The Supreme Court of Appeal has ruled that an indemnity provided by one company in a group to support an insurance guarantee obtained by another company in the group was void where the requirements of section 45 of the Companies Act were not complied with.
Companies in the Protech group asked Constantia Insurance Company Limited (CICL) to provide performance guarantees in respect of the contractual obligations of the operating companies in the group towards third parties.
CICL agreed to do so in return for a premium per guarantee and provided that each of the companies in the group signed an indemnity in its favour.
The chief executive of the Protech group signed the indemnity on behalf of the group of companies. The consequence of the indemnity was that each company in the group undertook to indemnify CICL in respect of any demand under any guarantee issued to third parties for the obligations of any company in the group.
The High Court placed Protech Khuthele Property Investments in liquidation in September 2014. All the other companies in the Protech group are also being wound up.
CICL itself was placed in final liquidation in September 2022.
CICL’s claims under the guarantees amounted to some R182 million and related to the various guarantees that it had issued to third parties to secure the obligations of Protech Khuthele Property Investments (Pty) Ltd.
CICL claimed the demands that had been made on it in terms of the guarantees from Protech Investments under the indemnity.
Liquidators dispute the claims
Protech’s liquidators disputed the claims. They contended that the indemnity constituted “financial assistance” – as defined by section 45 of the Companies Act – by Protech Investments to one of the group’s subsidiaries, Protech Khuthele (Pty) Ltd.
According to section 45(1)(a) of the Act, “financial assistance” includes lending money, guaranteeing a loan or other obligation, and securing any debt or obligation.
The liquidators also said they had been unable to find a resolution by the board of Protech Investments authorising the group’s chief executive to bind it to the indemnity or indicating compliance with the requirements of section 45.
The Master of the High Court expunged the claims on the grounds that there were reasonable grounds that they were invalid.
CICL sought an order from the High Court reviewing and setting aside the Master’s decision. The High Court dismissed the application with costs, but it granted CICL leave to appeal to the SCA.
Was the indemnity ‘financial assistance’?
The SCA found that all matters mentioned in section 45(1)(a) are exhaustive of the meaning of “financial assistance”. In terms of section 45(2), however, section 45 applies to direct and indirect financial assistance.
In terms of sections 2(1) and 2(2) of the Companies Act, read with the definitions in section 1, a juristic person is related to another juristic person if, among other things, they are subsidiaries of the same company. Both Protech Investments and Protech Khuthele were subsidiaries of Protech Holdings. Constantia therefore rightly accepted that Protech Khuthele was a company related to Protech Investments.
The SCA said CICL guaranteed the contractual obligations of Protech Khuthele towards third parties in return for the undertaking by Protech Investments to indemnify CICL in respect of any claims under these guarantees.
In terms of its contracts with the third parties, Protech Khuthele was obliged to furnish performance guarantees. It obtained those guarantees because Protech Investments indemnified the guarantor. As such, Protech Investments put its property at risk to ensure that CICL provided the guarantees that Protech Khuthele required. Therefore, Protech Investments indirectly secured the obligations of Protech Khuthele within the meaning of section 45(1)(a).
Did Protech Investments comply with section 45?
The SCA held that in the context of section 66(1) and the use of the word “resolution” in sections 45(5), 45(6) and 45(7), the expression “the board may authorise” 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).
The board may not take such a resolution unless the two requirements set out in section 45(3)(b) are met:
- The company meets the solvency and liquidity test; and
- The terms of the financial assistance are fair and reasonable to the company.
The SCA found there was no evidence on record that the board of Protech Investments had adopted a resolution to enter into the indemnity. It also held there was no evidence that the board applied its mind to the requirements of section 45(3)(b) when it undertook to indemnify the contractual obligations of Protech Khuthele.
The court said Protech Investments provided financial assistance to Protech Khuthele in terms of an indemnity that in material respects did not comply with the requirements of section 45, which rendered the indemnity void.
The SCA dismissed CICL’s appeal with costs.
