SOUTHERN CAPE NEWS - According to SA law firm Adams & Adams, when a bank approves a loan facility, it will typically require the registration of a mortgage bond over the borrower’s immovable property in order to secure the debt.

In most cases, the loan facility will require security in addition to the mortgage bond, typically in the form of a guarantee or surety given by a third party (who is related to the borrower) in favour of the bank for the debts of the borrower.

This phenomenon constitutes the granting of financial assistance and is common in mortgage-backed loan facilities. In practice, other forms of financial assistance include scenarios where the third party guarantees, in favour of the bank, the due performance of the borrower’s obligations to the bank, where the debit order is debited from the third party’s bank account, or where the third party undertakes to fund cash-flow shortfalls in favour of the borrower.

The law firm also indicated South African law dictates certain requirements in instances where the third party is a company.

Briefly, the requirements in terms of Section 45 of the Companies Act are as follows:

1. The financial assistance must not be in contravention with the provisions of the company’s Memorandum of Incorporation;
2. The financial assistance must be duly sanctioned in terms of an authorising resolution by the board of directors;
3. The directors must be satisfied that, immediately after providing the financial assistance, the company would satisfy the solvency and liquidity test;
4. The directors must be satisfied that the terms under which the financial assistance is proposed to be given are fair and reasonable to the company;
5. Written notice of the director’s resolution must be provided to all shareholders and to any trade union representing the company’s employees;
6. The financial assistance must be duly approved in terms of a special resolution by the shareholders of the company; and
7. The financial assistance must be pursuant to an employee scheme that satisfies the requirements of Section 97, if applicable.

Read more on Caxton publication, Alberton Record