In terms of the Companies Act No. 71 of 2008 (“Companies Act”), a distribution, in broad terms, encompasses any direct or indirect transfer by a company of money or other property of the company (save for its own shares), whether out of capital or profits, the incurrence of a debt or obligation by the company and/or the forgiveness or waiver of a loan owed to the company, in favour of any of its own shareholders (or beneficial interest holders of its shares) or other shareholders (or beneficial interest holders of such shares) of other companies in the same group and in respect of the shares of that shareholder. A distribution of money or other property may take on various forms including payment of a dividend, payment in lieu of a capitalisation share, payment of consideration for the repurchase by the company of its own shares, payment as consideration for the acquisition by any company within the same group of any shares of a company within that group or otherwise in respect of any shares of the company or a company within the same group. The definition of a distribution however excludes a distribution made pursuant to the final liquidation of a company.

This article shall explore the statutory requirements in terms of the Companies Act for a distribution as contemplated in the Companies Act, as well as the consequences of non-compliance of such statutory requirements.

Statutory requirements for a distribution:

The requirements for a valid distribution are covered in section 46 of the Companies Act. These statutory requirements are an unalterable portion of the Companies Act, meaning that directors and shareholders cannot waive, amend or dispense with such requirements.

In terms of section 46, there must firstly be a resolution of the board of directors authorising the distribution, unless the distribution is pursuant to an existing legal obligation of the company or a court order. Secondly, it must reasonably appear that the company will satisfy the solvency and liquidity test immediately after the completion of the distribution. A distribution in the form of a transfer of money or property will be completed once the money or property is transferred. Such transfer must occur within a period of 120 business days after the board has applied the solvency and liquidity test failing which it is subject afresh to the solvency and liquidity test. If, however, the distribution consists of the incurrence of a debt or other obligation by the company, the solvency and liquidity test must be satisfied at the time when the board resolves that the company may incur the debt or obligation and not when the debt or obligation is actually incurred, nor when the debt is subsequently satisfied. Thirdly, there must be a resolution of the board of directors acknowledging that the board has applied the solvency and liquidity test and reasonably concluded that the company will satisfy the solvency and liquidity test immediately after the completion of the distribution.

In terms of section 46, a distribution is a management decision and no shareholder approval is required. Shareholder approval may however be required in terms of a company’s memorandum of incorporation, as the memorandum of incorporation of a company may include any provision imposing on the company a higher standard, greater restriction, longer period of time or any similar provision placing a more onerous obligation on the company than would otherwise apply in terms of an unalterable provision of the Companies Act. Although such a provision in the memorandum of incorporation could confer on the shareholders a right to veto a proposed distribution, it would not confer on shareholders a right to decide that a distribution must be made by the company. The decision whether to make a distribution must remain a board decision.

Consequences of an invalid distribution made by the Company:

The Companies Act contains no criminal sanction for an unlawful distribution, however it does contain a civil sanction. In terms of the Companies Act read with the common law, if a company makes an unlawful distribution, the directors who authorised the distribution may be liable to reimburse the company the amount by which the value of the distribution exceeds the amount that could have been validly distributed without contravening the solvency and liquidity test, less any amount recovered by the company from the persons to whom the distribution was made. There is no explicit provision in the Companies Act that stipulates that an unlawful distribution is null and void – but a court may set aside the resolution authorising the distribution in terms of section 218(1) of the Companies Act.

Concluding remarks:

It is of the utmost importance that any distribution made by a company complies with the provisions of the Companies Act, as personal liability of directors may follow as a result of non-compliance as described above.

VDMA’s team of experts are available to assist you and your business with any legal requirements pertaining to the making of distributions by your company including, drafting the memorandum of incorporation, drafting the board and shareholder resolutions and the provision of legal advice.

Published 16 March 2023