The Companies Amendment Bill released on 21 September 2018 for public comment, proposes a raft of amendments to the Companies Act. Section 45 presently provides that any financial assistance granted by a holding company to its subsidiary must be authorised by the board and the shareholders by way of a special resolution. If not the transaction is void and unenforceable. The Bill proposes that subsections (2), and consequently subsections (3) and (4) of section 45 will not apply if a holding company gives financial assistance to its own subsidiary.
As such, a holding company when granting financial assistance to its own subsidiary will not be required to pass a special resolution of the shareholders approving the financial assistance. Nor will the holding company’s board be required to apply their minds to the solvency and liquidity test nor to whether the terms of financial assistance are fair and reasonable to the company.
The risk to creditors of a company with a rogue board may be increased.
This proposed amendment will assist financiers by removing the possible defence of voidness otherwise available to a holding company which grants financial assistance to its subsidiary. However, the risk to creditors of a company with a rogue board may be increased as the board of a holding company will no longer need to apply its mind to compliance with section 45. Holding companies would be able to grant unrestricted financial assistance to their subsidiaries without oversight from their shareholders.
Financiers will be able to mitigate this potential risk when lending to a holding company or a subsidiary, by the inclusion of contractual terms to place a restriction on the amount or terms of the financial assistance the holding company may provide.
