South Africa: Navigating Indemnities In Light Of The Financial Assistance Provisions Of The Companies Act: A Look At Constantia Insurance Company Limited V The Master Of The High Court

In the case of Constantia Insurance Company Limited v The Master of the High Court, Johannesburg and Others (512/2021) [2022] ZASCA 179 (13 December 2022), an indemnity provided to a guarantor by a related group company was held to constitute financial assistance in terms of section 45 of the Companies Act, 71 of 2008 (the Act).

During liquidation proceedings, Constantia Insurance Company Limited (Constantia) proved claims at a meeting of creditors of Protech Khuthele Property Investments (Pty) Ltd (in liquidation) (Protech Investments). The claims were subsequently expunged by the Master of the High Court, which prompted Constantia to bring a review application, which was then taken on appeal to the Supreme Court of Appeal (SCA). The issue on appeal was whether the High Court correctly determined the issues against Constantia. Of particular interest was the issue as to whether an indemnity provided by a related group company to Constantia constituted financial assistance.

Protech Investments formed part of a group of companies to which Constantia provided performance guarantees. These performance guarantees were given by Constantia in favour of third parties for the contractual obligations of the operating companies in the group. The guarantees were given in return, inter alia, for the undertaking by Protech Investments to indemnify Constantia in respect of any claims under the guarantees.

The liquidators of Protech Investments subsequently disputed demands made by Constantia under the indemnity. The liquidators contended that the indemnity given by Protech Investments in favour of Constantia for the obligations of one of the companies in the group, Protech Kuthele, constituted financial assistance as set out in section 45 of the Act. The liquidators averred that there was no evidence of a resolution of the board of Protech Investments authorising the chief executive officer of the group of companies to bind it to enter into the indemnity. Accordingly, the argument of the liquidators was that there was non-compliance with the requirements of section 45 of the Act and the indemnity was not valid.

The SCA determined that the expression ‘the board may authorise' (which appears in section 45(2) of the Act) means that the board of a company must adopt a resolution to provide financial assistance to a company or person mentioned in section 45(2) of the Act. The SCA further determined that the board may only take such a resolution if it satisfied itself with the additional two requirements set out in section 45(3)(b) of the Act. The first is that, immediately after providing the financial assistance, the company must satisfy the solvency and liquidity test. The second is that the terms under which the financial assistance is proposed must be fair and reasonable to the company. The SCA held that there was no evidence that the board of Protech Investments had adopted a resolution to enter into the indemnity.Notwithstanding Constantia's contestation that the requirements referred to in section 45(3)(b) of the Act had been considered upon the entering of the indemnity, as the solvency and liquidity of the members of the group had regularly been considered by the group audit and risk committee, the SCA held that this clearly did not meet the requirements as per section 45(2) of the Act, and that the board of Protech Investments had to specifically satisfy itself that it was appropriate to place its assets at risk in terms of the indemnity.

In light of this, the SCA held that Protech Investments provided financial assistance to Protech Kuthele in terms of the indemnity, and that that in all material respects, Protech Investments did not comply with the requirements of section 45 of the Act. Accordingly, in terms of section 45(6) of the Act, the indemnity was void. The claims that Constantia thus sought to prove for purposes of the liquidation proceedings under the indemnity could not be considered in the liquidation proceedings.

From the judgment, it is clear that an indemnity given pursuant to a guarantee for the performance of an obligation can constitute financial assistance in terms of section 45 of the Act. As such, the requirements of section 45 must be followed. Specifically, the board of a company must approve such an indemnity in terms of the peremptory requirements set out in section 45(3)(b) of the Act, failing which the indemnity will be deemed void as per section 45(6) of the Act.

This bulletin was prepared by Part Daniel Hart, Associate David Pule and Candidate Attorney Jovan Pienaar.

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