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Review By An Examination Of Corporate Groups Notes

Law Notes > Business Associations I Notes

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Class 21 Review by an examination of corporate groups Corporations Act ss 46-50; 50AA, 187, 259E; s 588V-588X. CORPORATIONS ACT 2001 - SECT 46 What is a subsidiary A body corporate (in this section called the first body ) is a subsidiary of another body corporate if, and only if: (a) the other body: (i) controls the composition of the first body's board; or (ii) is in a position to cast, or control the casting of, more than one-half of the maximum number of votes that might be cast at a general meeting of the first body; or (iii) holds more than one-half of the issued share capital of the first body (excluding any part of that issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital); or (b) the first body is a subsidiary of a subsidiary of the other body. CORPORATIONS ACT 2001 - SECT 47 Control of a body corporate's board Without limiting by implication the circumstances in which the composition of a body corporate's board is taken to be controlled by another body corporate, the composition of the board is taken to be so controlled if the other body, by exercising a power exercisable (whether with or without the consent or concurrence of any other person) by it, can appoint or remove all, or the majority, of the directors of the first-mentioned body, and, for the purposes of this Division, the other body is taken to have power to make such an appointment if: (a) a person cannot be appointed as a director of the first-mentioned body without the exercise by the other body of such a power in the person's favour; or (b) a person's appointment as a director of the first-mentioned body follows necessarily from the person being a director or other officer of the other body. CORPORATIONS ACT 2001 - SECT 48 Matters to be disregarded (1) This section applies for the purposes of determining whether a body corporate (in this section called the first body ) is a subsidiary of another body corporate. (2) Any shares held, or power exercisable, by the other body in a fiduciary capacity are treated as not held or exercisable by it. (3) Subject to subsections (4) and (5), any shares held, or power exercisable: (a) by a person as a nominee for the other body (except where the other body is concerned only in a fiduciary capacity); or (b) by, or by a nominee for, a subsidiary of the other body (not being a subsidiary that is concerned only in a fiduciary capacity); are treated as held or exercisable by the other body. (4) Any shares held, or power exercisable, by a person by virtue of the provisions of debentures of the first body, or of a trust deed for securing an issue of such debentures, are to be disregarded. (5) Any shares held, or power exercisable, otherwise than as mentioned in subsection (4), by, or by a nominee for, the other body or a subsidiary of it are to be treated as not held or exercisable by the other body if: (a) the ordinary business of the other body or that subsidiary, as the case may be, includes lending money; and (b) the shares are held, or the power is exercisable, only by way of security given for the purposes of a transaction entered into in the ordinary course of business in connection with lending money, not being a transaction entered into with an associate of the other body, or of that subsidiary, as the case may be. CORPORATIONS ACT 2001 - SECT 49 References in this Division to a subsidiary A reference in paragraph 46(b) or 48(3)(b) or subsection 48(5) to being a subsidiary, or to a subsidiary, of a body corporate includes a reference to being a subsidiary, or to a body corporate that is a subsidiary, as the case may be, of the first-mentioned body by virtue of any other application or applications of this Division. CORPORATIONS ACT 2001 - SECT 50 Related bodies corporate Where a body corporate is: (a) a holding company of another body corporate; or (b) a subsidiary of another body corporate; or (c) a subsidiary of a holding company of another body corporate; the first-mentioned body and the other body are related to each other. CORPORATIONS ACT 2001 - SECT 50AA Control (1) For the purposes of this Act, an entity controls a second entity if the first entity has the capacity to determine the outcome of decisions about the second entity's financial and operating policies.

