If you’re running an Australian startup or SME, it’s common to look for practical ways to fund growth, bring in investors, restructure ownership, or help a buyer acquire shares in your company.
But there’s a legal catch many founders only discover mid-transaction: in Australia, a company generally can’t give “financial assistance” for someone to buy shares in that company (or its holding company) unless an exception applies under the Corporations Act 2001 (Cth).
This is where people often talk about “whitewash relief” under the Corporations Act. “Whitewash relief” isn’t a formal term in the legislation, but it’s commonly used as shorthand for the financial assistance approval pathway in sections 260A–260D (and related provisions).
Below, we’ll break down what whitewash relief is, when you might need it, how the process usually works for proprietary companies, and the common pitfalls to avoid (so your deal doesn’t unravel at the last minute).
What Is “Whitewash Relief” Under The Corporations Act?
“Whitewash relief” isn’t the formal name of a single section of the legislation. It’s a widely used term for the process that can allow a company to provide financial assistance for the acquisition of its own shares (or the shares of its holding company) in circumstances where the Corporations Act would otherwise restrict it.
In practice, the starting point is s 260A, which restricts financial assistance for share acquisitions unless (for example):
- the assistance does not materially prejudice the interests of the company (or its shareholders), or the company’s ability to pay its creditors; or
- the assistance is approved under the shareholder-approval procedure in s 260B (with additional requirements for proprietary companies under s 260C).
In plain English, “financial assistance” is broad. It can include things like:
- giving a loan to a buyer to help them buy shares in your company
- providing a guarantee or indemnity to the buyer’s financier
- granting security over the company’s assets to support the buyer’s debt
- forgiving a debt, or otherwise funding the share purchase in a way that benefits the buyer
The policy reason behind this is to protect the company (and its creditors and minority shareholders) from having the company’s own resources used to fund people acquiring control of the company.
For many small businesses, the practical impact is this: you may be deep in negotiations for an investment, buyout, or internal restructure, and then your accountant, lender, or buyer’s lawyer asks: “Is there any financial assistance here? Do we need to do a ‘whitewash’ under the Corporations Act?”
Why People Search “Whitewash Corporations Act”
Most founders and directors don’t plan to “do a whitewash.” They stumble across it when a deal involves company assets supporting a share acquisition.
It often comes up alongside questions about filings and process (sometimes described informally as an “ASIC whitewash”), but the core issue is always the same: is the company giving assistance connected to someone buying shares?
When Do Startups And SMEs Usually Need Whitewash Relief?
Not every share transaction triggers the financial assistance rules. But it’s common in real-world deals for some level of company support to be involved - especially where the buyer is borrowing to fund the purchase.
Here are some scenarios where whitewash issues commonly appear for startups and SMEs:
1) Management Buyouts And Founder Buyouts
Let’s say one founder is exiting and the remaining founder (or management team) is buying them out. The buyer may not have enough cash personally.
If the company lends money to the buyer, guarantees the buyer’s loan, or provides security over company assets, this may be financial assistance.
2) Sale Of Shares To A Third Party Where The Company Gives Security
In small business acquisitions, the buyer often asks the company to grant security over business assets (like plant/equipment, receivables, IP, or bank accounts) to support acquisition finance.
Even though it feels commercially “normal,” this can raise financial assistance issues because it’s the company supporting the buyer to acquire shares.
Where the deal involves a share sale, you’ll usually want your documentation aligned - for example, the Share Sale Agreement and the completion steps should match the whitewash timeline (rather than being drafted as if settlement can occur immediately).
3) Employee Or Contractor Equity Deals
Some SMEs try to help key people buy in by offering loans or “vendor finance” arrangements funded by the company. Depending on the structure, that support can become financial assistance.
4) Group Restructures And Holding Company Changes
If you’re reorganising your group (for tax, investment, or asset protection reasons), you may have a share acquisition within the group and some form of intra-group financing. It’s worth checking whether financial assistance rules are triggered.
These restructures often run in parallel with governance documents - for example, whether your Company Constitution allows the relevant approvals and whether there are pre-emption rights or transfer restrictions in place.
What Counts As “Financial Assistance” (And What Doesn’t)?
