Corporations Law- Sample
Law 3112- Incorporation and its effects exam template Registration
- Creating a company requires registration via lodging an application with ASIC (s117), which must include information listed in s117(2) including;
~ Type of company - Name
● Under s148(1) a company may have as its name an available name or the expression ‘Australian Company Number’ followed by the company’s ACN.
● A limited company must have the word ‘limited’ or the abbreviation ‘ltd’ as the end of its name and proprietary limited companies must have ‘pty ltd’ s148(4).
● Under s147(1) a name cannot be identical to a name that is already registered or reserved, identical to a name included on national business name register or unacceptable.
~ Member’s addresses
~ Director’s and company secretary’s details
~ Company’s address
~ Information on initial capital and shares issued
- ASIC may register the company, give it an ACN and issue a certificate of registration (s118(1).
Effects of registration
- Under s119 a company comes into existence as a body corporate at the beginning of the day on which it is registered.
- A company ceases to exist on deregistration: s601AD(1).
● A person becomes a member, director or company secretary of a company on registration if the person is specified in the application with their consent as a proposed member, director or company secretary of the company: s120(1).
● The shares to be taken up by members as specified in the application are to be issued to the members on registration of the company: s120(2).
Separate legal entity doctrine
- The separate legal entity doctrine was established in Salomon’s case that a company is a legal entity that is separate and distinct from directors and shareholders creating the concept of the corporate veil.
● In Salomon’s case the principal Salomon was able to claim money back and wasn’t viewed as personally responsible for paying back the debt ahead of unsecured creditors.
- A de-facto one person company is capable of being a separate legal entity (Salomon’s case).
- The recognition of a company as a separate legal entity may work against the person responsible for the formation of the company (Macaura v Northern Assurance Co Ltd)
- Shareholders have no legal or equitable interest in their company’s property (Macaura v Northern Assurance Co Ltd).
● Macaura owned a company which sold timber and only had personal insurance for it and no company insurance and couldn’t receive compensation for burnt timber.
- Another consequence of the corporate veil is that a company is able to contract with its employees (Lee v Lee’s Air Farming Ltd)
- A majority shareholder and director may still be recognised as a worker of the company (Lee v Lee’s Air Farming Ltd).
● Despite Lee acting as majority shareholder and director of an aerial top-dressing business his wife was able to claim worker compensation as his plane crashed an he died.
- A company can contract with its founder and director as they are all separate entities (Lee v Lee’s Air Farming Ltd).
-Reminder:under s9 and s516 personal liability is limited to the amount unpaid on one’s shares.
Salomon v Salomon & Co Ltd Facts;
- Mr Salomon owned a shoe-making company and his wife, five children and himself became shareholders, being issued one share each with his two sons appointed directors.
- Mr Salomon was allocated 20,001 of the company’s 20,007 shares
- He was given £10,000 as debentures and received £5,000 from Edmund Broderip however the company went insolvent.
- Broderip was repaid and there was £1,005 left in assets which Salomon claimed. However, it was argued that Salomon should be responsible for the company’s debts and Salomon sued for the remaining money.
Issue: did a company have a separate legal identity allowing for a shareholder/controller to avoid liability for debt?
Held;
- The House of Lords on appeal stated that Mr Salomon was able to keep the £1,005 ahead of unsecured creditors rather than pay the creditor.
- Therefore, the legal personality doctrine was established where a company is distinct from shareholders and directors.
Macaura v Northern Assurance Facts;
- Macaura sold land and timber to a company he formed. Macaura and his nominees were the sole shareholders of the company.
- He took out insurance in his own name.
- The timber was destroyed by fire, but because the timber was owned by the company, and the insurance policy was owned by Macaura rather than the company, the insurance company refused to pay.
Issue: should Macaura receive insurance compensation for the burnt timber?
Held;
- It was held that shareholders have no legal or equitable interest in the property of the company and therefore Macaura did not have any rights to the timber and therefore no claim for insurance.
Lee v Lee’s Air Farming Facts;
- Lee incorporated what was effectively a one-person company. He was (almost) the sole shareholder; the sole director and the sole employee.
- He died whilst working, and his wife claimed worker’s compensation.
