10.2.2 Financial assistance for buying shares: s 44
S 44 and 45 are very closely related; but we have to keep the two separate
S 44: what we will look at is the purpose behind financial assistance
o Company gives financial assistance to a person; the purpose behind that financial assistance
is crucial
In s 45, the identity of the person receiving financial assistance is important, not necessarily the
purpose behind it
It is possible that a specific type of financial assistance would be to a recipient falling under s 45 and
the purpose is also covered by s 44
o There is a possibility of overlap between the two sections
The heading of s 44 is deceptive – states “financial assistance for subscription of securities”
o Implies that this only deals with the primary market
o As we will see, it doesn’t just cover the subscription of shares, it also deals with the
purchase of shares
o Doesn’t just cover the primary market; also covers the secondary market
o This section deals with the company assisting a person financially to obtain shares in the
company
o Whether that person obtains shares directly from the company through a subscription and
issue, or the person purchases shares from an existing shareholder, is irrelevant – s 44
applies to both situations
S 44(1): says that ‘financial assistance’ for purposes of this section does not include lending money
in the ordinary course of business by a company whose primary business is the lending of money
o If you borrow money from a bank to buy shares in the bank, s 44 wouldn’t apply
Crux is in s 44(2): see this section in the Act; long section
o S 38 of the old Act is important for understanding s 44 of the new Act
S 38 had very similar wording to s 44
The crucial difference is that s 38 prohibited and criminalised financial assistance
o The new Act moves away from that in s 44
The default position is that financial assistance is allowed, but it is subject to
restrictions
It is an alterable provision – s 44 can be removed
You could provide in your MOI that the board or the company is not allowed to
provide financial assistance at all
o What abuse do the creditors suffer if a company provides financial assistance?
The money could be used in a much better way for the creditors, instead of giving
people loans to buy shares
The possibility of abuse to the creditors exists
This is what the section tries to regulate
Why would the company help someone to buy shares in it? E.g. they want a specific
person to be a shareholder
S 44(3) sets out the requirements for financial assistance; we will get back to this section
S 44(4) provides that the company may impose stricter requirements in its MOI than those
contained in s 44(3), and the board will have to satisfy both the requirements of s 44(3) and the
MOI in such a case
Under the old Act, financial assistance by the company to help people buy shares was prohibited
o But, the wording was similar to s 44
o Does the fact that the wording is very similar mean that we interpret s 44 in a similar
fashion to the old s 38?
1
, o Difficult to answer this question, because the context differs: financial assistance for the
purchase of shares was prohibited and criminalised under the old Act, whereas it is allowed
under new Act
o Should words and phrases that appeared in the old Act be treated the same?
o If something is criminalised by an Act, courts tend to interpret those provisions quite strictly
– it won't read in criminality unless the conduct falls squarely within the wording of the
provision
o If you just transfer the wording to the new Act, would the court now be more liberal in
interpreting the same words and phrases?
o We are looking specifically at phrase “the purpose of, or in connection with, the
subscription of any…securities”
What does “in connection with” mean?
Should this be interpreted strictly, like under the new Act, or do we interpret it more
broadly because it is not a criminal offence anymore?
Two steps that we have to look at:
1. Was there financial assistance?
2. Secondly, what was the purpose of that financial assistance?
Does the purpose fall within s 44(2)?
o S 44 can only apply if both are satisfied
o The mere fact that a company provides financial assistance to someone is not sufficient –
that is only step one
If the company did not give financial assistance, don’t bother going to step two; the
investigation stops there
o If the company assisted someone to obtain shares, but it wasn’t financial assistance, we
don’t go further
o Once step one is satisfied, we go over to step two to determine the purpose of the financial
assistance
10.2.2.1 Question one: was there financial assistance?
The Act says: “a loan, guarantee, security, or otherwise” will qualify as financial assistance
Loan, guarantee and security = easy; there is clearly financial assistance in these cases
What does “otherwise” mean?
