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Can a company help buy its own shares?

by Steve - Posted 13 June 2009

Section 38 of the old Companies Act severely restricted a company from providing financial assistance for the purchase of its own shares. The Act was amended in 2006 to allow for assistance to be given by the company under the following circumstances:

1. Where the board is satisfied that, immediately after providing the financial assistance, the Company will remain solvent; and

2.The terms on which the assistance was given were fair and reasonable to the company and were approved by special resolution.

These amendments have been carried through to section 44 of the new Companies Act of 2008.

Solvency and liquidity test

In assessing the solvency of a Company, the board must be satisfied that, after the assistance is given:

1. the assets of the company will exceed its liabilities; and

2.the company will be able to pay its debts as they become due in the ordinary course of business.

Personal liability

A Director may be held personally liable if he was present at the meeting when the decision or agreement was reached to provide financial assistance contrary to the requirements set above and he did not vote against that decision or agreement, despite knowing that providing the assistance was contrary to the Act or the company’s Memorandum of Incorporation.