Financial Assistance Rules Under The Companies Act 1993 In NZ

If you run a company in New Zealand and you’re buying or selling shares (or raising funds to do it), you might hear the phrase “financial assistance” and wonder what the fuss is about.

In simple terms, the Companies Act 1993 has rules that can restrict a company from helping someone buy its own shares (or shares in its holding company). These rules catch common small business scenarios like management buy-outs, founders exiting, bringing in an investor, or restructuring shareholdings.

Getting this wrong can create serious headaches later - deals can be challenged, director duties can be questioned, and your paperwork can unravel when you least want it to (often when you’re doing due diligence for a sale, a refinance, or a new investor).

Below, we’ll walk you through how the financial assistance rules under the Companies Act 1993 work, what counts as “assistance”, the main compliance pathways, and practical steps you can take to stay protected from day one.

What Is “Financial Assistance” Under The Companies Act 1993?

“Financial assistance” is a broad concept. It generally means the company is giving some kind of help (directly or indirectly) so someone can buy shares in the company (or in the company’s holding company).

The key thing to understand is this: it’s not just about handing over cash. Assistance can be structured in many ways, and the Companies Act 1993 is designed to look at the substance of what’s happening - not just what the documents are labelled.

Common Examples Of Financial Assistance

Here are examples that often come up for NZ small businesses:

• Loans from the company to a shareholder (or future shareholder) so they can buy shares.
• Guarantees given by the company to a bank lender, where the loan funds are used to purchase shares.
• Security interests granted by the company over company assets to secure a share purchase loan.
• Gifting or forgiving debt (e.g. “Don’t worry about repaying the company loan”) tied to a share acquisition.
• Funding the purchase price indirectly (for example, declaring a special dividend timed to fund the share purchase, depending on the structure and circumstances).

It can also include assistance provided by a subsidiary, or assistance provided to a related party. So even if the company isn’t lending to the buyer directly, the rules may still be relevant.

Why Does The Law Regulate This?

From a policy perspective, the law is trying to protect:

• Creditors (so the company doesn’t strip out assets to fund a private share deal);
• Minority shareholders (so company funds aren’t used in a way that unfairly benefits one shareholder); and
• The company itself (so directors don’t approve transactions that weaken the business).

That’s why financial assistance comes up so often in share transfers, buy-outs, and capital raising.

When Do The Financial Assistance Rules Usually Get Triggered?

In practice, these rules show up during “real life” growth moments for small businesses - when you’re changing ownership, bringing in funding, or reshuffling shares between founders.

Some common trigger points include:

• Founder exit where the remaining shareholders want the company to help fund the buy-out.
• Management buy-out (MBO) where the business owners want to support key staff to buy in.
• Investment or recapitalisation where new money is being injected and the company is also supporting a share purchase in some way.
• Group restructuring where entities are created and loans/guarantees are put in place around shareholding changes.

If your company has (or needs) a Company Constitution, it’s also important to check what it says about share transfers, director powers, and approvals - because your constitution and the Act need to work together.

Is Financial Assistance Always Illegal In New Zealand?

No - but it’s not a “do whatever you want” area either.

The Companies Act 1993 sets a general rule that a company must not give financial assistance for the purchase of its own shares (or shares in its holding company) unless it is given under a permitted process in the Act.

In broad terms, there are two common compliance pathways:

• Shareholder approval route: the company obtains shareholder approval (typically by special resolution) before providing the assistance; or
• Notice route: the directors approve the assistance and meet the statutory requirements (including the solvency test), and shareholders are given the required notice (with the ability, in some cases, to force the company to put it to a shareholder vote).

Exactly what you need depends on the structure, the timing, the value of the assistance, and what your constitution says. The key point is that shareholder approval isn’t automatically required in every case - but you do need to follow the correct pathway for your situation.

The Solvency Test (A Core Concept You Can’t Ignore)

The solvency test is central in the Companies Act 1993 and shows up in lots of company decisions (including distributions and certain structural changes).

