The provision of financial assistance by a company to its directors, officers, or related entities is strictly regulated under section 45 of the Companies Act, 2008. Failure to comply with these requirements can render such transactions void. The case illustrated here highlights the importance of board oversight when authorising financial assistance and clarifies the limitations of section 20(7) in rectifying non-compliance.
In terms of section 45 of the Companies Act, 2008 very specific requirements are laid down before a company may provide financial assistance to certain people. These people are (1) any of its own directors or prescribed officers, (2) any of the directors or prescribed officers of a related or inter-related company, (3) any related or inter-related company, or (iv) any member or person otherwise related to a related or inter-related company. Where the company provides any such financial assistance without complying with these requirements of section 45, the actions of the company are void.
In the case of Constantia Insurance Company Limited v The Master of the High Court, Johannesburg & Others [2023 (5) SA 88 (SCA)], the Supreme Court of Appeal held that an indemnity that Protech Khuthele Property Investments (Pty) Ltd provided to Constantia Insurance Company Ltd constituted indirect financial assistance to Protech Khuthele (Pty) Ltd, which was a related company of Protech Investments. The indemnity was a condition to the provision by Constantia of a guarantee for the performance of the obligations of Protech Khuthele to a third party, and because Protech Investments was related, the giving of the indemnity fell squarely within the ambit of section 45 of the Companies Act.
Protech Investments argued that, since the board of Protech Investments never passed a resolution authorising the provision of such financial assistance (which is one of the requirements of section 45), the indemnity was void. Constantia argued that section 20(7) of the Companies Act applied, which entitles a person dealing in good faith with a company to presume that the company, in making any decision in the exercise of its powers, has complied with all of the necessary formal and procedural requirements. The Court said that the requirements set forth in section 45 of the Act are substantive requirements and not procedural requirements, which means that the directors sitting on the board of Protect Investments had to apply their minds in deciding whether or not to authorise Protech Investments to provide the financial assistance in the form of the indemnity to Constantia, and because that did not happen, the indemnity (and the financial assistance provided thereunder) was void.
Therefore, where a company provides financial assistance to or for the benefit of a related or inter-related company (or to any of the other categories of people referred to in section 45 of the Companies Act) without complying with the requirements of section 45, the provisions of section 20(7) of the Companies Act do not apply and the actions of the company are void.