In the recent case Trevo Capital Ltd v Steinhoff International Holdings (Pty) Ltd, the High Court had to determine if section 45 of the Companies Act, 2008 (”Act”) applied to financial assistance provided to a related foreign company, and if a conditional payment undertaking constitutes financial assistance as defined in section 45.
In 2017 substantial financial irregularities were discovered in the financial statements of Steinhoff International Holdings (Pty) Ltd (“Steinhoff”). Steinhoff subsequently proposed a scheme of arrangement to its creditors which would settle all claims against Steinhoff and its South African subsidiaries.
The settlement arrangement included three classes of creditors, being market participant creditors, financial creditors and contractual creditors. The three different classes of creditors would be treated differently in terms of the settlement arrangement. Trevo Capital Ltd (“Trevo”) was dissatisfied with the manner in which market participation creditors would be treated in terms of the settlement arrangement, and in response instituted legal action against Steinhoff.
Trevo challenged the validity of the financial assistance that Steinhoff previously granted to Steinhoff Finance Holding GmbH (“SFHG”) and Lux Finco 1, which are both foreign companies related to Steinhoff. The basis of Trevo’s claim was that the financial assistance was granted in contravention of the solvency and liquidity requirements provided for in section 45.
Section 45 of the Companies Act
Section 45 provides that a company can’t offer financial assistance to an interrelated company unless the board of directors is satisfied that immediately after providing the financial assistance the company would satisfy the solvency and liquidity test (section 45(3)(b)). For the purposes of section 45, financial assistance includes lending money, guaranteeing a loan or other obligation, and securing any debt or obligation.
Trevo alleged that Steinhoff granted the following financial assistance to foreign related companies:
- in 2014 Steinhoff guaranteed convertible bonds which SFHG had provided to investors; and
- in 2019, after Steinhoff’s financial irregularities were uncovered, Steinhoff entered into a conditional payment undertaking (“CPU)” with the abovementioned bondholders.
The High Court’s Judgment
The High Court had to answer the following questions:
- does section 45 apply to financial assistance granted by a South African company to a related foreign company;
- did Steinhoff’s board of directors ensure compliance with the solvency and liquidity requirements before approving the 2014 guarantee; and
- does the abovementioned CPU constitute financial assistance as contemplated in section 45 of the Act?
Does section 45 apply to foreign companies?
The court had to determine if the phrase “or to a related or interrelated company or corporation” in section 45(2) included foreign companies. “Company” is defined in the Act and clearly does not include a foreign company, while “corporation” is not defined.
By reading section 45(2) in light of the overall purpose of section 45, and by having regard to the presumption against superfluity, the court determined that the legislature had intended for “corporation” to include foreign companies, and as a result had intended for section 45 to apply to foreign companies.
Did Steinhoff’s board of directors ensure compliance with the solvency and liquidity requirements before approving the 2014 guarantee?
Trevo argued that because Steinhoff’s financial irregularities had significantly exaggerated their profits and assets it would have been impossible for Steinhoff’s board to have satisfied themselves of the liquidity and solvency tests.
The court, however, rejected Trevo’s ex post facto approach and concluded that Trevo had provided no evidence that at the time of the 2014 guarantee Steinhoff’s board was unreasonable in approving the guarantee. Therefore, the 2014 guarantee was declared valid by the court.
Does the CPU constitute financial assistance as contemplated in section 45 of the Act?
The CPU replaced the 2014 guarantee by restating the bondholders existing debt while also revising several terms of the guarantee. The CPU essentially transferred the bondholder’s existing debt from SFHG to Lux Finco 1, a newly formed related company, while still requiring Steinhoff to guarantee the debt in question.
Trevo argued that the revised terms meant that Steinhoff had provided new financial assistance to Lux Finco 1, and therefore the provisions of section 45 of the Act should have been complied with before Steinhoff’s board approved the CPU.
Steinhoff argued that the CPU simply restated its existing debt under the 2014 guarantee and therefore could not constitute new financial assistance.
The High Court ultimately rejected Steinhoff’s argument on the basis that the restatement of a debt on new terms, and involving new parties, creates a new debt in terms of applicable South African law. The High Court concluded that the CPU resulted in financial assistance being granted to Lux Finco 1. Since Steinhoff’s board had not complied with section 45 of the Act before approving the CPU, the CPU and the resolution approving the CPU were both void.