UK: Issues For Lenders - The Companies Act 2006

The Companies Act 2006 will have an impact, on a date to be decided after consultation, on lenders in respect of financial assistance, changes to the process of "Slavenburg" filings for overseas companies registering security in England & Wales and floating charge-holders losing priority to liquidation expenses. Some provisions relating to directors' duties, company meetings and resolutions came into force on 1 October that have an impact on lenders' practice.

Issues for Lenders

The purpose of this note is to detail some issues in the Companies Act 2006 that are relevant for lenders. It supersedes our note dated November 2006.

The Act received Royal Assent on 8 November 2006. It is being implemented in stages. The whole Act will be in force by 1 October 2009. The 2006 Act will repeal and replace nearly all the Companies Act 1985.

Changes Now in Force of Interest to Lenders

The Act is long and wide-ranging, restating much existing company law, but it has an impact on lenders in some respects: e.g., the changes still to come into force relate to the abolition of financial assistance, changes to the process of "Slavenburg" filings for overseas companies registering security in England & Wales and floating chargeholders losing priority to liquidation expenses.

From 1 October 2007, some provisions on directors’ duties, company meetings and resolutions came into force that will have some impact on lenders. Most of these matters are dealt with in more detail later in this note but, briefly, the changes affect:

• written resolutions

• extraordinary resolutions – these will disappear over time

• the phrase "the constitution" in certain circumstances replacing "Memorandum & Articles of Association" as the definition of the constitutional documents of the company is now wider

• instead of needing unanimity, an ordinary resolution will be capable of being passed in writing by a simple majority of the total voting rights of eligible members, and a special resolution in writing by 75%. However, see our comments under "Resolutions and Meetings" below for the approach we think lenders are more likely to take in practice.

Financial Assistance

The restriction on private companies from giving financial assistance for the acquisition of their own shares (and shares in their private company parents) will be repealed by the Act. The date at commencement of those provisions is not known yet: there is to be a short period of consultation followed by an announcement in December 2007 as to whether they will be introduced in October 2008 or 2009.

Even a private company subsidiary of a public company will be free of the restriction in relation to an acquisition of its own shares or the shares in an intermediate private company holding company. But public companies will still be prohibited from giving financial assistance for the acquisition of their own shares or those of their parent company (whether public or private) and private company subsidiaries will be under the same prohibition in relation to acquisitions of shares in their public company parents.

A public company will be able to re-register as private in order to give financial assistance (as some public companies presently do in order to take advantage of whitewash procedure for private companies, in s 155-158 of the 1985 Act) – for example where a takeover bid of a public company is financed by debt and the bank wants to take security over the target’s assets. The Government does not propose to take advantage of the relaxation for public companies offered by the Directive Amending the Second Company Law Directive (2006/68).

The relaxation of the rules on financial assistance will remove one of the potential obstacles to M&A transactions that involve only private companies, and also public-to-private transactions. But a company proposing to enter into an arrangement that is designed to assist one or more of its shareholders, or even a purchaser, whether in connection with an acquisition of its shares or otherwise, will have to consider carefully whether the arrangement:

• Will promote the success of the company.

• May be treated as an indirect distribution of profits to one or more members, which would be unlawful if the company does not have sufficient distributable profits to cover the net book value of the assets distributed. In addition, any shareholders who do not benefit will probably need to be asked to waive their entitlement to participate in the distribution.

• May be susceptible to challenge in the event of insolvency.

As a result, directors may be advised to follow a procedure similar to the whitewash – ie formally to consider the effect of the proposed arrangement on the company’s solvency over the following 12 months; to ensure that the arrangement either does not deplete the company’s net assets, or to the extent that it does, that the assistance is provided out of distributable profits; and to obtain the approval of shareholders.

For fuller details, please click here for our note, "Issues for lenders - the Companies Act 2006".

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 13/11/2007.