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A simple thing as giving a shareholder a loan could mean non-compliance with the Companies Act

by , 20 October 2015
Most shareholders take loans from the company without understanding the serious consequences.
And many company directors simply give the shareholders loans without even thinking of the liquidity and solvency of the company.

If you don't account for shareholder loans correctly, you're at risk of not being able to pay your current liabilities. And, you may be found non-compliant of section 45 of the Companies Act.

Read on and I'll show you the implications of shareholders' loans under the Companies Act.

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The Companies Act Decoded

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When are you at risk of being non-compliant with the Companies Act?

Let's look at an example to explain this.

James owns a small mechanical engineering business. He's the only director and shareholder of this company.

He's always taking money out of the business. He never repays the loan. Nor does he levy interest on the amount due.

The loan is currently R400 000. Suppliers are always looking for repayment and despite all efforts; he simply can't live up to his commitments. And James has clients that are refusing to pay him for services rendered.

It's likely that this cycle will continue for the following year. And the business will have to undergo liquidation.

James may be personally liable for those amounts due, if he doesn't meet the requirements of section 45 of the Companies Act.

Read on for these requirements.

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What are the requirements of section 45?

You must:
  • Make sure you meet liquidity and solvency tests after you give financial assistance.  The fair value of your total assets must exceed the fair value of all the liabilities;
  • Get authorisation for the financial assistance by all shareholders;
  • Get a resolution of the board of directors to approve any financial assistance you give to an employee share scheme;
  • Inform all shareholders (and unions, if applicable) about the financial assistance and the terms.

So, if James in the example above, met all the above requirements, he wouldn't personally liable for the monies his company owes to suppliers.

But, if he didn't meet the requirements, he'd be non-compliant of section 45. If this happens, and your company can't cover its obligations, then creditors and employees can hold your company directors personally liable for repaying these obligations.

P.S. For everything you need to know about shareholders loans, turn to chapter S04 in your Practical Accountancy Loose Leaf. Don't have one, get yours with a 30-day money back guarantee here

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