Companies Act 2006 ('The Act') - The Abolition Of The Prohibition Of Financial Assistance By Private Companies And The Steps Banks Should Take To Protect Their Security

From 1 October 2008, the prohibition of

financial assistance by a private company for the

purchase of shares in itself or its holding company has been

abolished.

The prohibition of financial assistance by a public

company (or by its private company subsidiary) for the

purchase of shares in the public company remains.

Now the restriction has been lifted for private companies, it is

likely that transactions will become simpler, and directors will no

longer have to worry about the possibility of committing a criminal

offence if a private company gives financial assistance.

However, private company directors will still need to give

consideration to:

whether the transaction is for the company's benefit;

their directors duties (which are now codified in the Act);

and

the solvency of the company

before they allow a company to give security. This includes

security that constitutes financial assistance which will typically

constitute a guarantee supported by a charge.

Whilst the "whitewash" procedure previously required

might have been seen as unduly onerous in some circumstances, it

did provide a checklist for directors and banks to follow to ensure

that any security granted to the bank would be valid and

enforceable. Under the new regime banks need to be certain that the

security is given for the company's benefit and that the

company is solvent after the giving of security that constitutes

financial assistance to ensure that it is valid.

Corporate Benefit

Section 172 of the Companies Act 2006 provides that a director

"must act in a way he considers, in good faith, would be most

likely to promote the success of the company for the benefit of its

members as a whole". In doing so regard (amongst other

matters) must be given to:-

the likely consequences of any decision in the long term;

the interests of the company's employees;

the need to foster the company's business relationships

with suppliers, customers and others;

the impact of the company's operations on the community and

the environment;

the desirability of the company maintaining a reputation for

high standards of business conduct; and

the need to act fairly as between members of the company.

Case law provides that when considering whether to enter into a

transaction, (eg giving security) the directors must act in a way

they believe to be in the best interests of the company and for the

benefit of the company and not just in the best interests of and

for the benefit of the group as a whole...