When can a company provide financial assistance to a person acquiring shares in the company?

11 July 2008

---

Introduction

In Kinarra Pty Ltd v On Q Group Ltd [2008] VSC 12, the Supreme Court of Victoria affirmed that the “impoverishment test” is applied to determine whether a company’s financial assistance to a person acquiring shares in the company contravenes section 260A of the Corporations Act.

Section 260A

Under section 260A, a company may financially assist a person to acquire shares in the company only if:

• the interests of the company or its shareholders, or the company’s ability to pay its creditors, are not materially prejudiced; or
• the shareholders have approved the transaction; or
• the financial assistance is exempt under section 260C.

Facts

Kinarra Pty Ltd (Kinarra) and Mr McDougall were shareholders of a company, “On Q”. “On Q” proposed to enter into a joint venture with Ipay Express Pte Ltd (Ipay) to use and to market an electronic business management system in the Middle East.

The proposal was that “On Q” would issue 10% of its issued capital to Ipay. Linked to this proposal was a proposal for “On Q” to license its technology to the proposed joint venture. The proposed joint venture was to be held 22% by “On Q” and 78% by Ipay.

Kinarra and McDougall alleged the transaction was materially disadvantageous to the company and its shareholders, not because of the purchase price of the shares (which was in fact advantageous), but because of the terms on which the licence had been granted.

Kinarra and McDougall sought:

• a declaration that the transaction had contravened section 260A; and
• an injunction under section 1324 restraining On Q from proceeding with the transaction.

Decision

Robson J ultimately decided that the plaintiffs had not established that the transaction would contravene section 260A.

In determining whether “On Q” had given financial assistance to Ipay to the material prejudice of the company or its shareholders, Robson J expressly affirmed the usage of the “impoverishment approach”. This approach focuses on the transaction, looking at all its interlinking elements, and whether it affects a net transfer of value to the person acquiring shares. The purpose of the transaction is not relevant to this assessment.

Significance

The sections of the Corporation Act relating to financial assistance differ from those which applied prior to certain amendments made in 1998. Prior to those amendments, there were competing lines of authority as to the application of "impoverishment test". Importantly, the purpose of the transaction was a relevant consideration.

Corrs acted for the successful company.

---

This article provides information about topical legal issues.
Information contained in this article is intended as an introduction only and should not be relied on in place of legal advice.