In Constantia Insurance Company Limited v Master of the High Court, Johannesburg and Others [2022] judgment, the Supreme Court of Appeal (SCA) held that the matters listed in section 45(1)(a) of the Companies Act, 2008 exhaustively define "financial assistance". Additionally, the Companies Amendment Act, 2024 introduces a key exemption: the financial assistance requirements in section 45 no longer apply to financial assistance provided by a company to its subsidiaries. Together, the SCA decision and this amendment will likely narrow the scope of transactions subject to section 45.
A group of companies, including Protech Khuthele Property Investments (Pty) Ltd (Protech Investments), requested Constantia Insurance Company Limited (Constantia) to provide performance guarantees for contractual obligations owed by various group entities to third parties. Constantia agreed, subject to each company in the group (including Protech Investments) indemnifying Constantia against any demands or payments under the guarantees.
Claims amounting to ZAR 182 million were made under the guarantees to secure obligations owed by Protech Khuthele (Pty) Ltd (Protech Khuthele),a subsidiary of Protech Investments. Constantia, in turn, sought to enforce the indemnity against Protech Investments. However, Protech Investments was in liquidation, and the liquidator disputed the claim, arguing that there was no board resolution demonstrating compliance with section 45 of the Companies Act.
Constantia successfully proved three claims at the second meeting of creditors of Protech Investments. However, at the liquidator’s request, the Master of the High Court expunged these claims. Constantia's application for review in the High Court was dismissed, leading to the appeal before the SCA.
The SCA findings
The SCA dismissed the appeal with costs, making several key findings:
1. Definition of "Financial Assistance"
Section 45(1)(a) of the Companies Act states:
"(1) In this section, 'financial assistance' –
(a) includes lending money, guaranteeing a loan or other obligation, and securing any debt or obligation; but
(b) does not include –
(i) lending money in the ordinary course of business by a company whose primary business is the lending of money;
(ii) an accountable advance to meet –
(aa) legal expenses in relation to a matter concerning the company; or
(bb) anticipated expenses to be incurred by the person on behalf of the company; or
(iii) an amount to defray the person's expenses for removal at the company's request." (own emphasis)
The SCA held that the list in section 45(1)(a) is exhaustive, meaning that "financial assistance" is limited to the specific instances outlined. While the word "includes" often implies an expanded definition, the court ruled that in this case, it was meant to provide a precise definition.
The court held that the matters listed as included by section 45(1)(a) (and excluded by section 45(1)(b)) form part of the primary meaning of financial assistance. In reaching this conclusion, the court referred to R v Debele 1956 (4) SA 570.
The court also confirmed that, in terms of section 45(2), financial assistance applies to both direct and indirect financial assistance.
In this matter, the SCA found that Protech Investments, by indemnifying Constantia, had indirectly secured Protech Khuthele’s obligations within the meaning of section 45(1)(a) and had therefore provided financial assistance.
2. Compliance with Section 45 Requirements
Under section 45(3)(b), before providing financial assistance, a company’s board must satisfy itself that:
1. immediately after providing the financial assistance, the company would satisfy the solvency and liquidity test; and
2. the terms of the financial assistance are fair and reasonable to the company.
Additionally, section 45(4) requires the board to ensure compliance with any conditions or restrictions in the company's memorandum of incorporation.
The SCA held that a board resolution is required to approve financial assistance and that the board must apply its mind to the conditions set out in section 45(2).
Constantia argued that compliance with section 45(3)(b) should be inferred, as solvency and liquidity were regularly assessed at a group level. However, the court found no evidence that Protech Investments’ board had independently considered the section 45 requirements. As a result, the indemnity failed to comply with section 45 and was void to this extent under section 45(6).
3. Notice Requirements Under Section 45(5)
Under section 45(5), once a resolution approving financial assistance is passed, a company must notify:
● all shareholders (unless every shareholder is also a director); and
● any trade union representing the company’s employees.
The SCA held that non-compliance with section 45(5) does not render a resolution or an agreement to provide financial assistance void. It ruled that section 45(6), which states that non-compliant resolutions or agreements are void, applies only to the substantive requirements of section 45 and not to procedural notice requirements.
4. Constitutionality of Section 45(6)
Constantia argued that section 45(6) permits arbitrary deprivation of property, violating section 25(1) of the Constitution. However, the SCA found that Constantia had not established a sufficient case to support its claim.
Legislative amendment: Companies Amendment Act, 2024
Section 45(2) of the Companies Act applies financial assistance requirements to:
● a director or prescribed officer of the company or a related or inter-related company;
● a related or inter-related company or corporation;
● a member of a related or inter-related corporation; or
● a person related to any of the above entities or individuals.
Under the Companies Act, a juristic person is considered "related" to another juristic person if:
● either of them directly or indirectly controls the other or its business;
● either is a subsidiary of the other; or
● a person directly or indirectly controls both entities or their businesses.
The Companies Amendment Act, 2024 introduces a significant exemption: Financial assistance requirements in section 45 no longer apply to financial assistance provided by a company to its subsidiaries. This amendment, effective from 27 December 2024, removes the regulatory burden for intra-group financial assistance, making it easier for parent companies to support their subsidiaries.
It is important to note that due to the definition of "subsidiary" in the Companies Act, which refers only to South African companies, the section 45 requirements still apply to financial assistance provided by a South African company to a foreign subsidiary that qualifies as a “related” or “inter-related” corporation.
The SCA judgment and the legislative amendments both clarify and limit the scope of section 45 of the Companies Act. The judgment confirms that “financial assistance” is narrowly defined, while the Companies Amendment Act, 2024 introduces an exemption for subsidiaries, reducing compliance burdens for intra-group transactions.
Companies should carefully assess whether section 45 applies to their financial assistance arrangements and ensure proper board approvals and compliance with substantive requirements to avoid resolutions or agreements being rendered void under section 45(6).
