08 Sep 2014

Corporate & Commercial Law Update, The NCA and Shareholder and Employee Loans


Does the National Credit Act, 34 of 2005 ("NCA") apply to loans by a company to its shareholders and loans by an employer to its employees?  These questions arise time and time again. 

In terms of section 4(1)(a) of the NCA it applies to every credit agreement made within or having an effect in South Africa and which is between parties dealing at arm's length.  The million dolar question is whether shareholder and employee loans are "credit agreements" for the purposes of the NCA.

An agreement is deemed to be a credit agreement in terms of the NCA if:

  • an obligation to pay is deferred;
  • a charge, fee or interest is payable to the credit provider in respect of that deferred amount;
  • the parties are dealing at arm's length.

Section 4(2)(b) of the NCA states that parties are not dealing at arm's length if the loan is between a company and a person who has a controlling interest in that company e.g. a loan by a company to its controlling shareholder.  The same applies if the parties are not independent of each other and so one party does not try to get the "utmost possible advantage" from the transaction.  This may apply to employee loans. 

SHAREHOLDER LOANS

While the NCA deals clearly with loans between a company and a majority shareholder, what is the situation where the shareholder borrower does not have a "controlling interest" in that company?  The NCA does not define when a shareholder would have a "controlling interest".  In Christian Findlay Bester and others v Coral Lagoon Investments (16168/2012) [2013] ZAWCHC 27; 2013 (6) SA 295 (WCC), the court considered this question and referred to the Guide to the National Credit Act and various legislation.  The court held that a person may control a company without controlling all the shares and without having a majority shareholding and that a person can influence the affairs of a company by means other than holding a majority shareholding.  This means that loans to minority shareholders will not be at arm's length for the purposes of the NCA if the minority shareholder has "control" over the company.  Whether that is the case is a question of fact in each case.

EMPLOYEE LOANS

Most employee loans include interest being charged, even at a nominal rate.  If interest is charged at a nominal rate, is the transaction is at arm's length?

While there is an argument that charging a nominal interest means that the transaction is not at "arm's length" because the employer does not achieve the utmost benefit from the loan, the National Credit Regulator has adopted the view that the charging of any interest, fee or charge on a transaction renders an agreement a credit agreement for the purposes of the NCA.

SO WHAT DOES THAT MEAN?

If you or your company has at least 100 credit agreements or if the total principal debt owed to you exceeds R500 000, then you have to register as a credit provider under the NCA. 

Once registered as a credit provider, you have to do preliminary assessments of credit-worthiness on all borrowers before you make loans to them.  This includes employees and shareholders.  If you do not do so, you may be concluding reckless credit agreements which means that those credit agreements will be unlawful and void.

LOANS TO DIRECTORS?

In addition to the complications of the NCA, the Companies Act imposes certain requirements on a company before it can lend money or give any financial assistance to its directors.  The Companies Act includes in the concept of financial assistance, lending money, guaranteeing of a loan or other obligation and securing any debt or obligation.

Unless a company's memorandum of incorporation ("MOI") says otherwise, section 45 of the Companies Act allows a company to give direct or indirect financial assistance to directors and prescribed officers of the company and its related companies and other related persons.  Any financial assistance has to meet any applicable restrictions imposed in the company's MOI.

In addition to those hurdles, the Companies Act imposes solvency and liquidity requirements and a condition that the terms of any financial assistance must be fair and reasonable to the company.  Financial assistance is also prohibited unless it is in terms of an employee share scheme under the Companies Act or specifically approved by shareholders in terms of a special resolution passed within the previous 2 years.

If the board of the company resolves to grant the financial assistance and the value of that assistance exceeds 1/10 of 1% of the company's net worth at that time of the resolution, the board must give shareholders and trade unions a copy of the resolution within deadlines prescribed by the Companies Act. 

Resolutions which grant financial assistance to directors without complying with the Companies Act and the company's MOI are void.  If such a resolution is void, any director present at the meeting where it was passed and who failed to vote against it, is personally liable.

Sally Mashiane, Associate

Contact: 031 575 7418 or mashiane@wylie.co.za