#8578 - Corporate Groups - Business Associations

1. What is the relationship between the companies? Subsidiary? Control? 2

2. Officers/Directors overlap? 3

3. Related Party Transactions? 3

4. Best interests issue? 3

5. Liability of Holding company for Insolvent trading? 3

Is the holding company liable if subsidiary traded when insolvent? S 588V 3

What is a subsidiary: s 46 4

Control of a body corporate's board: s 47 4

Matters to be disregarded: s 48 4

Related bodies corporate: s 50 5

Checklist:

1. What is the relationship?

2. If subsidiary?

   1. Obligation for director

   2. Other issues

3. If related corporate body?

   1. Obligation for director

4. Holding company’s liability for trading insolvent? S 588V-X

   1. Whether liable: s 588V

   2. Consequences – liquidator can sue holding corp: s 588W

   3. Defences: s 588X

5. If trading when insolvent?

6. Consider:

   1. Whether officers of co A are officers/directors of co B (like in Asic v Adler – Adler was an officer of HIHC etc)

   2. Analogise with:

      1. Walker v wimbourne

      2. Equiticorp finance

1. Issue: Is co A a subsidiary of co B? or is co A controlled by co B?

2. Four ways for corporation A to be a subsidiary of corporation B: s 46. (Note that any shares held or power exercisable by Co B in a fiduciary capacity are treated as not held or exercisable by it: s 48(2)).

   1. Corporation B controls the composition of Co A’s board: s 46(a)(i). Ie if Co B, by a power exercisable (with/without consent of any other person) by it, can appoint or remove all or the majority of the directors of Co A: s 47. Ie if: (a) a person cannot be appointed as a director of co A without the exercise by co B of such a power in the person’s favour: s 47(a); or (b) a person’s appointment as director of co A follows necessarily from the person being a director or other officer of co B: s 47(b). (Discount exercisable power held in fiduciary capacity: s 48(2)).

   2. Co B is in a position to cast or control casting of more than of max no of votes at Co A’s AGM: s 46(a)(ii)

   3. Co B holds more than of issued share capital: s 46(a)(iii). (Discount shares held in fiduciary capacity: s 48(2)).

   4. Co A is a subsidiary of corps X, which is a subsidiary of Co B: s 46(b)

3. Significance if co A is a subsidiary of co B – are related: under s 50; holding co liable if subsidiary traded when insolvent under s 588V-X

   1. Where a Co is (a) a holding Co of another body Co; or (b) a subsidiary of another body co; or (c) a subsidiary of a holding Co of another body Co; these two bodies are related to each other: S 50

   2. (Holding co, in relation to a body corporate, means a body corporate of which the first body corporate is a subdiary: s 9)

4. Is Co A Controlled by Co B? s 50AA. If Co B has the capacity to determine the outcome of decisions about Co A’s financial and operating policies: s 50AA(1). In determining whether there is this capacity:

   1. The practical influence: the first entity can exert (rather than its legal rights it can enforce) is considered: s 50AA(2)(a)

   2. Any practice or pattern of behavior: affecting Co A’s financial or operating policies is to be taken into account (Even if it involves a breach of an agreement or trust): s 50AA(2)(b)

   3. Joint capacity to determine behavior insufficient: Co B doesn’t control A merely because co B and a third entity (eg co C) jointly have the capacity to determine the outcome of decisions about Co A’s financial and operating policies: s 50AA(3)

   4. Fiduciary power discounted: If Co B has the capacity to influence decisions about Co A’s financial and operating policies; and is under a legal obligation to exercise that capcity for the benefit of someone other than co B’s members, Co B is taken not to control Co A: s 50AA(4).

   5. NOTE: S 50AA – is about when an entity controls another entity. Entity under s 9 includes a body corporate; a partnership; unincorporated body; an individual; trustee(s).

   6. Under s 259E:

Duty: s 181

• A director or other officer of a corporation must exercise their powers and discharge their duties: (a) in good faith in the best interests of the corporation; and (b) for a proper purpose: s 181(1).

