Company Law Bill [HL]

Noble Lords will be aware that the current prohibition on the giving of financial assistance applies, with certain exceptions, to public and private companies alike. The Bill abolishes the prohibition on the giving of financial assistance by private companies, so the prohibition will apply only to public companies. The prohibition for public companies is required to be maintained by EU law. New Section 151A deals with the circumstances where a public company that is a subsidiary of a private company provides financial assistance to a third party for the purpose of an acquisition of shares in its parent company. New Section 151A prohibits the giving of such assistance, irrespective of whether it is given before or at the same time as the acquisition takes place, or whether it is given after the acquisition has taken place. The amendment tabled by the noble Lord relates to the latter case. Subsection (2) of new Section 151A provides that if a person has acquired shares in a private company and a liability has been incurred for the purpose of that acquisition, it is unlawful for a public company that is a subsidiary of that private company to give financial assistance for the purpose of discharging or reducing that liability. Financial assistance is a complex area of the law. It may help if I give an example to illustrate the issue behind the proposed amendment: Aco plc is a subsidiary of Bco Ltd. On day 1, John Smith buys 10 shares in Bco Ltd with the benefit of a loan from the bank. On day 3, Aco plc advances a loan to John Smith on favourable terms, which John Smith uses to repay his loan from the bank. The advance of the loan by Aco plc to John Smith would constitute prohibited financial assistance under subsection (2) of new Section 151A. The amendment seeks to reinforce the point that, in order to fall within the prohibition, it is essential that the subsidiary is a public company at the time when the financial assistance is given. Let us continue with our example: if, on day 2, Aco plc has re-registered as a private company, the advance of the loan to John Smith by what is now Aco Ltd would not fall within the prohibition in new Section 151A(2). While the Government agree with the intention underlying the amendment, we do not consider it to be necessary. In particular, subsection (2) of new Section 151A clearly states that, where certain events have occurred, it is not lawful for a public company that is a subsidiary of a private company to give financial assistance. It is inherent in the drafting of this subsection that the public company must be a public company when it gives the assistance. If a public company subsidiary had re-registered as a private company following the acquisition of the shares in its parent, but prior to its giving financial assistance, it would be necessary, to determine whether the prohibition in new Section 151A had been breached, to assess the facts as at that date when the financial assistance was given. If the subsidiary is a private company at the date when the assistance is given, it is clearly not caught by the prohibition, as the prohibition relates only to public companies. In the light of my explanation, I hope that the noble Lord will agree that the proposed amendment is unnecessary.