Issue: was the director and majority shareholder Mr Lee a ‘worker’?
Held;
- The Privy Council held that a person can legitimately have several legal relationships at once with an incorporated entity.
- Lee could be the director of the company and separately an employee of it. He was not employing himself- the
employer was the company and therefore he was a worker.
- So, his wife was entitled to workers’ compensation.
Application of Salomon’s case to corporate groups
Overview
- A corporate group exists where there are ‘a number of companies associated by common, interlocking shareholdings, allied to unified control or capacity to control’ (Walker v Wimborne).
- Each company within a corporate group is a separate legal entity (Walker v Wimborne).
- A subsidiary company’s profits can not be regarded as the profits of its holding company available for payment of the holding company’s dividends (Industrial Equity Ltd v Blackburn).
- The separate entity approach means that directors of one company in a group owe their due to that company rather than the group as a whole (Walker v Wimborne).
- The contracting of holding companies and subsidiaries is separate (Pioneer Concrete Services).
Relevant legislation Subsidiary test; s46
- A body corporate is a subsidiary if the other body;
s46 a) i) controls the composition of the first body’s board; or
● There must be legal control not de facto control (Mount Edon).
ii) is in a position to control the casting of more than one-half of the maximum votes in a meeting of
● There must be a present control to cast more than 50% of the votes (Bluebird).
the first body; or
iii) holds more than one-half of the issued share capital of the first body Controlling the board; s47
- Under s47 a body controls a company if they can appoint or remove the majority of directors of the company.
Matters to be disregarded; s48
- Whether shares are held in a fiduciary capacity s48(2) or shares held or exercisable by virtue of debentures are disregarded (s48(4) is irrelevant to ascertain whether there is a subsidiary.
Related bodies corporate; s50
- Where a body corporate is a holding corporation/subsidiary of another body corporate they are related to each other.
Industrial Equity v Blackburn Facts;
- Industrial Equity Ltd’s board of directors declared a ‘special distribution’ where shareholders of the holding company would be paid a dividend.
- However, the dividends were paid as a result of the subsidiary companies profit as opposed to the holding company’s profit.
Issue: was the dividends paid valid?
Held;
- Until the subsidiaries profits have gone through the formalities of declaring and paying their profits over to the holding company as dividends, those profits are the subsidiary’s profits and the holding company has no right to treat them as their own.
- Mason J stated the decision was ‘natural consequence of the recognition of the separate personality of each company, a recognition which derives from Salomon v Salomon’.
Lifting the corporate veil: common law Introduction
The courts must decide whether to pierce the corporate veil at common law in regards to [insert factual matrix]. The judiciary generally treats a company as a separate legal entity from its shareholders and officers [other companies in a corporate group] (Salomon; Industrial Equity). Therefore, there is a
‘corporate veil’ but sometimes the court will look beyond the company as a separate legal entity to make individuals [or holding companies] liable.
Fraud
- The corporate veil may be lifted where the corporation acts as a vehicle for fraud allowing for the defendant to disgorge personal profits (Re Darby).
● In Re Darby, Darby set up a sham company to sell a substantially overvalued mining licence to a separate company which eventually failed and he was held liable.
Avoidance of legal obligations
- The courts will lift the corporate veil if a company has been used to avoid a legal obligation under contract or statute (Gilford Motor Co; Lipman).
● Horne formed a company to avoid a personal prohibition against soliciting customers from a business but the court declared this as a ‘mere cloak and sham’ and the veil was lifted.
● ^ Dicta in Horne indicates that if a pre-existing company was used to avoid contractual obligations, the court may not pierce the corporate veil.
● Lipman unsuccessfully tried to avoid specific performance of a K regarding the sale of land by forming a company and selling it to another person allowing for the veil to be lifted.
Subsidiaries as agents
- The corporate veil may be lifted where the subsidiary acts as an agent for its holding company (Smith, Stone and Knight).
- The Salomon principle can be displaced if the following 6 requirements, which are a question of fact, can be made out (Smith, Stone and Knight).
