#10840 - Review By An Examination Of Corporate Groups - Business Associations 1

Division 5 – Liability of holding company for insolvent trading by subsidiary

S 588V – When holding company liable

1. Where corporation contravenes this section: A corporation contravenes this section if:

   1. The corporation is the holding company of a company at the time when the company incurs a debt and;

   2. The company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and

   3. At that time, there are RG for suspecting that the company is insolvent or would be come as such

   4. One or both of the following applies:

      1. The corporation, or 1+ of its directors, is/are aware at that time there are grounds for so suspecting

      2. Having regard to the nature and extent of the corporation’s control over the company’s affairs and to any other relevant circumstances, it is reasonable to expect that:

         1. A holding company in the corporation’s circumstances would be so aware; or

         2. 1+ of such a holding company’s director would be so aware

   5. That time is at or after the commencement of this Act

2. No offence: A corporation that contravenes this section is not guilty of an offence

S 588W –Recovery of compensation for loss resulting from insolvent trading

1. Where liquidator may recover

   1. A corporation has contravened s 588V irt the incurring of a debt by a company and

   2. The person to whom the debt is owed has suffered loss or damage irt the debt because of the company’s insolvency; and

   3. The debt was wholly or partly unsecured when the loss or damage was suffered; and

   4. The company is being wound up;

2. Time limit: Proceedings under this section may only be begun within 6 years after the start of winding up

S 588X – Defences

1. Effect – This section has effect for the purposes of proceedings under s 588W

2. Defence of reasonable presumption of solvency: It is a defence if it is proved that, at the time when the debt was incurred, the corporation, and each relevant director, had RG to expect and did expect, that the company was solvent at that time and would remain solvent even if it is incurred that debt any other debts that it incurred at that time

3. Defence of other reasonable presumptions: WLOG (2), it is a defence, it is a defence if it is proved that, at the time when the debt was incurred, the corporation, and each relevant director (if any):

   1. Had RG to believe, and did believe

      1. That a competent and reliable person was responsible for providing the corporation with adequate information about whether the company was solvent; and

      2. That the person was fulfilling that responsibility; and

   2. Expected, on the basis of the information provided to the corporation by the person, that the company was solvent at that time and would remain solvent if it incurred that debt and any other debts that it incurred at that time

4. [Defence of Illness] If it is proved that, because of illness or for some other good reason, a particular relevant director did not take part in the management of the corporation at the time when the company incurred the debt, the fact that the director was aware as mentioned in s 588V(1)(d)(i) is to be disregarded

5. Defence of reasonable steps – It is a defence if it is proved that the corporation took al reasonable steps to prevent the company from incurring the debt

6. Relevant director – means a director of the corporation who was aware as mentioned in s 588V(1)(d)(i)

• Redmond refers to two competing legal conceptions of the corporate group – a common phenomenon in large scale corporate business:

  • A family of subsidiary companies under a holding company with majority ownership or voting control of the subsidiary

  • An economic entity of a parent and its controlled entities under a broader and more generally expressed definition of corporate control

• [4.80] The incidence of corporate groups – Occurrence is attributed to takeovers, increased organizational efficiency, risk isolation. In AU 89% of all companies have a controlled entity

• [4.85] The Patrick Group Restructure and its industrial aftermath – Patrick Stevedores v Maritime Union of AU

  • Facts: The PG had conducting stevedoring operations across AU for a long time. In 9/97 they were restructured so that several companies in the group (the employer companies) sold their businesses to another company (the stevedoring company) but still employed their staff. They used the sale proceeds to buy back a large portion of their shares and repay debts. The stevedoring company entered into labour supply contracts with the employer companies terminable without notice and when industrial action was taken the contracts were terminated. The employer companies lost their only significant source of income since there was no means to discharge continuing employment contracts. They went into external administration

  • Held (HCA): They upheld orders of the FC restraining the employer and stevedoring companies from giving effect to the terminations, subject to the statutory powers of administrators.

  • Redmond notes that if company law remedies were invoked the directors of the employer companies may have been in breach of the fiduciary duties and duties of care by stripping their companies of assets and prejudicing their capacity to pay employee entitlements

[4.90] The evolving legal conception of the corporate Group

The concept of the corporate group starts with the a number of key concepts

Subsidiary Company – s 46

• Controls the composition of the board

• Is in a position to cast, or control the casting of, more than half of the votes in a GM

• Holdings more than half of the share capital

S 47 As to control - But without limiting other modes of board composition, a company controls the compistion of the board of a second if it has the power to appoint or remove all or the majority of the directors of that company even if only with the consent of another person; a company is deemed to have that power if:

• NO person can be appointed to the board of the second company without the exercise by the first company of the power in favour of that person (a power which could derive from the CC or agreement between members)

• The person’s appointment as director of the second company follows necessarily from the person being a director of the first

  • A company is a subsidiary of another if it is a subsidiary of a subsidiary of the other – s 46(b)

  • If a company owns the whole of the share capital in a subsidiary it is a wholly owned subsidiary (s 9)

  • A holding company that is not itself a subsidiary of another is the ultimate holding company (s 9)

  • The ultimate holding company and its subsidiaries are commonly known as a ‘group of companies’ (s 9) and each member of the group can be said to related to the others (s 50)

• Redmond charts the development of control of voting and board composition in the definition of subsidiaries – noting the uncertainty:

  • Mount Edon Gold Mines v Burmine – Practical and de facto control (here both companies regarded Burmine as a subsidiary of Burmine – it had 38.5% of voting shares) is not enough in the absence of any legally enforceable power to establish a relationship of holding company/subsidiary under s 46(a)(i)

    • It isn’t sufficient that a possession of substantial shares under 50% will be enough to determine the result of an ordinary resolution at a GM

  • Bluebird Investments v Graf – adopted this interpretation. Here a 22% shareholding was argued to fall within s 46(a)(ii) – the holder is in a position to (/control the) cast(ing) of more than half of the votes at a GM

    • The section was held to mean that some arrangements short of control could bring a holding company/subsidiary relationship where the putative holding company is in a position where it can vote more than 50% of the total votes capable of being cast.

    • Thus an actual power, revocable or not, legally enforceable or not, to cast more than 50% of the votes does suffice to satisfy the section, so long as it doesn’t depend on further action/support and isn’t under the control of another

• One of the uses of the related company concept was to:

  • Prohibit a company from being a member of its holding company and declared void any allotment or transfer to the subsidiary

  • This was broadened in 1998 under s 259B-C by prohibiting shareholding of a controlled entity in its controller (control measured by the capacity to determine the outcome of decisions about financial/operating polices – the capacity being marked by the practical influence that the controller has rather than the rights it can enforce and any practice of behaviour affecting those – s 259E)

• There is further the requirement of consolidated balance sheets for company groups

  • But this is often evaded by ‘off balance sheet’ reporting of interests in entities under effective control but the interests are structured to fall outside the definition of subsidiary

• Redmond notes the adopting of the accounting definition of control (the capacity to dominate decision making in relation to financial and operating policies) in s 259E

• (Additional stuff on pooling in p 168)

• [4.95] Issues posed by corporate groups – the case law makes it clear that each company in a group retains its distinct entity status with its own separate liabilities and issues. Issues of legal polices which the corporate group raises are wide-ranging such as:

  • Whether generally or in particular contexts company law should treat the group itself as the relevant legal entity – ignoring the separate status of individuals

  • What loyalty if...