Section 38 Of The Companies Act No 61 of 1973

Section 38 of the Companies Act prohibits a company from providing financial assistance to acquire shares in that company, subject to certain exceptions.

The position in terms of the Corporate Law Amendments Act No 24 of 2006 (the “Act”)

Section 38(1) states that a company may not give any financial assistance for the purpose of, or in connection with, a purchase or subscription made or to be made by any person for any shares of the company, or where the company is a subsidiary company of its holding company.

The position, with regards to Section 38 of the Companies Act No 61 of 1973, and Section 38(1) of the Act, remains relatively unchanged and has the same effect.

In terms of sub-section (2A) of the Act, a company is allowed to provide financial assistance for the purchase of, or subscription for its own shares, or shares in its holding company, if authorised by a special resolution and if the company’s board is satisfied that “subsequent to the transaction” the company’s consolidated assets will exceed its consolidated liabilities and that “subsequent to the transaction” and “for the duration of the transaction” the company will be able to pay its debts as they fall due in the ordinary course of business. A solvency test is accordingly introduced with regards to the provision of financial assistance by a company for the acquisition of its shares. This is in line with the solvency test adopted in the share buy-back provisions of Section 85 of the Companies Act No 61 of 1973.

Further, for the purposes of paragraph (2A) of the Act, the directors must account for any contingent liabilities which may arise in the company, including any contingent liability which may result from giving their assistance. This provision is not present in the Companies Act No 61 of 1973.

21 December 2010