News

Repeal of financial assistance

Release date: 26/09/2008

One of the most eagerly awaited changes contained in the Companies Act 2006, is the repeal of restrictions under the Companies Act 1985 on financial assistance for the acquisition of shares in private companies, including the "whitewash" procedure.

For more than 20 years, the ability of companies to enter into many types of corporate transaction has been restricted by the financial assistance prohibition.

In many cases this has required directors to follow a statutory "whitewash" procedure, which has frequently added to the cost and complexity of deals.

With effect from 1 October, these restrictions will be repealed, although it remains to be seen whether banks and other financial institutions will now require their own informal version of the "whitewash" procedure.

Directors will no longer be legally required to prepare detailed cashflow forecasts, obtain reports from the company's auditors and swear statutory declarations in order to "whitewash" transactions or security arrangements where the company provides financial assistance in connection with the acquisition of its own shares.

They are therefore unlikely to mourn the repeal of sections 151 to 155 of the Companies Act 1985.

However, for all its faults this procedure did provide a degree of certainty.

So long as all the hoops had been jumped through, the other parties to a transaction could be reasonably sure that the underlying transaction could not be unpicked at a later date by creditors or shareholders.

In the absence of a statutory procedure to authorise transactions involving financial assistance, it seems likely that banks and other institutional lenders will require rather more in the way of comfort from directors, auditors and possibly also shareholders than has previously been the case.

The precise form of this remains to be seen, but it is probably too early to confidently predict the death of financial assistance.