  • Involved? Apersonwho isinvolved ina contravention of subsection(1) contravenes this subsection: s 181(2). Involved if: (a) aided, abetted, counselled, procured; (b) induced, whether by threats/promises etc, the contravention; (c) has in any way by act/omission, directly/indirectly, knowingly concerned in, or party to, the contravention or; (d) has conspired with others to effect the contravention: s 79.

Duty where wholly-owned subsidiaries: s 187

• 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.

Consequences:

• Both s 181(1) and (2) are civil penalty sections: see s 1317E. If Court satisfied of contravention, Court must make a declaration of contravention. Then ASIC can seek a pecuniary penalty order ( s 1317G) or (in the case of acorporation/schemecivil penalty provision) a disqualificationorder(section206C).

1. Holding company’s liability for trading insolvent? S 588V-X

   1. Whether liable: s 588V

   2. Consequences – liquidator can sue holding corp: s 588W

   3. Defences: s 588X

• A corporation is a subsidiary of another if (i) control composition of board; (ii) controls casting of more than of max no of votes at AGM or (iii) holds more than of issued share capital: s 46. Abody corporate(in this section called thefirstbody) is asubsidiaryof anotherbody corporateif, and only if: (a) the otherbody:

1. controlsthe composition of the firstbody'sboard; or

2. is in a position to cast, orcontrolthe casting of, more than one-half of the maximum number of votes that might be cast at a general meeting of the firstbody; or

3. holdsmore than one-half of theissuedshare capital of the firstbody(excluding any part of thatissuedshare capital that carries norightto participate beyond a specifiedamountin a distribution of either profits or capital); or
   (b) the firstbodyis asubsidiaryof asubsidiaryof the otherbody.

Withoutlimitingby implication the circumstances in which the composition of abody corporate'sboardis taken to becontrolledby anotherbody corporate, the composition of theboardis taken to be socontrolledif the otherbody, by exercising a power exercisable (whether with or without the consent or concurrence of any otherperson) by it, can appoint or remove all, or the majority, of thedirectorsof the first-mentionedbody, and, for the purposes of this Division, the otherbodyis taken tohavepower to make such an appointment if:

1. apersoncannot be appointed as adirectorof the first-mentionedbodywithout the exercise by the otherbodyof such a power in theperson's favour; or

2. aperson's appointment as adirectorof the first-mentionedbodyfollows necessarily from thepersonbeing adirectoror otherofficerof the otherbody.

1. This section applies for the purposes of determining whether abody corporate(in this section called thefirstbody) is asubsidiaryof anotherbody corporate.

2. Any shares held, or power exercisable, by the otherbodyin 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:

1. by apersonas a nominee for the otherbody(except where the otherbodyis concerned only in a fiduciary capacity); or

2. by, or by a nominee for, asubsidiaryof the otherbody(not being asubsidiarythat is concerned only in a fiduciary capacity);

are treated as held or exercisable by the otherbody.

4. Any shares held, or power exercisable, by apersonby virtue of theprovisionsofdebenturesof the firstbody, or of a trustdeedfor securing anissueof suchdebentures, 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 otherbodyor asubsidiaryof it are to be treated as not held or exercisable by the otherbodyif:

1. the ordinary business of the otherbodyor thatsubsidiary, as the case may be, includes lendingmoney; and

2. the shares are held, or the power is exercisable, only by way ofsecuritygiven for the purposes of atransactionentered into in the ordinary course of business in connection with lendingmoney, not being atransactionentered into with anassociateof the otherbody, or of thatsubsidiary, as the case may be.

Where abody corporateis:

1. aholding companyof anotherbodycorporate; or

2. asubsidiaryof anotherbodycorporate; or

3. asubsidiaryof aholding companyof anotherbody corporate;

the first-mentionedbodyand the otherbodyare related to each other.