The amendments proposed in the Companies Amendment Bill 2018 have caught the attention of financiers and attorneys in so far as the provision of financial assistance (e.g. providing a loan, guaranteeing a loan, and securing any debt or obligation), to ‘its own subsidiary’ is concerned.
The Amendment Bill proposes to amend section 45 by removing the requirements of the shareholder and director approvals contemplated by sub-sections 45(2), (3) and (4) in the scenario where financial assistance is being provided by a holding company to ‘its own subsidiary’.
Financial assistance provided by a holding company to a subsidiary company will no longer require a shareholders’ resolution approving the financial assistance in general terms, nor will it require a directors’ resolution approving the financial assistance as fair and reasonable and confirming that the company will comply with the solvency and liquidity test or with its memorandum of incorporation.
The meaning of ‘subsidiary’ in the Companies Act generally envisages a relationship of control by a holding company over a subsidiary company through majority shareholding or control of the board. This includes indirect control, where the holding company controls the subsidiary company through one or more interposed subsidiary companies.
The question most parties to a finance transaction will be asking is: what is meant by the words ‘its own subsidiary’? Does this mean a company’s direct subsidiary only, or will this extend to a company’s indirectly held subsidiary?
We would suggest that the inclusion of the word ‘own’ does not limit the ambit of this proposed amendment to an exclusion of financial assistance involving a direct subsidiary only and will (and should) encompass both a direct and indirect subsidiary of a holding company. Our conclusion then is that both a direct and indirect subsidiary company must be an ‘own subsidiary’ of the holding company.
But the inclusion of the word ‘own’ is curious and unnecessary and may lead to confusion. The legislator should be encouraged, through public comment, to rephrase and replace ‘its own subsidiary’ with the words ‘any of its subsidiaries’ so as to ensure that its meaning is clear and unassailable.