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Companies Act, 1973 (Act No. 61 of 1973)

Chapter IV: Formation, Objects, Capacity, Powers, Names, Registration and Incorporation of Companies

Formation, Objects and Powers

37. Loans made and security provided by a subsidiary

 

 

1)
a) If-
i) any funds of a company were employed directly or indirectly (whether through the instrumentality of its subsidiary or otherwise) in a loan to any company which is its holding company or which is a subsidiary of that holding company but not a subsidiary of itself; or
ii) a company directly or indirectly (whether through the instrumentality of its subsidiary or otherwise) provided any security to another person in connection with an obligation of any company which is its holding company or which is a subsidiary of that holding company but not a subsidiary of itself, particulars of that loan or security, as the case may be, shall be stated in the annual financial statements of the company for every year during which such loan or security was in operation.
b) The provisions of paragraph (a) shall not apply in respect of loans made or security provided bona fide in the ordinary course of the business of a company actually and regularly carrying on a business a substantial part of which is the making of loans or the provision of security, as the case may be.

 

2)
a) Any director or officer of a company who fails to take all reasonable steps to secure compliance with the provisions of subsection (1) shall be guilty of an offence.
b) In any prosecution against any director or officer of a company under paragraph (a), the defence referred to in section 284(4)(b) shall, mutatis mutandis, be available to him.

 

3)
a) Any director or officer of a company who authorises or permits or is a party to the making of any loan or the provision of any security contemplated in subsection (1)(a), shall be liable to the company for any damage directly arising from the making of such loan or the provision of such security on terms or conditions which, at the time of the making of such loan or the provision of such security, were not fair to the company or failed to provide reasonable protection for its business interests: Provided that a director or officer who has paid any amount as damages by virtue of the provisions of this paragraph may recover such part of that amount as the Court considers equitable, from any other director or officer who is in terms of this paragraph also liable to the company for the same damage.
b) For the purposes of paragraph (a), "director or officer" of a company shall include any director or officer of a holding company of such company, and for the purposes of recovery of such damages as are contemplated in the said paragraph (a) the provisions of sections 266, 267 and 268 shall mutatis mutandis apply as if a director or officer or past director or officer of such holding company was a director or officer or past director or officer of such company, respectively.
c) In enquiring, for the purposes of paragraph (a), whether or not any terms or conditions were fair to the company or failed to provide reasonable protection for its business interests, regard shall be had, without prejudice to the generality of the enquiry,
i) whether, in view of the financial position of the parties, the loan should have been made or the security should have been provided at all;
ii) in the case of a loan, whether security has been or should in the circumstances have been provided therefor, and whether any security provided therefor is adequate;
iii) the consideration for the loan or security, including any interest or other benefit received therefor;
iv) the term of the loan or security; and
v) the manner of repayment of the loan or discharge of the security.
d) The provisions of this subsection shall not derogate from any other rule of law relating to the liability of a director or officer of a company.

 

4) For the purposes of this section-
a) "funds" includes money, shares, debentures or any other property;
b) "loan" includes any credit extended by a company, if the debt concerned is not payable or being paid in accordance with the normal business practice of the company in respect of the payment to it of other debts of the same kind;
c) "security" includes a guarantee.

 

5) The provisions of this section shall not apply to anything done by a company with the consent of all its members.