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Comapnay Law - Essay Example

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Company law was established for the sake of outlining the duties to be fulfilled by the company's responsible figures. The flows present in the Company Act regarding prohibition of companies to give financial assistance to their own shares mandated a change to be studied which came into existence by 2006 as the new Company's Act.
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Comapnay Law
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Section 151 in the 1985 Companies Act declares the prohibition of financial assistance of one's own shares in a public company and legal actions such as fines and imprisonment can be taken if this is done, this can be considered as a precautionary action to provide a certain step back safety option for investors from major capital loss risks. Private companies however have certain law exceptions which give them an escape to provide financial assistance.
The court case of Brady v Brady involving two brothers sharing a family business was the first to encounter this issue and they filed a petition feeling that their assts where not justly divided upon a previous agreement. The judge consequently allowed financial assistance as an exception to the withheld rule though at first it was not seen to fit the frame of permitted cases.
"Infringing the prohibition on financial assistance is a criminal offence and may involve serious civil consequences. This uncertainty has prompted calls for reform, which the government would appear to be addressing in its White Paper "Modernising Company Law" by proposing to simplify the rules for public companies and to abolish the restrictions altogether for private companies." (Gleghorn)
The many advantages from omitting this section was removing the negative effect it had on private companies, remove the burden of falling into illegal traps, avoid time consuming procedures such as whitewashing and by so save the money spent on it.
In an effort to develop an effective infrastructure for companies to work in, an independent group was formed to oversee the management of the 1998 DTI review and, following an extensive process of consultation, presented its final report on 26 July 2001 which included the following recommendations (Government's White Paper, "Modernizing Company Law" (July 2002)) for the abolition of complex rules on financial assistance for private companies:
Abolition of the whitewash procedure. The financial assistance provisions should in future apply only to public companies. So the whitewash procedure will no longer be necessary for private companies. It is unlikely to be extended to apply to public companies. The prohibition would also no longer apply to unlimited companies.
Foreign subsidiaries. The scope of the prohibition should be amended so that it is made clear that the prohibition does not apply to provision of financial assistance by a foreign subsidiary for the acquisition of shares in its British parent company.
Criminal sanctions. Criminal sanctions for breach of the financial assistance provision should continue for directors but should be relaxed for companies. Transactions should no longer be void solely on the grounds that they constitute unlawful financial assistance.
How Companies Act 2006 will change the law in this area
The Secretary of State, Alistair Darling, said that, "this Act will ensure Britain remains one of the best places in the world to ...Download file to see next pagesRead More
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