Section 1 of the Companies Act, No. 71 of 2008 (“the Companies Act”)

Section 1 of the Companies Act, No. 71 of 2008 (“the Companies Act”) defines a Distribution as:-

1.1 The transfer by a company of money or other property of the company, to or for the benefit of one or more holders of any of the shares, or to the holder of a beneficial interest in any such shares, of that company or of another company within the same group of companies; or

1.2 The incurrence of a debt or other obligation by a company for the benefit of one or more holders of any of the shares of that company or of another company within the same group of companies; or

1.3 Forgiveness or waiver by a company of a debt or other obligation owed to the company by one or more holders of any of the shares of that company or of another company within the same group of companies.

2. REQUIREMENTS FOR VALID DISTRIBUTIONS

In terms of section 46 of the Companies Act, a distribution will only be valid if:
2.1 It is made pursuant to an existing legal obligation of the company, a court order, or authorised by a resolution of the company’s board

2.2 It reasonably appears that the company will satisfy the solvency and liquidity test immediately after completing the proposed distribution, and

2.3 The board of the company, by resolution, reasonably acknowledged and concluded the solvency and liquidity test,

2.4 The distribution is completed within 120 business days from approval by a resolution.

3.DIRECTORS’ LIABILITY FOR NON-COMPLIANCE WITH THE COMPANIES ACT

A director of a company is liable for any loss, damages or costs sustained by a company if such director was present during a meeting whereby a distribution contrary to the provision of section 46 was approved, and such director failed to vote against the distribution

From what is set out above it is clear that distributions must be made in accordance with the requirement set out in the Companies Act. If you act as a director of a company, we strongly suggest that you familiarise yourself with the provisions of section 46 of the Companies Act.

The above exposition is a summary of provisions contained in the Companies Act affecting the validity of distributions. Certain related factors and circumstances will play a role and we strongly suggest that independent legal advice be obtained.

If you need any advice relating to your Company’s distributions then get in touch with us and we will gladly assist.