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Abolition of financial assistance prohibition and implementation of solvency statement capital reductions

The law society has published a paper providing some practical guidance on directors' responsibilities following the abolition of the prohibition on financial assistance.

Financial assistance

The law society has published a paper providing some practical guidance on directors' responsibilities following the abolition of the prohibition on financial assistance. This abolition will render redundant the so called "whitewash procedure", and auditors' responsibilities thereunder.

The paper clarifies that directors should not normally need to request a review by an independent accountant of the cash flows and projections relied upon when considering the net assets position of the company. It also states that directors may have an ongoing dialogue with their auditor regarding the distributable profits position (to make sure the auditor (qua auditor) is comfortable with the directors' assessment), but does not recommend that independent accountants are requested to provide comfort to the directors regarding the distributable profits position.

The ICAEW supported this paper because we hope this will prevent companies (or their banks) requesting the involvement of independent accountants as a matter of course, which would otherwise have been costly and thus could have negated the benefit of this important reform.

Solvency statement capital reductions

The Law Society has also finalised a paper providing guidance on directors' responsibilities under the new mechanism for conducting capital reductions supported by a solvency statement.

This mentions that the type of comfort that directors may seek from third party advisers includes "comfort on the process" type engagements, to reflect the fact that accountants are likely to limit their appointments to such process-based engagements (rather than, for example, providing confirmation of the directors' assessment of solvency). The paper also states that advice from third parties is only needed in some (ie not all) cases.

The ICAEW supported this paper because it is important to avoid the possibility of independent accountants' reports creeping into banking covenants as a prerequisite for solvency-statement capital reductions, as this would be costly and thus could negate the benefits of this important reform. The finalised paper is available here, and will be published on their website shortly.

Both of the above legislative changes were effective from 1 October 2008.