The Companies Bill received Royal Assent on 8 November 2006 and it is the government's intention that all parts of the Bill will have commenced by October 2008. Some provisions, such as those dealing with electronic communications will commence in January 2007.

There are a number of headline issues which will have a direct effect on a bank's credit approval process. One of those headline issues is the abolition of the existing prohibition on a private company giving financial assistance for the purchase of its own shares.

Financial assistance was originally made unlawful to protect the creditors and minority shareholders of a target company. The prohibition, contained in the Companies Act 1985, prevents a purchaser agreeing with a cash rich target company that the target will use its own assets, such as its cash at bank, to help fund the acquisition of the shares.

As we all know, the 1985 Act relaxes the prohibition if certain statutory requirements are met, commonly know as the whitewash procedure. Whitewashing includes the giving of a statutory declaration by the directors of the target company in relation to the company's solvency and its ability to pay its debts in the 12 month period following the declaration, the scrutiny by the company's auditors of its financial affairs and a report supporting the declaration made by the directors.

But, that will change under the Companies Act 2006. The 2006 Act abolishes the prohibition on the giving of financial assistance by a private company and dispenses with the whitewash procedure. Public companies, however, remain prohibited from giving financial assistance. Under the new Act, the subsidiary of a public company cannot give financial assistance for the acquisition of its parent's shares but can do so for the purchase of its own shares.

Banks and their customers will welcome the new legislation on financial assistance for a number of reasons.

Structures of lending transactions may be simplified as it will not be necessary to formulate a structure solely to avoid financial assistance issues. Professional fees for the consideration of financial assistance issues and the preparation of whitewash documentation will be avoided. This should represent useful savings in terms of both time and cost in acquisition transactions. It is possible for the costs of a whitewash to be substantial particularly where a company with a number of subsidiaries is being acquired.

The financial assistance legislation under the 1985 Act has the advantage for a bank that it focuses the minds of the target company's directors on the target's net asset position, how those assets would be used in any acquisition and whether they would form part of the asset pool available to the bank as security post acquisition.

In order to maintain that focus when the 2006 Act comes into force, a bank, as part of its ongoing monitoring of a newly acquired subsidiary may wish to include within its covenant package a prohibition on the giving of financial assistance without its consent. Such a prohibition would sit comfortably within the list of covenants a bank may require.

In any event, there will be no requirement for a private company to whitewash the giving of financial assistance once the relevant provisions of the 2006 Act come into force in Autumn 2008.