1. The profits of a subsidiary must be treated as the profits of the holding company.
2. The persons conducting the subsidiary must be appointed by the holding company.
3. The holding company must be the head and brain of the trading venture.
4. The holding company must govern the venture, decide what should be done and what money should be spent.
5. The business profits of the subsidiary must be made by the holding company’s skill and direction.
6. The holding company must be in effectual and constant control.
● The holding company owned all the shares in the subsidiary except for 5 which were owned by the directors of the subsidiary.
● All the accounts were kept with the holding company.
↑ Analogy
● In SSK corporation, there was a finding of agency piercing the corporate veil as the subsidiary company (SC) conducted business for the holding company (HC) on the land allowing the HC to receive a claim of compensation for the SC’s eviction.
● In SSK the board of the subsidiary (directors) and the parent company were identical and the subsidiary had no staff except a manager on the ground enhancing a finding of a subsidiary.
Suggested ground: where a subsidiary cannot afford the claims of tort victims
- Rogers AJA in Briggs v James Hardie suggested that it may be possible to pierce the corporate veil at the common law so a tort victim could sue the holding company of a subsidiary.
- This may occur where subsidiaries are undercapitalised and unable to meet their tort liabilities (Briggs).
● In Briggs, Rogers AJA argued that the plaintiff who suffered from asbestosis during his
employment at the subsidiary company should be able to recover from the holding company to recover compensation.
Suggested ground: commercial unreality in some corporate group situations
- In Qintex Australia Finance, Rogers CJ suggested it may be possible to pierce the corporate veil at common law for a voluntary contractor to sue the holding company of a subsidiary.
● In Quintex, subsidiary QAL owed Schroders money but they couldn’t pay it even though other subsidiaries under Quintex could.
- Rogers CJ regarded the demarcation of subsidiaries in a corporate group as a legal fiction and believed this judgment unfair especially as money is often ‘shuffled round’ to those in need.
Gilford Motors v Horne Facts;
- Horne signed a contract stating that he would not solicit away customers of Gilford.
- Horne resigned and established his own company and then started soliciting customers.
Issue: did the separate legal entity apply as to preclude Horne from being held accountable?
Held;
- The corporate veil was pierced and the separate legal entity was discarded as the company was used to avoid contractual obligations.
- Lord Hansword stated that ‘the company was formed as a device, a stratagem in order to mask the effective carrying out of a business’.
Jones v Lipman Facts;
- Lipman entered into a contract of sale to sell the land to Jones.
- Subsequently, Lipman set up a company to sell the land to someone else.
Issue: can the separate legal entity apply to preclude Lipman from liability?
Held;
- The court ordered specific performance of the contract by piercing the corporate veil.
- Lipman was held to have complete control of the company, and the company was a mere ‘device and a sham’ whose sole purpose was to help Lipman avoid existing legal obligations.
Smith, Stone and Knight v Birmingham Corporation Facts;
- Smith, Stone and Knight (SSK) owned land on which its wholly owned subsidiary conducted a business.
- A local government authority tried to compulsorily acquire the land.
- The government agreed to pay compensation for the land but refused to compensate for the disturbance to the business being conducted on it, arguing that the business was not conducted by SSK but by a different legal entity.
- SSK argued that the subsidiary was conducting the business as an agent for it.
Issue: can the corporate veil be lifted due to agency?
Held;
- The court held in favour of the company by piercing the corporate veil and deeming the land- and the business conducted on it- as really that of Smith, Stone and Knight and not its subsidiary.
- This is because the subsidiary was deemed to be an agent of its holding company.
Qintex Australia Finance v Schroders Facts;
- Schroders entered into a contract with a subsidiary of the Qintex group allowing for Schroders to be owed over $1 million.
- Qintex subsidiaries went bankrupt and schroders sought a payment from the group.
Issue: should the corporate veil be pierced so that Schroders can receive payment?
Held;
- The court decided against piercing the corporate veil and Schroders therefore lost some of the money it was owed.
- Rogers CJ explained the unfairness of it all stating the SLE has resulted in ‘unproductive expenditure on legal costs, a reduction in the amount available to creditors, a windfall for some, and an unfair loss to others’.
- Rogers also stated that the money is shuffled around the members of a group demonstrating that there isn’t a strict demarcation between holding companies and their subsidiaries.
