This blog was co-authored by: Luke Schooling, Candidate Attorney
The Supreme Court of Appeal held that an indemnity provided by one group company to support an insurance guarantee obtained by another group company was void where the requirements of section 45 of the Companies Act of 2008 (the Act) were not complied with because it amounted to ‘financial assistance’.
The insurer was approached by a group of eight companies to provide performance guarantees in respect of the contractual obligations of the operating companies in the group towards third parties.
The insurer undertook to do so provided that each of the companies in the group signed an indemnity in its favour. The chief executive officer of the group signed the indemnity on behalf of the group companies. The consequence of the indemnity was that each company in the group undertook an obligation to indemnify the insurer in respect of any demand under any guarantee issued to third parties for the obligations of any company in the group.
The insurer’s claims under the guarantees amounted to R182 million and the insurer called on one of the group companies, in liquidation, to indemnify it in respect of these claims under their indemnity. The liquidators disputed the claims, stating that the indemnity constituted financial assistance by the company and they were unable to locate a resolution of the company’s board authorising the indemnity nor indicating compliance with the requirements of section 45. According to section 45(1)(a) of the Act, financial assistance includes lending money, guaranteeing a loan or other obligation, and securing any debt or obligation.
The court found that on a proper reading, all matters mentioned in section 45(1)(a) are exhaustive of the meaning of ‘financial assistance’. The company had put its property at risk to ensure that the insurer provided the guarantees and therefore the company indirectly secured the obligations of its fellow subsidiary within the meaning of section 45(1)(a) of the Act.
Section 66 of the Act provides that the business affairs of a company must be managed by its board, and the expression “the board may authorise” means the board must adopt a resolution to provide financial assistance to a company or person in terms of section 45(2). The board may not take such a resolution unless the two requirements set out in section 45(3)(b) of the Act are met, namely that the company meets the solvency and liquidity test and the terms of the financial assistance are fair and reasonable to the company.
The court was satisfied that there was no resolution by the board and found that there was no evidence that the board contemplated the provisions of section 45(3)(b) of the Act when it undertook to indemnify the contractual obligations of the other group company. The court concluded that the company had provided financial assistance but had failed to comply with the requirements of section 45, rendering the indemnity void.