Division 6 of Part VI of the Companies Act 1997 deals with the company funding the purchase of its own shares — in substance, paying for its own change of ownership.
Section 63(1) — permitted, but only this way
A company may give financial assistance directly or indirectly for the purposes of or in connection with the acquisition of its own shares in accordance with this section, but not otherwise.
“Financial assistance” includes a loan, a guarantee, and the provision of security.
The word “includes” means the list is not exhaustive, and “directly or indirectly” catches assistance routed through a subsidiary or a third party. The classic case is a leveraged buy-out: the buyer borrows to acquire the shares, and the company then guarantees the loan or charges its assets to secure it.
Section 63(2) — three resolutions
(a) giving the assistance is in the interests of the company; and
(b) the terms and conditions on which it is given are fair and reasonable to the company and to any shareholders not receiving that assistance; and
(c) immediately after giving the assistance, the company will satisfy the solvency test.
Financial assistance almost always benefits the buyer of the shares, not the shareholders who remain. The board must nevertheless be able to say the terms are fair and reasonable to the company and to shareholders not receiving the assistance. In a leveraged acquisition, that requires a genuine analysis of what the company gets in return — and often means the assistance is given on arm’s-length terms, secured and priced.
Note that under section 63(3) the giving of financial assistance is not a distribution for the purposes of section 50 — but the solvency test still applies through paragraph (c), and section 54(2) expressly picks up a failure to follow “the procedure set out in section 50 or section 63”, making directors personally liable.
Sections 63(5) to (7) — disclosure and timing
(a) the nature and terms of the assistance and the name of the person to whom it will be offered; and
(b) the nature and extent of any relevant interest of any director in the assistance; and
(c) the text of the section 63(2) resolution, with such further information and explanation as is necessary to enable a reasonable shareholder to understand the nature and implications of the proposed assistance.
| Route | Requirement | Timing of the offer |
|---|---|---|
| Standard — s 63(5), (7)(a) | Disclosure document to each shareholder | Not less than 10 working days and not more than 6 months after the document is sent |
| Unanimous consent — s 63(6), (7)(b) | No disclosure document needed if all shareholders have consented in writing | Not more than 6 months after the date of the final shareholder consent |
In a company with a handful of shareholders, obtaining written consent from all of them is usually faster and simpler than preparing a disclosure document and waiting 10 working days. It also removes the risk of a shareholder complaining later that the disclosure was inadequate. Note that this is a consent to the assistance, distinct from the section 89 unanimous assent machinery.
Section 63(8) — applying to stop it
(a) it is not in the best interests of the company and of benefit to those shareholders not receiving the assistance; or
(b) the terms and conditions are not fair and reasonable to the company and to those shareholders not receiving the assistance.
The 10-working-day minimum in subsection (7)(a) exists precisely so that a shareholder can consider the disclosure document and apply. A shareholder who waits until after the assistance has been given loses the practical benefit of subsection (8), and is left with section 152, section 143, or a claim against the directors.
Every director who fails to comply with this section commits an offence and is liable on conviction to the penalty in section 414(2). Unlike some provisions, this fastens on every director, not only those who voted in favour.
Section 63A — the transaction still stands
(1) Failure to comply with section 63 does not affect the validity of a transaction.
(2) This section does not affect a liability of a director or any other person for breach of a duty, or as a constructive trustee, or otherwise.
A bank that takes a guarantee or a charge from the company keeps it even if the board did not follow section 63. That is consistent with sections 19 and 20, under which a company cannot assert non-compliance with the Act or its constitution against an outsider, and an outsider has no constructive notice.
But subsection (2) preserves the personal exposure: breach of the directors’ duties in sections 112 to 115, liability under section 54(2) for failing to follow the section 63 procedure, and liability as a constructive trustee — which reaches a knowing recipient of company funds.
Giving financial assistance — the checklist
- Confirm the transaction is caught. Is the company lending, guaranteeing, or providing security, directly or indirectly, for or in connection with an acquisition of its own shares?
- Work through solvency as at the moment immediately after the assistance is given, taking account of the new obligation.
- Analyse the benefit to the company and to shareholders not receiving the assistance — paragraphs (a) and (b) require positive findings, not an absence of harm.
- Pass the three resolutions and record the reasoning.
- Choose the route — disclosure document plus 10 working days, or written consent from all shareholders.
- Make the offer inside the window — 6 months either way.
- Consider section 118: a director involved in the buy-out is almost certainly interested in the transaction and must disclose, with section 119 avoidance consequences if they do not.
- Do not rely on section 63A. It saves the transaction, not the directors.
Sources
- Companies Act 1997 — ss 19, 20, 50, 51, 54, 56, 63, 63A, 89, 112–115, 118, 119, 124, 143, 152, 414
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.