The Serious Fraud Office (SFO) has taken unprecedented action in bringing charges against both Barclays and some of its former executives over the way the bank secured finances from Qatar in 2008.
It is the first time that both a bank and its senior executives have faced criminal charges over their actions during the financial crisis.
Barclays’ fundraising, which amounted to £11.8 billion in total, has led to two types of charges being brought:
* Conspiracy to commit fraud by false representation. This is in relation to what have been called advisory services agreements; where Barclays paid £322M to the Qataris for what the bank has said was advice.
* Unlawful financial assistance. This allegation is due to a £2.4 billion loan that Barclays made to Qatar after the fundraising had been completed. This loan, which was not declared at the time, is claimed to breach Section 151 Companies Act 1985; which bans companies from lending money for the purchase of their own shares.
The offence of unlawful financial assistance (UFA) is not a well-known offence.
‘Financial assistance’ refers to assistance given by a company for the purchase of its own shares or the shares of its holding companies. In many jurisdictions, such assistance is prohibited. All EU member states are required to restrict financial assistance by public companies up to the limit of the company's distributable reserves. Some countries go even further: Belgium, Bulgaria, France and Holland, for example, restrict financial assistance by all companies.
Where such unlawful assistance is given, it will render the relevant transaction void and may constitute a criminal offence. The UK version of this offence was originally covered by Section 151 of the Companies Act 1985.
Companies Act 2006
What must be noted, however, is that Section 151 has now been repealed. It was repealed by the Companies Act 2006. This Act continued the prohibition on financial assistance contained in Section 151 of the 1985 Act but with a difference. The difference is that the repeal is effective (from 1/10/08) in relation to private companies only. In other words, only public limited companies are affected by the UFA provisions.
Section 678 of the 2006 Act provides that where a person is acquiring or proposing to acquire shares in a public company, it is ‘not lawful’ for that company, or a subsidiary of that company, to give financial assistance, directly or indirectly, for the purpose of the acquisition. Not only is it ‘not lawful’ – Section 680 makes it a criminal offence. This means that the company incurs criminal liability, as well as ‘every officer of the company who is in default’; under Section 680(1)(b).
Barclays, of course, is a public limited company and so is still caught by the 1985 Act.
The change that came with the Companies Act regarding UFA, however, should not lead directors of private companies to think that they can be relaxed about financing deals as the law imposes no restrictions upon them. That is still very far from the case.
Directors of companies have a statutory duty to act in a way that they consider to be most likely to promote the success of their company. This success has to be for the benefit of its members as a whole, as opposed to a select few who may be enriched by a certain transaction that may not be in the general interests of the company.
This means that financing a third party’s investment raises issues about corporate governance and the directors’ fiduciary duties to the company. This is what will be under scrutiny in the Barclays’ case.
Now the SFO has used the 1985 Act against a public company, it will be interesting to see if they do so again. The SFO may conduct a bribery investigation, discover nothing incriminating but still decide that the third-party financing was done improperly. In such circumstances, a UFA prosecution could occur.
It is imperative, therefore, that all companies seek immediate, specialist advice if they believe they could be subject to a corporate wrongdoing and / or UFA investigation.