Financial Assistance Under the Corporations Act for Startups and SMEs

If you’re building a startup or running an established SME, it’s normal to spend most of your energy on growth: hiring, product, customers, fundraising, and keeping cashflow under control.

But when you start dealing with shares - issuing them, transferring them, buying them back, or helping someone else buy them - you can quickly run into a less well-known part of Australian company law: the Corporations Act financial assistance rules.

In plain English, the Corporations Act regulates when a company can help someone acquire shares in that company (or in its holding company). This can catch founders, investors, and small business owners by surprise - especially when the “help” feels commercial and reasonable (like a loan, an advance, a guarantee, or forgiving a debt).

Below, we’ll break down what financial assistance is, when it matters, what the main pathways and exceptions are, and the practical steps you can take to avoid accidentally creating an unnecessary compliance risk.

What Is Financial Assistance Under The Corporations Act?

Under the Corporations Act 2001 (Cth), a company can only give financial assistance to help someone acquire shares in:

• that company; or
• its holding company (if it has one),

if it fits within the rules in section 260A and related provisions (including, where relevant, the shareholder approval process in section 260B).

The policy reason is simple: the law tries to prevent a company’s funds being used in a way that effectively helps someone “buy into” the company, potentially harming the company’s financial position or unfairly impacting existing shareholders and creditors.

What Counts As “Financial Assistance”?

Financial assistance is interpreted broadly. It’s not limited to handing over cash.

Examples that can amount to financial assistance include:

• Loans (including on “friendly” or below-market terms)
• Gifts or non-arm’s length payments
• Guarantees (the company guarantees a buyer’s loan)
• Security interests (the company grants security over its assets to secure the buyer’s borrowing)
• Indemnities (the company agrees to cover a buyer’s liabilities if the purchase goes wrong)
• Forgiving or reducing a debt where the effect is to help fund a share acquisition
• Paying “transaction costs” that are really part of enabling the acquisition

It’s also about effect, not labels. Calling something a “service fee” or “advance” won’t necessarily change the legal character if, in substance, it helps the acquisition happen.

Is It Only About Buying Shares From The Company?

No - it can also apply to buying shares from an existing shareholder (for example, an incoming co-founder buys shares from a founder, and the company helps fund that buy-in).

It can also apply where the “acquisition” is indirect, such as through a holding structure.

When Does Corporations Act Financial Assistance Actually Matter For Startups And SMEs?

Many early-stage businesses don’t think about financial assistance until a transaction is already moving quickly (and someone has already promised terms).

In practice, financial assistance most often becomes an issue in these scenarios.

1. Founder Or Employee Buy-Ins

Let’s say you want to bring in a key employee as a part-owner, but they don’t have cash upfront. You might consider:

• the company lends them money to buy shares
• the company “fronts” the purchase price and reduces it from future bonuses
• the company agrees to pay the selling shareholder in instalments on the buyer’s behalf

Those arrangements can all raise financial assistance risk, depending on how they’re structured.

Sometimes a better route is to use equity incentives that don’t require an immediate acquisition (for example, options or vesting structures), but even then, you’ll want the documents and approvals done properly (an Option Deed can be a starting point depending on what you’re trying to achieve).

2. Share Transfers Between Co-Founders (Or Exiting Co-Founders)

When someone leaves, there’s often a negotiation: who buys their shares, at what price, and how it’s funded.

If the company is helping to fund the exit (directly or indirectly), this can trigger financial assistance issues. That’s one reason why it’s important to be clear on the difference between company money and shareholder money, and the decision-making roles of each party (the Director vs shareholder distinction becomes very practical here).

3. Management Buyouts (MBOs) In Smaller Businesses

In SMEs, a common growth or succession pathway is a management buyout, where managers acquire shares from the owners.

If the company gives security over its assets so the management team can borrow the purchase price, that can be classic financial assistance territory.

4. Bringing In A New Investor With “Company Support”

Most capital raises involve investors subscribing for new shares (they pay the company; the company issues shares). Financial assistance issues typically arise when:

• the company pays or reimburses the investor’s purchase price, or
• the company structures side-deals that effectively return the subscription money, or
• the company guarantees an investor’s borrowing to invest.

This is also where founders can inadvertently create future disputes if expectations aren’t documented clearly. A tailored Shareholders Agreement can help set the rules around funding, exits, and decision-making before pressure hits.

How Can You Provide Financial Assistance Legally?

The good news is: financial assistance is not automatically “illegal”. The Corporations Act provides pathways to do it - but you need to fit within the rules.

Broadly, under section 260A, a company may give financial assistance if:

• the assistance does not materially prejudice the interests of the company or its shareholders or creditors; or
• the assistance is approved by shareholders under the prescribed approval process (often referred to as the “whitewash” process); or
• the assistance falls within another exception under the Act.

Which approach applies depends on the facts and the company’s structure.

Step 1: Identify Whether There Is “Assistance” And Whether It Is “In Connection With” An Acquisition

This step sounds obvious, but it’s where most issues begin.

Ask:

• What exactly is the company doing (loan, guarantee, security, payment, debt forgiveness)?
• Would the acquisition happen without this support?
• Is the support on commercial, arm’s length terms?
• Is the support closely timed with the acquisition?

Even if something is commercially reasonable, it can still be financial assistance if the effect is to help the purchase occur.

Step 2: Consider Whether The Assistance Creates Material Prejudice

“Material prejudice” is not just about whether your company survives. It’s about whether the assistance meaningfully harms (or could harm) the company, shareholders, or creditors.

In an SME context, material prejudice is often linked to:

• cashflow pressure (will the loan reduce working capital?)
• risk transfer (is the company taking on someone else’s debt risk?)
• balance sheet impacts (does a guarantee expose the company to a big contingent liability?)
• security enforcement risk (could the company lose key assets if the buyer defaults?)

