Jun 20 2022

Intra-company loans: Financial assistance

Have you ever wondered if loans can be made within the company itself and how they work? In this article we tell you everything you need to know about financial assistance

What is financial assistance?

The term “financial assistance” refers to operations in which the company itself makes use of its participations, shares or resources for a purpose that is expressly prohibited by law.

In these cases, the company puts its own structure and operation at risk in order to favor a third party, regardless of whether the latter has a legitimate interest or not.

Article 143 of the Capital Companies Law contemplates different expressly prohibited cases of this type of operations, especially the so-called financial assistance.

In this sense, a limited liability company may not advance its own funds or grant credits, loans, guarantees or other financial assistance mechanisms to carry out the acquisition of its own shares or of other shares created by companies of the group to which it belongs.

Let us assume the case of a legal entity that wishes to acquire shares of a limited liability company and the target company grants it a loan to carry out the transaction. This case would be expressly prohibited.

The Law tries to ensure that, if the shareholder or future shareholder is unable to make the payment, the company should not be liable to the detriment of the other shareholders and creditors of the company.

Is leverage valid for acquiring shares in a company?

In line with the above, it is important to distinguish between those cases expressly prohibited by the Capital Companies Law and those that are permitted.

For example, obtaining financing for the acquisition of shares in a limited liability company is not against the law. It is even common practice to resort to financing options to carry out the acquisition of shares in a company. The problem arises when the acquisition of shares is intended to be financed in any way by the target company itself.

Nor does this prohibition limit the company’s ability to lend money to a shareholder or to guarantee external transactions it enters into.

For these reasons, this prohibition must be understood as it is set forth in the Capital Companies Law, being a restriction on companies financing in any way, with their own resources, the acquisition of their own shares.

Sanctions applicable to the implementation of financial assistance operations

Once the scope of the prohibition to carry out this type of operations has been determined and limited, it is convenient to know the legal sanctions that will be applied in case of non-compliance with the provisions of the Capital Companies Law.

In the first place, it is provided that the operations carried out and which are a case of financial assistance will be null and void and the Company may also be fined.

The penalties usually reach the amount of the nominal value of the shares acquired or to be acquired.

It should be clarified that, within the penalty regime established for financial assistance operations, there is no mechanism to annul the acquisition of the shares subject to the financial assistance agreement. In this case, the financing operation as such will be annulled and rendered ineffective, and the company will be able to immediately demand payment of the price.

This is because it is understood that, in this type of operation, the fines imposed on the companies are sufficiently restrictive to limit this type of operation.

Who is responsible for financial assistance operations?

In this type of case, it is understood that the directors of the company that has lent its resources to carry out this operation will be liable, and the liability may extend to the parent company that has induced the infringement.

For these purposes, the administrators are considered to be the managers, the members of the board of directors or those persons with power of representation of the offending company.

In any case, it is clear that this type of operation is intended to prevent a shareholder from financing himself with the company’s assets, as well as to prevent the company’s directors from favoring trusted third parties so that they become shareholders, thus altering the company’s decision-making process.