Company Law Reform Bill [HL] (328-331)

House of Commons

Session 2005 - 06
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Other Bills before Parliament

Company Law Reform Bill [HL] (328-331)

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 19 — Acquisition by limited company of its own shares
Chapter 2 — Financial assistance for purchase of own shares
328

Circumstances in which financial assistance prohibited
691
Assistance for acquisition of shares in public company
(1)
Where a person is acquiring or proposing to acquire shares in a public
company, it is not lawful for the company or any of its subsidiaries to give
financial assistance directly or indirectly for the purpose of the acquisition
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before or at the same time as the acquisition takes place.
(2)
Subsection (1) does not prohibit a company from giving financial assistance for
the acquisition of shares in it or its holding company if—
(a)
the company’s principal purpose in giving the assistance is not to give
it for the purpose of any such acquisition, or
10
(b)
the giving of the assistance for that purpose is only an incidental part of
some larger purpose of the company,

and the assistance is given in good faith in the interests of the company.
(3)
Where—
(a)
a person has acquired shares in a company, and
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(b)
a liability has been incurred (by that or another person) for the purpose
of the acquisition,

it is not lawful for the company or any of its subsidiaries to give financial
assistance directly or indirectly for the purpose of reducing or discharging the
liability if, at the time the assistance is given, the company is a public company.
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(4)
Subsection (3) does not prohibit a company from giving financial assistance
if—
(a)
the company’s principal purpose in giving the assistance is not to
reduce or discharge any liability incurred by a person for the purpose
of the acquisition of shares in the company or its holding company, or
25
(b)
the reduction or discharge of any such liability is only an incidental part
of some larger purpose of the company,

and the assistance is given in good faith in the interests of the company.
(5)
This section has effect subject to sections 694 and 695 (unconditional and
conditional exceptions to prohibition).
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692
Assistance by public company for acquisition of shares in its private holding
company
(1)
Where a person is acquiring or proposing to acquire shares in a private
company, it is not lawful for a public company that is a subsidiary of that
company to give financial assistance directly or indirectly for the purpose of
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the acquisition before or at the same time as the acquisition takes place.
(2)
Subsection (1) does not prohibit a company from giving financial assistance for
the acquisition of shares in its holding company if—
(a)
the company’s principal purpose in giving the assistance is not to give
it for the purpose of any such acquisition, or
40
(b)
the giving of the assistance for that purpose is only an incidental part of
some larger purpose of the company,

and the assistance is given in good faith in the interests of the company.
(3)
Where—
(a)
a person has acquired shares in a private company, and
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Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 19 — Acquisition by limited company of its own shares
Chapter 2 — Financial assistance for purchase of own shares
329

(b)
a liability has been incurred (by that or another person) for the purpose
of the acquisition,

it is not lawful for a public company that is a subsidiary of that company to give
financial assistance directly or indirectly for the purpose of reducing or
discharging the liability.
5
(4)
Subsection (3) does not prohibit a company from giving financial assistance
if—
(a)
the company’s principal purpose in giving the assistance is not to
reduce or discharge any liability incurred by a person for the purpose
of the acquisition of shares in its holding company, or
10
(b)
the reduction or discharge of any such liability is only an incidental part
of some larger purpose of the company,

and the assistance is given in good faith in the interests of the company.
(5)
This section has effect subject to sections 694 and 695 (unconditional and
conditional exceptions to prohibition).
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693
Prohibited financial assistance an offence
(1)
If a company contravenes section 691(1) or (3) or section 692(1) or (3)
(prohibited financial assistance) an offence is committed by—
(a)
the company, and
(b)
every officer of the company who is in default.
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(2)
A person guilty of an offence under this section is liable—
(a)
on conviction on indictment, to imprisonment for a term not exceeding
two years or a fine (or both);
(b)
on summary conviction—
(i)
in England and Wales, to imprisonment for a term not
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exceeding twelve months or to a fine not exceeding the
statutory maximum (or both);
(ii)
in Scotland or Northern Ireland, to imprisonment for a term not
exceeding six months, or to a fine not exceeding the statutory
maximum (or both).
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Exceptions from prohibition
694
Unconditional exceptions
(1)
Neither section 691 nor section 692 prohibits a transaction to which this section
applies.
(2)
Those transactions are—
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(a)
a distribution of the company’s assets by way of—
(i)
dividend lawfully made, or
(ii)
distribution in the course of a company’s winding up;
(b)
an allotment of bonus shares;
(c)
a reduction of capital under Chapter 10 of Part 18;
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(d)
a redemption of shares under Chapter 3 or a purchase of shares under
Chapter 4 of this Part;