Briggs v James Hardie & Co Pty Ltd Facts;
- Mr Briggs was employed by Marlew Mining and suffered from asbestos poisoning which he contracted during the course of his employment.
- He sought to sue Marlew Mining and the Hardies who were the holding companies.
Issue: can the corporate veil be pierced to hold the holding company accountable?
Held;
- The corporate veil was pierced but within the context of tort victims.
- The fact that a holding company exercises control and dominance over a subsidiary is insufficient to pierce the corporate veil.
Lifting the corporate veil: by statute (s588G) Introduction
The issue here is whether the courts can pierce the corporate veil and hold the directors [insert directors]
personally liable for insolvent trading. This liability arises where directors breach the duty contained in s588G by failing to prevent the company incurring debts when there are reasonable grounds for
suspecting it is insolvent. For a director to be liable under s588G, the requirements in s588G(1) must be satisfied and one of the limbs in s588G(2).
1. Director?
- It must be established that [insert individual] is a director of [insert company].
- The duty to prevent insolvent trading applies to someone who is a director at the time when the company incurs a debt: s588G(1)(a).
- Under s9(1)(b) those who act in the position of directors are permissible even though they aren’t formally appointed.
● A de facto director is a person who is not validly appointed but acts in the position of a director under s9(b)(i).
● A shadow director is a person whose instructions or wishes the directors of the company are accustomed to act in order under s9(b)(ii).
Additional guidance on shadow directors
- To be a shadow director there must be a willingness and ability to exercise control and an actuality of control over the management of the company (Standard Chartered Bank).
● In Standard Chartered Bank the ‘shadow director’ put 3 directors on the board, had 42% of the votes as a shareholder, the board followed whatever he said etc.
- A 3rd party who can control a company’s financial standing isn’t a shadow director unless they affect the management of the affairs of the company (Buzzle).
● In Buzzle, Apple wasn’t a shadow director as they were not actively participating in decision making of Buzzle and only a couple of Buzzle’s board members contacted Apple regularly.
- NB: Subpara b)(ii) explains that because someone gives a director advice in their professional capacity this doesn’t mean they are ‘de facto’ directors.
2. Was the individual a director when the debt was incurred?
- The person must have been a director when the company incurred the debt under s588G(1)(a).
- A debt is incurred when a company contractually obligates itself to make a future payment that is unavoidable (Hawkins).
- The time when a contingent debt is entered into is when the contract is signed regardless of if or when the contingency occurs (Hawkins).
● In determining when a debt was incurred, the court may look to the substance and commercial reality (ASIC v Plymin).
Actions of company When the debt is incurred
Paying a dividend When the dividend is paid or, if the company has a
constitution that provides for the declaration of dividends, when the dividend is declared.
Making a reduction of share capital When the reduction takes effect.
Buying back shares When the buy-back agreement is entered into.
Redeeming redeemable preference shares that are redeemable at its option
When the company exercises the option
Issuing redeemable preference shares that are redeemable otherwise than at its option
When the shares are issued
Financially assisting a person to acquire shares it itself or a holding company
When the agreement to provide the assistance is entered into or, if there is no agreement, when the assistance is provided.
Entering into an uncommercial transaction When the transaction is entered into.
3. Insolvency
- Another requirement is that the company must have been insolvent when the debt occurred or the debt must have caused the insolvency as noted in s588G(1)(b).
- Insolvency refers to the company’s inability to pay its debts as and when they become due and payable:
s95A.
- Whether a company is able to pay its debts when they become due is based on a cash flow test and is not determined simply on the basis of a surplus of assets over liabilities (McLellan’s Case).
↑ Assessment of insolvency
- Indicators of insolvency include substantial trading losses, overdue taxes and late payments to suppliers (ASIC v Plymin).
- If a company is merely facing a temporary shortage of liquidity this doesn’t constitute insolvency (Hall).
- If the company can realise money through sale or borrowing against the security of an asset this doesn’t constitute insolvency (Powell).
- However, if there is an endemic shortage of working capital this equates to insolvency (Hall).
4. Reasonable grounds of insolvency
- There must have been reasonable grounds for suspecting that the company is insolvent or would become insolvent at the time the debt was incurred: s588G(1)(c).
