Financial assistance for the purchase of own shares

Financial assistance is a company helping someone to buy its own shares, for example by lending them the money, guaranteeing their bank loan or securing it on the company’s assets. Since 1 October 2008 the criminal prohibition has not applied to a private company assisting the purchase of its own shares or shares in another private company; under sections 678 and 679 of the Companies Act 2006 it now bites on public companies and their subsidiaries. Private companies still face directors’ duty, capital maintenance, insolvency and tax risks.

What counts as financial assistance?

Section 677 of the Companies Act 2006 defines financial assistance as assistance given by way of:

• gift;
• guarantee, security or indemnity (other than an indemnity for the indemnifier’s own neglect or default), or release or waiver;
• loan, or any other agreement under which the company’s obligations are to be fulfilled while the other party’s obligations remain unfulfilled, or the novation or assignment of rights under such an agreement; or
• any other financial assistance where the company’s net assets are reduced to a material extent, or the company has no net assets.

Common examples are a target company guaranteeing the buyer’s acquisition loan and charging its property to the bank, lending cash to a management team to buy out the founder, paying the buyer’s deal costs, or waiving a debt owed by the buyer.

Who does the prohibition still apply to?

Section 151 of the Companies Act 1985 prohibited financial assistance generally. Sections 155 to 158 relaxed it for private companies, but only if the company’s net assets were not reduced (or the assistance came out of distributable profits) and, unless it was a wholly owned subsidiary, the assistance was approved by special resolution; this was commonly called the whitewash procedure. Article 5(2) of the Companies Act 2006 (Commencement No. 5) Order 2007 repealed sections 151 to 153 and 155 to 158 of the 1985 Act from 1 October 2008 so far as they applied to a private company giving assistance for the acquisition of shares in itself or another private company. The relaxation and its conditions went with them, because they were no longer needed.

The 2006 Act prohibition is now limited to three situations:

Shares being acquired	Company that may not assist	Provision
Shares in a public company, before or at the time of acquisition	That public company or any of its subsidiaries, including private subsidiaries	Section 678(1)
Shares in a company that is public when assistance is given after the acquisition, to reduce or discharge a liability incurred for it	That company or any of its subsidiaries	Section 678(3)
Shares in a private company	A public company that is its subsidiary	Section 679

So a private company owned by a public company is still caught if it helps someone buy shares in its public parent. A purely private group is not caught by the statutory prohibition at all.

What exceptions apply to public companies?

Purpose exceptions

Sections 678(2) and (4) and 679(2) and (4) exclude assistance where the company’s principal purpose is not the acquisition, or the assistance is only an incidental part of a larger purpose, and in either case it is given in good faith in the interests of the company.

Unconditional exceptions (section 681)

• a lawful dividend or a distribution in a winding up;
• an allotment of bonus shares;
• a reduction of capital under Chapter 10 of Part 17;
• a redemption or purchase of own shares under Chapters 3 or 4 of Part 18;
• court sanctioned schemes under Parts 26 or 26A, liquidator schemes under section 110 of the Insolvency Act 1986, and company voluntary arrangements.

Conditional exceptions (section 682)

These cover lending in the ordinary course of a lending business, assistance for an employees’ share scheme, facilitating share dealings by employees and their families, and loans to employees who are not directors to buy fully paid shares. A public company may rely on them only if its net assets are not reduced, or to the extent they are, the assistance comes out of distributable profits. Net assets are taken from the accounting records immediately before the assistance is given.

What happens if the prohibition is broken?

Under section 680, the company and every officer in default commit an offence. On conviction on indictment the penalty is up to two years’ imprisonment, a fine or both. Section 847, which makes members repay distributions they knew were unlawful, expressly does not apply to assistance given in breach of sections 678 or 679, so the consequences fall under the general law rather than that section.

What risks remain for private companies?

The repeal removed a criminal offence, not every control. A private company giving assistance still has to respect:

• Directors’ duties. Under section 172 each director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. A target guaranteeing its buyer’s borrowing gets little direct benefit, so the board minute should explain why the transaction is in the company’s interests and that the company can bear the exposure. See directors’ duties.
• Capital maintenance. A gift or transfer at an undervalue to a shareholder can be a disguised distribution, which may only be made out of profits available for the purpose (section 830). Section 658 separately prohibits a company acquiring its own shares except as Part 18 allows. See unlawful dividends.
• Insolvency. If the company later enters administration or liquidation, a guarantee or security given for little or no consideration can be attacked as a transaction at an undervalue under section 238 of the Insolvency Act 1986, and the directors’ conduct reviewed. See wrongful trading.
• Group structure. A private subsidiary of a public company remains within section 678.

Are there tax consequences?

If a close company lends money to a buyer who is a participator, or an associate of one, section 455 of the Corporation Tax Act 2010 charges the company tax equal to the dividend upper rate for the tax year on the amount lent until it is repaid. This applies whether or not the loan is lawful company law assistance. See director’s loan accounts. Where the aim is simply to let a shareholder exit, a company purchase of own shares is often cleaner, and it is an unconditional exception for public companies too.

How does this work in a management buyout?

Illustration only. A management team forms Newco, a private company, which borrows £1 million from a bank to buy all the shares in Target Ltd, also private. The bank wants Target to guarantee Newco’s loan and grant a debenture over its assets.

• Both companies are private, so sections 678 and 679 do not apply and no whitewash is needed.
• Target’s directors still consider whether giving the guarantee promotes Target’s success, whether Target can meet the exposure if Newco defaults, and record this in a board minute.
• If Target were a public company, it would need either to re register as private under section 97, which requires a special resolution, before giving the assistance, or to fit within an exception. Section 678(3) tests whether the company is public at the time post acquisition assistance is given.

What are the common mistakes?

• Assuming the rules were abolished for everyone, and overlooking a private subsidiary of a listed or other public parent.
• Treating “no prohibition” as “no risk” and giving no thought to the target’s solvency or interests.
• Failing to minute the board’s reasons, which leaves nothing to rely on if a liquidator later reviews the transaction.
• Making a loan to a shareholder buyer and missing the section 455 charge.
• Structuring a value transfer to a shareholder as a gift without checking distributable profits.

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Related Accountapedia entries

• Intra group guarantees and corporate benefit
• Transactions at an undervalue
• Intra group transfers at undervalue as distributions
• Directors’ duty to consider creditors
• Overdrawn director’s loan account in liquidation

Sources

• legislation.gov.uk: Act 1985 c. 6, section 155
• legislation.gov.uk: Act 2006 c. 46, section 677
• legislation.gov.uk: SI 2007/3495, article 5
• legislation.gov.uk: Act 2006 c. 46, section 678
• legislation.gov.uk: Act 2006 c. 46, section 679
• legislation.gov.uk: Act 2006 c. 46, section 681
• legislation.gov.uk: Act 2006 c. 46, section 682
• legislation.gov.uk: Act 2006 c. 46, section 680
• legislation.gov.uk: Act 2006 c. 46, section 847
• legislation.gov.uk: Act 2006 c. 46, section 172

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.