From 1 October 2008, the Companies Act 2006 will repeal the prohibition on private companies providing financial assistance for the purchase of its own shares.  This change in law will not apply to public companies which will continue to be prohibited from giving financial assistance.

Currently, the financial assistance whitewash procedure is required when a “predator” company purchases the shares in a “target” company using finance that is secured and guaranteed by the target company.  If the whitewash procedure is not followed then the transaction could be set aside and the directors of the target company could also face criminal prosecution. 

In order to comply with the whitewash procedure, the directors of the target company must swear a statutory declaration to confirm that the company is solvent.  The declaration must also be accompanied by an auditor’s report to confirm the declaration is accurate and that the company will continue to be solvent after the transaction has completed.  

However, once the new rules come into force, it is possible that the Banks may still require certain aspects of the whitewash procedure, or a similar process, to be followed when dealing with financial assistance transactions as it provides verification to the Bank as to the current and future solvency of the target company. 

Company directors must also still ensure that the proposed transaction does not breach their own duties to the company and insolvency laws, such as preference and transactions at an undervalue.  This means that the directors must always hold appropriate board meetings which should  be accurately minuted.   The grant of “upstream” security by a target company should also be approved by a shareholder’s resolution.