This blog was co-authored by: Tshegofatso Rammutla, Associate; Darragh Meaker, Associate Designate and Devan Falconer, Candidate Attorney.
The proposal in the Companies Amendment Bill of 2021 published for public comment on 1 October 2021 for the exclusion of subsidiary companies from the limiting provisions relating to inter-group financial assistance should be enthusiastically supported.
Section 45 of the Companies Act presently provides that any financial assistance granted by a holding company to a subsidiary must be authorised by a board resolution and a special shareholders resolution adopted within the previous two years, failing which the proposed transaction is void.
In many financial transactions involving a holding company and its subsidiaries, the applicability of section 45 being applicable to financial assistance by a holding company to its subsidiary invokes much heated debate. The origin of the debate lies in whether the requirements as set out in section 45 are a necessary or unnecessary compliance burden borne by holding companies when it seeks to provide financial assistance to a subsidiary.
The Companies Amendment Bill, 2021 seeks to close this debate by excluding the provisions of section 45 where a holding company provides financial assistance to its subsidiary.
The proposed amendments seek to:
- substitute the heading of section 45 to read “Financial Assistance” because the previous reference to directors is misleading; and
- include a new subsection (2A) as follows: “The provisions of this section shall not apply to the giving by a company of financial assistance to, or for the benefit of its subsidiaries”. Should the amendment be passed (which is probable), the risk run by holding companies of having financial transactions rendered void should they not pass a special resolution by its shareholders approving the financial transaction when providing financial assistance to its subsidiaries will be thankfully removed.
The 2018 Companies Amendment Bill also sought to introduce this delayed amendment. Readers are encouraged to read our previous blog post on the 2018 Companies Amendment Bill, where we delved deeper into the risks faced by creditors of a company with a rogue board arising from the fact that holding companies, through the proposed amendment, would be able to grant unrestricted financial assistance to their subsidiaries without oversight from its shareholders.