Financial Assistance - Some Good News at Last?

BACKGROUND

The prohibition on "financial assistance" forms part of the wider maintenance of capital regime in English company law. It is a criminal offence for a company (or any of its subsidiaries) to give financial assistance for the purpose of the acquisition of shares in that company. The current rules are based on the Second Company Law Directive, although the prohibition has its origins in the Companies Act 1929.

Many people take the view that the current prohibition on "financial assistance" creates potential traps for the unwary without effectively protecting creditors against the abuse of limited liability by the dishonest. The Company Law Review Steering Group, reporting in November 2000, recommended that in future the "financial assistance" prohibition should only apply to public companies. In the White Paper entitled "Modernising Company Law" (July 2002), the Government welcomed the Steering Group's proposal and draft legislation to remove the prohibition on the giving of "financial assistance" by private companies for the acquisition of their own shares is expected in due course.

CURRENT LAW AND PRACTICAL DIFFICULTIES

The current law is set out in Sections 151 to 158 Companies Act 1985 (as amended). There are two basic provisions:

Section 151(1): where a person is acquiring or is proposing to acquire shares in a company, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of that acquisition before or at the same time as the acquisition takes place; and

Section 151(2): where a person has acquired shares in a company and any liability has been incurred (by that or any other person), for the purpose of that acquisition, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of reducing or discharging the liability so incurred.

There are a number of exemptions from the prohibition - such as, for example, the payment of a lawful dividend - but the law on the purpose of any particular "financial assistance" is notoriously difficult to apply.

There are also certain additional restrictions for public companies. The regime can be relaxed for private limited companies, through what is known as the "whitewash" procedure. However, that procedure is onerous and requires, amongst other things, the preparation of an auditors' report and the swearing by the directors of a statutory...