Beruflich Dokumente
Kultur Dokumente
corporations law:
[O]wing to the ease with which companies can be formed in this country, and owing to
the rigidity with which the courts applied the corporate entity concept ever since the
calamitous decision in Salomon v Salomon & Co Ltd [1897] AC 22, a single trader or a
group of traders are almost tempted by the law to conduct their business in the form of
a limited company, even where no particular business risk is involved, and where no
outside capital is required. . . This state of affairs would not necessarily call for reform,
if it were not for the fact that the courts have failed to give that protection to the
business creditors which should be the corollary of the privilege of limited liability…
The flexibility of the law governing this topic contrasts completely with the failure of the
courts to mitigate, through the mechanism of the law of agency, the rigidities of the
‘folklore’ of corporate entity in favor of the legitimate interests of the company’s
creditors. As it is, the company has often become a means of evading liabilities and of
concealing the real interests behind the business.
2. In the light of one of the theoretical models of the corporation you have studied
in the course:
(a) Give a succinct account of the Australian law in sections 588V-X of the
Corporations Act, including relevant case law through which the sections
have been interpreted;
(b) Consider how well you think sections 588V-X in action address the criticisms
made of limited liability by Kahn-Freund?
The central complaint of Kahn-Freud is that modern corporations law does not give
limited liability has been the paramount consideration – at the expense of the interests
of creditors. Section 588V directly attacks limited liability. To use a cliché; 588V-X
pierces the corporate veil in favour of the creditor. This essay will first summarise the
broad approach. This essay will look at case law regarding 588G – the corresponding
section to prevent insolvent trading in non-group companies. This section uses almost
identical language to 588V, and has had much more judicial scrutiny than 588V-X.
Following an analysis of relevant case law and a summary of powers, this essay will
with the arguments in favour of limited liability. The legislature has recognised Kahn-
Freud’s concerns, and has armed creditors, liquidators and the courts with an
Section 588V-X provides an exemption to the general rule of limited liability. 588V
prevents a holding company from hiding behind limited liability when a subsidiary
company incurred a debt at a time when it was insolvent or there were reasonable
obligation to pay unliquidated damages.2 Pay-roll tax can be a debt.3 Insolvency must
business ventures in which the existing working capital has been deployed.”4
There are of course qualifications, which limit the scope of the action. 588V only
takes effect if the company was insolvent or became insolvent when taking on the
debt.5 In addition it must be found that there were reasonable grounds for suspecting
insolvency,6 and either the company (or directors) was aware of grounds for
suspecting insolvency;7 or having regard to the holding company’s control over the
knowledge are factual, “liability is, therefore, not contingent on elements personal to
the respondent.”10 Section 588W prescribes that the liquidators may only recover
money in relation to the debt incurred.11 The creditor must have suffered a loss as a
result of the company’s insolvency,12 the debt must be unsecured,13 and the company
Section X provides some defences. The directors and holding company will not be
liable if they had reasonable grounds to “expect”, and did expect, that the company
was solvent and would remain solvent despite accepting the debt.15 The term “expect”
also a defence to believe that a competent and reliable person was responsible for
providing adequate information regarding the company’s solvency.17 The court held
that directors could not rely on business consultants, but rather the defence was
established for large companies where competent accountants advised the board.18
There is also a defence for a director who is aware of solvency problems or had
reasonable ground for suspecting problems, but, because of illness or “some other
good reason” that director did not take part in the management of the company at the
time the debt was incurred.19 Finally, it is a defence if the holding company took all
reasonable steps to prevent the company from incurring the debt.20 The Executive of
9
Group Four Industries Pty Ltd v Brosnan (1991) 56 SARS 234, 238.
10
Metropolitan Fire Systems Pty Ltd v Miller (1997) 37 ACSR 589, 76.
11
Corporations Act 2001 (Cth) s 588W(1)(a).
12
Ibid, s 588W(1)(b).
13
Ibid, s 588W(1)(c).
14
Ibid, s 588W(1)(d).
15
Ibid, s 588X(2).
16
Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201, 67.
17
Ibid, s 588X(3)(a).
18
Manpac Industries Pty Ltd v Cecattini [2002] NSWSC 330 [54].
19
Ibid, s 588X(4).
20
Ibid, s 588X(5).
the day suggested that “a court might require unequivocal action” if seeking to rely on
trading cases from that a defence like those listed above was argued 63.1% of the
time, however was only successful in 10.8% of those cases.22 This evidence suggests
This section only applies to legally defined holding companies. The Act only
composition of the board;23 or has half the votes of a general meeting;24 or has half the
share capital of the other entity.25 It has been held that “de-facto control, in the
absence of any such legally enforceable power, does not suffice to establish the
wider more fluid standard is used with “the practical influence” as the primary
concern.27 Ramsey notes a new definition has come into vogue, based on “the capacity
21
Corporate Law Reform Bill 1992, Public Exposure Draft and Explanatory Paper (1992) para 1240.
22
Paul James, Ian Ramsey and Polat Siva, ‘Insolvent Trading – An Empirical Study’ (Research Report,
Clayton Utz and Centre for Corporate Law and Securities Regulation, the University of Melbourne,
2004) 33, 34.
23
Corporations Act 2001 (Cth) s 46(a)(i)
24
Ibid, s 46(a)(ii).
