In the dynamic landscape of Australia’s charities and not‑for‑profits sector, collaboration through mergers and acquisitions (M&A) is firmly on the agenda. Organisations driven by purpose rather than profit increasingly view consolidation as a way to sustain services, broaden impact and respond to funding and regulatory change. According to the Australian Institute of Company Directors’ Not‑for‑profit Governance & Performance Study 2024–2025, almost one in five not‑for‑profit organisations surveyed expect to be engaged in merger conversations over the next 12 months. While motivations vary, many cited expected financial challenges and increased compliance burdens.
As lawyers advising in the charity sector, we are seeing an increase in sale processes involving distressed charities looking for buyers both from the charity and for-profit sectors. Many charity endeavours are equally aligned with the ‘business’ of other charities as they are with the for-profit commercial providers (particularly in the health, education, disability and aged care sectors).
Rather than the financial distress of a target being a red flag for potential acquirers to keep away, such situations present a unique opportunity to carefully consider M&A activity and facilitate the ongoing viability of a struggling charity or its business.
Alongside the opportunities arising from a merger, there are additional complex governance and insolvency considerations which emerge when an organisation is experiencing financial distress and demand careful, board‑led stewardship.
With a focus on companies limited by guarantee registered as charities with the Australian Charities and Not‑for‑profits Commission (ACNC), this article describes the governance framework applicable to such charities, clarifies directors’ insolvent trading duties and safe harbour protections and provides a practical roadmap for navigating a merger involving a financially distressed target. It also identifies the principal legal risks boards should anticipate and manage to achieve a successful and compliant outcome.
Governance fundamentals for charity mergers
Companies limited by guarantee are incorporated under the Corporations Act 2001 (Cth) (Corporations Act) and, if registered with the ACNC, must also comply with the ACNC Governance Standards. In merger decision‑making, four governance fundamentals consistently underpin responsible and defensible outcomes.
Purpose and best interests: Directors must act in good faith, for a proper purpose and in the best interests of the charity, always keeping the organisation’s charitable purpose at the forefront. Any merger should be clearly aligned with and demonstrably advance the charity’s mission. Board minutes and supporting papers should explicitly record the analysis of alignment with the entity’s purpose at each key decision point, providing a clear rationale for the chosen course of action.
Conflicts and independence: While appropriate management of conflicts of interest, conflicts of loyalty and related party transactions should always be front of mind, the risk of conflicts can be heightened in merger scenarios, particularly where directors serve on multiple boards, senior staff are transitioning between entities, or shared advisers are involved. To preserve the integrity of the decision‑making process, boards should ensure transparent disclosure of interests, implement robust abstention protocols, and where appropriate establish independent sub‑committees.
Constitutions and member approvals: Where the acquisition involves bringing in the financially distressed entity as a wholly owned subsidiary (rather than say an asset acquisition), constitutions often need adjustment for post‑merger governance (for example, board size and skills mix, appointment processes, quorum thresholds and any transitional board arrangements). Where the structure is a membership transfer (that is, the acquirer becomes sole member of the target), check member approval thresholds, notice requirements and any unusual constitutional provisions. Where multiple members exist, early engagement to build informed consent is critical.
Controls and documentation: Boards should approve a clear delegation framework for merger workstreams (for example, legal, finance, people, government relations and communications) while retaining control over the key gateways: go/no‑go decisions, structure selection, conditions precedent, funding and post‑completion integration priorities. Comprehensive records of advice received, alternatives considered and reasons for decisions materially reduce governance risk and strengthen regulatory defensibility.
Directors’ duties in financial distress: insolvent trading and safe harbour
Under the Corporations Act, directors have a positive duty to prevent insolvent trading. Subject to establishing a defence, directors can be personally liable for a debt incurred when the company is insolvent or becomes insolvent by incurring the debt. This duty applies equally to directors of companies registered as charities with the ACNC, even if the director is a volunteer or acts in a part‑time capacity. The ACNC Governance Standards also include a requirement to ensure the charity does not operate while insolvent.
Accordingly, all directors must actively monitor and keep themselves informed about, the financial position of the company and, if they identify any concerns with the company’s solvency, take steps to investigate the issue, assess the available options and obtain appropriate professional advice. While prepared primarily with for-profit trading companies in mind, ASIC Regulatory Guide RG217 provides practical guidance for directors of charities structured as companies on navigating insolvent trading risks.
Circumstances which may indicate financial distress in a charity context include ongoing losses with limited ability to generate revenue (for example, restricted grants or inability to access sufficient NDIS funding to meet expenses), difficulty in complying with any tax obligations (such as PAYG remittances), inability to obtain further bank funding (if applicable, such as bank overdrafts) and employees and other creditors (such as landlords, vehicle lessors, IT providers) not being paid on normal terms.
The ‘safe harbour’ regime provides a defence from civil insolvent trading claims for directors who, upon suspecting insolvency, start developing and implementing one or more courses of action reasonably likely to lead to a better outcome for the company than immediate appointment of an administrator or liquidator. Accessing safe harbour requires meeting two threshold conditions:
All employee entitlements must be paid when due.
The charity must be up to date with its required tax lodgements.
