Financial assistance under Companies Law

Our Commercial Partnerships Ordinance, Cap.168 (CPO) enacted rules on financial assistance in 1965. In substance they preclude a company from giving directly or indirectly any form of financial assistance to a third party where the purpose of this assistance is the acquisition of its own shares or shares in its parent company.

The CPO was eventually substituted (January 1, 1996) by the Companies Act, Cap. 386, but the new Article 110(1)(b) retained substantially the same rules of the CPO, save that these rules did not apply to investment companies with fixed share capital whose shares were being acquired by another undertaking and insofar as the financial assistance did not erode company net assets beyond the legal limit. This was the first inroad.

Whitewashing

Several years later, Article 110(1)(b) was amended twice: by the Set-Off and Netting on Insolvency Act, 2003 which restricted the ambit of potential financial assistance by removing the qualifying words “in connection with” and retaining only “for the purpose of”. Later, the Accountancy Profession Act and other Laws (Amendment) Act, 2008 introduced ‘whitewash’ provisions for private companies by means of which the directors and shareholders may authorise transactions that would otherwise have been null and void for financial assistance.

The equi-valent whitewash provisions for Shipping Organisations under the Merchant Shipping (Shipping Organisations-Private Companies) Regulations, 2004 are an even lighter burden still and were actually introduced earlier than the whitewash provisions in the Companies Act. Finally, and although the securitisation regime is an admittedly singular one, the 2006 Securitisation Act, Cap. 484 set the tone for future action by actually disapplying all financial assistance restraints, unless the securitisation vehicle is established as a public limited liability company.

The evolutionary changes to the financial assistance rules under our law have been represented chronologically in tabular form in the table (see right).

Why repeal?

Although the Company Service Providers Act, 2013 has brought about useful changes to the Companies Act in addition to promulgating much-needed legislation on the regulation of corporate service providers, it is unfortunate that the next step was not taken to repeal outright the current provisions on financial assistance in the case of private companies.

The prohibition of financial assist-ance for private companies was removed under English law several years ago, together with the repeal at that time of the corresponding whitewash procedure, save for maintaining it for the purpose of the acquisition of shares of a public parent company.

While there are undoubtedly strong arguments in favour of leaving the prohibition in place for public companies (even setting aside for a moment the effects of EU Directives on the subject), there are equally compelling ones in favour of completely repealing current financial assistance prohibitions (albeit whitewashed) in respect of private companies and shipping organisations that are limited liability companies.

One reason is that the prohibition needlessly snares transactions that are often intra-group and innocuous to third parties. Another is that the regulatory burden may on occasion shackle transactions that need to move fast.

It is unfortunate that the next step was not taken to repeal outright the provisions on financial assistance in the case of private companies

Furthermore, the codification in our law of the management and fiduciary duties of directors has, in practice, had the commendable effect of intensifying the focus on, and expectations as to, the level of care that directors must exercise when performing the duties of their office. It has also sharpened awareness in directors’ minds of the risks of personal liability. A director has a duty to act in the best interests of the company and renders himself open to liability for breach of duty if the grant of financial assistance does not pass muster in terms of law.

Moreover, our courts have not shied away from holding directors personally liable for their acts or omissions. Consequently, the legal and judicial climate is favourable for a re-think in this area.

Conclusion

Repealing the financial assistance prohibition and the attendant whitewash procedures for private companies should not mean that directors have carte blanche to act as they will or to the detriment of creditors and minority shareholders.

Directors still need to remain seriously mindful of their obligations towards the company and, especially in an insolvency context, creditors, as well as to the risk of liability for wrongful or fraudulent trading or if a transaction is made at undervalue or in preference.

Over the years, our company law has developed in this area (largely following English law) from an outright prohibition to a current state where financial assistance for private companies is permitted if a whitewash procedure is followed. Moreover, an even more simplified procedure exists for shipping organisations that are limited liability companies, while securitisation vehicles not being public companies are excluded altogether. The next step is evident.

This is the second part of an article that appeared on March 20. The author was inadvertently identified last week as Robert Mizzi, rather than Dr Gabarretta and Dr Mifsud. Any inconvenience is regretted.

Adrian Gabarretta is a partner with Ganado Advocates and heads the corporate and corporate services and governance teams, while Philip Mifsud is an advocate with Ganado Advocates.