Introduction

Section 1 of the Companies (Financial Assistance for Acquisition of Own Shares) Ordinance, 1998 ("FAO") restricts the giving of financial assistance by a Guernsey company ("GCo") or any of its subsidiaries which is a Guernsey company, for the purpose of the acquisition of shares in GCo or in reducing or discharging a liability incurred for the purpose of the acquisition.

The FAO is modelled on, but is different in some important respects from, sections 151 to 158 of the Companies Act 1985 of the United Kingdom.

This briefing provides an overview of the financial assistance regime, identifies some of the key differences between the FAO and sections 151 to 158 of the Companies Act 1985 of the United Kingdom ("CA85"), highlights the legal consequences of a breach of the FAO and summarises the criteria, compliance with which will prevent from becoming unlawful for the purposes of the FAO any transaction which would otherwise be lawful under that Ordinance.

It has been proposed, as a part of the general company law and related legislation reform that the FAO be repealed, but as at the date of this note the FAO remains in force.

Overview of the Financial Assistance Regime under the FAO

Section 1(1) and 1(2) of the FAO respectively provide that:

  • where a person is acquiring or proposing to acquire shares in a company, the company and any of its subsidiaries may give financial assistance directly or indirectly for the purpose of or in connection with that acquisition before or at the same time as the acquisition takes place provided that the company or, as the case may be, the subsidiary fulfills the criteria set out below; and
  • where a person has acquired shares in a company and any liability has been incurred (by that or any other person) for the purpose of or in connection with that acquisition, the company or any of its subsidiaries may give financial assistance directly or indirectly for the purpose of or in connection with reducing or discharging the liability so incurred provided that the company or, as the case may be, the subsidiary fulfills the criteria set out below.

The criteria for the giving of financial assistance referred to above are the same for each subsection and are that the company or, as the case may be the subsidiary:

(a) is authorized to do so by the provisions of its memorandum or articles; and

(b) will, immediately after the financial assistance is given, satisfy the solvency test

The Definition of Financial Assistance under the FAO

Section 2 of the FAO defines "financial assistance", in terms mirroring CA85 section 152(1)(a), as meaning:

  • financial assistance given by way of 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
  • financial assistance given by way of a loan or any other 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 obligations of another party to the agreement remains unfulfilled, or by way of the novation of, or the assignment of rights arising under, a loan or such other agreement
  • any other financial assistance given by a company the net assets of which are thereby reduced to a material extent or which has no net assets

Key Differences with Section 151 CA85

Key differences between the FAO and section 151 CA85 include:

  • Under section 151 CA85 it is prima facie unlawful for financial assistance to be given but prima facie lawful under the FAO
  • The FAO does not include an equivalent to the "de minimis" provisions contained in section 152(1)(a)(iv) CA85
  • The FAO does not include a "principal purpose" exemption, such as contained in section 153(1) and (2) CA85
  • Under section 151, only private companies can carry out a whitewash. In Guernsey there is no concept of a "public" company so that all companies are in effect private. However the compliance criteria under the FAO is open to all Guernsey companies whether or not they may be designated "public" by the rules or regulations of another jurisdiction
  • The requirements of the solvency test are far more relaxed under the FAO than under CA85. The compliance criteria under the FOA are far simpler than the equivalent under CA85. See "The Whitewash Procedure" below.

Legal Consequences of a Breach of the FAO

Under the FAO it is prima facie lawful for financial assistance to be given subject to compliance with the specified criteria. This perspective is reinforced by the provisions of the FAO in relation to dealings with third parties. Section 6(1) provides that if a person is dealing with a company in good faith, no act of the company shall be invalidated by reason of a failure to comply with the provisions of Section 1 (the "whitewash"/compliance criteria). As such, unlike the CA85, a transaction tainted with unlawful financial assistance is not also void.

Section 6(3) takes this protection a step further by providing that a party to a transaction with a company is not bound to enquire as to whether the transaction is in accordance with the provisions of section 1.

The FAO does not provide that a failure to comply with its provisions, resulting in the giving of unlawful financial assistance, results in the commission of any offence or breach, nor does it provide any sanction for such.

However section 6(4) stresses that despite these third party protection provisions it remains the duty of a company’s directors to observe any limitation on their powers imposed by or deriving from the provisions of section 1. As a result the directors of a company giving unlawful financial assistance may be in breach of their fiduciary duties to the company. The consequences of being in breach of such duties might include personal liability for loss suffered by the company as a result.

The Whitewash Procedure

Strictly speaking, as the provision of financial assistance under the FAO is prima facie lawful, there is no need for what is known as a "whitewash" procedure i.e. a procedure which if followed makes a prima facie unlawful act a lawful one. Under the FAO the giving financial assistance is lawful if the company or as the case may be the subsidiary giving the financial assistance:

  • is authorized to do so by the provisions of its memorandum or articles; and
  • will, immediately after the financial assistance is given, satisfy the solvency test.

The Solvency Test

Section 3(1) of the FAO provides that a company satisfies the solvency test if:

(a) immediately following the date on which the assistance is proposed to be given, the company will be able to discharge its liabilities as they fall due in the normal course of its business;

(b) the value of the company’s assets is greater than the aggregate of:

(i) the amount of its liabilities;

(ii) the nominal amount of its issued shares; and

(iii) any amounts standing to the credit of its share premium account and capital redemption reserve fund.

Where the company is one which is a supervised company as defined in the FAO (essentially a company regulated by the Guernsey Financial Services Commission) there is an additional requirement that such supervised company also satisfy any other requirement as to solvency imposed on it by the laws or regulations to which it is subject.

Section 3(2) provides that in determining whether the value of a company’s assets will be greater than the aggregate of the amounts specified above, reliance may be placed upon valuations of assets and estimates of liabilities which are reasonable in all the circumstances.

There is no statutory requirement to obtain an auditors’ report. It is ultimately for the directors to decide what supporting evidence (if any) is appropriate in order for them to be in a position to form the opinion referred to above.

Further, there is no statutory requirement to swear a statutory declaration. In practice, the directors who authorise the financial assistance will include in the transaction board minutes that they confirm they have formed the opinion referred to above

Please note that this briefing is only intended to provide a very general overview of the matters to which it relates. This briefing is not intended as legal advice and should not be relied on as such. © Carey Olsen 2006