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26 Oct 2021
BY Heinrich Meiring AND Joshua Broll

Does section 45 of the Companies Act apply to foreign companies?

When setting out the rights and duties of companies and their various role-players, the Companies Act, 2008 (the “Companies Act”) uses a number of terms to distinguish between different types of entities. It is only by taking care to note which term the Companies Act uses in any particular section that one can ascertain whether the Companies Act finds application in the specific circumstances. This arose in the case of Trevo Capital Ltd (“Trevo”) v Steinhoff International Holdings (Pty) Ltd (“SIHPL”) in the Cape Town High Court. In particular, it had to be decided whether financial assistance provided by a South African Company to foreign companies was required to have adhered to the requirements of section 45 of the Companies Act.

The Companies Act distinguishes between a “company”, a “foreign company”, a “domesticated company” and an “external company”. In brief terms relating to section 1 of the Companies Act:

  • the definition of a “company” includes a juristic person incorporated in terms of the Companies Act, a “domesticated company” as well as a company registered or in existence under the 1973 Companies Act, or an entity registered in terms of the Close Corporations Act, 1984 (the “Close Corporations Act”), and subsequently converted under the Companies Act;
  • a “foreign company” means an entity incorporated outside of South Africa, irrespective of whether it is for profit or non-profit, and even irrespective of whether it is carrying on business within South Africa;
  • an “external company” means a “foreign company” that is carrying on business, or non-profit activities, in South Africa, upon which section 23 of the Companies Act places the obligation to register as an “external company” in South Africa; and
  • a “domesticated company” means a “foreign company” whose registration has been transferred to South Africa in terms of section 13 of the Companies Act.

In addition to the above definitions, the Companies Act also uses the term “juristic person”, which according to section 1 of the Companies Act, includes a “foreign company” and a trust, irrespective of whether or not it is registered within or outside of South Africa. By contrast, when the Companies Act defines a “company”, it uses the term “juristic person” by specifically limiting the “juristic person” to one incorporated in terms of the Companies Act.

The Companies Act does not generally apply to “foreign companies”, unless such a company qualifies as an “external company”. With regard to “foreign companies” which qualify as “external companies”, under the current Companies Act, only certain specified sections of the Companies Act find application.

Section 45 of the Companies Act

In broadest terms, section 45 of the Companies Act provides that a company may provide “financial assistance” to certain related or inter-related parties, provided that:

  • the company’s memorandum of incorporation does not provide otherwise;
  • the financial assistance is provided pursuant to an employee share scheme as per section 97 of the Companies Act, or pursuant to a special resolution of shareholders within the previous two years;
  • the company’s board is satisfied that, immediately after providing financial assistance, the company would satisfy the solvency and liquidity test; and
  • the company’s board is satisfied that the terms of the financial assistance are fair and reasonable to the company.

Section 45(6) of the Companies Act indicates that a resolution to provide financial assistance, or an agreement to that effect, is void to the extent that it is inconsistent with section 45 of the Companies Act, or to the extent that such a resolution or agreement does not satisfy the conditions and restrictions in the memorandum of incorporation. In that event, section 45(7) of the Companies Act may make a director personally liable if the director participated in the resolution or agreement and failed to vote against it.

In the Trevo matter, Trevo sought a declaration that inter alia the agreement concluded in 2019 by the South African company SIHPL, namely the SIPHL CPU, be declared void in terms of section 45(6) of the Companies Act.

In support of its application to declare the agreement void, Trevo argued that the agreement constituted “financial assistance”, in terms of section 45(1) of the Companies Act, which SIHPL gave to Steenbok Lux Finco 1 SARL (“Lux Finco 1”), a foreign company, constituting (according to Trevo) “a related or inter-related company or corporation” to SIHPL in terms of section 45(2) of the Companies Act. In particular, Trevo argued that the financial assistance was provided, in circumstances where (inter alia) the “solvency and liquidity” requirements were not met, being a breach of  section 45(3) of the Companies Act. 

Section 45(2) contemplates that a company may, subject to terms of the Memorandum of Incorporation and the remainder of section 45, provide direct or indirect financial assistance to “a director or prescribed officer of the company or of a related or inter-related company, or […] a related or inter-related company or corporation, or […] a member of the related or inter-related corporation, or […] a person related to any such company, corporation, director, prescribed officer or member” (emphasis added).

Whereas the term “close corporation” is a defined term in the Companies Act (carrying the meaning it had under the Close Corporations Act of 1984), notably, the self-standing term “corporation” is not defined in the Companies Act. Section 45(2) is also the only place in the Companies Act, except for schedules 2 and 3 of the Companies Act, where the self-standing term “corporation” is used.

In order to ascertain what the Companies Act means by “related” and “inter-related”, we turn to section 2(1)(c) of the Companies Act. In section 2(1)(c), the Companies Act defines what it considers to be a related or inter-related person with reference to the term “Juristic Person” which, as we have indicated above, specifically includes a Foreign Company.

On that basis, Trevo contended that :

  • Where section 45(2) uses the term “company”, it is clear that the term should be read as defined in the Companies Act – which definition would exclude a foreign company. However, that section 45(2) goes further by also using the word “corporation”.
  • Given the above, the ordinary meaning of “corporation” should apply, namely a legal entity that is separate and distinct from its owners – without limitation to whether or not such a corporation is South African.
  • Lux Finco 1 is accordingly a “corporation” and falls within the ambit of section 45.

When Judge Bozalek handed down judgment in this matter on 2 July 2021, he expressed reservation about interpreting the term “corporation” in the presence of the word “company” in a manner that would be tautologous. Judge Bozalek went on to say that the purpose of section 45, as well as the purposes of the Companies Act, are served by interpreting the word “corporation” broadly and, on the face of it, there appears to be no plausible reason for excluding the financial assistance by a local company to a related foreign company. Judge Bozalek stated that, if not so interpreted, a company’s directors’ intent on providing financial assistance could circumvent section 45(3)(b) by making use of a foreign company. 

Judge Bozalek found that the SIHPL CPU concluded in 2019 as well as the board resolution authorising the entry into the SIHPL CPU were void in terms of section 45(6) of the Companies Act.

conclusion

The Companies Act is of limited application to foreign companies. Judge Bozalek concluded that the Companies Act contemplates that foreign companies would fall within the class of persons to whom financial assistance could only be given to by local companies upon compliance by local companies with section 45(3) of the Companies Act. This is a landmark judgment with important consequences for foreign companies, specifically in respect of section 45 of the Companies Act. 

Judge Bozalek granted leave to appeal to the Supreme Court of Appeal on 16 August 2021 and we wait to see what the SCA decides on the matter. 

 

Heinrich Meiring

Dispute Resolution | Executive

hmeiring@ENSafrica.com

+27 82 708 0526

 

Joshua Broll

Dispute Resolution | Senior Associate

jbroll@ENSafrica.com

+27 82 310 3620