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Financial Assistance In The Corporations Act Explained

Financial Assistance In The Corporations Act Explained

Companies can provide other entities with financial assistance if they comply with the rules outlined in the Corporations Act. Find out more here.

17th August 2020
Reading Time: 2 minutes

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 company’s ability to pay its debt

The interests of the company’s shareholders must be taken into consideration if financial help is something that you’re 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 company’s own shareholders. This requires either:

  1. 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).
  2. 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 doesn’t comply with the above requirements, the company cannot be held liable for the offence. However, any person who is involved in the company’s 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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Author
Richard Yuen
Richard Yuen

Richard is a Paralegal working in our content team which aims to provide free legal guides to facilitate public access to legal resources. With an interest in information law, his primary focus is in how the law adapts to govern the use and development of new technology in a modern environment.