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.
(1) For any purpose of this Act, a company satisfies the solvency and liquidity test at a particular time if, considering all reasonably foreseeable financial circumstances of the company at that time— (a) the assets of the company, as fairly valued, equal or exceed the liabilities of the company, as fairly valued; and (b) it appears that the company will be able to pay its debts as they become due in the ordinary course of business for a period of— (i) 12 months after the date on which the test is considered; or (ii) in the case of a distribution contemplated in paragraph (a) of the definition of ‘distribution’ in section 1, 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.
(1) A company must not make any proposed distribution unless— (a) the distribution— (i) is pursuant to an existing legal obligation of the company, or a court order; or (ii) the board of the company, by resolution, has authorised the distribution; (b) it reasonably appears that the company will satisfy the solvency and liquidity test immediately after completing the proposed distribution; and (c) the board of the company, by resolution, has acknowledged that it has applied the solvency and liquidity test, as set out in section 4, and reasonably concluded that the company will satisfy the solvency and liquidity test immediately after completing the proposed distribution.
(3) A director of a company is liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director having— … (e) been present at a meeting, or participated in the making of a decision in terms of section 74, and failed to vote against— … (vi) a resolution approving a distribution, despite knowing that the distribution was contrary to section 46, subject to subsection (4); …
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, where its rules apply, generally 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. The first job is always to establish whether either section applies to the transaction in front of you, and whether an exclusion takes it out again.
(2) Except to the extent that the Memorandum of Incorporation of a company provides otherwise, the board may authorise the company to provide financial assistance by way of a loan, guarantee, the provision of security or otherwise to any person for the purpose of, or in connection with, the subscription of any option, or any securities, issued or to be issued by the company or a related or inter-related company, or for the purchase of any securities of the company or a related or inter-related company, subject to subsections (3) and (4).
(2) Except to the extent that the Memorandum of Incorporation of a company provides otherwise, the board may authorise the company to provide direct or indirect financial assistance to a director or prescribed officer of the company or of a related or inter-related company, or 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, director, prescribed officer or member, subject to subsections (3) and (4).
Note — Since 27 December 2024 a new s 45(2A) (inserted by Act 16 of 2024) provides that s 45 does not apply to financial assistance a company gives to or for the benefit of its subsidiaries — so straight parent-to-subsidiary funding within the group no longer needs the s 45 special resolution. Section 44, the directors’ general duties and the company’s Memorandum of Incorporation must still be considered.
The mechanics matter. Where either section applies, the board may authorise the assistance only if it is covered by a special resolution of the shareholders adopted within the previous two years (either for the specific recipient or for a category the recipient falls into) — or, as the Act’s alternative, is given under an employee share scheme that meets section 97. So the special resolution is the usual route for a family company, not a universal one. In every case the board must also be satisfied that, immediately after the assistance is given, the company would satisfy the solvency and liquidity test and that the terms are fair and reasonable to the company, and it must make sure any conditions in the Memorandum of Incorporation have been met. A board resolution or agreement is void to the extent that the assistance is inconsistent with those requirements (s 44(5) and s 45(6)).
Section 45 also has a built-in exclusion. Under s 45(2A), in force since 27 December 2024, section 45 does not apply to financial assistance a company gives to or for the benefit of its subsidiaries. The exclusion runs one way — down to a subsidiary. It does not cover a subsidiary helping its holding company, a loan between sister companies, or a loan to a director.
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 approve or enter into the property sale without that process. Two points of precision: the exemption turns on holding all the beneficial interests, not merely on being the registered holder of all the shares; and section 75 regulates disclosure, approval and execution, so who may sign for the company depends on which route applies.
Keep the two routes distinct. The sole-director rule in s 75(3) needs an ordinary resolution of the shareholders after disclosure; once that is passed, the sole director may enter into the agreement. A company with a board of two or more follows s 75(5) instead: shareholder approval is not the statutory requirement there — the conflicted director discloses, leaves the meeting and takes no part, and the other directors decide. On that route the conflicted director also faces a signing restriction:
(5) … the director— … (g) must not execute any document on behalf of the company in relation to the matter unless specifically requested or directed to do so by the board.
(7) A decision by the board, or a transaction or agreement approved by the board, or by a company as contemplated in subsection (3), is valid despite any personal financial interest of a director or person related to the director, only if— (a) it was approved following disclosure of that interest in the manner contemplated in this section; or (b) despite having been approved without disclosure of that interest, it— (i) has subsequently been ratified by an ordinary resolution of the shareholders following disclosure of that interest; or (ii) has been declared to be valid by a court in terms of subsection (8).
In plain terms: a decision touched by a director’s personal financial interest is valid only through one of three routes — approval after proper disclosure, later ratification by an ordinary resolution of the shareholders after disclosure, or a court declaring it valid. And on a board, the conflicted director may sign the document for the company only where the board has specifically requested or directed it.
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.
(3) Subject to subsections (4) and (5), a director of a company, when acting in that capacity, must exercise the powers and perform the functions of director— (a) in good faith and for a proper purpose; (b) in the best interests of the company; and (c) with the degree of care, skill and diligence that may reasonably be expected of a person— (i) carrying out the same functions in relation to the company as those carried out by that director; and (ii) having the general knowledge, skill and experience of that director.
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.
(1) Every company must- (a) establish or cause to be established a register of its issued securities in the prescribed form; and (b) maintain its securities register in accordance with the prescribed standards. (2) As soon as practicable after issuing any securities a company must enter or cause to be entered in its securities register, in respect of every class of securities that it has issued- (a) the total number of those securities that are held in uncertificated form; and (b) with respect to certificated securities- (i) the names and addresses of the persons to whom the securities were issued; (ii) the number of securities issued to each of them; … (v) any other prescribed information.
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. First check whether s 45 applies at all: since 27 December 2024, assistance to or for the benefit of the company’s own subsidiaries is outside s 45 (s 45(2A)). Where it does apply — as it does to a loan to a director — the assistance needs a special resolution of the shareholders passed within the previous two years (or an employee share scheme that meets s 97), the board must be satisfied the company would pass the solvency and liquidity test immediately afterwards and that the terms are fair and reasonable, and any conditions in the Memorandum of Incorporation must be met. The resolution or agreement is void to the extent that it is inconsistent with those requirements.
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. On a board of two or more, the conflicted director discloses the interest, leaves the meeting and takes no part in the decision, and may sign a document on the matter only if the board specifically requests or directs it (s 75(5)). A sole director who does not hold all the beneficial interests needs an ordinary resolution of the shareholders after disclosure (s 75(3)). A decision taken despite the interest is valid only if it was approved after proper disclosure, is later ratified by the shareholders after disclosure, or is declared valid by a court (s 75(7)).
Only after the s 75 process. The s 75(2)(b) exemption needs one person to hold all the beneficial interests and be the only director; once the trust holds the shares it falls away, so under s 75(3) a sole director must disclose the interest and have the shareholder (the trust) approve by ordinary resolution before entering into the deal. With a board, the conflicted director discloses, recuses and the others decide (s 75(5)) — and may sign for Newco only if the board specifically requests or directs it (s 75(5)(g)); otherwise a disinterested authorised signatory signs. The founder can sign on their own side as seller.
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 (but not, since 27 December 2024, to the company’s own subsidiaries: s 45(2A)). First establish whether either section applies and whether an exclusion applies. Where they do apply, the assistance needs a special resolution passed within the previous two years (or an employee share scheme that meets s 97), plus the board’s solvency-and-liquidity and fairness checks and compliance with any conditions in the Memorandum of Incorporation, before the assistance is given.