Financial Assistance - CA 1985

Financial Assistance - CA 1985

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Hello

A company takes out a loan to purchase another company and after the purchase an inter-co transfer of cash takes place from the target to the aquiring company. The company then uses this cash to pay off some of the loan taken out to purchase the company in the first place.

1. Is this allowable under company law?

2. If it is allowable, is the investment on the balance sheet reduced by the cash transfered or is an inter-co account created?

Many thanks for your help.

Martin

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By AnonymousUser
15th Aug 2005 12:51

And incidentally
Any monies paid from target to acquiror after the transaction should be treated as what they are i.e. loans or dividends or management charges etc. not deducted from the cost of the acquisition. If this were the case, what would the entry be in the books of the target company?

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By AnonymousUser
15th Aug 2005 12:49

Some further commentary
I'm no lawyer but financial assistance is a dangerous area unless you are very familiar with the rules. I work in corporate finance and have a reasonable grasp of financial assistance but I tend to look to the lawyers to identify exactly when it occurs.

Financial assistance is essentially a provision to protect the creditors of the target company. In a simple scenario, company a lends cash to company b in order that company b can acquire shares in company a. This is financial assistance as company a is providing financial assistance for the purchase of its own shares. This is illegal under CA1985.

This is a very simple example of financial assistance but it can get very complicated. another example - company B secures a bank loan for the purchase of shares on the assets of company A - this is financial assistance!

Also cash gifts, loans after the event (which i think is effectively what you are proposing), large immediately post transaction dividends, even where target pays some of acquiror's fees etc. can all point to financial assistance.

This is always illegal in public companies but for private companies there is a procedure called a financial assistance whitewash which makes the financial assistance allowed. The procedure involves the directors of target company signing statutory declarations (for which there are criminal penalties) stating effectively that the financial assistance does not prejudice the other creditors of the company. This is accompanied by a report from the company's auditors providing the directors with some comfort that what they are signing is ok!!

This is a process which should be attempted only with the help of a skilled corporate lawyer, think of the criminal sanctions!!

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By NeilW
08th Aug 2005 12:17

What happens
It is a perfectly normal transaction that happens all the time.

There are two ways to look at doing it. Either you loan the money from the subsiduary to the parent, or you declare a dividend in the subsiduary.

If you loan the money then a loan is created in both companies - an asset in the subsiduary and a liability in the parent.

If you declare a dividend then the retained profit is reduced and the parent receives some dividend income.

Either way the cash is transferred it is used to reduce the third party liability in the parent.

HTH

NeilW

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By carnmores
08th Aug 2005 20:47

not sure
i think for public companies the procedure is called 'whitewash' and there are a number of procedures that must be followed, my understanding was within very tight limitations only

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By User deleted
09th Aug 2005 14:55

Thanks for your help.

It is a private company.

I wasn't aware of anything but the bank is getting excited about it.

Thanks again.

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