(2) In determining whether the first entity has this capacity: (a) the practical influence the first entity can exert (rather than the rights it can enforce) is the issue to be considered; and (b) any practice or pattern of behaviour affecting the second entity's financial or operating policies is to be taken into account (even if it involves a breach of an agreement or a breach of trust). (3) The first entity does not control the second entity merely because the first entity and a third entity jointly have the capacity to determine the outcome of decisions about the second entity's financial and operating policies. (4) If the first entity: (a) has the capacity to influence decisions about the second entity's financial and operating policies; and (b) is under a legal obligation to exercise that capacity for the benefit of someone other than the first entity's members; the first entity is taken not to control the second entity. CORPORATIONS ACT 2001 - SECT 187 Directors of wholly-owned subsidiaries A director of a corporation that is a wholly-owned subsidiary of a body corporate is taken to act in good faith in the best interests of the subsidiary if: (a) the constitution of the subsidiary expressly authorises the director to act in the best interests of the holding company; and (b) the director acts in good faith in the best interests of the holding company; and (c) the subsidiary is not insolvent at the time the director acts and does not become insolvent because of the director's act. CORPORATIONS ACT 2001 - SECT 259E When a company controls an entity (1) For the purposes of this Part, a company controls an entity if the company has the capacity to determine the outcome of decisions about the entity's financial and operating policies. (2) In determining whether a company has this capacity: (a) the practical influence the company can exert (rather than the rights it can enforce) is the issue to be addressed; and (b) any practice or pattern of behaviour affecting the entity's financial or operating policies is to be taken into account (even if it involves a breach of an agreement or a breach of trust). (3) Merely because the company and an unrelated entity jointly have the capacity to determine the outcome of decisions about another entity's financial and operating policies, the company does not control the other entity. (4) A company is not taken to control an entity merely because of a capacity that it is under a legal obligation to exercise for the benefit of someone other than its shareholders. Note: This situation could arise, for example, if the company holds shares as a trustee or is performing duties as a liquidator. CORPORATIONS ACT 2001 - SECT 588V When holding company liable (1) A corporation contravenes this section if: (a) the corporation is the holding company of a company at the time when the company incurs a debt; and (b) 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 (c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and (d) one or both of the following subparagraphs applies: (i) the corporation, or one or more of its directors, is or are aware at that time that there are such grounds for so suspecting; (ii) 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: (A) a holding company in the corporation's circumstances would be so aware; or (B) one or more of such a holding company's directors would be so aware; and (e) that time is at or after the commencement of this Act. (2) A corporation that contravenes this section is not guilty of an offence. CORPORATIONS ACT 2001 - SECT 588W Recovery of compensation for loss resulting from insolvent trading (1) Where: (a) a corporation has contravened section 588V in relation to the incurring of a debt by a company; and (b) the person to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; and (c) the debt was wholly or partly unsecured when the loss or damage was suffered; and

(d) the company is being wound up; the company's liquidator may recover from the corporation, as a debt due to the company, an amount equal to the amount of the loss or damage. (2) Proceedings under this section may only be begun within 6 years after the beginning of the winding up. CORPORATIONS ACT 2001 - SECT 588X Defences (1) This section has effect for the purposes of proceedings under section 588W. (2) 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), had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time. (3) Without limiting the generality of subsection (2), 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): (a) had reasonable grounds to believe, and did believe: (i) that a competent and reliable person was responsible for providing to the corporation adequate information about whether the company was solvent; and (ii) that the person was fulfilling that responsibility; and (b) 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 even if it incurred that debt and any other debts that it incurred at that time. (4) 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 subparagraph 588V(1)(d)(i) is to be disregarded. (5) It is a defence if it is proved that the corporation took all reasonable steps to prevent the company from incurring the debt. (6) In subsections (2), (3) and (4): "relevant director" means a director of the corporation who was aware as mentioned in subparagraph 588V(1)(d)(i).

Holding company or subsidiary company: Holding company/subsidiary or control test?

* Part 1.2 Div 6/s46-50AA

* What is a subsidiary? S46,47

* What is a related body corporate? S50 o Catch all definition and captures idea of holding company and subsidiary.

* What are associated entities? S50AA

* When does one company control another? S50AA

* Other places in the CA too! E.g. 259E; 228, mini regimes problem.

* What is a related party? S208 Instances of statutory response to groups

* S187 CA

* Insolvent trading- s588V-X

* Related party transactions- part 2.E/s208 ff

* Capital maintenance and financial assistance- s259B&C, 259E; also s260A

* Financial reporting and consolidation of accounts- entities controlled by a company must report together with the controlling entity.

* We don't need to look at associated entities in the exam. Separate personality and limited liability: Redmond [4.75]-[4.95]; [4.120]-[4.125].

* Where a holding company owns the whole of the share capital of the subsidiary, it is called a wholly owned subsidiary: s9.

* A holding company that is not itself the subsidiary of another company is the ultimate holding company: s9. The ultimate holding company and its subsidiary companies are known commonly, but not exclusively, as a group of company - s9. Each member of the group is said to be related to the others: s50. Page 166 Mount Edon Gold Mines (Aust) Ltd v Burmine Ltd

* Mt Edon held 38.5% of shares in Europa and its nominees were in majority on its board. Both regarded Burmine as Europa's subsidiary and its financial statements

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