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INFLUENCE: Personally liable, Never?

Section 45 of the new Companies Act – Liability for loans and other financial assistance to directors – remains a thorny issue, writes Natasha Sexton

Two years have passed and implementation of the new Companies Act 71 of 2008 should be in full swing, or is it? One area that has resulted in much confusion and many questions is loans and other financial assistance to directors (section 45). Directors and smaller practitioners (auditors and independent reviewers) are struggling to identify when section 45 is applicable and which steps are appropriate to follow.

A typical scenario is where you are the director and owner of a small business. For years you put money into the business from your home loan and carried the burden of smoothing over challenging cash flow months. Finally things turned around and you want to enjoy the rewards of your hard work and take a loan from your business. Over the years this loan has grown to quite a substantial sum of money. Then the business is hit hard by the recent economic downturn and you now find yourself in a position where cash flows are once again under pressure. Your creditors are pressuring you to make good on your payment arrangements with them and despite all efforts, you simply cannot live up to your commitments. Unfortunately, this cycle continues and the big deal that would have set you up for the next few years does not come through. Your financial statements have always been signed off by the auditors without any qualifications to this point. You have unsuccessfully attempted to enter business rescue proceedings and are forced to liquidate.

At least you can breathe a sigh of relief that you are not personally liable – especially for that loan – or are you?

What the director and auditor in the scenario above need to know is that there may indeed be personal and professional liability for those loans made without meeting the requirements of section 45.

What changes should you be aware of?

Section 45 of the new Companies Act brings about a huge shift in the requirements and implications of financial assistance to directors compared with section 226 of the previous Companies Act. Directors and small practitioners may not be aware of the new requirements. ❐

Author: Natasha Sexton CA(SA) Auditing Lecturer at School of Accountancy, University of Stellenbosch