- The notion of reasonable entails that this is an objective test and that ‘the appropriate standard is that of a reasonably competent and diligent non-executive director’ (ASIC v Plymin).
- To decide whether s588G(1)(c) is satisfied the courts will make reference to the indicators of insolvency as outlined by Mandie J in Plymin.
Indicators of insolvency
In ASIC v Plymin, Mandie J in the Victorian Supreme Court thought the following 14 indicators were common features in insolvency situations;
1. Continuing losses.
2. Liquidity ratios below one.
3. Overdue Commonwealth and State taxes.
4. Poor relationship with the present bank, including inability to borrow further funds.
5. No access to alternative finance 6. Inability to raise further equity capital.
7. Suppliers placing company on cancellation of debt, or otherwise demanding special payments before resuming supply.
8. Creditor unpaid outside trading terms.
9. Issuing of post-dated cheques (in the future).
10. Dishonoured cheques.
11. Special arrangement with selected creditors.
12. Solicitors’ letters, summons, judgements or warrants issued against the company.
13. Payments to creditors of rounded sums which are not reconcilable to specific invoices.
NB: a creditor is a person or company to whom money is owed and doesn’t just relate to lenders.
Presumptions of insolvency
- There are two presumptions of insolvency in s588E but they can be rebutted by evidence to the contrary: s588E(9).
Presumption Analysis
Continuing insolvency
As [company] was insolvent on [date] within [last 12 months] and is now insolvent there is presumption of continuing insolvency: s588E(3).
Failure to keep records
As [company] has manifestly failed to keep adequate records of its financial transactions within the last seven years it can be presumed as insolvent.
5. Awareness
- Per s588G(2) the directors must have had subjective or objective awareness of the insolvency.
Subjectively aware
- In ASIC v Plymin it was held that s588G(2)(a) requires proof that the director is aware there are reasonable grounds for suspecting the company’s insolvency.
- So, the director doesn’t need to possess an actual suspicion but rather the director must be aware of facts which would cause a reasonably competent director to suspect insolvency upon incurring a debt.
Objectively aware
- If the director isn’t subjectively aware of the facts constituting reasonable grounds for suspecting insolvency it is sufficient that a reasonable person in a like position would be aware: s588G(2)(b).
- The awareness of a ‘reasonably competent and diligent non-executive director’ must be considered (ASIC v Plymin).
- Directors are obliged to keep informed about the activities of a corporation and cannot shut their eyes to corporate misconduct (ASIC v Plymin).
● In Plymin, a reasonable person in the director’s position would have realised the reasonable grounds of insolvency due to the extensive indicators.
Defences to insolvent trading Introductory remarks
Even if the court is likely to establish the director’s liability under s588G, one or more defences may be available under s588H or miscellaneous provisions to absolve them of liability. The director bears the onus of proving the elements of any relevant defences (ASIC v Plymin).
Safe harbour defence
✷Discuss safe harbour very quickly, even if it is not invoked by the facts.
- [Director] will raise Section 588GA which provides that companies taking action that is reasonably likely to lead to a better outcome and have incurred debt in the process are exempt from s588G(2).
- s588GA(2) provides factors which enhance a finding of working towards a better outcome;
a) the director is properly informing themselves of the company’s financial position.
b) is working towards preventing misconduct of officers of employees that might affect repayment of debts.
c) is ensuring the company is keeping appropriate financial records.
d) is obtaining advice from a qualified entity.
e) is developing a plan for restructuring the company to improve its financial position.
- A better outcome compared to the immediate appointment of an administrator or a liquidator.
- Exception in s588GA(4)(a) that the safe harbour provision can’t be relied on if they are failing to pay employees on time or failing to pay its taxes.
Reasonable grounds to expect solvency
- [Director] will argue that, at the time the debt was incurred, he had reasonable grounds to expect, and did expect, that the company was solvent and remain which excuses his liability per s588H(2).
- ‘Expect’ is a higher threshold than suspect and must be more than mere hope (Hall).
- A director who knows that the company has realisable assets sufficient to satisfy debts are valid in their expectation of solvency (Hall).
