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Financial assistance: whitewashed by the Companies Act 2006

March 2009 - Corporate & Commercial. Legal Developments by Kingsley Napley.

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Undoubtedly, the most eagerly awaited provision contained in the most recent Companies Act 2006 (the 2006 Act) implementation in October 2008 was that in relation to financial assistance. One of the overall aims of the 2006 Act was to significantly reduce the administrative burdens involved with running a company. To what extent have the changes to the financial assistance regime eased the regulatory burdens on directors and the workload of their lawyers?

financial assistance prohibition

Section 151 of the Companies Act 1985 (the 1985 Act) prohibits a company (and its subsidiaries) from giving financial assistance for the purpose of the acquisition of its shares before, or at the same time as, the acquisition of those shares. Section 151 also applies where shares have been acquired in a company and a liability has been incurred (eg a loan) in so doing. In this scenario the company (and its subsidiaries) is also prohibited from providing financial assistance to the purchaser of its shares for the purpose of reducing the liability incurred. 

What is ‘financial assistance’?

To the chagrin of many directors, the 1985 Act provides no definition of the term ‘financial assistance’. Section 152 gives specific examples of various types of transactions that constitute financial assistance, but as they all refer back to the phrase ‘financial assistance’ the scope of the prohibition is very fact-sensitive:

  • Financial assistance given by way of gift.
The word ‘gift’ is given a strict meaning and thus any consideration, however insignificant, moving to the company does not constitute a gift.
  • Financial assistance given by way of guarantee, security or indemnity, other than an indemnity in respect of the indemnifier's own neglect or default, or by way of release or waiver.
This covers situations whereby a company is standing behind another’s obligations, such as when a company guarantees a bank loan in favour of an individual for the purchase of shares in the company.


  • Financial assistance given by way of a loan, or by way of the novation or assignment of rights arising under a loan.

  • Financial assistance by way of an agreement under which any of the obligations of the person giving the assistance are to be fulfilled at a time when, in accordance with the agreement, any obligation of another party to the agreement remains unfulfilled (or novation or assignment of rights under such an agreement).
This would cover a situation whereby a seller (S) agrees to sell their shares in a target company (T) on terms that a wholly owned subsidiary of T (Sub) pays S an amount sufficient to discharge an outstanding debt owed by T to S. Under these terms S is either causing Sub to lend the money to T or to pay off S directly. Sub is therefore either making funds available to T or S, thus providing financial assistance for the acquisition of T’s shares.

  • Financial assistance given by a company the net assets of which are thereby reduced to a material extent, or which has no net assets.
‘Net assets’ means the aggregate of the company’s assets less the aggregate of its liabilities. A commonly accepted figure for a ‘material’ reduction of a company’s net assets is 1% and over.

repeal of the provisions

On 1 October 2008 the financial assistance provisions of the 1985 Act were repealed in respect of private companies (and their subsidiaries). This now means that private companies are not prohibited from providing financial assistance for the purpose of the acquisition of shares in themselves.

Whitewash procedure

Importantly, the repeal of the financial assistance provisions also means the repeal of the whitewash procedure. Under the 1985 Act, following the whitewash procedure was the only way a private company could provide financial assistance for the purchase of its own shares (the procedure did not apply to public companies). With the procedure repealed, there is now no need for directors to prepare detailed cash flow forecasts, obtain reports from the company’s auditors and swear statutory declarations in order to ‘whitewash’ transactions involving financial assistance. 

The repeal of the financial assistance provisions therefore appears to have lifted a heavy regulatory burden from many transactions. However, despite the repeal of ss151-158 of the 1985 Act, financial assistance cannot now be provided without thought. There are several concerns that directors and lawyers must be mindful of before embarking upon a transaction which would previously have required the ‘whitewash’ treatment.

Exceptions from the repeal

The financial assistance provisions of the 1985 Act have not been repealed in respect of public companies. A public company (and its subsidiaries) is still prohibited from giving financial assistance for the purpose of the acquisition of its shares or those of a parent company. This is due to a need to comply with the Second Company Law Directive (77/91/EEC) that prohibits a public company from advancing funds, making loans or providing security in order for a third party to acquire its shares.