Lipschitz v UDC Bank 1979 (A) (prescribed)
o This case was concerned with three companies: Ubco, Oreon and Kruben (U, O and K)
o Lipschitz was the liquidator of each of the three companies
o UDC Bank lodged certain claims against the companies in liquidation and Lipschitz rejected
them as being void and unenforceable as a result of s 38 under the old Act
o The facts are very important for this case:
Each of the three companies owned neighbouring properties in a certain area
One day, a company called Prosun (P) offered to purchase the and loan accounts of K
Part of the purchase price was to be paid in cash
The balance (R87 000) was to be paid about a year later
That offer was accepted by the shareholders of K
Then, P made a second offer, for the purchase of the shares and loan accounts of O,
which was accepted
Then U took over the rights and obligations of P under two agreements and
substituted itself into P’s place as the purchaser of the shares and loan accounts of O
and K
The purpose of all this was for U to take control of all three of the properties and
develop them
2
, U now approached UDC Bank for a loan (first transaction)
UDC was willing to lend U R132 000, which could cover the balance of the
purchase price that U owed to P in respect of the shares and loan accounts of
O
Of that total sum, about R77 000 was the price of the O shares, and R55 000
was the price of the loan accounts
Agreement was reached in respect of the loan, subject to certain conditions:
o O undertook to provide security for R55 000 of the loan (the price of
the loan accounts)
o O gave UDC a special power of attorney to register the security
UDC then loaned U the R132 000
When UDC made this loan, it knew that the purpose of the agreement was to
enable U to acquire O’s shares and loan accounts
U later approached UDC for another loan (second transaction)
This time, U needed a loan so that it could pay P the purchase price for the
shares and loan accounts of K
UDC agreed to loan R87 000 to U under certain conditions:
o U, O and K signed a cross-guarantee in terms of which they bound
themselves as sureties and co-principal debtors to UDC for any
obligation which U, O or K might owe to P
o K and O then each gave UDC a special power of attorney to register
security (“surety mortgage bonds”) over their immovable property,
securing the loan
o The contemplated surety mortgage bond by O in favour of UDC was
later duly executed, which served to secure the obligations of U to
UDC in respect of the purchase by U of O’s loan accounts (for the sum
of R55 000) and the purchase of the shares in K (for the sum of R87
000)
The three companies are then liquidated and UDC claims the loans back
Lipschitz rejects the claims on the basis that the loans constituted financial
assistance by O and K for the purpose of or in connection with the purchase of their
shares, and that the loan agreements and security for such loans were void and
unenforceable
o Court asked itself: what test can one use to determine whether or not financial assistance
was given?
o Are there any tests that would enable a court to make this determination?
o The first test the court considers is the “impoverishment test”
The question is: did the company, in consequence of what it did for the purpose of
or in connection with the purchase of its shares, become poorer?
If the answer is yes, it was financial assistance
If the answer is no, there wasn’t financial assistance
E.g. payment of a dividend like in Novick v Comair
The value of a share is X
The company pays out a dividend to the seller to reduce the value of the
share
Did the company give financial assistance to the parties in this case?
NB: s 44 doesn’t say “financial assistance to the purchaser”; assistance to the
seller could also qualify
Both financial assistance to the seller and the buyer are covered
The identity of the recipient of the assistance is not important under s 44
3
, Is the impoverishment test a good test or not?
Act uses e.g. “security” as a form of financial assistance
In Lipschitz, the court says that although the Act is clear that the granting of
security is financial assistance, granting a security doesn’t make the company
poorer
But, because it is listed in the Act, it qualifies as financial assistance within the
meaning of s 44
Is the court necessarily correct in saying that granting a security doesn’t make
the company poorer?
Probably not correct – as soon as you encumber an asset, you reduce its
value, because you can't dispose of it as freely as before
The example the court gives is wrong; granting security does impoverish the
company
E.g. registering a mortgage bond over your immovable property reduces its
value
On the other hand, the court uses the example of a loan, which is also expressly
mentioned in the Act
The court says that if the company grants a loan to a person, the company is
poorer
Is that necessarily the case?
No
The company gets that money back + interest
The company is not necessarily poorer by providing a loan to a person,
especially if interest accrues on that loan, because that loan could be an asset
for the company
It is clear from the Lipschitz case that the impoverishment test can assist you to
determine whether financial assistance was given, but it cannot be conclusive
The mere fact that the company is poorer cannot be conclusive as to whether
the company granted financial assistance or not
In itself, impoverishment is not sufficient
10.2.2.2 Question two: what was the purpose of the financial assistance?
Once you’ve answered question one, was there financial assistance, the next question is: what was
the purpose of that financial assistance?
Was it for the purpose of or in connection with the purchase or subscription of shares?