In practice, a robust safe harbour approach typically involves the directors engaging experienced legal and financial advisers to assist in developing a formal plan and a counterfactual analysis comparing the proposed strategy to an administration or liquidation scenario, and to continuously monitor and update that plan as circumstances evolve. It is crucial for directors to thoroughly document the measures taken and decisions made when implementing the safe harbour plan because they bear the evidential burden of presenting material which suggests a reasonable possibility the facts relied on for the defence exist.
Key legal risks when acquiring in or near insolvency
For the target charity operating in circumstances of distress, its directors may be exposed to personal liability risk if the organisation continues to incur debts while it is (or may be) insolvent but must continue to trade pending the completion of any transaction. The risks are less acute for the acquirer, but it is important to recognise that involvement in the target’s management prior to completion has the potential to inadvertently give rise to liability (on the basis that the acquirer, or its directors or executives, are acting as a ‘shadow’ or ‘de facto’ directors of the target). It is possible that the target charity will require funding from the acquirer or the protection of the safe harbour provisions, to continue to operate while the transaction is pending (which may add to the cost and complexity of the transaction).
Different factors come into play if the target charity has already appointed an administrator or liquidator and entered into a formal insolvency process. Transactions are generally conducted on an ‘as is, where is’ basis, without the representations and warranties that would be conventional in a solvent transaction and on a compressed timeframe. An administrator may also seek funding from the acquiring charity while the transaction is pending, to the extent that trading costs (such as employees’ wages and rent for premises) cannot be paid from the company’s funds. To the extent that the acquirer takes control of the company itself, it will need to ensure that it is adequately recapitalised to operate its business on a solvent footing going forward.
In any scenario, and even where the transaction is structured as an asset purchase (rather than as a share transfer or, in an administration scenario, a deed of company arrangement), the acquirer may inherit certain liabilities (for example, regulatory or employment liabilities) if there is substantial continuity of operations. Careful identification and allocation of assumed liabilities, robust indemnities, transitional services arrangements (as feasible, factoring in the distress of the target) and detailed integration planning help minimise the risk of unforeseen obligations.
From 2026, certain notifiable transactions may require clearance from the Australian Competition and Consumer Commission (ACCC) before they can be implemented. It is important to consider whether serial acquisitions or previous transactions in the same service area may be aggregated under look‑back provisions, potentially triggering notification requirements. For more information regarding these changes, read our previous article ‘Major overhaul of Australian merger laws: what charities and not-for-profits need to know’.
More broadly, acquiring a distressed charity may bring legacy issues which could affect the combined entity’s reputation or dilute its purpose. It is therefore vital to clarify the merged organisation’s purpose and strategy, alongside legal risk management, to ensure alignment and protect stakeholder trust and confidence. Where the acquirer is purchasing assets rather than the entire entity, alignment of purpose between the two organisations is less critical. Nevertheless, it remains essential that the acquiring entity is able to clearly demonstrate how the acquisition advances its own charitable purpose.
A duties‑compliant pathway to a merger in distress
A duties‑compliant process is both a legal necessity and a practical safeguard. The following sequence provides a helpful framework for navigating a merger involving a financially distressed charity.
Assess solvency and stabilise: The target’s board must continually reassess the organisation’s solvency and ensure that there are appropriate people and systems in place to remain informed about the financial position and affairs of the company. If the board suspects the company may become or be insolvent, it should consider whether the company is eligible for the safe harbour protections. Alternatively, the board may need to take action to appoint an administrator to the company (which provides a separate defence and prevents insolvent trading liability from arising from the date of appointment). Immediate practical priorities will likely include preserving cash, communicating with key stakeholders, ensuring all employee entitlements are met and ensuring all tax lodgements are up to date (although the specific steps will depend on the circumstances).
Set governance for the transaction: Each board should obtain independent legal and financial advice. Conflicts of interest should be identified and managed transparently. Clear workstreams for the merger should be established, with regular reporting to the full board to maintain oversight and accountability.
Evaluate alternatives and structure: Directors should compare potential merger structures against alternatives such as administration or liquidation, quantifying the likely outcomes for creditors, employees, beneficiaries and the charity’s mission.
Targeted diligence and risk allocation: Focus due diligence on high‑risk areas. Adjust pricing or consideration mechanisms as necessary, and negotiate risk allocation through conditions precedent, pre‑completion covenants, targeted warranties and indemnities and clear completion deliverables.
Regulatory and third‑party approvals: Develop a comprehensive plan for obtaining necessary consents and novations. Obtain all required approvals and, where relevant, secure competition clearance. Plan the completion sequence to maintain strong governance and assurance over any ongoing high‑risk activities.
Execute integration with purpose and compliance: Following completion, both boards should oversee integration in line with a detailed plan. Ongoing focus should be given to purpose alignment and compliance.
Practical takeaways for directors
A merger with a distressed charity can be an appropriate outcome for creditors, employees and beneficiaries if it is executed through a disciplined governance and insolvency lens. For the acquiring charity, the essentials are to keep purpose at the centre and proceed with an understanding of the insolvency law considerations. While every situation is unique, with appropriate advice and documentation, directors should be able to carefully evaluate a target and, if they choose to proceed, discharge their duties and deliver a merger that is purpose‑driven, beneficial for stakeholders and legally compliant.
How we can assist
If you are considering a merger for your charity and would like assistance with the process, please get in touch with our specialist Charities + Social Sector lawyers or our Restructuring and Insolvency lawyers.