William Fry recently acted successfully for Barclays Bank in a Commercial Court case which has provided further clarification on the application of Section 60 of the Companies Act 1963. Section 60 prohibits a company from providing financial assistance (whether by loan, guarantee, the provision of security or otherwise) for the purchase of the company’s own shares, unless the company undergoes the “whitewash procedure”. The Court decided that despite a flaw in the whitewash procedure, the financial assistance was not prohibited because Barclays Bank had not been, and could not have been, aware of the flaw.
The whitewash procedure includes the passing of a special resolution by the company and the making of a statutory declaration of solvency by the directors. Section 60 also requires that the declaration must be delivered to the Companies Registration Office (CRO) within 21 days of the provision of financial assistance.
In the Matter of Cognotec Limited (In Receivership), the Commercial Court was asked to determine the effect of a late filing of the declaration. Barclays Bank provided a loan to shareholders to purchase the shares of an exiting shareholder in Cognotec Limited (Cognotec). This loan was secured by a guarantee from Cognotec and a debenture over its assets. The whitewash procedure was complied with in full, except that Cognotec filed the declaration in the CRO after the 21 day period. Barclays Bank appointed a receiver to the Company earlier this year.
The legislation provides that any transaction which is in breach of Section 60 is voidable by a company against a party who had notice of the breach. After Cognotec sought to avoid the transaction because of the late filing, the receiver applied to the Commercial Court to determine the validity of the charge.
Barclays Bank and the receiver argued, amongst other things, that Barclays Bank was not and could not have been aware of the failure to file the declaration at the time of providing the financial assistance. Mr Justice McGovern followed previous caselaw that the notice required was actual notice as opposed to constructive notice.
Mr Justice McGovern explained that the failure to deliver the declaration within the required time “taints” the whitewash procedure, but was only relevant if Barclays Bank knew of this deficiency. Such knowledge must be prior to or simultaneous with the transaction and the onus of establishing knowledge lies with the person asserting the breach of the procedure.
Mr Justice McGovern accepted the evidence on behalf of Barclays Bank that it did not have actual notice of the deficiency and upheld the validity of the charge.