● If the company is selling assets to pay creditors, it is reasonable that the asset can be realised within about 90 days (Hall)
- Yet, if solvency was merely possible based on eventual sale prices, this is insufficient (Hall).
Reasonably relied on advice/information
- [Director] will note that the defence of reasonable reliance on advice or information under s588H(3)(a) applies to excusing them of liability.
- [Director] will prove that when the debt accrued he had reasonable grounds to believe and did believe that [party] was fulfilling his responsibility to provide adequate information regarding solvency per s588H(3).
- Consequently, [director] will note that because of the information he believed the company was solvent and would remain solvent even after incurring debt (s588H(3).
↑ Counter-arguments
- The person cannot be a mere accountant or financial advisor, they must be responsible for providing information specifically about the company’s solvency (McLellan’s case).
- The defence will not be available if the director doesn’t properly monitor the other’s performance and doesn’t inquire or receive reasonable assurances that information is adequate(ASIC v Plymin).
● In ASIC this defence was N/A as the person relied on couldn’t be considered competent and reliable as they didn’t comply with board requirements for financial information.
Director did not take part in management of the company
- Section 588H(4) provides a defence for a director who was absent from management because of illness or some other good reason at the time when the company incurred a debt in question.
- The absence of management defence is not applicable where a director defers their role to the managing director as this is a mere failure to participate in the business (Clark).
● In Clark, this defence wasn’t made out as the wife left all the business affairs to her partner and didn’t understand the importance of the financial matters.
Reasonable steps
- Under s588H(5), it is a defence if the director proves that they took all reasonable steps to prevent the company from incurring the debt.
- S588(6) directs the court to consider any action the director took regarding appointing an administrator or a restructuring practitioner, when that action took place and the result.
Consequences of contravention [no defences]
- The court may order the director to pay compensation to the creditor or liquidator under s588M.
- Since s588G is a civil penalty provision, a contravention may result in the imposition of a pecuniary penalty order under s1317G or disqualification from managing corporations under s206C.
- Under s588G(3) a contravention is a criminal offence, punishable by a fine or imprisonment or both if a director’s failure to prevent the company incurring the debt in breach of s588G was dishonest.
Hawkins v Bank of China Facts;
- A company guaranteed the pre-existing debts that two other companies in the same group owed to the Bank of China.
- At the time of the guarantee, the borrowing companies were unable to pay their loans because they were insolvent.
Issue: when was the debt incurred?
Held;
- It was held that the guarantor company incurred a debt to the bank when the guarantee was executed because after that date the company’s obligation to the bank under the guarantee was unavoidable by any action of its own.
- NB: the debt was contingent as the guarantor would only have to pay if the two other companies could not.
ASIC v Plymin Facts;
- The company contracted to buy raw materials for its business from a large number of suppliers.
- Plymin went insolvent and Elliot was a non-executive director and individuals were trying to hold him liable for insolvent trading.
- Elliot relied on information about the company’s financial position provided to him by its managing director Plymin as a potential defence.
Issue 1: when does a company ‘incur a debt’?
Held:
- The company did not incur a debt until the delivery orders were made as payment was to be made 30 days after delivery and so it wasn’t logical for payment to be made upon entering into the original contract.
Issue 2: was there reasonable grounds for suspecting insolvency?
Held;
- It was stated unnecessary for the purposes of this proceeding to determine whether the facts and matters of the period gave rise to reasonable grounds for suspecting that the company was insolvent.
Issue 3: could the defence of reliance on others be successfully raised?
Held;
- The court held that this defence could not be successfully raised.
- The court held that a reasonable person wouldn’t have regarded that Plymin and the management were competent and reliable persons who were fulfilling their responsibilities including providing adequate information about the company’s solvency.
- The evidence disclosed that Plymin did not comply with board requirements for financial information.
- The court was not satisfied that Elliott, an experienced businessman and an astute, intelligent individual did not know that he should have obtained the requisite information from management.
McLellan, in the matter of the Stake Man Pty Ltd v Carroll Facts;
- The liquidator of the Stake Man applied to the court for orders against its sole director Mr Carroll in regards to insolvent trading.
