The Companies Act, No 71 of 2008 (“Companies Act”) provides a closed list of permissible distributions that can be made by companies.
The Companies Act defines “distributions” as the direct or indirect –
- transfer by a company of money, or other property, other than its own shares, to or for the benefit of one or more holders of any of the shares, or to the holder of a beneficial interest in any such shares, of that company or of another related company. The transfer can be in the form of either a dividend, payment in lieu of capitalisation shares or consideration for the acquisition of any shares of the company or related companies;
- incurrence of a debt or other obligation by a company for the benefit of one or more holders of any of the shares of that company or of another related company; or
- forgiveness or waiver by a company of a debt or other obligation owed to the company by one or more holders of any of the shares of that company or another related company.
The above definition specifically excludes any action taken upon the final liquidation of a company.
The Companies Act further provides that a company may not proceed with a proposed distribution unless –
- it is pursuant to an existing legal obligation of the company, or a court order, or the board of directors of the company has authorised the distribution by means of a resolution;
- the company will satisfy the solvency and liquidity test immediately after completing the proposed distribution; and
- the board of directors of the company, by means of a resolution, has acknowledged that they have applied the solvency and liquidity test and that the company complies therewith.
The board of directors of a company have a period of 120 (one hundred and twenty) days within which to carry out the above mentioned distribution fully. Should the board of directors fail to do so within the 120 (one hundred and twenty) day period, the board of directors will be required to reconsider the solvency and liquidity test with respect of the distribution to be made pursuant to the original resolution.