Distributions and the solvency & liquidity test
Once Newco owns the property and the trust owns Newco, the cash the structure produces has to move up: rent collects in the company, and the company pays it to the trust as a dividend or a return of capital. Company law does not let the board do that freely. Newco may only make a distribution if its board first applies and passes the solvency and liquidity test.
… a company satisfies the solvency and liquidity test … if, considering all reasonably foreseeable financial circumstances …— (a) the assets of the company, as fairly valued, equal or exceed the liabilities …; and (b) it appears that the company will be able to pay its debts as they become due … for a period of— (i) 12 months after the date on which the test is considered; or (ii) in the case of a distribution …, 12 months following that distribution.
Section 46 then makes that test a hard precondition for any distribution, and requires the board to resolve on it and to acknowledge that it has applied the test — not merely assume the company is solvent.
A company must not make any proposed distribution unless— (a) the distribution— … (ii) [is] authorised … by resolution …; (b) it reasonably appears that the company will satisfy the solvency and liquidity test immediately after completing the proposed distribution; and (c) the board … has acknowledged that it has applied the solvency and liquidity test …
Financial assistance: sections 44 and 45
Family structures often involve the company helping someone buy its shares, or lending within the group. The Companies Act treats that as financial assistance and gates it with a special resolution of the shareholders plus the solvency and liquidity test. Section 44 deals with assistance for acquiring shares; section 45 deals with assistance to a director or a related company.
s 44(2): … the board may authorise the company to provide financial assistance … for the purpose of, or in connection with, the subscription [for] or … purchase of[,] any securities of the company or a related or inter-related company …
s 45(2): … the board may authorise the company to provide direct or indirect financial assistance to a director or prescribed officer … or to a related or inter-related company or corporation … [subject to a special resolution and the solvency and liquidity test].
The mechanics matter. For both sections the assistance must be authorised by a special resolution of the shareholders adopted within the previous two years (either a specific authority or a general authority for that recipient), and the board must be satisfied, immediately after the assistance is given, that the company will satisfy the solvency and liquidity test and that the terms are fair and reasonable to the company. Assistance given without those steps is void.
Director conflicts: section 75 once the trust owns the shares
This structure routinely puts one person on both sides of a deal. The founder may be the seller of the property, the sole director of Newco, and a trustee and beneficiary of the trust that owns Newco. Section 75 regulates that personal financial interest. There is an exemption — but it is narrow, and it disappears the moment the trust takes the shares.
(2) This section does not apply— … (b) to a company or its director, if one person— (i) holds all of the beneficial interests of all of the issued securities of the company; and (ii) is the only director of that company.
(3) If a person is the only director of a company, but does not hold all of the beneficial interests of all of the issued securities of the company, that person may not— (a) approve or enter into any agreement in which the person or a related person has a personal financial interest; or (b) as a director, determine any other matter in which the person or a related person has a personal financial interest, unless the agreement or determination is approved by an ordinary resolution of the shareholders after the director has disclosed the nature and extent of that interest to the shareholders.
Read the exemption and the override together. Section 75(2)(b) switches the conflict rule off only where one person both holds all the beneficial interests and is the only director. Once the trust owns Newco’s shares, the founder-director no longer holds all the beneficial interests — so the exemption falls away and section 75(3) applies. The founder cannot simply sign the property sale on both sides.
Good faith, best interests, and the securities register
Two further provisions round out the housekeeping. Section 76 imposes the director’s core duties: to act in good faith and for a proper purpose, in the best interests of the company, and with the degree of care, skill and diligence reasonably expected. Those duties are owed to the company — Newco — not to the founder personally and not to the trust, which is exactly why a conflicted founder-director has to stand back from a deal that benefits them.
Section 50 requires Newco to establish and maintain a securities register recording who holds its shares. Get this right at the outset: the register must show the trust (through its trustees) as the holder of the shares once they have moved across, and it should track every issue and transfer. A register that still shows the founder personally undermines the whole structure — it is evidence the trust does not really own the shares, and it leaves the s 75(2)(b) exemption looking as if it still applies when it does not. Keep it aligned with the trust’s and the company’s beneficial-ownership registers.
Frequently asked questions
It is the two-limb test in s 4(1) of the Companies Act 71 of 2008 the board must apply before any distribution. First, the company’s assets, fairly valued, must equal or exceed its liabilities. Second, it must appear the company can pay its debts as they fall due for the 12 months after the test (or the distribution). The board must acknowledge it has applied the test.
Yes, but only with the s 45 controls. Financial assistance to a director, prescribed officer, or a related or inter-related company needs a special resolution of the shareholders and the board must be satisfied the company will pass the solvency and liquidity test immediately afterwards and that the terms are fair and reasonable. Skip those steps and the loan is void.
Section 75 governs a director’s personal financial interest in a company matter, including the interest of a related person — a spouse, the trust the director controls, or another tied company. The conflicted director must disclose the nature and extent of the interest and step out of the decision, leaving it to the disinterested directors or the shareholders.
No — not once the trust owns the shares. The sole-director / sole-shareholder exemption in s 75(2)(b) falls away when the trust holds the beneficial interests, so under s 75(3) you cannot self-approve a deal you have a personal financial interest in. Disclose it and have the shareholder (the trust) approve by ordinary resolution, or appoint an independent co-director.
Section 44 covers assistance — a loan, guarantee or security — for the purchase of or subscription for securities of the company or a related company. Section 45 covers assistance to a director or related company. Both need a special resolution plus the board’s solvency-and-liquidity and fairness checks before the assistance is given.