In the first part of this two-part series, we considered the potential tension that may arise where financing arrangements confer extensive consent and approval rights to lenders while responsibility for the management of the company remains vested in the board. This tension becomes more apparent when considered against some of the fundamental principles of South African law, in particular, the long-established principle that directors may not abdicate their decision-making responsibilities to another person. The premise of this principle is that directors are not appointed merely to implement the wishes of shareholders, creditors or other stakeholders. While directors may properly have regard to the interests of such stakeholders, they remain obliged to exercise independent judgement and to act in what they consider to be the best interests of the company.
This principle is often illustrated through the concept of the "dummy" or "puppet" director – while directors may have been nominated by shareholders, appointed at the insistence of particular stakeholders or elected because of a particular commercial relationship, this does not entitle directors to act merely as representatives of such persons. Where the interests of the company and the interests of the person seeking to exert influence diverge, directors’ duties are owed to the company and not to the appointing stakeholders (see Fisheries Development Corporation of SA Ltd v Jorgensen; Fisheries Development Corporation of SA Ltd v AWJ Investments (Pty) Ltd 1980 (4) SA 156 (W)). The analogy with lenders is not exact. Lenders seldom appoint directors and their leverage is usually contractual and economic (for instance, the prospect of an event of default) rather than a matter of appointment or voting control. The principle applies all the same: where the pressure comes from does not change the duty that the directors owe to the company.
As already discussed, it is common for financing arrangements to require lender approval before a company may incur further indebtedness, dispose of material assets, undertake significant transactions or adopt particular courses of action. From a lender's perspective, such protections are both justifiable and commercially necessary as they serve to protect the lender's position and preserve the credit profile on which the financing was advanced. It is important, however, to consider to what extent a board continues to exercise independent judgement where the implementation of its decisions depends upon lender approval and the extent to which a board remains liable for its actions despite the lender’s involvement. At the outset, it should be noted that agreeing to lender consent rights is not in itself an abdication of judgement. The decision to accept those restrictions is an exercise of board discretion, taken when the facility is negotiated and it is unobjectionable if the board was then satisfied that financing on those terms was in the company's best interests. A distinction should also be drawn between negative covenants, which prevent the company from acting without the lender's consent, and positive direction, which purports to require the board to act in a particular way. The former limit what the company may do; only the latter begins to substitute the lender's judgement for that of the board.
A related principle is that directors may delegate powers, but they cannot delegate responsibility. Directors routinely rely on management, board committees, auditors, financial advisors and other professional advisers in the discharge of their functions and duties. The commercial necessity of such delegation is well recognised in our law. However, this does not mean that directors are able to avoid responsibility for decisions by arguing that their decision was influenced, recommended or even insisted upon by another person. This is significant even in the financing context - where lender approval is contractually required, directors remain responsible for determining whether the proposed course of action is in the best interests of the company. The existence of a financing covenant or lender consent right does not relieve directors of the obligation to consider the matter independently and to exercise their own judgement.
A recent judgment of the KwaZulu-Natal Division of the High Court, Pietermaritzburg illustrates this point. In Bank of China Limited Johannesburg Branch v Matrox Investments Proprietary Limited (12499/2024) [2026] ZAKZPHC 84 (21 August 2026), the Bank of China Limited ("BOC") sought the provisional winding-up of Matrox Investments Proprietary Limited ("Matrox") on the basis that Matrox was commercially insolvent. The application arose from a suretyship furnished by Matrox in favour of BOC to secure indebtedness owed by Educor Holdings Proprietary Limited ("Educor"). The suretyship recorded that the necessary approvals and resolutions required by section 45 of the Companies Act, 71 of 2008 ("Companies Act") had been obtained.
In opposing the application, Matrox challenged the validity of the suretyship. Amongst other things, it contended that BOC had effectively driven the approval process by presenting resolutions for signature and that the board had not been afforded an opportunity to properly consider the requirements of section 45 of the Companies Act, including the solvency and liquidity assessments contemplated therein.
The court rejected this argument on the evidence before it and found that, having examined the relevant resolutions, financial information and surrounding circumstances, it was apparent that there had been meaningful and deliberate compliance with section 45 of the Companies Act. The evidence demonstrated substantive consideration of the solvency and liquidity requirements and did not support the suggestion that the directors had merely appended their signatures to resolutions prepared by the lender. The court ultimately concluded that nothing rendered the suretyship invalid. Two further aspects of the judgment matter for present purposes; first, the court accepted that compliance with section 45 appeared to have been motivated by BOC, but did not regard this as inconsistent with the directors having applied their minds. Secondly, the court found that Matrox and Educor were neither related nor inter-related within the meaning of section 2 of the Companies Act, so section 45 was not in fact triggered. Matrox appears to have complied out of an abundance of caution. The court granted a provisional winding-up order.
The significance of the judgment extends beyond the validity of the suretyship itself. Implicit in the court's reasoning is the recognition that the involvement of a lender in a transaction does not displace the responsibility of directors to consider the transaction independently. The fact that documentation originates from a lender, or that a lender requires the implementation of a particular structure as a condition of financing, does not absolve directors from their obligation to satisfy themselves that the transaction is in the interests of the company and compliant with the Companies Act.
The judgment also illustrates an important distinction between influence and control. Commercial relationships frequently involve influence and this is often seen in the negotiation of the terms of a financing arrangement where the lender may enjoy more bargaining power than the borrower. Lenders monitor performance, require information, impose reporting obligations and reserve approval rights in relation to matters that may affect their credit exposure. These mechanisms are ordinarily directed at protecting the lender's commercial position and do not, without more, amount to participation in management. The position may become more complex where lender involvement extends beyond protective oversight and begins to influence the substance of corporate decision-making. The closer a lender moves towards directing strategy, determining which transactions may proceed or effectively dictating the exercise of board discretion, the more difficult it becomes to distinguish creditor protection from corporate governance.
If a lender moves beyond protective oversight and effectively dictates board decisions, the issue is no longer merely commercial influence. Depending on the facts, it may raise questions whether the directors have fettered their discretion in breach of section 76(3)(b), whether the lender has become a de facto director under the broad definition in section 1 of the Companies Act, or whether the company has a claim against the lender. Mere monitoring, reporting and consent rights do not, without more, cross that line.
In practice, this means that a board asked to approve a lender-driven transaction should consider any lender-prepared resolutions on their merits rather than as a formality; record its own assessment in the minutes (and not merely that the lender requires it), including, where section 44 or 45 applies, the solvency and liquidity test and whether the terms are fair and reasonable to the company; take independent advice where the transaction is material; and record why the board considers the transaction to be in the company's best interests.
The challenge for directors is therefore not to resist lender influence altogether, but rather to ensure that, notwithstanding such influence, they continue to exercise the independent judgement that the law requires of them and ensure that they remain the true decision-makers as courts are unlikely to entertain unsubstantiated attempts by directors or companies to avoid responsibility for corporate decisions by attributing them to lender influence.