While the legal detail matters, the practical takeaway is:

• Liquidity limb: can the company pay its debts as they fall due?
• Balance sheet limb: does the company have assets greater than liabilities (including contingent liabilities)?

If directors approve assistance without properly turning their minds to solvency, that can raise director duty issues. This is one reason it’s smart to document the decision properly - often with a tailored Directors Resolution (or a more comprehensive set of resolutions where the transaction is complex).

Why “We’ll Sort The Paperwork Later” Can Backfire

With small businesses, share deals sometimes move quickly - especially if there’s a time-sensitive opportunity or relationship dynamics at play.

But financial assistance is one of those areas where missing steps can come back later during:

• bank due diligence (for a refinance);
• investor due diligence (during a capital raise);
• sale due diligence (when you’re exiting); or
• a shareholder dispute (when someone challenges how the deal was done).

Getting the approvals and disclosures right upfront is often the difference between a clean transaction and a messy one.

How Can NZ Companies Give Financial Assistance Properly? (A Practical Step-By-Step)

If you suspect your transaction involves financial assistance, it’s usually worth getting legal advice early - not because it has to be complicated, but because the “right” process depends on your exact facts.

Here’s a practical step-by-step framework many companies follow.

1) Identify The Assistance (Direct And Indirect)

Start by mapping what the company is actually doing. Ask:

• Is the company lending money?
• Is the company guaranteeing a third-party loan?
• Is the company providing security over its assets?
• Is there a side arrangement (like forgiving an existing debt) that makes the share purchase possible?

If the answer is “yes” to any of these, financial assistance may be in play.

2) Check Your Existing Company Documents

Your constitution and shareholder arrangements may add extra requirements (like special thresholds for approvals or restrictions on share transfers).

This is where a well-drafted Shareholders Agreement can be really useful, because it typically sets out:

• how share transfers happen;
• what approvals are needed;
• how buy-outs are priced and paid; and
• what happens if there’s a dispute.

3) Directors Consider And Approve The Transaction

Directors must act in the best interests of the company and comply with their duties under the Companies Act 1993. In a financial assistance scenario, that usually means the board should:

• understand the commercial rationale (why is the company doing this?);
• assess the risks to the company and creditors;
• consider any conflicts of interest; and
• form a view on solvency (and document it).

Board approvals should be properly recorded and tailored to the transaction. Generic minutes are often not enough when the transaction is later scrutinised.

4) Shareholder Approval Or Shareholder Notice (Depending On The Route)

Depending on the pathway you’re using under the Companies Act 1993, you may need to either:

• obtain shareholder approval before the assistance is given; or
• give shareholders the prescribed notice and information after directors approve the assistance (and be prepared for shareholders to require a meeting and vote where the Act allows this).

This step matters because it builds transparency, particularly where some shareholders benefit more than others, and it helps protect the company and directors if the transaction is later questioned.

5) Document The Share Deal Properly

Financial assistance is often only one part of the bigger transaction. You’ll also want the share transfer itself documented clearly.

For many small business ownership changes, that means a tailored agreement such as a Share Sale Agreement (especially where there are warranties, payment terms, restraint clauses, or conditions that need to be enforced).

If the transaction involves the company purchasing its own shares (rather than someone else buying them), a Share Buyback Agreement may be relevant - but share buybacks come with their own legal and solvency requirements, so it’s worth getting advice before you commit to that structure.

6) Make Sure The Funding Structure Matches The Legal Structure

One common issue we see is where the “deal handshake” is one thing, but the documents and funding flow do something else.

For example:

• The bank loan is in the buyer’s name, but the company gives security over company assets.
• The buyer “pays” for shares over time, but those payments are effectively offset by company payments elsewhere.
• A shareholder loan is created, but repayment terms don’t match the business reality.

These inconsistencies are where financial assistance risks often hide. Aligning the commercial plan and the paperwork is key.

What Are The Risks If You Don’t Comply?

It’s tempting to treat financial assistance as “paperwork”, but there are real legal and commercial risks if you ignore it.

