Class 21 – Review by an examination of Corporate Groups

S 588V-X

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)

Separate personality and limited liability

• 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...

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