Private companies are also not completely exempt from the prohibitions on financial assistance. A private company can still not give financial assistance for the purpose of the acquisition of shares of a public parent company.

Checks in lieu of the whitewash procedure 

The whitewash procedure existed primarily to protect the interests of both creditors and minority shareholders in light of a transaction involving financial assistance. The interests of both groups still need to be safeguarded in the absence of the whitewash procedure and thus the following factors will all be of relevance before embarking on a transaction involving the giving of financial assistance:


Does the company have the power to grant financial assistance under its memorandum and articles? Many lenders now insist on an express provision to grant financial assistance in a company’s constitution. Moreover, companies incorporated between 1 July 1948 and 2 December 1981 with unamended Table A articles will have an article prohibiting the granting of financial assistance, which must be deleted or disapplied.

Directors’ duties

Under the 2006 Act a director needs to consider whether a transaction involving financial assistance is consistent with their duty to act in good faith and is likely to promote the success of the company for the benefit of its members as a whole (s172).

Directors should record their reasons for giving the assistance in sufficiently detailed board minutes. Moreover, a ratifying shareholder resolution approving the transaction assists in confirming that a director is acting in the best interests of the company.


The giving of financial assistance will of course not be in the best interests of the creditors of a company if that company is of doubtful solvency or on the verge of insolvency. This is important because, when a company is insolvent, the s172 directors’ duty mentioned above is displaced by an obligation for directors to act in the best interests of creditors as the company nears insolvency. As such, directors could find themselves liable for wrongful or fraudulent trading or the transaction itself could be set aside under the Insolvency Act 1986 as a transaction at an undervalue or as a preference. 

To avoid falling foul of insolvency law when granting financial assistance, directors must consider the cash flow and net asset position of the company to ensure there are no pertinent insolvency worries. 

Capital maintenance

The prohibition of financial assistance forms one part of the maintenance of capital concept that prevents a company from unlawfully reducing its capital by returning assets to shareholders other than as permitted by legislation. The case that established this rule is Trevor v Whitworth [1887]. This case gives rise to the concern that the common law prohibition of financial assistance is resurrected by the repeal of ss151-158 of the 1985 Act. However, to deal with this concern, the saving in paragraph 54 of Schedule 4 to the fifth Commencement Order of the 2006 Act ensures that no common law restrictions on financial assistance are resurrected by the repeal of the relevant sections of the 1985 Act.

The rule of law derived from Trevor v Whitworth is, however, far wider than the prohibition on financial assistance in the 1985 Act. Thus, in certain specified cases, transactions previously prohibited by the 1985 Act will remain prohibited by the common law under the wider principles derived from the case law. The explanatory notes to the fifth Commencement Order give the specific examples practitioners must be aware of: 

  • A company with no (or insufficient) distributable reserves makes a gift of money to a shareholder with which to purchase further shares in the company. 
This transaction is still prohibited as it would result in an unlawful reduction of capital of the company. 

  • A company with no (or insufficient) distributable reserves makes a loan to a shareholder with a view to the shareholder purchasing further shares in the company. Meanwhile, the company is aware when the loan is made that the shareholder has no reasonable prospect of repaying the loan, so that the company would have to make an immediate provision in respect of the loan. 
This practice is still prohibited on the grounds that it gives rise to an unlawful reduction of capital. 


The 2006 Act has clearly made the granting of financial assistance a far less laborious process 

for private companies through the repeal of the whitewash procedure. There was a fear that the entities who typically relied on the whitewash procedure (primarily lenders) would require some sort of de facto whitewash procedure in their loan agreements before granting loans in transactions involving financial assistance. So far, this hasn’t been the case, so transactions have been simplified, shortened and costs reduced; all welcome developments for directors. 

However, the checks that still need to be made before financial assistance by private companies can be granted, alongside the fact that the prohibition still exists for public companies, highlights that the 2006 Act has by no means made financial assistance a principle that a company lawyer can ignore. 

By Andrew Solomon, trainee solicitor, Kingsley Napley.