Dealpoint is a regular briefing on issues relevant to corporate transactions, notably M & A and reconstructions. Each edition of Dealpoint will focus in detail on one area of law and practice which may be of interest to principals and practitioners in the corporate transactions area.

In this issue of Dealpoint we focus on the reform (in the Companies Act 2006) of the law relating to financial assistance by private companies.

The companies Act 2006

Abolition of financial assistance

The new Act received Royal Assent in November and one of the principal changes which it makes is the removal of the prohibition against private companies giving financial assistance for the purchase of their own shares.

This will mean that the whitewash procedure will be no more: nevertheless, its corpse seems likely to keep twitching for the foreseeable future as the Government has (rather late in the day) come to accept that arrangements which would have amounted to illegal financial assistance may nevertheless continue to be illegal by virtue of various legal principles which pre-date the introduction of a statutory prohibition against giving financial assistance.

In order to deal with these concerns, the Government has stated that it intends to amend the new Act before it even comes into force, in order to provide that anything which could have been "whitewashed" under the 1985 Act will be legal under the new regime - the clear implication being that any arrangements which could not have been whitewashed will remain unlawful.

It seems almost inconceivable that there will be any requirement for a declaration of solvency or auditors' report but it is likely that it will be necessary to show that the company has net assets and that, if the financial assistance reduces net assets, the amount of the reduction does not exceed its distributable profits.

Lenders would therefore be well-advised to continue to insist upon comfort on these matters, both through the board minutes of the company concerned and (where they are in doubt) from the auditors. If there are real concerns about the solvency of the company, lenders would be well advised to obtain comfort on that from both the directors and the auditors as, if the company is on the verge of insolvency, the directors' primary responsibility will be to act in the best interest of creditors.

It is very likely, therefore, that a "Son of Whitewash” procedure will emerge.

We may have to start considering these issues rather sooner than was originally expected as, although most of the new Act is likely to come into force in the Autumn of 2007, there are suggestions that the new financial assistance regime may be introduced much earlier than that.

It should be noted that the law relating to financial assistance by public companies has not changed and that the changes introduced by the new Act will not apply where a private company subsidiary is proposing to give financial assistance in connection with the acquisition of shares in its public company parent - in such circumstances, the existing regime will continue to apply.

December 2006