25
Ibid, s 46(a)(iii).
26
Mount Edon Gold Mines (Aust) Ltd v Burmine Ltd (1994) 12 ACSR 727, 748.
27
Paul Redmond, Companies and Securities Law: Commentary and Materials (Thomas Reuters, 5th ed,
2009) 167.
28
Ian Ramsey, ‘Holding Company Liability for the Debts of an Insolvent Subsidiary: A Law and
Economics Perspective’ (1994) 17(2) University of New South Wales Law Journal 520, 544.
29
Redmond, above n 10, 168.
In direct contrast to Kahn-Freud many scholars hail the limited liability regime for its
positive effect on investment and its appropriate positioning of the burden of risk – on
[T]he difficulties for shareholders with unlimited liability regime exceed the
Shareholders, she argues, would risk losing their personal assets, and would therefore
need to monitor the company’s actions. This reduces a shareholders’ capacity to limit
risk through diversification of stocks, and places upward pressure on the required
return.31 Creditors, on the other hand, have a better opportunity to shield from risk.
They can either alter the interest rate, and/or restrict the company from incurring debts
creditors may exercise, another factor which assists creditors is that shareholders and
managers are unlikely to take action that will harm their reputation.33
While legislative safeguards relating to insolvent trading have existed since the
has held:
practical sense their [the creditors] assets and not the shareholders’ assets that,
30
Helen Anderson, ‘Piercing the veil on Corporate Groups in Australia: The Case for Reform’ (2009)
33 Melbourne University Law Review 333, 338.
31
Ibid, 338
32
Although 588V-X will only assist the unsecured creditor. Ramsey, above n 10, 523.
33
Ibid, 524.
34
James, Ian and Siva, above n 22, 4.
through the medium of the company, are under the management of the
directors.35
What Street CJ is saying is that when a company is insolvent the shareholders’ assets
have already been expunged. Taking on a debt in these circumstances means the
directors are no longer gambling with the shareholders’ money, but rather they are
using the creditors to play for the “bonanza payoff that will prevent insolvency.”36
The legislature is trying to stop companies from exacerbating the problem, making it
corporate veil when insolvent trading is established. We now need to turn to the
holding company, and establish why it is important to pierce the corporate veil to hold
As already stated there is a concern that unlimited liability would give rise to the need
their investments because of the need to monitor the company and fellow
investors.37
The notion that shareholders do not monitor companies they invest in and have very
The director primacy model of a corporation places decision making authority at the
core of the company – with the board. The shareholder is peripheral, generally
the practicality of consensus decision making is possible. Partners share equally in the
gains and losses of the company, they have an equality of interests, and an equality of
making works in a partnership. On the other side of the coin is the director primacy
model – authority based decision making. The advantages include efficient and cheap
decision making; and the potential for specialisation of labour. The result is that
shareholders’ rights to control the company are minimal and usually limited to some
makes shareholders apathetic and aware that it is “easier to switch than fight.”39
It is easy to see how limited liability fits into the director primacy framework.
engages in insolvent trading, those with limited decision making power have limited
liability. And this is fair enough. But why should a holding company, not receive the
between parent and subsidiary, “the parent company will be involved in important
Helen Anderson lists other differences between shareholders and holding companies.
This sharp analysis backs up the call from Kahn-Freud to protect the creditor not the
parent company. Firstly, unlimited liability would rely on recovery from multiple
shareholders where “the cost of taking action against them may exceed the benefit”.41
On the other hand a parent company is a single target for the liquidators, and unlikely
reap the full rewards of the subsidiaries risk taking. In conclusion, holding companies
are influential on the decision making process, they are easy to litigate against, and
they are more like directors than shareholders. The legislature has long established
that directors should not hide behind the veil if found to have taken on debts while
insolvent.42
The justification for 588V-X lies with the analysis of access to effect the decision to
trade while insolvent. The shareholder, has little or no decision making power with
the management of the company, it would limit their ability to reduce risk by
diversifying their portfolios. The holding company, on the other hand, is involved in
the decision making processes, and does monitor the management of subsidiaries.
588V-X recognises this and imposes liability for insolvent trading. However, the
section only imposes liability when the power to effect the decision to trade while
41
Ibid, 352.
42
Ibid, 353.
insolvent existed – this is a matter of fact. The holding company must have been
aware or it is reasonable to expect that they would have been aware that the subsidiary
was insolvent. The section appropriately provides defences including when directors
or holding companies did all that they could to stop the subsidiary from taking on the
debt. Without these qualifications on the section, it would arm the courts with too
large a scalpel and undermine the core of limited liability. The section provides
only punishes only those who had the capacity to effect decisions to take on debts
while insolvent.
Bibliography
5. James, Paul, Ian Ramsey and Polat Siva, ‘Insolvent Trading – An Empirical
Study’ (Research Report, Clayton Utz and Centre for Corporate Law and
Securities Regulation, The University of Melbourne, 2004).
B. Cases
9. Mount Edon Gold Mines (Aust) Ltd v Burmine Ltd (1994) 12 ACSR 727.
10. Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201.
C. Legislation
D. Other
1. Corporate Law Reform Bill 1992, Public Exposure Draft and Explanatory
Paper (1992).