This is one of the trickiest parts, because “financial assistance” is not limited to obvious cash loans.
Assistance can be direct or indirect. The question is often whether what the company is doing makes it easier for the buyer to acquire shares.
Common examples that can be financial assistance include:
- Loans: the company lends acquisition funds to the buyer (including related parties).
- Security: the company grants a charge/security interest over assets to support acquisition finance.
- Guarantees/indemnities: the company backs the buyer’s obligations to a lender.
- Debt forgiveness: the company forgives money owed so the buyer can use funds elsewhere.
- Asset transfers at undervalue: the company sells assets cheaply as part of an acquisition structure.
On the other hand, some transactions might be commercially connected to a sale but still not be financial assistance - it depends heavily on the facts, timing, and documentation.
Also, there are circumstances where financial assistance may be permitted without going through the “whitewash” shareholder-approval pathway - for example, if (on the specific facts) the assistance does not materially prejudice the company or its stakeholders under s 260A. However, you shouldn’t assume you’re safe just because the business can “afford it” - the Corporations Act analysis is more nuanced than that.
If you’re unsure, it’s usually worth getting legal advice early, because the fix often affects:
- deal timeline (approvals and notice periods)
- the structure (asset sale vs share sale, or different funding arrangements)
- your board minutes and shareholder resolutions
- your financing documents and security documents
How The Whitewash Process Usually Works For Proprietary Companies
Most startups and SMEs in Australia operate through proprietary companies (Pty Ltd). The good news is that the shareholder-approval pathway commonly used for proprietary companies is often practical to run - but it does come with specific procedural steps (including solvency and lodgement requirements) that need to be built into your timeline.
While the exact steps depend on your circumstances, the process commonly involves:
1) Directors Consider The Assistance And Solvency
The directors need to properly consider whether the company can give the assistance and remain solvent.
This is not just a “tick the box” moment. Directors still have duties to act in the best interests of the company and to avoid insolvent trading.
Practically, you’ll want a paper trail showing the board considered things like:
- the amount and nature of the assistance (loan, guarantee, security etc.)
- the commercial rationale (why this helps the company, not just the buyer)
- cashflow and balance sheet impacts
- risk scenarios (what happens if the buyer defaults?)
- any conflicts of interest (e.g. directors personally benefiting)
These decisions are commonly documented through formal board paperwork, such as a Directors Resolution (tailored to the transaction).
2) Shareholder Approval (Usually A Special Resolution)
For proprietary companies, financial assistance is often given by relying on the shareholder-approval process in s 260B. This commonly involves a special resolution (which generally means at least 75% approval).
This is where your cap table and shareholder dynamics really matter. If you have multiple shareholders (especially minority shareholders), you should think carefully about:
- who can vote and whether any shareholder is excluded due to the structure
- what information shareholders need to make an informed decision
- whether you need to coordinate signatures across time zones (common for startups)
It’s also a good time to check your Shareholders Agreement for reserved matters, veto rights, or extra approval requirements that sit on top of the Corporations Act requirements.
3) Solvency Statement Requirements
For proprietary companies, the process commonly requires directors to make a solvency statement under s 260C (essentially confirming the company will be able to pay its debts as and when they become due and payable) in connection with giving the financial assistance.
This step is a key legal safeguard. If the company isn’t actually solvent, or the directors can’t reasonably form that view, you should not proceed as if whitewash relief is just “paperwork.”
4) ASIC Lodgement And Timing
One of the most common “gotchas” for SMEs is that the proprietary-company process can involve ASIC lodgement and a timing gap. In broad terms, where you’re relying on the proprietary-company procedure, the special resolution and the solvency statement generally need to be lodged with ASIC within the required timeframe, and the company typically should not give the assistance until the relevant waiting period has passed (unless ASIC confirms otherwise).
Because of this, whitewash work is often derailed by timing issues. For example, parties may sign transaction documents assuming “completion next week,” but the approvals and procedural steps need to occur first.
5) Documents And Execution
Execution mechanics matter too. If your company executes documents under section 127, you’ll want to ensure signing blocks and signing authority are correct - especially if you have a sole director/secretary structure or you’re using electronic signing. The practicalities are covered in section 127 signing requirements.