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 19 — Acquisition by limited company of its own shares
Chapter 2 — Financial assistance for purchase of own shares
330

(e)
anything done in pursuance of an order of the court under Part 27
(order sanctioning compromise or arrangement with members or
creditors);
(f)
any thing done under an arrangement made in pursuance of section
110 of the Insolvency Act 1986 (c. 45) or Article 96 of the Insolvency
5
(Northern Ireland) Order 1989 (S.I. 1989/2405 (N.I. 19)) (liquidator in
winding up accepting shares as consideration for sale of company’s
property);
(g)
anything done under an arrangement made between a company and its
creditors that is binding on the creditors by virtue of Part 1 of the
10
Insolvency Act 1986 or Part 2 of the Insolvency (Northern Ireland)
Order 1989 (S.I. 1989/2405 (N.I. 19)).
695
Conditional exceptions
(1)
Neither section 691 nor section 692 prohibits a transaction to which this section
applies—
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(a)
in the case of a private company, or
(b)
in the case of a public company if—
(i)
the company has net assets that are not reduced by the giving of
the assistance, or
(ii)
to the extent that those assets are so reduced, the assistance is
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provided out of distributable profits.
(2)
The transactions to which this section applies are—
(a)
the lending of money in the ordinary course of the company’s business;
(b)
the provision by the company, in good faith in the interests of the
company, of financial assistance for the purposes of an
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employees’ share scheme;
(c)
the provision of financial assistance by a company or any of its
subsidiaries for the purposes of or in connection with anything done by
the company, or a company in the same group, for the purpose of
enabling or facilitating transactions in shares in the first-mentioned
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company between, and involving the acquisition of beneficial
ownership of those share by—
(i)
bona fide employees or former employees of that company or of
another company in the same group, or
(ii)
spouses or civil partners, widows, widowers or surviving civil
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partners, or minor children or step-children of any such
employees or former employees;
(d)
the making by a company of loans to persons (other than directors)
employed in good faith by the company with a view to enabling those
persons to acquire fully paid shares in the company or its holding
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company to be held by them by way of beneficial ownership.
(3)
The references in this section to “net assets” are to the amount by which the
aggregate of the company’s assets exceeds the aggregate of its liabilities.
(4)
For this purpose—
(a)
the amount of both assets and liabilities shall be taken to be as stated in
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the company’s accounting records immediately before the financial
assistance is given, and
(b)
“liabilities” includes any amount retained as reasonably necessary for
the purpose of providing for a liability the nature of which is clearly

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 19 — Acquisition by limited company of its own shares
Chapter 3 — Redeemable shares
331

defined and that is either likely to be incurred or certain to be incurred
but uncertain as to amount or as to the date on which it will arise.
(5)
For the purposes of subsection (2)(c) a company is in the same group as another
company if it is a holding company or subsidiary of that company or a
subsidiary of a holding company of that company.
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Supplementary
696
Definitions for this Chapter
(1)
In this Chapter—
“distributable profits”, in relation to the giving of any financial
assistance—
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(a)
means those profits out of which the company could lawfully
make a distribution equal in value to that assistance, and
(b)
includes, in a case where the financial assistance consists of or
includes, or is treated as arising in consequence of, the sale,
transfer or other disposition of a non-cash asset, any profit that,
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if the company were to make a distribution of that character
would be available for that purpose; and
“distribution” has the same meaning as in Part 24 (distributions) (see
section 832).
(2)
In this Chapter—
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(a)
a reference to a person incurring a liability includes his changing his
financial position by making an agreement or arrangement (whether
enforceable or unenforceable, and whether made on his own account or
with any other person) or by any other means, and
(b)
a reference to a company giving financial assistance for the purposes of
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reducing or discharging a liability incurred by a person for the purpose
of the acquisition of shares includes its giving such assistance for the
purpose of wholly or partly restoring his financial position to what it
was before the acquisition took place.
Chapter 3
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Redeemable shares
697
Power of limited company to issue redeemable shares
(1)
A limited company having a share capital may issue shares that are to be
redeemed or are liable to be redeemed at the option of the company or the
shareholder (“redeemable shares”), subject to the following provisions.
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(2)
The articles of a private limited company may exclude or restrict the issue of
redeemable shares.
(3)
A public limited company may only issue redeemable shares if it is authorised
to do so by its articles.
(4)
No redeemable shares may be issued at a time when there are no issued shares
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of the company that are not redeemable.