 Financial assistance is basically the agreement by a company to allow its assets to be used in connection with the acquisition of its own shares. This means that, if the buyer wishes to secure bank funding on the target company’s business, the directors of the target company will be required to swear a statutory declaration confirming that, in their reasonable opinion, the company will be solvent for the next twelve months. There is also a requirement that the company’s auditors prepare a report stating that the company ought to be solvent in the year following. Not only is there a substantial amount of work in preparing the necessary documentation (including board minutes, shareholder resolutions and a mini audit), but also the timing of the whole process needs to be carefully co-ordinated in order to avoid falling foul of the rules. The penalties for not carrying out the procedure or wrongly completing a stage can be severe. Added to all this, the client is often bemused at the need for such a process when companies can be formed with a minimum of a £1 stake and in these days of seemingly limitless credit available to all and sundry.
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It therefore comes as a huge relief that the rules on financial assistance for private companies are likely to be abolished under the latest Company Law Reform Bill which is due to come into force in 2007, and in case the message seems to be confined to a handful of commercial lawyers shrouded in legalese, be aware that the removal of this process will enable solicitors to provide a far more competitive price, which should mean that clients see the benefits in reduced legal fees!
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