What happened was that a lot of schemes were thought out to circumvent s 38 under the old Act
o You would go to your lawyer or auditor and ask them to help you provide financial
assistance to a new shareholder without contravening s 38
o E.g. paying out a massive dividend to the seller to reduce the value of the share
o With all these schemes, the court had to determine whether it qualified as financial
assistance, and secondly, what the purpose of the scheme was
o If the direct purpose was to assist a person to purchase shares, that would be covered
o Sometimes, the direct purpose of a scheme is not that obvious
o E.g. I’ve got a loan account in a private company
The company owes me money
And I also have shares in the company
I will never sell my shares without selling my loan account as well
I wouldn’t want to be outside the company and keep my loan account, not knowing
what is going on financially
The purchaser of shares would take cession of the loan account
4
S 44 and 45 are very closely related; but we have to keep the two separate
S 44: what we will look at is the purpose behind financial assistance
o Company gives financial assistance to a person; the purpose behind that financial assistance
is crucial
In s 45, the identity of the person receiving financial assistance is important, not necessarily the
purpose behind it
It is possible that a specific type of financial assistance would be to a recipient falling under s 45 and
the purpose is also covered by s 44
o There is a possibility of overlap between the two sections
The heading of s 44 is deceptive – states “financial assistance for subscription of securities”
o Implies that this only deals with the primary market
o As we will see, it doesn’t just cover the subscription of shares, it also deals with the
purchase of shares
o Doesn’t just cover the primary market; also covers the secondary market
o This section deals with the company assisting a person financially to obtain shares in the
company
o Whether that person obtains shares directly from the company through a subscription and
issue, or the person purchases shares from an existing shareholder, is irrelevant – s 44
applies to both situations
S 44(1): says that ‘financial assistance’ for purposes of this section does not include lending money
in the ordinary course of business by a company whose primary business is the lending of money
o If you borrow money from a bank to buy shares in the bank, s 44 wouldn’t apply
Crux is in s 44(2): see this section in the Act; long section
o S 38 of the old Act is important for understanding s 44 of the new Act
S 38 had very similar wording to s 44
The crucial difference is that s 38 prohibited and criminalised financial assistance
o The new Act moves away from that in s 44
The default position is that financial assistance is allowed, but it is subject to
restrictions
It is an alterable provision – s 44 can be removed
You could provide in your MOI that the board or the company is not allowed to
provide financial assistance at all
o What abuse do the creditors suffer if a company provides financial assistance?
The money could be used in a much better way for the creditors, instead of giving
people loans to buy shares
The possibility of abuse to the creditors exists
This is what the section tries to regulate
Why would the company help someone to buy shares in it? E.g. they want a specific
person to be a shareholder
S 44(3) sets out the requirements for financial assistance; we will get back to this section
S 44(4) provides that the company may impose stricter requirements in its MOI than those
contained in s 44(3), and the board will have to satisfy both the requirements of s 44(3) and the
MOI in such a case
Under the old Act, financial assistance by the company to help people buy shares was prohibited
o But, the wording was similar to s 44
o Does the fact that the wording is very similar mean that we interpret s 44 in a similar
fashion to the old s 38?
1
, o Difficult to answer this question, because the context differs: financial assistance for the
purchase of shares was prohibited and criminalised under the old Act, whereas it is allowed
under new Act
o Should words and phrases that appeared in the old Act be treated the same?
o If something is criminalised by an Act, courts tend to interpret those provisions quite strictly
– it won't read in criminality unless the conduct falls squarely within the wording of the
provision
o If you just transfer the wording to the new Act, would the court now be more liberal in
interpreting the same words and phrases?
o We are looking specifically at phrase “the purpose of, or in connection with, the
subscription of any…securities”
What does “in connection with” mean?
Should this be interpreted strictly, like under the new Act, or do we interpret it more
broadly because it is not a criminal offence anymore?
Two steps that we have to look at:
1. Was there financial assistance?
2. Secondly, what was the purpose of that financial assistance?
Does the purpose fall within s 44(2)?
o S 44 can only apply if both are satisfied
o The mere fact that a company provides financial assistance to someone is not sufficient –
that is only step one
If the company did not give financial assistance, don’t bother going to step two; the
investigation stops there
o If the company assisted someone to obtain shares, but it wasn’t financial assistance, we
don’t go further
o Once step one is satisfied, we go over to step two to determine the purpose of the financial
assistance
10.2.2.1 Question one: was there financial assistance?
The Act says: “a loan, guarantee, security, or otherwise” will qualify as financial assistance
Loan, guarantee and security = easy; there is clearly financial assistance in these cases
What does “otherwise” mean?
