Financial assistance provisions in the Corporations Act 2001 allow a company to financially assist a person acquiring shares in the company or a holding company. It is important you understand what the provisions permit you to do when it comes to providing financial assistance, so you avoid facing civil and criminal penalties. There are particular circumstances under which you can provide assistance without breaching the provisions or your directors’ duties, although you must consider the company’s interests and obtain shareholder approval. This article explains 10 facts you should know about financial assistance, including when a company can provide financial assistance.

1. Financial Assistance is Not Just a Loan

Financial assistance may constitute the:

  • making of a loan;
  • giving of a guarantee;
  • provision of security;
  • release of an obligation; or
  • forgiving of a debt.

However, the term “financial assistance” is not precisely defined. Nor do the provisions attempt to describe what it means to financially assist a person acquiring shares. Nevertheless, we know that a company may provide assistance before or after the acquisition of shares and that the assistance may take the form of paying a dividend.

2. An Acquisition of Shares Can Be by Share Issue or Share Transfer

If your company is providing a person with financial assistance, it can be an acquisition by way of:

  • subscribing for an issue of new shares in the company; or
  • purchasing existing shares in the company from another party or other means.

3. You Can Provide Financial Assistance if There is “No Material Prejudice”

If your company enters into a transaction to financially assist a person, you need to consider whether the financial assistance will materially prejudice the shareholders or the company’s ability to pay its creditors.

If it will, you cannot provide the assistance unless you obtain shareholder approval or the transaction is an exempted dealing.

4. You Can Provide Assistance if it is an Exempted Dealing

Even if the financial assistance materially prejudices the shareholders or the company’s ability to pay its creditors, your company can proceed with the assistance under two circumstances. One of these is where the assistance is an exempted dealing.

Some of the exempted dealings include:

  • a lien on partly-paid shares in the company;
  • an agreement where a person can make payments to the company on shares by instalments;
  • the company is a financial institution and is providing the loan in its ordinary course of business; and
  • the company gives financial assistance under an employee share scheme approved by ordinary resolution of the company and its Australian parent company.

5. You Can Provide Assistance if Shareholders Have Approved it

If the financial assistance will materially prejudice the shareholders or the company’s ability to pay its creditor, but does not constitute an exempted dealing, then your company should first obtain shareholder approval. Obtaining such approval is known as getting a financial assistance “whitewash” of the transaction.

Shareholders must give approval by a:

  • special resolution passed at a general meeting of the company, with no votes being cast in favour of the resolution by the person acquiring the shares or their associates; or
  • resolution agreed to by all ordinary shareholders at a general meeting.

6. If You Breach the Provisions, Your Financial Assistance is Still Valid

If you contravene the financial assistance provisions, this does not affect the validity of the financial assistance you give or the underlying transaction. Accordingly, this ensures financial certainty for third parties dealing with the company.

7. Your Company Will Not Be Liable For a Contravention of the Provisions

If you contravene the financial assistance provisions, this does not mean your company is guilty of an offence. This means your company will not face any financial penalties, even if the assistance you provided is in breach of the financial assistance provisions.

However, this rule does not apply to other people involved in your company’s contravention, such as the directors of the company.

8. Any Person Involved in a Contravention May Face Penalties

Any person involved in a company’s contravention of the financial assistance provisions may need to pay a civil penalty or compensation. They may also have committed a criminal offence if their conduct was dishonest.

A person is “involved” if they have aided, abetted, counselled or procured the contravention. This definition extends to company directors, who will therefore have to prove the company did not contravene the provisions. 

9. Creditors and Members Can Apply For an Injunction

If a company provides financial assistance in violation of the provisions, the interests of creditors and members may be affected. Therefore, creditors and members may apply to the court for an injunction which prevents the company from providing the assistance.

10. Directors’ Duties Still Apply

Directors’ duties apply to the transaction in addition to, and notwithstanding, the financial assistance provisions. Even if a company can provide assistance under the provisions, the directors should proceed only if they are not in breach of their duties. For example, directors should ensure:

  • the transaction is in the best interests of the company;
  • the transaction does not result in the company trading insolvent;
  • they act with care and diligence; and
  • they do not act for an improper purpose.

Furthermore, if a company is found to have breached the financial assistance provisions, the directors of the company may face penalties for being:

  • in breach of the director’s duties; and
  • involved in the company’s contravention of the provisions.

Key Takeaways

Is your company considering providing financial assistance? If so, you should understand the requirements under the Corporations Act. These provisions are important as they detail when you can provide financial assistance and, therefore, when you may be contravening the provisions and your directors’ duties. If you have any questions, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

If you would like further information on any of the topics mentioned in this article, please get in touch using the form on this page.

Would you like to get in touch with Nadine about this topic, or ask us any other question? Please fill out the form below to send Nadine a message!