Article 58 of the Companies (Jersey) Law 1991 ("CJL") restricts the giving of financial assistance by a Jersey company ("JCo") or any of its subsidiaries which is a Jersey company, for the purpose of the acquisition of shares in JCo or in reducing or discharging a liability incurred for the purpose of the acquisition.
Article 58 is modelled on, but is different in some important respects from, sections 151 to 158 of the Companies Act 1985 of the United Kingdom.
This briefing provides an overview of the Article 58 regime, identifies some of the key differences between Article 58 and sections 151 to 158 of the Companies Act 1985 of the United Kingdom ("CA85"), highlights the legal consequences of a breach of Article 58 and summarises the "whitewash" procedure which will make lawful for the purposes of Article 58 any transaction which would otherwise be unlawful under that Article.
Draft proposals are under consideration which will revoke Article 58, but as at the date of this note Article 58 remains in force.
Overview Of The Article 58 Regime
Article 58(1) CJL provides that, except where otherwise provided by the Article:
- where a person is acquiring or proposing to acquire shares in a company, it is not lawful for the company or any of its subsidiaries which is a Jersey company to give financial assistance directly or indirectly for the purpose of that acquisition before or at the same time as the acquisition takes place; and
- where a person has acquired shares in a company and any liability has been incurred (by that person or any other person) for the purpose of that acquisition, it is not lawful for the company or any of its subsidiaries which is a Jersey company to give financial assistance directly or indirectly for the purpose of reducing or discharging the liability so incurred.
Article 58(2) CJL provides that the following are not prohibited:
- assistance given in the ordinary course of the company’s business
- assistance given by means of any distribution of the company’s assets to its members, lawfully made
- the provision by a company in good faith in the interests of the company of assistance for the purposes of an "employee’s share scheme" (as defined)
- the making by a company of loans to persons (other than directors) employed in good faith by the company with a view to enabling those persons to acquire fully paid shares in the company or its holding company to be held by them by way of beneficial ownership
Key Differences With Section 151 CA85
Key differences between Article 58 CJL and section 151 CA85 include:
- Article 58 does not include a definition of "financial assistance"
- Article 58 does not include an equivalent to the "de minimis" provisions contained in section 152(1)(a) (iv) CA85
- Article 58 does not include a "principal purpose" exemption, such as contained in section 153(1) and (2) CA85
- Article 58 permits both public and private companies to "whitewash", under section 151 only a private company can "whitewash".
As a result of the above, it may be more likely that a particular transaction would amount to unlawful financial assistance under CJL than it would under CA85. However, the "whitewash" procedure in CJL is thought to be simpler than its equivalent under CA85. See "The Whitewash Procedure" below.
Legal Consequences Of A Breach Of Article 58
Article 58(5) CJL provides that if a company gives financial assistance in contravention of Article 58, the company and any officer of it who is in default is guilty of an offence. The offence is punishable by up to two years imprisonment or a fine (which is not subject to any limit) or both.
It is also likely that, following English law principles, a transaction tainted with unlawful financial assistance may also be void (or at least that part which constituted the provision of unlawful financial assistance).
Additionally, the directors of a company giving unlawful financial assistance may be in breach of their fiduciary duties to the company. The consequences of being in breach of such duties might include personal liability for loss suffered by the company as a result
The Whitewash Procedure
Article 58(3) CJL sets out what is known as the "whitewash" procedure. Article 58 does not prohibit a company from giving financial assistance if:
- the giving of assistance is sanctioned by a prior special resolution of the company proposing to give it, and
- the directors of the company who are to authorise the giving of the assistance make a prior statement that, having made full enquiry into the affairs and prospects of the company, they had formed the opinion:
(a) that, immediately following the date on which the assistance is proposed to be given, the company will be able to discharge its liabilities as they fall due, and
(b) that, having regard to the prospects of the company and to the intentions of the directors with respect to the management of the company’s business and to the amount and character of the financial resources that in their view will be available to the company, the company will be able to continue to carry on business and will be able to discharge its liabilities as they fall due until the expiry of the period of one year immediately following the date on which the assistance is proposed to be given or until the company is dissolved under Article 150 of the Law, whichever first occurs.
There is no statutory requirement to obtain an auditors’ report. It is for the directors to decide what supporting evidence (if any) is appropriate in order for them to be in a position to form the opinion referred to above.
Further, there is no statutory requirement to swear a statutory declaration. In practice, the directors who authorise the financial assistance will sign a statement to confirm they have formed the opinion referred to above.