DIVIDENDS UPDATE – PART 1

Under the Companies Act 37 of 1973, the payment of dividends was regulated under section 90.  In terms thereof, a company could pay dividends to its shareholders in their capacities as shareholders, provided that its Articles of Association authorised such payment.

The Companies Act of 2008 (“the Act”), which replaced the Act of 1973, is currently the applicable legislation regulating any and all distributions made by companies.  Under the Act distributions are now more strictly controlled. 

In terms of section 1 of the Act, a distribution is defined as a “direct or indirect transfer by a company of money or other property of the company, other than its own shares, to or for the benefit of one or more holders of any of the shares, … of that company … whether in the form of a dividend, … but does not include any such action taken upon the final liquidation of the company.”

Based on the above, the payment of a dividend clearly falls within the ambit of a distribution.  Distributions are regulated by section 46 of the Act, which sets out the requirements that need to be complied with in order for a distribution to be lawful.  A distribution may only be made if:

1)     unless a distribution is made pursuant to a court order or an existing legal obligation, the board of   directors has authorised same by means of a resolution (section 46(1)(a)); and

2)     it reasonably appears that the company will satisfy the solvency and liquidity test immediately after the proposed distribution has been completed (section 46(1)(b); and

3)     by means of a resolution, the board of the company has acknowledged that it has applied the solvency and liquidity test … and reasonably concluded that the company will satisfy the solvency and liquidity test immediately after completing the proposed distribution (section 46 (1)(c)).

It is therefore not necessary for the company’s shareholders to authorise a distribution during a general meeting by passing an ordinary or special resolution.  The solvency and liquidity test is set out in section 4 of the Act.  In terms of section 4(1)(a) of the Act, the company must consider “all reasonably foreseeable financial circumstances of the company at that time” when applying this test.  To satisfy the solvency test, the company’s assets, fairly valued, must equal or exceed the fairly valued liabilities of the company.  In order to satisfy the requirements of the liquidity test, it must appear that the company is able to settle its debts as they become due in the ordinary course of business for a period of 12 months after the particular distribution has been completed.

Once the abovementioned test has been applied and satisfied, the distribution must be made within 120 days.  Should the distribution not be effected within this period, the board will have to pass a new resolution in respect of the distribution and apply the solvency and liquidity test once again.

Should it become evident that the distribution in fact did not comply with the section 46 requirements or the solvency and liquidity test, the directors, who were present at the meeting where the distribution was approved, will be held liable.  These directors can only be held liable if they voted in favour of the specific distribution, despite knowing that same does not comply with the abovementioned requirements.  These directors will be held personally liable for not more than the extent of the unauthorised amount so distributed.

 

WHO IS REALLY ENTITLED TO THE BENEFITS UNDER A LIFE INSURANCE POLICY?

In the back of my mind I can still hear my Financial Advisor stating the importance of nominating a beneficiary for my life insurance policy.  Nominating a beneficiary on your policy assures you of where the sum assured (the amount for which insurance was taken out) will go after your passing, instead of just being pooled together at random with the other funds in your estate. 

The beneficiary of a life insurance policy becomes entitled to the benefit under the policy only upon the death of the policy holder and not prior to this event occurring.  This makes sense right, as the policy holder’s life is insured by the policy. 

However, uncertainty creeps in when events take a turn for the unexpected.  What happens should the beneficiary predecease the policy holder?  In this instance the policy holder will have to appoint a new beneficiary, after which matters will return to the status quo.  Unfortunately, many people pay attention to their policies only when they sign up and never revert back to them for the servicing thereof, a habit which is very important, as you will see below.  The purpose of this article is to reveal the consequences should a beneficiary predecease the policy holder, who in turn does not nominate a new beneficiary to replace him or her.  This issue recently landed in court, in the case of PPS Insurance Company v Mkhabela (159) of 2011, where even the judges had to consider it carefully.  The case can be summarized as follows:

Facts:

Ms Sebata was the owner of a life insurance policy issued by PPS Insurance.   She nominated her mother, Ms Mkhabela, as the beneficiary of the policy in the event of her death.  Ms Mkhabela passed away on 26 May 2007, predeceasing her daughter, the policy holder.  Not long thereafter, Ms Sebata also passed away on 12 August 2007.  There was thus no beneficiary nominated when the proceeds of the policy fell due on Ms Sebata’s death, as her mother had predeceased her.  The executor of Ms Mkhabela’s estate claimed the proceeds of the policy in the High Court.