Lipschitz v UDC Bank 1979 (A) (prescribed)
o This case was concerned with three companies: Ubco, Oreon and Kruben (U, O and K)
o Lipschitz was the liquidator of each of the three companies
o UDC Bank lodged certain claims against the companies in liquidation and Lipschitz rejected
them as being void and unenforceable as a result of s 38 under the old Act
o The facts are very important for this case:
Each of the three companies owned neighbouring properties in a certain area
One day, a company called Prosun (P) offered to purchase the and loan accounts of K
Part of the purchase price was to be paid in cash
The balance (R87 000) was to be paid about a year later
That offer was accepted by the shareholders of K
Then, P made a second offer, for the purchase of the shares and loan accounts of O,
which was accepted
Then U took over the rights and obligations of P under two agreements and
substituted itself into P’s place as the purchaser of the shares and loan accounts of O
and K
The purpose of all this was for U to take control of all three of the properties and
develop them
2
, U now approached UDC Bank for a loan (first transaction)
UDC was willing to lend U R132 000, which could cover the balance of the
purchase price that U owed to P in respect of the shares and loan accounts of
O
Of that total sum, about R77 000 was the price of the O shares, and R55 000
was the price of the loan accounts
Agreement was reached in respect of the loan, subject to certain conditions:
o O undertook to provide security for R55 000 of the loan (the price of
the loan accounts)
o O gave UDC a special power of attorney to register the security
UDC then loaned U the R132 000
When UDC made this loan, it knew that the purpose of the agreement was to
enable U to acquire O’s shares and loan accounts
U later approached UDC for another loan (second transaction)
This time, U needed a loan so that it could pay P the purchase price for the
shares and loan accounts of K
UDC agreed to loan R87 000 to U under certain conditions:
o U, O and K signed a cross-guarantee in terms of which they bound
themselves as sureties and co-principal debtors to UDC for any
obligation which U, O or K might owe to P
o K and O then each gave UDC a special power of attorney to register
security (“surety mortgage bonds”) over their immovable property,
securing the loan
o The contemplated surety mortgage bond by O in favour of UDC was
later duly executed, which served to secure the obligations of U to
UDC in respect of the purchase by U of O’s loan accounts (for the sum
of R55 000) and the purchase of the shares in K (for the sum of R87
000)
The three companies are then liquidated and UDC claims the loans back
Lipschitz rejects the claims on the basis that the loans constituted financial
assistance by O and K for the purpose of or in connection with the purchase of their
shares, and that the loan agreements and security for such loans were void and
unenforceable
o Court asked itself: what test can one use to determine whether or not financial assistance
was given?
o Are there any tests that would enable a court to make this determination?
o The first test the court considers is the “impoverishment test”
The question is: did the company, in consequence of what it did for the purpose of
or in connection with the purchase of its shares, become poorer?
If the answer is yes, it was financial assistance
If the answer is no, there wasn’t financial assistance
E.g. payment of a dividend like in Novick v Comair
The value of a share is X
The company pays out a dividend to the seller to reduce the value of the
share
Did the company give financial assistance to the parties in this case?
NB: s 44 doesn’t say “financial assistance to the purchaser”; assistance to the
seller could also qualify
Both financial assistance to the seller and the buyer are covered
The identity of the recipient of the assistance is not important under s 44
3
, Is the impoverishment test a good test or not?
Act uses e.g. “security” as a form of financial assistance
In Lipschitz, the court says that although the Act is clear that the granting of
security is financial assistance, granting a security doesn’t make the company
poorer
But, because it is listed in the Act, it qualifies as financial assistance within the
meaning of s 44
Is the court necessarily correct in saying that granting a security doesn’t make
the company poorer?
Probably not correct – as soon as you encumber an asset, you reduce its
value, because you can't dispose of it as freely as before
The example the court gives is wrong; granting security does impoverish the
company
E.g. registering a mortgage bond over your immovable property reduces its
value
On the other hand, the court uses the example of a loan, which is also expressly
mentioned in the Act
The court says that if the company grants a loan to a person, the company is
poorer
Is that necessarily the case?
No
The company gets that money back + interest
The company is not necessarily poorer by providing a loan to a person,
especially if interest accrues on that loan, because that loan could be an asset
for the company
It is clear from the Lipschitz case that the impoverishment test can assist you to
determine whether financial assistance was given, but it cannot be conclusive
The mere fact that the company is poorer cannot be conclusive as to whether
the company granted financial assistance or not
In itself, impoverishment is not sufficient
10.2.2.2 Question two: what was the purpose of the financial assistance?
Once you’ve answered question one, was there financial assistance, the next question is: what was
the purpose of that financial assistance?
Was it for the purpose of or in connection with the purchase or subscription of shares?
What happened was that a lot of schemes were thought out to circumvent s 38 under the old Act
o You would go to your lawyer or auditor and ask them to help you provide financial
assistance to a new shareholder without contravening s 38
o E.g. paying out a massive dividend to the seller to reduce the value of the share
o With all these schemes, the court had to determine whether it qualified as financial
assistance, and secondly, what the purpose of the scheme was
o If the direct purpose was to assist a person to purchase shares, that would be covered
o Sometimes, the direct purpose of a scheme is not that obvious
o E.g. I’ve got a loan account in a private company
The company owes me money
And I also have shares in the company
I will never sell my shares without selling my loan account as well
I wouldn’t want to be outside the company and keep my loan account, not knowing
what is going on financially
The purchaser of shares would take cession of the loan account
4
