Restrictions on giving financial assistance
First published for Appleby’s Mauritius Newsletter, August 2019
Financial assistance refers to the assistance given by a company, whether directors or indirectly, for the purchase of its own shares. The assistance may be of a variety of different types, and includes giving a loan or guarantee, or the provision of security.
The law seeks to prevent the assets of the company being used to assist a third party who wishes to acquire or hold a beneficial interest in that company. In this respect, the assets of a company should be preserved for the benefit of that company’s creditors and the company’s shareholders. In Mauritius, such financial assistance is restricted under the Companies Act 2001 (the “Act”).
The Act provides that a company may have financial assistance for the purpose of the acquisition of its own shares where the company’s board has previously resolved that (a) giving the assistance is in the interests of the company, (b) the terms and conditions on which the assistance is given are fair and reasonable to the company and to any shareholders not receiving such assistance and (c) the company will satisfy the solvency test immediately after giving the assistance.
In addition, the Act provides that a company shall not give financial assistance for the acquisition of its own shares in the event the amount of the financial assistance approved by the company’s board exceeds 10 per cent of the stated capital of the company. In such circumstances and prior to the financial assistance being made by the company, a certificate would be required to be obtained from an auditor to confirm that he has inquired into the company’s state of affairs and he is of the view that the board’s opinion that the company will satisfy the solvency test, after giving the financial assistance is not unreasonable in all circumstances.
It is to be highlighted that the provisions of the Act relating to financial assistance does not apply to a distribution to a shareholder, issue of shares by the company, repurchase or redemption of shares by the company, compromises with creditors or where the ordinary business of a company includes the lending of money by the company in the ordinary course of business.
