CORPS SEM 2
Capital maintenance
- Capital maintenance rule: required reservoir of assets that could not be diminished
by paying funds out of capital reserves to shareholders, thus creditors protected as
at very least have reservoir
- Accounts kept separate, no dipping
- Ended up being not that effective
- Principle of solvency and liquidity: solidified in companies act, overtook capital
maintenance rule
- Should be able to enter any lawful transaction provided for in the MOI as long as will
remain solvent and liquid after completion
Financial assistance
- Rule prohibiting company from giving financial assistance to outsiders to acquire
shares in company
- Shares issued but company receives nothing
- Disrupts reservoir of capital
- Counts for subsidiary companies as well
- FINANCIAL ASSISTANCE FOR THE PURPOSE OF OR IN CONNECTION WITH THE
PURCHASE OR SUBSCRIPTION OF SECURITIES – LEWIS
“Financial assistance”
No set definition – legislation states what it is NOT s44(1):
- Lending money in ordinary course of business by company whose primary business is
lending of money
- Advice, information, documents
- Giving a person something that they already have a legal right to receive
- Debt that is due and payable
- The words have no technical meaning and their frame of reference is in my
judgement the language of ordinary commerce. One must examine the commercial
realities of the transaction and decide whether it can properly be described as giving
financial assistance by the company, bearing in mind that the section is a penal one
and should not be strained to cover transactions which are not fairly within it.
- - Charterhouse Investment Trust Ltd v Tempest Diesel Ltd [1986]
Includes:
- Loan, guarantee provision of security or otherwise
- LIPSCHITS V UDC BANK – stood surety (simulated transaction)
- BRADWELL: legitimate loan accounts due and payable does not equal financial
assistance
,Test
- BRADWELL V ROSTRA PRINTERS:
- Impoverishment test – rendered poorer – too narrow – Shcriener JA
- Holistic approach:
- Agreement non-genuine – e.g., fictious debt, fictious service contract
- Purchase asset at inflated price, not for business purposes
- Condition that shares sale plus excessive rental in respect of lease agreement
- DOES NOT INCLUDE:
purchase asset bona fide, seller subsequently uses to buy shares
“For the purpose of or in connection with”
- LEWIS
- Reason why is key
- Broad sense of the phrase – such proximity to the acquisition of shares that is
appropriate for regulation to apply
“Purchase or subscription of securities”
- Issued or to be issued
- Securities acquired directly from company or another person who holds them
Statutory requirements
- Is an alterable provision
- If choose to authorize according to subsection 2 then must follow requirements in
subsection 3
- Can make these requirements more onerous but not less onerous
- Subsection 3:
- Shareholder special resolution within previous 2 years
- Employee share scheme
- Board satisfied pass solvency and liquidity test immediately after providing financial
assistance (test is objective, satisfaction is subjective)
- Fair and reasonable to company (BEEE, Employee share schemes, market price
interest, vested interest, more than just ‘financial’ – to company benefit)
- (must pass all of the above)
- Ensure all additional restrictions in MOI complied with
Consequences of non-compliance
- Void to extent of inconsistency with the act or MOI
- Directors face liability for loss, damages, or costs
- Present at meeting, participated in decision, failed to vote against provision despite
knowing inconsistency (reasonably or ought to have known)
Financial assistance to directors
- Agency dilemma: more likely to have conflict of interest
- S45
- Same extended reach for subsidiary companies or related or inter-related persons to
the director
, Plan of action for answering ‘is this financial assistance and legal’ type questions
1. Does it fit the s44 description of financial assistance?
- Check the definition and what it includes/excludes
- Use interpretation from case law (LIPSCHITZ, BRADWELL,CHARTERHOUSE INVEST.)
