Thorts: Corporate governance considerations for Boards of Directors overseeing entities outside of South Africa

Financial assistance resolutions remain the cause of many sleepless nights for attorneys
and their clients.

The much written on Trevo Capital Ltd and others v Steinhoff International Holdings (Pty) Ltd and others (2833/2021) [2021] ZAWCHC 123 (Trevo Capital) decision has taught us valuable lessons on financial assistance to related companies. In this article, we discuss this case in relation to aspects that have not been highlighted much in previous reports of the case, and which we believe are important for the boards of directors overseeing related and inter-related entities incorporated outside of South Africa.

In this case, the third respondents are the financial creditors of Steinhoff International Holdings Proprietary Limited (SIHPL, previously SIHL) and the investors in a convertible bond (2021 Bond) issued by another company in the Steinhoff Group, namely Steinhoff Finance Holdings GmbH (SFHG), an Austrian entity. SIHPL guaranteed the obligations under the 2021 Bond, in terms of a guarantee (2014 Guarantee).

Following the discovery of accounting irregularities in the Steinhoff Group in 2017, Steinhoff was forced to restructure its debt in the European Union to avoid liquidation. Steinhoff proposed a compromise of its financial obligations to three classes of creditors, including the so-called financial creditors.

The proposed compromise required SIHPL to restructure its debt, and included a contingent payment undertaking (CPU) to the second respondent (an agent for the financial creditors).

Under the CPU, the SFHG debt in respect of the 2021 Bond was restated by way of bondholders providing cashless loans to Lux Finco 1, incorporated in Luxembourg, and on lending the cashless proceeds to SFHG, pursuant to an inter-company loan, to discharge its obligations under existing SFHG debt. The CPU recognises that SIHPL assumes the role of guarantor in respect of obligations originally owed by SFHG under the 2021 Bond, and later to Lux Finco 1.

The board of SIHL took steps to comply with section 45(3) of the Companies Act, 71 of 2008 (Companies Act) in respect of the 2014 Guarantee, but failed to comply with s45(3) in respect of the CPU and the resulting obligations to Lux Finco 1.

Financial Assistance to Related Foreign Companies

In Trevo Capital, the respondents argued that the applicants have no standing and that s45 is not applicable, since the financial assistance was advanced to a foreign company, namely SFGH. This raised the question of whether s45 applies to financial assistance provided to a foreign company.

To answer this question, the Court followed a contextual method of interpretation by referring to the text of s45 and other provisions of the Companies Act, and to the context and apparent purpose of the financial assistance provisions. The Court found that –
i. s45 did not expressly refer to a “foreign company” (a defined term in s1 of the Companies Act), but that this did not exclude foreign companies, and that foreign companies fell within the corporation category. As a reminder, the term corporation is referred to in s45(2) in the following context, “the board may authorise the company to provide direct or indirect financial assistance to … a related or inter-related company or corporation, or to a member of a related or inter-related corporation, or to a person related to any such company, corporation…”; the purpose of the financial assistance provisions is to prevent the abuse of the company’s directors’ powers by advancing financial assistance to foreign entities without safeguarding the shareholders’ and the company’s creditors’ interests;

ii. a generous interpretation of s45, to include financial assistance given by a South African entity to foreign recipients, was in line with the purpose of the provision and, in the court’s view, intended by the legislature; and that

iii. SIHL had given financial assistance to a foreign entity and had to comply with s45.

Applying the Solvency and Liquidity Test

The applicants contended that –
i. when the board approved the 2014 Guarantee, SIHL was factually and materially insolvent as a result of the overstatement of its assets and the inclusion of misleading information in its financial statements. Therefore, the board could not reasonably find that SIHPL would be solvent and liquid following the conclusion of the 2014 Guarantee; and that

ii. the board had to investigate and interrogate the financial statements before reaching a conclusion.

The Court –
i. accepted that the requirement in s45(3)(b) of the Companies Act that the “board is satisfied” is not a purely subjective test and that the board must take reasonably foreseeable circumstances into account; and

ii. noted that SIHL’s board took steps to comply with the requirements of s45 and considered fair and reasonable opinions prepared by reputable auditing and law firms before concluding that the conditions of s45(3) were met.

Thus, the applicant’s retrospective analysis of SIHL’s financial position, following the discovery of accounting irregularities in 2017, did not convince the court that the board had violated the requirements of s45 of the Companies Act when it approved the 2014 Guarantee.

Restructure of Debt – New Financial Assistance

The applicants argued that the CPU amounted to a new loan granted by financial creditors to Lux Finco 1, and that SIHPL’s guarantee of this loan amounted to financial assistance to a related company.

The respondents and the financial creditors argued that the CPU was not a new debt, but merely a restatement of an existing debt under the 2021 Bond and 2014 Guarantee, which
was approved by the board. As such, SIHPL did not provide further financial assistance.

The Court disagreed and found that the restatement or restructuring of debt on new terms and owing to a new party amounted to a new debt for the purposes of s45.

The fact that the quantum of the debt remained the same was irrelevant, as SIHPL’s board had to consider the revised terms of the restated debt, including the recipient of payment, and in so doing, the board had to comply with s45.

Conclusion

Trevo Capital has reminded us of three valuable principles relating to financial assistance. Firstly, financial assistance to a related foreign entity falls within the scope of s45 of the Companies Act. It is imperative to bear this in mind when group companies include companies incorporated outside of South Africa. Secondly, when applying the solvency and liquidity and fair and reasonable tests, the board must take reasonable, foreseeable circumstances into account. Thus, if the board is aware of any circumstances that could impact on the solvency and liquidity of the company (which may not be reflected in the company’s financial statements), it must take this into account when complying with s45(3). Lastly, restructured debt on new terms, which includes new counterparties, will require new financial assistance resolutions, even if the quantum of the debt has not changed.

Janke Strydom is a Partner and Jacques Marais a Senior Associate | Fasken.

This article first appeared in DealMakers, SA’s quarterly M&A publication

DealMakers is SA’s M&A publication
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