1) The Transaction Can Be Challenged Later

If the required process under the Companies Act 1993 isn’t followed, you can end up with uncertainty about whether the assistance was valid. Even if the business continues as normal, problems can surface later when:

• an investor asks for evidence the share issue/transfer was properly done;
• a buyer is doing due diligence for a business acquisition; or
• a liquidator reviews pre-insolvency transactions.

2) Director Duty Issues

Directors have duties under the Companies Act 1993 (for example, acting in good faith and in the best interests of the company, and avoiding reckless trading).

If a company gives financial assistance that harms the company’s solvency or unfairly benefits certain shareholders, directors can be exposed - particularly if conflicts weren’t managed or solvency wasn’t properly considered.

3) Relationship Damage Between Shareholders

Financial assistance often appears in scenarios where there’s already some pressure: someone wants out, someone wants in, or the business needs capital.

If the structure isn’t transparent and agreed, it can lead to disputes such as:

• claims that one shareholder was unfairly advantaged;
• arguments about whether company funds were misused; or
• disagreements about repayment obligations and who bears the risk.

This is why it’s so helpful to have strong legal foundations early - not only for compliance, but for long-term working relationships.

Practical Tips For Small Businesses Dealing With Financial Assistance

If you’re a small business owner, you usually don’t need a law lecture - you need a practical way to spot issues early and avoid costly re-work.

Here are some tips that can make a big difference.

Do A Quick “Red Flag” Check Before You Sign Anything

Before you sign a term sheet, heads of agreement, or bank security documents, ask:

• Is the company paying anything connected to a share purchase?
• Is the company taking on risk (guarantee/security) so someone can buy shares?
• Would the share purchase still happen if the company didn’t step in?

If you’re not sure, that’s usually your cue to get advice. A short consult can save you from having to unwind a structure later.

Keep Your Company Records Clean

Even well-meaning companies can run into trouble if approvals are undocumented or incomplete.

Make sure you keep (and can easily locate):

• board minutes/resolutions and supporting solvency materials;
• shareholder resolutions (if applicable);
• updated share registers and share transfer/issue documents; and
• signed copies of the relevant agreements.

If it’s been a while since you reviewed your company’s “legal admin”, a Legal Health Check can help you identify gaps before they become due diligence issues.

Don’t Rely On Templates For Ownership Changes

Financial assistance transactions are often bespoke. A template might not:

• deal with shareholder approvals or shareholder notice requirements properly;
• address solvency considerations;
• manage conflicts of interest; or
• match what your constitution requires.

That’s where tailored advice matters - especially when the business is valuable, the relationships are sensitive, or funding is involved.

Get Advice Early If You’re Combining A Share Deal With Funding

The “danger zone” for financial assistance is where share transfers meet bank lending, shareholder loans, or group restructuring.

Even if you’re confident the deal is fair, it’s still worth sanity-checking the structure with a corporate lawyer before documents go out for signing. You can start with a Corporate Lawyer Consult to map out the safest path based on your goals.

Key Takeaways

• The Companies Act 1993 financial assistance rules can apply when your company helps someone buy shares in your company (or holding company), including by loans, guarantees, or providing security over company assets.
• Financial assistance isn’t always “illegal”, but you generally need to follow a permitted compliance pathway under the Act. Depending on the circumstances, that may involve shareholder approval by special resolution, or a directors’ approval and solvency process together with the required notice and disclosures to shareholders.
• These rules commonly arise in founder exits, management buy-outs, investor entry, and restructures - so it’s worth checking early in any share transaction.
• If you don’t comply, issues can surface later during due diligence, refinancing, disputes, or insolvency scenarios, and directors can face questions about their duties and decision-making.
• Strong documentation (resolutions, share sale/buyback documents, and well-aligned funding arrangements) can help keep the transaction enforceable and reduce the risk of future challenges.
• If you’re unsure whether your deal involves financial assistance, getting advice early is usually faster and cheaper than fixing it after signing.

If you’d like help structuring a share sale or buy-out, preparing approvals and company resolutions, or checking whether your transaction triggers the financial assistance rules, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.