Kayleigh May
Student no: 68021321
MRL2601 – Assignment 2 – Unique No: 758364
Date: 30/09/2020
, Question 1
Section 44 of the Companies Act 71 of 2008 sets out certain requirements that must be
met in order to determine if a transaction qualifies as financial assistance or not. This
section provides that a company may provide financial assistance in the form of a loan,
guarantee or provision of security to a person in order for them to acquire shares and
other securities in the company, but only if this assistance is permitted by the company’s
Memorandum of Incorporation. The board of directors have the responsibility to decide
whether they will assist a person to acquire shares in the company, but only if the
assistance is in terms of an employee share scheme that meets the requirements of
Section 97, or where a special resolution has been undertaken by the shareholders in the
previous two years that authorizes assistance to a person or persons that fall in a specific
category, and the person receiving the financial assistance must fall in that category. The
board must also have the surety that the solvency and liquidity requirements will be met
after providing the financial assistance, which must be given on fair and reasonable terms
for the company. The Memorandum of Incorporation must also be consulted to establish
whether there are further restrictions on the provision of financial assistance and if these
requirements are met.
In Lipschitz v UDC Bank Ltd, the court determined that the transaction must be assessed
in two phases, the first being that it must be established whether there was financial
assistance. In Gradwell (Pty) Ltd v Rostra Printers Ltd, the “impoverishment test” was
brought to life, which is used to consider whether the company will be poorer after the
transaction has concluded – if this is the case, then financial assistance was provided.
Secondly, it must be established whether the financial assistance was specifically for the
purchase of shares in the company. When the transaction has passed these two phases,
it also has to comply with Section 44 of the Companies Act in order to be declared as a
valid transaction.
In the scenario given, it can be concluded that the transaction of Securities (Pty) Ltd
loaning money to Jonathan to acquire shares in the company, is financial assistance.
Student no: 68021321
MRL2601 – Assignment 2 – Unique No: 758364
Date: 30/09/2020
, Question 1
Section 44 of the Companies Act 71 of 2008 sets out certain requirements that must be
met in order to determine if a transaction qualifies as financial assistance or not. This
section provides that a company may provide financial assistance in the form of a loan,
guarantee or provision of security to a person in order for them to acquire shares and
other securities in the company, but only if this assistance is permitted by the company’s
Memorandum of Incorporation. The board of directors have the responsibility to decide
whether they will assist a person to acquire shares in the company, but only if the
assistance is in terms of an employee share scheme that meets the requirements of
Section 97, or where a special resolution has been undertaken by the shareholders in the
previous two years that authorizes assistance to a person or persons that fall in a specific
category, and the person receiving the financial assistance must fall in that category. The
board must also have the surety that the solvency and liquidity requirements will be met
after providing the financial assistance, which must be given on fair and reasonable terms
for the company. The Memorandum of Incorporation must also be consulted to establish
whether there are further restrictions on the provision of financial assistance and if these
requirements are met.
In Lipschitz v UDC Bank Ltd, the court determined that the transaction must be assessed
in two phases, the first being that it must be established whether there was financial
assistance. In Gradwell (Pty) Ltd v Rostra Printers Ltd, the “impoverishment test” was
brought to life, which is used to consider whether the company will be poorer after the
transaction has concluded – if this is the case, then financial assistance was provided.
Secondly, it must be established whether the financial assistance was specifically for the
purchase of shares in the company. When the transaction has passed these two phases,
it also has to comply with Section 44 of the Companies Act in order to be declared as a
valid transaction.
In the scenario given, it can be concluded that the transaction of Securities (Pty) Ltd
loaning money to Jonathan to acquire shares in the company, is financial assistance.
