Do businesses offering financial assistance have to register as a credit provider?

Is a business that gives a loan to a person to purchase shares of that business required to register as a credit provider under the National Credit Act 34 of 2005 (NCA)?

Darryl Furman, director, Fluxmans

In considering the answer, reference should be made to both the NCA and the Companies Act 71 of 2008.

Under the NCA, a loan by nature is a credit agreement, but its provisions do not apply to all credit agreements. One of the consequences of applying the CNA is that the company lending the funds must be registered as a credit provider at the time of entering into the credit agreement or must have applied for its registration within 30 days of the credit agreement. conclusion of the credit agreement. If the lender was not registered at that time or did not apply to be registered, the credit agreement is illegal and can be declared void by a court.

As a general rule, the provisions of the NCA apply to all credit agreements between parties at arm’s length, which are made or have effect in South Africa. There are, however, exceptions when the NCA will not apply to such arm’s-length credit agreements, such as:

  • when the consumer (borrower) is a legal person whose asset value or turnover alone (or combined with the asset value or the combined annual turnover of all related legal persons), at the time of the conclusion of the credit agreement, is equal to or greater than the prescribed threshold. The current threshold is R1m. A legal person is defined as a partnership, association or other group of persons, whether incorporated or not, or a trust if there are three or more trustees or if the trustee is itself a legal person, but does not include a stokvel. A legal person is related to another legal person if (i) one of them exercises direct or indirect control over all or part of the activity of the other; or (ii) one person exercises direct or indirect control over both;
  • when the consumer is a legal person whose asset value or turnover (or with the combined asset value or annual turnover of all related legal persons) is below the threshold of R 1 million, but the credit agreement is an important agreement. A credit contract is an important contract whether it is a “mortgage contract” (that is to say a credit contract secured by the registration of a mortgage obligation on a building) or any other credit transaction (except a pawn shop or a credit guarantee) and the principal debt under this transaction is R 250,000 or more.

If any of the above exceptions apply, the company providing the loan does not have to register as a credit provider under the NCA before granting the loan.

Arm length

In addition to the above exceptions, the NCA will not apply to credit agreements in cases where the parties to the credit agreement deal at arm’s length. While the NCA does not define the term “arm’s length”, it does provide a non-exhaustive list of arrangements in which the parties will be deemed to be dealing at arm’s length. For the purposes of this article and the original question, the following agreements are deemed to be at arm’s length:

  • a loan to a shareholder;
  • any other arrangement in which each party is not independent of the other and therefore does not necessarily seek to get the most out of the transaction.

Applying the above, it is simple to deduce that the parties are dealing at arm’s length in cases where, at the time of entering into the loan agreement, the borrower is a shareholder of the lending company. In these cases, the business will not have to register as a credit provider as a prerequisite for granting such a loan. Therefore, a loan by a company to an existing shareholder for the purpose of acquiring additional shares in the company is not regulated by the NCA and, therefore, the company does not have to register as a credit provider under the granting of such a loan.

Strict interpretation

As the ANC specifically refers to a loan to a shareholder being excluded from the application of the ANC, does this then imply that loans to non-shareholders, wishing to acquire shares in the lending company, fall under within the jurisdiction of the ANC and in all such cases, a company which lends money to a non-shareholder, for the purpose of acquiring shares of the lending company, and provided that none of the other above exceptions apply, must register as a credit provider before this loan is entered into? A strict interpretation of the NCA suggests that this could be the case.

Should such a strict interpretation always apply? Can a loan from a company to a non-shareholder for the purpose of acquiring shares of that company in certain circumstances can be considered a arrangement “in which each party is not independent of the other and therefore is not independent of the other? not necessarily strive to obtain the maximum possible benefit from the transaction ”, in which case the company would not have to be registered as a credit provider?

One would think that this should be the case in cases where, for example, the borrower is a director (but not a shareholder) of the lending company and the loan is subject to favorable repayment terms, such as a rate. nominal interest (or a minimum interest rate so as not to be classified as a dividend by the South Africa Revenue Service) and repayable over an extended period or only on the proceeds of dividends attributable to the relevant shares which are vested .

However, businesses should be cautious when granting loans when they are not registered as a credit provider, as one of the consequences of a business granting a loan that falls under the jurisdiction of the ‘ANC, without being registered as a credit provider, is that a court can declare the loan illegal and unenforceable. In view of such a consequence, businesses are vulnerable to abuse from those who may seek to evade their repayment obligations by invoking non-registration of the business as a valid, albeit technical, defense. . With such a severe consequence, it may be desirable for companies to register as creditors before granting loans to persons (other than shareholders) for the purpose of acquiring shares in the company.

Article 44

Companies must also take into account the provisions of section 44 of the Companies Act when determining the terms and conditions that will apply to loans to persons to enable them to acquire shares of that company. Section 44 (3) (b) of the Companies Act provides that a board of directors of a company may not authorize any financial assistance under section 44 unless the board is satisfied that (i) immediately after providing the financial assistance, the company would pass the solvency and liquidity test; and (ii) the conditions under which financial assistance is offered are fair and reasonable for the business.

What constitutes “just and reasonable to the business” terms is not so straightforward to determine, for example, is the board only required to review the business terms of the loan and / or whether a guarantee provided for the repayment of the loan is adequate or is this requirement inserted to protect the interests of only the shareholders and / or creditors of the company?

If this is the case, would a loan granted at a nominal interest rate and / or containing other repayment terms favorable to a borrower be considered a loan the terms of which are not fair and reasonable for the company? lender? Therefore, although a company may offer favorable repayment terms to a non-existing shareholder in order to avoid having to register as a credit provider under the NCA, it must ensure that, in doing so, it does not violate section 44 (3) (b) of the Companies Act.

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