Legal Question:

Did the right to the proceeds/benefit of the policy vest in Ms Mkhabela, and therefore in her estate, prior to the death of the policy holder?

Court of first instance:

The judge reasoned that Ms Sebata’s nomination of her mother as the beneficiary of the policy ceased to exist upon Ms. Mkhabela’s death and that the proceeds therefore vested in Ms Sebata’s estate.  The claim was dismissed with costs.

Full court:

The executor of Ms Mkhabela’s estate then appealed against the ruling of the court of first instance.

The full court held that as Ms Mkhabela had accepted her nomination as beneficiary, a binding agreement came into effect between herself and PPS Insurance.  This agreement was regarded as a stipulatio alteri – an agreement for the benefit of a third party – which created a spes for Ms Mkhabela, which spes was to become a right upon the death of Ms Sebata.  As Ms Sebata had not revoked the nomination, the “agreement” remained a valid agreement.  The court accordingly ruled that Ms Mkhabela’s estate was entitled to the proceeds of the policy upon Ms Sebata’s death.

Supreme Court of Appeal:

The executor of Ms Sebata’s estate pursued the case and appeal was lodged against the judgment of the full court.

The SCA held that the full court was correct in that Ms Sebata’s nomination of her mother as beneficiary of the policy was a contract for the benefit of her mother (third party), which benefit was capable of being accepted upon the death of the policy holder.  However, the full court erred when it held that Ms Mkhabela’s acceptance of her nomination had legal significance and force. 

The court held that a nominated beneficiary only acquires a right to the proceeds of a policy upon the death of the policy holder, prior to which the beneficiary only has a spes (an expectation) of claiming benefit of the policy. Should the nominated beneficiary die before the policy holder, the spes falls away, irrespective of whether the beneficiary accepted the nomination or not.  Consequently, no right to the proceeds vested in Ms Mkhabela (her estate in this case). The benefit remained with the insured and therefore vested in her estate upon her death.

The appeal succeeded with costs.

From the above it is clear that, should the beneficiary predecease the policy holder, who then does not replace the deceased with a new beneficiary, the insurance company will pay out the benefits under the policy to thepolicy holder’s estate.

 

ESCAPING THE HIGHER CAPITALS GAINS TAX RATE

By Barry Ger, senior manager for corporate tax at KPMG

01 April 2012

 A window of opportunity opens for some companies.

 If your company is thinking of selling any capital assets and its year end is not February  or March there may be a window of opportunity to do it at the lower effective tax rate for a short while.

In his Budget Speech on February 22 2012, Finance Minister Pravin Gordhan announced increases to the capital gains tax (CGT) rates. Companies, trust and individuals would now be paying 18.6% (previously 14%), 26.7% (previously 20%) and a maximum of 13.3% (previously a maximum of 10%)  respectively of any capital gain that arises in their hands from the sale of their assets over to the South African Revenue Service (SARS).

In a new tax bill released on March 13 2012, it has been proposed that these new rates will take effect from tax years beginning from March 1 2012. The tax years of individuals and trusts perennially begin on March 1 anyway so for them the new rates apply already. The tax years of companies, on the other hand, have a multitude of different starting dates which means that some companies, specifically those with tax years that do not begin in March, have a short period in which they can still benefit from the lower rates. This period is, of course, longest for companies with tax years that commence much later in the calendar year or even in the next year. Companies with January 31 financial year ends, for example, will have almost 11 Months, until February 1 2013, to dispose of their assets before the new 18.6% rate kicks in.

The question arises though whether a company that makes use of this opportunity and sells off many of its high value assets before the end of its current tax year would be investigated by Sars for tax avoidance. The answer to this is probably not. Provided the company has primarily a commercial (but non -tax related) reason for making such disposals, it is unlikely Sars would be able to make such a claim stick.

It would be the height of foolishness, of course, for companies to rush off to sell their assets so as to take advantage of the lower rate.  The tax tail should never wag the commercial dog.   However, for those who were contemplating a sell-off anyway, the looming increase in CGT rates would no doubt spur them to make such decisions sooner rather than later.