Thorts: Consolidated, Amended and Restated Agreements

Creditor Beware That Your Guarantee Or Suretyship Is Still Intact

Written agreements are important in business and obviate the need to resolve disputes by weighing one person’s word over another’s. Amendments to agreements are often just as important as the original agreement itself. They are used to add forgotten provisions, address a need that became apparent after the entering into the original agreement or change original terms and conditions as a result of changed circumstances, in order to reflect more correctly the intention of the parties.

To remember that an agreement has been amended and to assist with the implementation of the agreement after an amendment, the signed amendment often gets attached to the original agreement. However, there are instances where an agreement is amended several times and, over time, it becomes inefficient, impractical or confusing to follow which terms are still binding. In these circumstances, it is preferable to consolidate all the changes into one document and fully amend and restate the original agreement. A consolidation and restatement does not create a new contract, but rather the original agreement is merged into one document.

If the performance of the obligations of one party to the original agreement (debtor) are secured by a third party (guarantor) in the form of a guarantee or a suretyship in favour of another party to the original agreement (creditor), that security will constitute the giving of financial assistance by the guarantor to the debtor. Such financial assistance must be given in accordance with the requirements of the Companies Act, 2008. The rationale for the requirements of the Companies Act is mainly to ensure that the company giving the financial assistance can indeed afford to give such assistance.

In terms of section 45(3) of the Companies Act, the board of a company may not authorise any financial assistance unless the particular provision of financial assistance is:

• approved by a general or specific special resolution of the shareholders of the company, adopted within the previous two years; and

• the board is satisfied that
(a) immediately after providing the financial assistance, the company would satisfy the solvency and liquidity test; and (b) the terms for giving the financial assistance are fair and reasonable to the company.

If the guarantee or suretyship is given without complying with the Companies Act, the board resolution approving the financial assistance and the guarantee or suretyship agreement for the provision of such assistance is void, to the extent that the provision of that assistance is inconsistent with the requirements of section 45 of the Companies Act.

Accordingly, whenever an original agreement is amended, a determination must be made as to whether new financial assistance resolutions are required. This determination would be particularly important if an amendment to the original agreement changes; for example, the financial exposure of the debtor, the material rights and obligations of the debtor, or the introduction of a new debtor, as these types of changes will consequently increase the financial exposure and/or obligations of the guarantor to the creditor in the event of default by the debtor.

In a situation where an original agreement has been amended a number of times, or materially amended once, and the parties elect, for convenience or other reasons, to conclude a consolidated, amended and restated agreement, the creditor must:

• assess whether the financial exposure of the debtor has increased and/or material obligations of the debtor have changed that will result in an increase in the debtor’s financial exposure; and

• if the debtor’s financial exposure has increased or will increase as a result of the modified obligations, request new financial assistance resolutions by the board of the guarantor and, to the extent necessary, new shareholder resolutions approving the assistance.

If the creditor does not make the assessment, or does, but incorrectly arrives at the conclusion that new financial assistance resolutions are not required when, in fact, they are, the guarantee or suretyship in respect of only that portion of the increased financial exposure or obligations will be void. A creditor may, therefore, inadvertently find itself with security that is no longer sufficient to cover its full risks under the original agreement.

Whilst concluding a consolidated, amended and restated agreement may be appealing, require minimal effort and negotiation, and can be signed fairly quickly (in certain instances) it may be sensible for the parties and beneficial for the creditor to terminate the original agreement that has been amended numerous times and conclude a new agreement, for the following practical reasons:

• unless there is a fundamental reason why it would not be ideal for the parties to enter into a new agreement, concluding a new agreement will help frame the creditor’s mind and influence it to make certain that the new agreement and security package is valid and enforceable;

• continuously amending, consolidating and restating an agreement may result in a creditor not applying its mind to whether it should request new financial assistance resolutions because, for all intents and purposes, the original agreement will be continuing, and it may not be immediately apparent that new resolutions are required. This risk may be more prevalent in large organisations where the individual negotiating the consolidated, amended and restated agreement is different from the one that negotiated the numerous prior amendments; and

• in the event that new financial assistance resolutions were required pursuant to prior amendments but never obtained, concluding a new agreement will ensure that the new agreement is not tainted by any prior non-compliances, provided that when concluding the new agreement, there is full compliance with the Companies Act.

In large finance deals, a failure to obtain fresh financial assistance resolutions (if they were required) as a result of an amendment to an agreement may have huge financial implications for the creditor, should it need to enforce its security. Furthermore, there is a risk that the creditor may only become aware of the error and the invalidity of a portion of its security many years down the line, when the debtor’s obligations under the original agreement mature and the debtor is unable to perform. Without considering any remedies that a creditor may have, there is also a risk that a guarantor may very well apply and succeed in setting aside the security (or a portion thereof) on the basis that it was given in contravention of the Companies Act.

Gabi Mailula is an Executive in Corporate Commercial | ENSafrica.

This article first appeared in DealMakers, SA’s quarterly M&A publication

DealMakers is SA’s M&A publication
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