Financial Assistance in Relation to a Loan Facility

Published Date: May 6, 2020

When a bank approves a loan facility, it will typically require the registration of a mortgage bond over the borrower’s immovable property in order to secure the debt.

More often than not, the loan facility will require security in addition to the mortgage bond, typically in the form of a guarantee or surety given by a third party (who is related to the borrower) in favour of the bank for the debts of the borrower.

This phenomenon constitutes the granting of financial assistance and is common in mortgage-backed loan facilities. In practice, other forms of financial assistance include scenarios where the third party guarantees in favour of the bank the due performance of the borrower’s obligations to the bank, where the debit order is debited from the third party’s bank account, or where the third party undertakes to fund cashflow shortfalls in favour of the borrower.

Our law dictates certain requirements in instances where the third party is a company.

Briefly, the requirements in terms of Section 45 of the Companies Act are as follows:

  1. The financial assistance must not be in contravention with the provisions of the company’s Memorandum of Incorporation;
  2. The financial assistance must be duly sanctioned in terms of an authorising resolution by the board of directors;
  3. The directors must be satisfied that, immediately after providing the financial assistance, the company would satisfy the solvency and liquidity test;
  4. The directors must be satisfied that the terms under which the financial assistance is proposed to be given are fair and reasonable to the company;
  5. Written notice of the director’s resolution must be provided to all shareholders and to any trade union representing the company’s employees;
  6. The financial assistance must be duly approved in terms of a special resolution by the shareholders of the company; and
  7. The financial assistance must be pursuant to an employee scheme that satisfies the requirements of Section 97, if applicable.

The effects of non-compliance with Section 45 of the Companies Act are as follows:

  1. The director’s resolution and any agreement with respect to the provision of financial assistance will be void; and
  2. Any director who was present at the meeting whereby the resolution was passed and failed to vote against it, knowing that the financial assistance does not comply with the above requirements will be held personally liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the financial assistance.

It is important that the bank, the borrower, and the third party guarantor or surety ensure compliance with the above requirements to avoid risk, over-exposure and legal disputes subsequent to financial assistance.

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