2. If it does, go to subsection 3 of s44 and make sure it complies with the requirements
- MOI alterations (allow) (can make more onerous but not less)
- Employee share scheme/share holder special resolution
- Solvency and liquidity test – cite cases that apply it
- Fair and reasonable to company
3. (if ask) consequences
- Liability (def of ‘know’)
Capital maintenance
- Capital maintenance rule: required reservoir of assets that could not be diminished
by paying funds out of capital reserves to shareholders, thus creditors protected as
at very least have reservoir
- Accounts kept separate, no dipping
- Ended up being not that effective
- Principle of solvency and liquidity: solidified in companies act, overtook capital
maintenance rule
- Should be able to enter any lawful transaction provided for in the MOI as long as will
remain solvent and liquid after completion
Financial assistance
- Rule prohibiting company from giving financial assistance to outsiders to acquire
shares in company
- Shares issued but company receives nothing
- Disrupts reservoir of capital
- Counts for subsidiary companies as well
- FINANCIAL ASSISTANCE FOR THE PURPOSE OF OR IN CONNECTION WITH THE
PURCHASE OR SUBSCRIPTION OF SECURITIES – LEWIS
“Financial assistance”
No set definition – legislation states what it is NOT s44(1):
- Lending money in ordinary course of business by company whose primary business is
lending of money
- Advice, information, documents
- Giving a person something that they already have a legal right to receive
- Debt that is due and payable
- The words have no technical meaning and their frame of reference is in my
judgement the language of ordinary commerce. One must examine the commercial
realities of the transaction and decide whether it can properly be described as giving
financial assistance by the company, bearing in mind that the section is a penal one
and should not be strained to cover transactions which are not fairly within it.
- - Charterhouse Investment Trust Ltd v Tempest Diesel Ltd [1986]
Includes:
- Loan, guarantee provision of security or otherwise
- LIPSCHITS V UDC BANK – stood surety (simulated transaction)
- BRADWELL: legitimate loan accounts due and payable does not equal financial
assistance
,Test
- BRADWELL V ROSTRA PRINTERS:
- Impoverishment test – rendered poorer – too narrow – Shcriener JA
- Holistic approach:
- Agreement non-genuine – e.g., fictious debt, fictious service contract
- Purchase asset at inflated price, not for business purposes
- Condition that shares sale plus excessive rental in respect of lease agreement
- DOES NOT INCLUDE:
purchase asset bona fide, seller subsequently uses to buy shares
“For the purpose of or in connection with”
- LEWIS
- Reason why is key
- Broad sense of the phrase – such proximity to the acquisition of shares that is
appropriate for regulation to apply
“Purchase or subscription of securities”
- Issued or to be issued
- Securities acquired directly from company or another person who holds them
Statutory requirements
- Is an alterable provision
- If choose to authorize according to subsection 2 then must follow requirements in
subsection 3
- Can make these requirements more onerous but not less onerous
- Subsection 3:
- Shareholder special resolution within previous 2 years
- Employee share scheme
- Board satisfied pass solvency and liquidity test immediately after providing financial
assistance (test is objective, satisfaction is subjective)
- Fair and reasonable to company (BEEE, Employee share schemes, market price
interest, vested interest, more than just ‘financial’ – to company benefit)
- (must pass all of the above)
- Ensure all additional restrictions in MOI complied with
Consequences of non-compliance
- Void to extent of inconsistency with the act or MOI
- Directors face liability for loss, damages, or costs
- Present at meeting, participated in decision, failed to vote against provision despite
knowing inconsistency (reasonably or ought to have known)
Financial assistance to directors
- Agency dilemma: more likely to have conflict of interest
- S45
- Same extended reach for subsidiary companies or related or inter-related persons to
the director
, Plan of action for answering ‘is this financial assistance and legal’ type questions
1. Does it fit the s44 description of financial assistance?
- Check the definition and what it includes/excludes
- Use interpretation from case law (LIPSCHITZ, BRADWELL,CHARTERHOUSE INVEST.)
2. If it does, go to subsection 3 of s44 and make sure it complies with the requirements
- MOI alterations (allow) (can make more onerous but not less)
- Employee share scheme/share holder special resolution
- Solvency and liquidity test – cite cases that apply it
- Fair and reasonable to company
3. (if ask) consequences
- Liability (def of ‘know’)