- A new accountant Mr Bright told Mr Carroll that the business was close to insolvency and so both Mr Carroll and the other shareholder advanced substantial funds to the company.
- Later Mr Bright consulted an insolvency practitioner who told Mr Carroll that if he believed that the business was viable, he should find an investor or further capital.
Issue: were any defences available?
Held;
- The court found that the defence of reasonable grounds to expect solvency wasn’t proved through applying Palmer J’s notion in Hall v Poolman that solvency can only be expected if the assets can be liquidated to resolve debts in 90 days.
- Moreover, the defence of reasonable reliance on a competent person didn’t count as Mr Bright was an accountant and was not responsible for providing adequate information to Mr Carroll about whether the company was solvent.
- Instead the honesty defence was made out because as Mr Carrol took steps to enhance the business, took advice from others and worked towards making the company solvent again.
Hall v Poolman Facts;
- Poolman who was a director of a company owning vineyards and winery tried to rely upon the defence regarding expected solvency when the company went insolvent.
Issue: could Poolman rightfully rely upon the defence of expected solvency under s588G?
Held;
- Mr Poolman’s defence did not succeed in this circumstances.
- To decide whether this defence can be utilised it must be queried whether the assets can be turned into cash to pay all our debts within 3 months.
Deputy Commissioner of Taxation v Clark Facts;
- This case involved a family company with 2 directors who were husband and wife.
- Mrs Clark did not take part in the management of the company and relied on her husband to manage the business.
- When the company got into financial difficulties, Mrs Clark tried to avoid liability by relying on the absence from management defence.
Issue: did Mrs Clark’s reliance on her husband constitute ‘some other good reason’ under the equivalent of the absence from management defence?
Held;
- The court held that ‘other good reason’ in this context should not be limited to matters that are unavoidable, but that total reliance on other directors is not in itself a ‘good reason’.
- Therefore, Mrs Clark couldn’t rely on the absence of management defence.
Liability of holding company for insolvent trading by a subsidiary Introduction
An issue arises as to whether the parent company [insert company] can be held liable for insolvent trading by the subsidiary [insert company] as outlined in s588V of the statutory regime. If [insert company]
can be established as a subsidiary of [insert company] and fulfils the preconditions in s588V then the parent company will be liable for the debts the subsidiary incurred.
NB: make sure it is a holding company and subsidiary relationship! (refer to above information) When holding company liable: s588V
1) A corporation is liable if
a) the corporation is theholding companyat thetimethe subsidiary incursdebt.
b) the company isinsolventat the time or becomes insolvent by incurring that debt.
c) there arereasonable grounds for suspectingthat the company is insolvent or may become so.
d) one or both of the following applies;
i) the corporation, or one or more of its directorsis awareof the grounds for suspecting.
ii) having regard to the nature and the extent of the corporation’s control over the company’s affairs and to other circumstances it is reasonable to expect that:
A) a holding company in the corporation’s circumstanceswould be awareor B) one of the holding company’s directorswould be aware
e) that time is at or after the commencement of this Act.
- Objective test is based on the parent company’s degree of control, if there is a larger degree of control then they are more likely to have been aware of the grounds for suspecting insolvency.
Defences: s588X
- s588X(2) states that if there was a reasonable expectation of continuing solvency a holding company won’t be liable.
- s588X(3) states that if the director was being advised by a competent, reliable person and reasonably believed the company as solvent then the holding company won’t be liable.
- s588X(4) if because of illness or another good reason a director didn’t manage the corporation at the time when the company incurred the debt the holding company won’t be liable.
- s588X(5) if it proved that the corporation took all reasonable steps to prevent the company from incurring a debt this acts as a legitimate defence.
↑ Safe-harbour exception: s588WA
-Under s588WA a holding company is not liable for a subsidiary for insolvent trading under s588V(1) if the safe harbour exception applies.
- Additionally, under s558WA reasonable steps should be taken to ensure that s588GA applies to each director of the subsidiary and they actually do apply.
Recovery of compensation for loss resulting from insolvent trading: s588W 1)
a) where a corporation has contravened s588 v and
b) the person to whom the debt has owed has suffered loss or damage 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 damages.
