Intercompany loans: what Australian directors need to know before transferring funds to a parent company

In global corporate groups, money often moves freely between related companies. A parent company may direct an Australian subsidiary to transfer funds, join up to a global finance commitment, approve an intercompany loan, repay a group balance, pay a dividend or move money to another entity in the group. 

From a group finance perspective, this makes sense. The money is within the same corporate group, and the request may come from head office, the finance team or the parent company. 

For directors of an Australian subsidiary, however, these requests need to be approached carefully. A transfer that makes sense for the wider group may still raise issues for the Australian company and its directors. 

Why “it’s all group money” is a risky assumption 

In Australia, a company is its own legal entity. That means it can: 

• enter into contracts;  

• own property;  

• incur debts;  

• sue and be sued in its own name; and  

• have legal obligations that are separate from other companies in the same group.  

It’s exactly why this structure is used to insulate one group company from another group company’s debt and creditor obligations. 

This is important for directors of Australian subsidiaries. Even where the Australian company is wholly owned by an overseas parent company, the directors still owe duties to the Australian company itself (and importantly, its creditors) under national legislation. These duties include obligations to: 

• act with care and diligence;  

• act in good faith in the best interests of the company;  

• use their powers for a proper purpose;  

• avoid or properly manage conflicts of interest;  

• avoid improper use of their position or information; and  

• prevent the company from trading while insolvent.  

In simple terms, a director cannot approve a transfer just because the parent company wants it. The director must consider whether the transaction is in the best interests of the Australian company. 

This can be uncomfortable in a global group. Head office may see the funds as group money. But Australian law looks at the Australian company as a separate legal entity. That means the Australian company’s interests need to be considered separately. 

 

What directors should consider before approving an intercompany loan

Intercompany loans are common in corporate groups and are not necessarily improper. In many cases, they are a legitimate way to manage finance within a group structure. 

The issue is whether the proposed loan or transfer has been properly considered in the context of the Australian company’s own circumstances. Before approving an intercompany loan or transfer, directors may need to consider the company’s financial position, the purpose of the transfer, the terms of the proposed transaction and the company’s existing obligations to its creditors and employees. 

Common issues that may need to be considered include: 

• Is the company solvent now?  

• Will the company remain solvent after the loan or transfer?  

• Are the funds genuinely surplus to the company’s needs?  

• Does the company need the money to meet current or future obligations? 

• Are any funds held for a specific purpose?  

• Could the transfer affect creditors, customers, employees or the ATO?  

• Is the transaction in the Australian company’s interests?  

• Is there a written loan agreement?  

• Are the repayment terms clear?  

• Are the terms commercial?  

• Has the board properly considered the decision?  

• Has the decision-making process been recorded?  

These questions are not a complete checklist. They are examples of the kinds of issues that may need to be considered before directors approve a transfer of funds to a parent company or another related entity. 

Can directors be personally liable for approving an intercompany loan?

Directors are not automatically personally liable for every decision a company makes. However, they can face personal risk if they breach their duties. 

This risk can arise where a director approves a loan or transfer without properly considering the company’s position. 

For example, there may be risk if: 

• the company is insolvent, or close to insolvent;  

• the transfer causes the company to become insolvent;  

• the company cannot meet its own debts after the transfer;  

• the transaction benefits the parent company but harms the Australian subsidiary;  

• the director has not considered the company’s creditors or its employees;  

• the director has simply followed instructions from head office; or  

• there is no proper record of the board’s decision-making process.  

This does not mean every intercompany loan is unlawful. Intercompany loans are common in corporate groups. They can be legitimate and commercially sensible. The issue is whether the directors have properly considered the Australian company’s position before approving the transaction. 

Example: When client funds are not really surplus cash

An Australian subsidiary may appear to have cash available in its bank account. But that does not always mean the money is surplus. 

For example, the company may have received advance payments from clients for future project work. If a project is cancelled, some or all of that money may need to be refunded. In some cases, there may also be trust or purpose-based issues to consider. 

If directors approve a loan to a parent company without considering those obligations, they may expose the Australian company — and themselves — to risk. 

 

What should directors do if head office asks them to transfer funds?

If head office asks an Australian subsidiary to transfer funds, approve an intercompany loan or move money to another group company, the directors should be careful about treating the request as a simple administrative step. 

These transactions can raise complex legal, tax, accounting and governance issues. If there is any uncertainty about the company’s position, or about the director’s duties, it is sensible to obtain independent legal advice before approving the transfer. 

One of the first issues is the nature of the proposed transaction. Is it intended to be a loan, a dividend, a repayment of an existing group balance, a capital return, a management fee, or something else? Each type of transaction may have different legal and tax consequences and may need to be documented differently. 

Directors may also need to understand why the transfer is being requested and whether the Australian company can properly afford it. That may involve considering the company’s current and future cash flow, existing debts, creditor obligations, customer commitments, employee entitlements, tax liabilities and any funds that may be held for a specific purpose.  These considerations should be documented so that it’s clear that the directors exercised their duty to give proper consideration to the best interests of the company and weighed up all relevant factors. 

The request should also be considered from the perspective of the Australian company. A transaction that benefits the parent company or the wider corporate group may not necessarily be in the interests of the Australian subsidiary. That does not mean the transaction cannot proceed, but it does mean the Australian company’s position should be considered separately. 

Depending on the circumstances, directors may also need to consider whether the transaction should be documented in writing, whether the terms are commercial, whether security or repayment terms are appropriate, and whether the board’s decision-making process should be recorded. 

Directors need to consider any restrictions on inter-company loans in the constitution or a shareholders’ agreement.  These considerations are especially important where there are minority shareholders. 

Where the request comes from overseas head office, a director of an Australian company cannot assume that the parent company has considered the Australian legal position. 

If the directors are unsure, the safer course is to pause and seek independent advice before approving the transaction. That advice can help clarify the company’s position, identify the risks and determine what documentation or further steps may be required. 

 

Professional advisory services for directors handling intercompany loans

Directors do not need to manage these issues alone. 

Legal advice helps directors assess whether a proposed intercompany loan or transfer is lawful, properly documented and consistent with their duties to the Australian company. 

For foreign-owned subsidiaries, where directors may be dealing with pressure from overseas head office, group finance teams or parent company executives, it’s essential to consider their duties to the Australian company and document the decision-making process thoughtfully. 

Argyll Law assists Australian and international businesses with commercial, governance and director-related issues. 

We assist with: 

• directors’ duties advice;  

• intercompany loan reviews;  

• board decision support;  

• Australian resident director services;  

• legal support for foreign-owned subsidiaries operating in Australia; and  

• risk management where head office is located overseas.  

Intercompany loans are useful and legitimate sources of funds within global groups. But they need to be considered properly. 

Before approving a transfer, directors should be clear about: 

• why the money is being moved;  

• whether the Australian company can afford the transfer;  

• how the transaction will be documented;  

• how the company’s creditors and obligations may be affected; and  

• whether the decision has been properly recorded.  

A short pause before approval can help prevent a much larger problem later. 

If you are unsure whether a proposed intercompany loan is appropriate, Argyll Law can help you assess the risks and work out the right next step.