What Are The Risks If You Get Whitewash Wrong?
For founders, the “risk” isn’t just a theoretical Corporations Act breach. It can create very practical commercial problems.
1) The Deal Can Be Challenged Or Unwound
If the financial assistance rules are breached, it can create uncertainty around enforceability and validity - especially in disputes, insolvency scenarios, or where minority shareholders later challenge what happened.
2) Director Duty And Insolvency Exposure
Even if you complete the approval steps, directors still must comply with their duties. If the company gives assistance that puts it at real financial risk (or pushes it into insolvency), directors may face significant exposure.
This is particularly relevant when the assistance is a guarantee or security: it may not “cost” cash today, but it can become very expensive if the buyer defaults later.
3) Financing And Security Problems
Lenders and investors often require clean “legal due diligence” on a transaction. If whitewash has been missed, it can delay funding, trigger renegotiations, or result in conditions precedent being imposed late in the process.
Where a transaction involves security interests, make sure you’re also thinking about the security package itself (what assets are secured, priority, enforcement). Depending on the structure, you may also encounter documents like a general security agreement, which should be consistent with the whitewash approvals and the overall deal terms.
How To Prepare For A Whitewash Transaction (Practical Checklist For SMEs)
If you suspect your transaction might involve financial assistance, you can save a lot of time (and professional fees) by getting organised early.
Here’s a practical checklist you can use as a starting point.
1) Map The Assistance Clearly
Write down exactly what the company is doing, and when:
- Is the company lending money? How much? On what terms?
- Is the company guaranteeing any buyer obligations?
- Is the company granting security? Over which assets?
- Is anything happening “at completion” vs “post-completion”?
This helps your advisers assess whether the assistance is caught and which pathway may apply.
2) Check Your Shareholder And Governance Documents
Even when the Corporations Act allows a pathway, your internal documents can impose extra rules.
In particular, check:
- your constitution (share transfer restrictions, meeting rules, voting thresholds)
- shareholder rights and pre-emptive rights
- director appointment and removal rules
If you’re planning a buyout or ownership change, it’s also worth being clear on the mechanics of transfer of shares, because the “paperwork” (forms, share certificates, member register updates) needs to line up with the whitewash process and completion steps.
3) Prepare Shareholder Communications (Especially If There Are Minority Holders)
If you have multiple shareholders, plan for questions. Minority shareholders often want to know:
- why the company is supporting the buyer
- whether the assistance affects dividends or future funding
- what happens if the buyer defaults
Getting in front of these questions early can reduce the risk of delay or disputes.
4) Don’t Leave Approvals To The End
One of the most common issues we see is parties drafting the commercial deal first and only addressing whitewash requirements right before completion.
Instead, build the approvals into the transaction timeline from day one - including any ASIC lodgement and waiting periods that apply to your structure.
5) Align The Transaction Documents
If the assistance is being given in connection with a share acquisition, the documents usually need to be consistent across the deal suite - for example:
- share sale documentation
- loan agreements (if the company is lending)
- security documents
- board and shareholder resolutions
- completion checklists
This alignment is a big part of avoiding nasty surprises during due diligence.
Key Takeaways
- “Whitewash relief” is a common shorthand for the Corporations Act process (often referring to the s 260A–s 260D framework) that can allow a company to provide financial assistance connected to someone acquiring shares.
- Financial assistance can include loans, guarantees, indemnities, and granting security over company assets - not just handing over cash.
- Startups and SMEs often encounter whitewash issues during founder buyouts, management buyouts, third-party share sales with acquisition finance, and group restructures.
- For proprietary companies, the process often involves director consideration (including solvency), shareholder approval (commonly a special resolution), and careful timing, including any required ASIC lodgements and waiting periods.
- If you get the process wrong, you can create serious deal risk, including delays in funding, disputes, and potential director duty exposure.
- Early planning - including checking governance documents and aligning transaction paperwork - is the best way to keep your transaction on track.
If you’d like a consultation on whitewash relief under the Corporations Act for your startup or SME, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
Note: This article is general information only and does not constitute legal advice. For advice specific to your circumstances, you should speak with a lawyer.
