Financial Assistance
The prohibition on financial assistance prevents companies from financing the acquisition of their own shares, reflecting the policy of capital maintenance. Financial assistance is broadly defined and includes loans, guarantees, and securities, whether direct or indirect. Breaches are voidable by the company and constitute a category 2 offence. The prohibition, while re-enacted by the Companies Act 2014, includes clarifications and extended exemptions, reducing earlier unintended complications.
The 2014 Act limits the prohibition where assistance is incidental to a larger purpose and benefits the company. It also modernised the “whitewash” procedure through the Summary Approval Procedure (SAP). SAP allows private companies to validate otherwise prohibited financial assistance, provided strict conditions are met. This requires a special resolution, a directors’ declaration of solvency, and compliance with procedural safeguards. Directors acting without reasonable grounds may face personal liability.
Exemptions to the prohibition include lending in the ordinary course of business, employee share schemes, lawful dividends, and financial assistance under SAP. Public companies, however, face stricter rules, and SAP is not available for assisting acquisitions of their parent company shares.
The prohibition often arises in private company share acquisitions involving special purpose vehicles (SPVs). The SPV may fund the purchase with loans secured against the target company’s assets, necessitating compliance with SAP or reliance on specific exemptions to avoid breaching the law.
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