Sydney-based consultant, working in data analytics. Formerly Data Analyst at Lawpath.
š”Ā Key insights
- Under the Corporations Act 2001 a company generally cannot provide financial assistance, such as loans, guarantees, or other support, to help someone acquire shares in that company or a holding company unless strict conditions are met.
- Financial assistance is allowed if it does not materially prejudice the company, its shareholders, or creditors, meaning it must not harm the companyās financial health or ability to pay debts.
- If financial assistance might cause prejudice, it may still proceed with shareholder approval through the whitewash procedure where the assisted party does not vote.
- Certain transactions are exempt from these restrictions, including cases involving financial institutions, partly-paid shares, instalment arrangements, share buy-backs, or employee share schemes.
Breaching the rules does not automatically invalidate the company, but individuals involved, such as directors, risk civil or criminal liability, making compliance essential.
The financial assistance provisions in the Corporations Act 2001 (Cth) provides a way for a company to loan money to another legal entity. This applies to both a person and a company, so that they can purchase shares in the original company. The financial assistance provisions can be complex, with legal concepts and definitions that can be confusing. Here are five things you should know about the financial assistance provisions and also how they can assist your business.
1. Financial assistance must not harm company/shareholder interests nor the companyās ability to pay its debt
The interests of the companyās shareholders must be taken into consideration if financial help is something that youāre thinking of offering through your company. It’s important to remember that your shareholders are the owners of the company, and it’s important that providing financial help to another entity does not compromise their interest in the business. Some instances where providing financial assistance may be ill-advised are:
- If the company is insolvent
- If the company has a large amount of debt
- Where providing a loan would be detrimental to the company’s finances
2. Point 1 can be bypassed if the assistance is approved by shareholders
This means that a company can provide financial help even if it harms company or shareholder interests. However, this can only occur if approval is given by the companyās own shareholders. This requires either:
- Passing of a special resolution at a general meeting of the company. However, the person who the funds may be given to cannot vote in favour of the resolution).
- A resolution agreed at a general meeting by all ordinary shareholders.
3. A company can provide financial assistance if it is exempt from the above requirements
Some of the exemptions that can be provided are if the company:
- Provides loans for acquiring part ownership or partly-paid shares
- Enters into an agreement where someone makes payments to the company by instalments
- Is a financial institution (such as a bank)
- Is a subsidiary of a borrower in relation to debentures
Please note that this is not an exhaustive list – there are more exemptions that can apply to your company in other circumstances, such as court-ordered assistance, or share buybacks.
4. The company is not liable if the financial assistance does not match the above requirements
If a company doesnāt comply with the above requirements, the company cannot be held liable for the offence. However, any person who is involved in the companyās provision of financial assistance will be liable. This means they may be subject to a civil penalty.
5. It’s not invalid if the company did not comply with the rules
This means that even if the company didn’t meet the requirements mentioned above, the financial assistance can still be valid and recognised. This applies regardless of any company oversight.
Conclusion
The Corporations Act 2001 (Cth) provides guidelines on how companies can provide financial assistance. However, it’s important to note that this is only a brief guide. If you require further information about corporate financial help and its limitations within Australia, it is imperative to seek legal advice before taking any action.
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