Private Limited Companies Can Fund The Acquisition of Their Own Shares

The Companies Act 1985 made it illegal for any UK company, or any of its subsidiaries, to give any form or Financial Assistance (loans, gifts, guarantees or any other form of security), directly or indirectly, for the purpose of purchasing shares in itself at the time of the acquisition, or in the period following the acquisition. Many directors think that this still applies as a general blanket ban. It does not.

The Companies Act 2006 (CA2006), which replaced the CA1985 reversed this position completely for Private Limited Companies. Even with the abolishment of the general ban on such Financial Assistance, if there is any doubt as to the solvency of the target company, then the target company must not provide Financial Assistance.

Directors could be in breach of their CA2006 duties, if their solvency is in doubt and the assistance is not in the best interests of its own creditors. The validity of the Financial Assistance could be deemed to be a transaction at less than the third party arms-length commercial value. In which case the directors could be held liable for wrongful or fraudulent trading and at the very least have to make good the related losses incurred by their creditors.

If you are a director of a target company which wishes to provide the Financial Assistance. You must also satisfy yourself that you are acting in accordance with your s172 CA2006 duty “to consider, in good faith, whether the transaction will promote the success of the company for the benefit of its shareholders as a whole and in doing so have regard to ….”

A number of factors that can be grouped together as the:

  • Consequences of any decision in the long term
  • Interests of all of the stakeholders, not just the shareholders

When considering providing such Financial Assistance, to be safe, the matter should be considered in detail at a board meeting and the board minutes should include a clear statement of the reasons why the transaction is considered to be beneficial for the company. It would also be sensible to propose a shareholder resolution approving the transaction, thus evidencing that the shareholders agree that it would be beneficial for the company. If the directors are also shareholders, they should not be allowed to participate in this vote.

Even if everything is approved, it would be illegal to provide the Financial Assistance out of Capital. The Share Capital is considered to constitute the “Creditors Buffer.” The Financial Assistance must only be provided out of distributable profits. Otherwise it would be an unlawful reduction of capital.

The good news is; Any Private Limited Company can provide Financial Assistance for the purchase of its own shares, provided:

  • The company is solvent
  • The transaction is in the best interests of the shareholders
  • The transaction is financed from distributable profits

For more information please click on this link
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