Thorts - Foreign lenders; South African borrowers. Given South Africa's strict foreign exchange controls, it is not surprising

that foreign lenders often ask if one or other regulation could prevent them

from taking their money "out of South Africa". The answer is: all should be

well if the i's are dotted and the t's crossed at the outset.

When a foreign lender advances a loan to a South African borrower, three key

sets of laws or regulations must be considered: the South African Exchange

Control Regulations, the National Credit Act and the financial assistance

sections of the Companies Act, 2008. All three are pivotal to the success of

lending transactions that involve a South African corporate borrower.

Borrowers must have prior approval

The Exchange Control Regulations apply to any cross-border lending transaction

involving a South African borrower, and to the taking security for such a

transaction. No South African corporate may borrow any foreign currency from

any person who is not an authorised dealer. The only exception is if the

borrower has prior approval from the Financial Surveillance Department of the

South African Reserve Bank.

The onus of obtaining exchange control approval rests on the South African

borrower, not the foreign lender. Even so, a foreign lender would be wise to

confirm that the borrower has obtained approval properly and in good time to

avoid the transaction being tainted. For this reason, the appropriate

representations and warranties should be included in the transaction

documentation.

Generally, once the Financial Surveillance Department has approved a loan, the

interest payable and loan repayments are freely transferable from South Africa

- unless the loan was made without exchange control approval. The foreign

lender's claim against the South African borrower may then be at risk as the

Financial Surveillance Department has the authority to prevent repayment or

enforcement and could declare the loan invalid.

The most recent case law confirms that although a lack of exchange control

approval does not render an agreement void, it could be declared invalid for

contravening the Regulations. Also, while the Financial Surveillance

Department may grant exchange control approval retrospectively, it can impose

certain penalties on the South African borrower.

Another critical factor for loans from a foreign lender to a South African

borrower is adherence to South African's credit law and regulations.

Foreign lenders bound by local credit law

The National Credit Act regulates the provision of credit in South Africa and

applies to all credit agreements made in or having an effect within South

Africa. Where the borrower is South African, it applies even if the credit

provider is foreign and has its principal place of business outside South

Africa. Lenders whose credit agreements fall under the NCA must register as

"credit providers" with the National Credit Regulator.

Note that these registration requirements are triggered where credit is made

available to a corporate borrower in South Africa with a net asset value or

annual turnover of less than ZAR 1 million.

The National Credit Regulator takes various factors into account in deciding

whether a credit or loan agreement has an effect within South Africa. These

include whether or not the proceeds of a loan will be remitted to South

Africa; whether or not the credit facility will be used in South Africa, and

whether or not any security for the loan or credit is situated in South

Africa.

There are certain exemptions to the application of the NCA. If not exempted, a

foreign credit provider must have the approval of the National Credit

Regulator as a credit provider to lawfully extend or market loans or credit in

South Africa. When a lender should be, but is not, registered with the

National Credit Regulator, it will not be able to enforce a credit agreement

against a South African borrower as the agreement will be void in terms of the

NCA. In addition to exchange control and credit regulations, loan transactions

must also meet the financial assistance requirements of the Companies Act.

Lending equates to financial assistance

Financial assistance includes lending money and guaranteeing a loan or other

obligation, as well as the security of any debt or obligation.

In terms of s45 of the Companies Act, a company may not provide direct or

indirect financial assistance to a related or inter-related company or

corporation unless certain conditions are met.

One condition is that the financial assistance must relate to an employee

share scheme or a special shareholders' resolution adopted within the previous

two years. The other is that the board of the company providing the financial

assistance (typically in the form of security in favour of the lender) should

be satisfied on two counts. First, immediately after providing the financial

assistance, the company must be able to satisfy the solvency and liquidity

test stipulated by the Companies Act. Second, the terms proposed or the

financial assistance should be fair and reasonable to the company.

Under certain circumstances, a South African company providing security may

not be able to pass the solvency and liquidity test. This could happen when

the financial assistance sought from the South African security provider is

intended to support the entire indebtedness arising under a (multi-

jurisdictional) loan, but the balance sheet of the South African security

provider is less than the aggregate indebtedness.

For the success of the funding transaction, it is vital that the auditors of

the company providing the financial assistance adequately advise its

directors, who must satisfy themselves that the financial assistance sought is

adequate to cover the indebtedness arising under the loan.

Any financial assistance provided in contravention of s45 is void and can

attract personal liability for a director who votes for or fails to vote

against a financial assistance resolution, knowing that this is inconsistent

with this section.

Fair and reasonable financial assistance

The Companies Act provides no guidance on what constitutes fair and reasonable

terms to the company granting the financial assistance. Similarly, South

African case law is silent on this as the Act is still relatively new. It

seems, though, that the financial wellbeing of the South African company

providing the financial assistance should be the most important factor for the

directors. Conversely, they should not place paramount importance on the

financial health of the group to which the company belongs, to the detriment

of the company itself.

Also not to be overlooked is whether the company satisfies the solvency and

liquidity test immediately after providing the financial assistance, to the

board's satisfaction. This introduces subjectivity in the directors' analysis

and is something the board should carefully consider.

Lischa Gerstle is a Partner in the Finance practice area at Bowmans.

This article first appeared in without prejudice, DealMaker's sister

publication

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