.]