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Financial
assistance for the purchase of shares was not given in accordance with
the "whitewash" procedure under the Companies Act 1985 and
monies therefore recoverable.
A company,
known as "In a Flap", was in financial difficulties and entered
into a share sale agreement with Lenark Ltd. Lenark did not meet its
liabilities under this agreement and so the company agreed to lend Lenark
sufficient money to discharge its liabilities. In an unusual sequence
of events R, a third party, was appointed as director on the same day
that Jenkins, the defendant, resigned. A statutory declaration under
s.155(6) Companies Act 1985 was then signed by R (as director of the
company) stating that the company was making money available to Lenark
in order to discharge its indebtedness in connection with the acquisition
of shares in the company - the whitewash procedure. An auditors' report
was signed on the same day. Having signed the statutory declaration
R then appointed Jenkins as a director and R resigned. In due course
the company went into compulsory liquidation.
Under s.155(2)
of the 1985 Act, financial assistance could only be provided if the
company had net assets, which were not thereby reduced, or, to the extent
that they were reduced, if the assistance had been provided out of distributable
profits.
It was
held that the financial assistance was not given in accordance with
the whitewash procedure in ss.155-158 of the 1985 Act and that the money
received by Jenkins was obtained pursuant to an illegal contract and
was recoverable from him. Although the liquidators of In a Flap had
failed to demonstrate that the financial assistance had been provided
in breach of the substantive requirement in s.155(2), neither the statutory
declaration nor the auditor's report had properly been made out in compliance
with the 1985 Act. The resignation of Jenkins and the brief replacement
by R were prompted by Jenkins' desire to distance himself from any dubious
implementation of the whitewash procedure. Jenkins had acted in breach
of his fiduciary duties to the company and it was held that he ought
not to be excused for his breach of duty under s.727 (a general provision
under which an officer of a company can seek relief for a breach if
he has acted honestly and reasonably).
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