If the assistance is minor, short-term, and genuinely commercial - and the company remains financially healthy - the risk can be lower. But you still need to document the decision-making properly.

Step 3: If Needed, Use The Shareholder Approval “Whitewash” Process

Where there’s real risk of prejudice (or you simply want a clearer compliance path), companies often use a formal approval process under section 260B.

While the details depend on the company (and extra steps can apply for public companies), this typically involves:

• directors considering the assistance and documenting their reasoning
• preparing an explanatory statement/disclosure for shareholders about the assistance
• passing the relevant shareholder resolution(s) (often a special resolution) to approve the assistance
• where required, lodging relevant documents with ASIC within the required timeframes
• properly executing the documents and keeping company records

For proprietary companies, this process can still be manageable - but it needs to be done carefully, because “informal approval” is where small businesses often get tripped up.

Step 4: Check Director Duties And Solvency

Even if you can approve financial assistance, directors still need to comply with their general duties and avoid insolvent trading issues.

In practical terms, directors should be satisfied that:

• the transaction is in the company’s best interests (not just a founder’s interests)
• the company can pay its debts as and when they fall due
• the assistance is appropriately risk-managed (for example, with repayment terms and security)

Depending on the transaction, you may also want supporting governance documents like a Solvency resolution so there’s a clear record of what the board turned its mind to at the time.

Common Traps For Startups And SMEs (And How To Avoid Them)

With financial assistance, the legal risk often isn’t intentional wrongdoing - it’s simply that the transaction moved quickly, and the paperwork didn’t keep up.

Here are some of the most common traps we see.

Trap 1: “It’s Our Company, So We Can Do What We Want”

Even if you’re the sole director and the majority shareholder, the company is still a separate legal entity.

The company’s money and assets must be used properly, and decisions need to be made through the right corporate processes (resolutions, records, execution).

Trap 2: Using Company Assets As Security For Someone Else’s Share Purchase

This is a very common “commercial” solution in small business acquisitions - but it’s also one of the clearest financial assistance fact patterns.

If the company is granting security, make sure the transaction has been properly assessed and documented, and consider whether your broader security position is already covered by existing arrangements such as a General security agreement.

Trap 3: Papering It After The Fact

Backdating documents or trying to recreate approvals later is risky.

If the assistance has already been provided and approvals weren’t obtained when needed, you may have to manage the legal risk strategically (for example, by restructuring, ratifying where possible, and ensuring future compliance).

Trap 4: Blurring The Line Between “Share Subscription” And “Share Purchase”

Raising capital (issuing new shares to an investor) is different from an investor buying existing shares from a founder.

Financial assistance issues are much more likely where the company is helping a buyer acquire existing shares (rather than simply receiving subscription funds for new shares).

Trap 5: Not Aligning The Deal With Your Constitution And Existing Shareholder Rules

Even if you address financial assistance, you still need the transaction to comply with the internal rules of the company (share transfer restrictions, pre-emptive rights, director approval requirements, and so on).

This is where having an up-to-date Company Constitution and a consistent shareholders framework can save you a lot of time and conflict.

What Documents And Approvals Should You Put In Place?

If you’re planning any transaction that might involve Corporations Act financial assistance, you’ll usually want to slow down just enough to get the “boring parts” right.

The exact documents depend on your deal, but these are common building blocks.

Corporate Approvals And Records

• Directors’ resolutions approving the transaction and recording the directors’ reasoning (including prejudice/solvency considerations)
• Shareholder resolutions where needed to approve the assistance
• Updated company records (share register, minutes, and supporting materials)

Execution is also important. If your company is signing deeds, guarantees, or security documents, you’ll want to ensure execution is valid (including if you rely on company execution rules like Signing documents under section 127).

Transaction Documents

• Share sale documentation (if someone is buying existing shares)
• Loan agreement (if the company is lending money to fund an acquisition)
• Guarantee or indemnity (if the company is backing a buyer’s obligations)
• Security documentation (if the company is granting security over assets)

If the transaction involves moving shares between individuals (for example, family arrangements or succession planning), make sure the transfer process itself is correctly documented as well (including steps around Transfer shares).

Governance Documents That Reduce The Chance You’ll Need A “Quick Fix” Later

Many financial assistance problems happen because the business didn’t set rules early - so every transaction becomes a bespoke negotiation under time pressure.

Depending on your business, it can help to have:

• Shareholders Agreement that sets out how buy-ins and exits work, and what approvals are required
• Constitution that aligns with how you actually operate (and your cap table reality)
• Employment and contractor documentation if the equity is tied to someone working in the business (an Employment Contract can be important where equity is part of the overall arrangement)

The goal is to reduce the “grey area” where someone later argues that company support was promised, implied, or handled informally.

Key Takeaways

• The Corporations Act financial assistance rules regulate when your company can help someone acquire shares in your company (or holding company), and “assistance” can include loans, guarantees, indemnities, and security interests.
• Startups and SMEs often encounter financial assistance issues during founder/employee buy-ins, exits, management buyouts, and share transfers funded with company support.
• Whether assistance is permitted often turns on whether it materially prejudices the company/shareholders/creditors, whether it fits an exception, or whether the company has followed the required shareholder approval process.
• Even if a transaction contravenes the financial assistance rules, it is not automatically invalid solely for that reason (but it can still create serious risk and potential liability, so it should be dealt with properly).
• Directors should document decision-making carefully, including solvency considerations and why the transaction is in the company’s interests.
• Having the right governance documents (constitution and shareholders agreement) makes equity transactions smoother and reduces compliance risk.

If you’d like a consultation about Corporations Act financial assistance for your startup or SME (including structuring a share buy-in, exit, or internal restructure), you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.