Section 60 Companies Act, 1963 – Update


Section 60 of the Companies Act, 1963 (“Section 60”) is one of the best known provisions of Irish company law. It essentially provides that a private company is prohibited from giving direct or indirect financial assistance for the purchase of its own shares unless it puts the transaction through a legal procedure colloquially known as “the whitewash procedure”.

Part of the whitewash procedure is the swearing of a declaration of solvency by a majority of directors of the company. The declaration of solvency must state the purpose for which the financial assistance has been given. The directors must also declare that they have made full enquiries regarding the affairs of the company and that, having done so, they are satisfied the company, after entering into the transaction in question, will be able to pay its debts as they fall due. The whitewash procedure also requires that certain documents be filed with the companies registration office within 21 days of completion of the transaction.

One of the consequences of breaching section 60 is that the company can void the transaction as against any entity who has actual notice of the breach.

Example:

Company A is made up of two shares. David wishes to purchase 1 of the shares in Company A for €1,000. The directors of Company A cause Company A to loan David €1,000 to allow him purchase the share. In the event that the Whitewash procedure is not properly completed in relation to this transaction (and David is aware of this flaw) then it is open to Company A to void the transaction. If Company A does so, David will be left without the share he had purchased and he is left without recourse as he had full knowledge of the flaw in the Whitewash procedure. It would even be open to Company A to sue David for the return of the €1,000 loan.

In a High Court case recently, In the Matter of Cognotec Limited (In Receivership), the Commercial Court gave judgment in a Section 60 dispute. The judgment is not a major development in the law but it is a useful re-statement and clarification of a difficult area of company law. The background to the case was that Barclays Bank had extended a loan to existing shareholders in Cognotec Limited to allow them to buy out the shareholding of an exiting shareholder. The bank’s security for the loan took the form of a guarantee from Cognotec Limited and a debenture over the assets of Cognotec Limited. In other words Cognotec Limited was providing assistance for the purchase of its own shares by giving the security to the bank for the loan money used for the purchase.

Barclays Bank subsequently called in its security and appointed a Receiver over the assets of Cognotec Limited in line with the terms of the debenture. However, the whitewash procedure used to allow the financial assistance for the purchase of shares in Cognotec Limited was flawed. The declaration of solvency by the directors of the company had been filed with the companies registration office outside the stipulated 21 day period. The question then arose: Could Cognotec Limited void the transaction such that the security given to Barclays would be inoperative and could not be relied upon by Barclays to appoint a Receiver and sell the company’s assets?

The Court’s answer to this question turned on whether Barclays had actual notice of the flaw in the whitewash procedure namely the late filing of the Declaration of Solvency.

The Court analysed the provisions of Section 60 and the case law interpreting those provisions and found that three principles emerged which were relevant to its deliberations:

(i) The onus of establishing that a person is on notice of a breach of Section 60 lies on the person asserting it – in this case the onus fell on Cognotec Limited.

(ii) The notice required to be established is actual notice not constructive notice – i.e. Barclays had to have been actually aware of the flaw in the whitewash procedure for Cognotec Limited to succeed.

(iii) The party asserting that a person is affected by actual notice must establish that they had such notice (of the relevant breach) prior to or simultaneously with the transaction sought to be impugned and not thereafter – in practical terms this seems to imply that a breach of this nature would never be capable of rendering the transaction voidable as, by necessity, it is undertaken after the completion of the transaction.

The Court concluded that Barclays Bank was not on actual notice of the flaw in the Whitewash procedure and therefore Cognotec Limited could not void the transaction whereby the security had been put in place in favour of Barclays.

Section 60 is a highly technical provision of the Companies Acts. However, its provisions are very frequently engaged as companies often give assistance for the purchase of their own shares. Whether it is proposed to undertake such a transaction in a direct or indirect fashion advice should be sought beforehand.

Matthew Austin