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The Companies Act 2006 does not prohibit a private company from giving financial assistance for the acquisition of its own shares (although if it has a subsidiary which is a public company, the public company may not assist the acquisition of shares in its private holding company).
The rules changed for private companies on 1 October 2008. The rules will not change for public companies.
Although financial assistance is part of the share capital provisions of the Act it is a simple matter to abolish the prohibition for private companies, and “whitewash”, separately from those provisions, which is why that abolition came into force in October 08. Business welcomes the earlier commencement of these provisions.
Save for one exception, the Companies Act 1985 prohibited a company from granting financial assistance (for example by means of a non-commercial loan) for the acquisition of shares in itself or in its holding company. The exception was that private companies could grant such assistance by going through a complex and expensive procedure, often referred to as “whitewash”.
Under the Companies Act 2006, the prohibition on granting financial assistance has been wholly lifted for private companies but will remain in place for public companies.
We have agreed with stakeholders the terms of a "saving" in the Commencement Order, and an explanatory passage in the accompanying Explanatory Memorandum, which will make clear that a transaction will not be unlawful if the only reason for its previously being unlawful was the prohibition in section 151 of the 1985 Act on financial assistance for the acquisition of shares; it will remain unlawful under Companies Act 2006 if there was some other reason for its previously being unlawful.
The Explanatory Memorandum (EM) is not a conclusive statement, because the Department is not able to make conclusive statements about what the law is, particularly in respect of the law applying as between private parties.
The Department’s view is that the statutory arrangements which eventually became sections 151 to 158 of the Companies Act 1985 had the effect that common law obstacles to financial assistance were “nullified” so far as they were obstacles to financial assistance by a company for acquisition of its own shares but not so far as they were also obstacles to any other type of arrangement.
So far as the common law obstacles were also obstacles to arrangements other than financial assistance by a company for acquisition of its own shares, those obstacles were not “nullified” by the statutory arrangements which eventually became sections 151 to 158 of the 1985 Act.
The position will be that to the extent that Trevor v Whitworth (or any other rule of law decided by the courts) survived the enactment of what eventually became sections 151 to 158 of the Companies Act 1985, that survival is unaffected by the repeal of those sections and cannot be affected by a saving provision under the 2006 Act. If a transaction is unlawful at common law now and cannot become lawful by being "whitewashed" under sections 155 to 158, it will remain unlawful after the repeal.
“Where to draw the line” is a matter of which they already need to be aware under the provisions of the Companies Act 1985; if they are not, they are at risk of causing their companies to enter unlawful transactions. A purported whitewash of something otherwise unlawful at common law would be ineffective, so directors and companies already have to satisfy themselves before applying whitewash that the proposed transaction is not one that would be unlawful at common law.
