Corporate groups

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Required Reading

Redmond, Paul Corporations and Financial Markets Law 6th ed, 2013, LBC, pp. [4.75]-[4.95]; [4.120]-[4.125]; [7.35]-[7.50]; [7.195]-[7.205]; [7.315]-[7.335].


A group of companies will often be employed to perform complementary functions within a single enterprise. Among large scale business, the group of companies is the dominant organisational structure.

  • ‘Corporate group’ is not a term with a clear single meaning although it generally refers to a ‘number of companies which are associated by common or interlocking shareholdings, allied to unified control or capacity to control’: Walker v Wimborne (1976)
  • There are two competing legal conceptions:
    • As a family of subsidiary companies under a holding company which has majority ownership or voting control of the subsidiary company, or
    • As an economic entity of a parents and its controlled entities under a broader and more generally expressed definition of corporate control.

The incidence of corporate groups

The current law only allows limited recognition of corporate groups. It mainly understands such corporate relations in terms of holding, subsidiary, and related companies.

  • Section 46 states that a company is a subsidiary of another when the other (ie, the holding company) either:
    • Controls the composition of the subsidiary’s board.
      • Section 47 defines ‘control of the board’ (not to be confused with the other definition control’ below) as the ability to appoint or remove all or a majority of the board.
      • For the purposes this subsection, control must flow from a legally enforceable power. Practical or de facto control is insufficient in the absence of such power: Mount Edon Gold Mines v Burmine (1994).
    • Casts or controls casting of more than half the maximum votes that might be cast at a GM
    • Holds more than half of issued shares (excluding shares with no participation rights beyond dividends).
      • This includes instances of ‘actual power’ ie, where the alleged holding company doesn’t have 50% of the votes, but is given general proxy votes from other shareholders (without instructions or need to consult them) which means it actually has over 50%: Bluebird Investments v Graf (1994).
    • Where the subsidiary is a subsidiary of the holding company.
  • Section 50 states that related bodies corporate are:
    • Holding companies
    • Subsidiary (child entities)
    • Subsidiaries of parent (sibling entities)

Note – there is another section (50AA) which defines ‘controls’. This section is not used for the purposes of determining a holding company under s 46. It only applies when determining ‘related parties’ under Part 2E. As per s 50AA:

  • Control is the capacity to determine the outcome of decisions about the second entity’s financial or operating policies.
  • Subsection (2) considers the practical influences (and not just the rights) and considers practices or patterns of behaviour
  • Subsection (3) - don’t regard a capacity which arises out of joint exercise with a third entity
  • Subsection (4) - don’t regard exercise which is in the interests of someone other than first entity’s members
  • Same as broad notion in s 259E (A company cannot hold shares in a company which controls it)
  • A company controls an entity if it had the capacity to determine the outcome of decisions about the entity‘s financial or operating policies

Issues arising in corporate groups

According to the current law, which adheres to the separate legal entity approach, companies within corporate groups are treated as separate entities (created and registered as such), which bear separate responsibilities and liabilities. There has been a debate as to whether this should really be the case (Blackburn and Walker v Wimborne). There are some exceptions at the moment, which allow lifting the corporate veil:

  • Fraud or improper purpose - when companies are created to avoid tortious liability or to avoid an existing legal liability.
  • Agency - Spreag v Paeson.
    • To qualify as an agent of another company, the controlled company must not be making its own decisions, not own resources, doesn’t make profits on its own account (but for parent and controller), Walker v Wimborne

Another question which arises from this debate is who should be responsible for the debt of a subsidiary – other companies in the group or the actual directors of the other companies in the group:

  • See s 588V-X in Standard Chartered Bank v Antico - should the debts be slated back to Pioneer Concrete (only owed 42% of company) but Giant was entirely controlled by Pioneer and never made any financial decisions
    • Not all members liable – 58% of members in Giant did not have this liability. Form of regulation designed to manage people’s behaviour and ensure those people with control do not exercise control in a way that will put creditors interests at risk.
    • Conglomerate company itself might be liable – beneficial if company is worth more money

Fraud Exception

The fraud exception to lifting the corporate veil will not be available after incorporation.

  • CSR v Wren – parent company were liable directly in tort to employees who were injured as they used the tort principles (duty of care) directly between parent and subsidiary employees – due to level of control and reasonable foresight test (not in realm of control but of tort – certain people have duties not to cause harm to others).
  • Equity v BNZ – directors owe duties to company they are a director of. If directors in two companies must make decisions in best interests of each company in separate meetings and if conflict then must step down. Acting in the interests of the group alone is not enough, you have to act in the best interests of the company(s)
  • s 187 Exception - if a wholly owned subsidiary, and constitution expressly permits the directors to act in the interest of the group, and the subsidiary is not insolvent or near insolvency when the decision was made, can act in the interest of the group.

Nominee directors

A nominee director is a director appointed by a significant shareholder who has the ability to appoint someone as director. He is expressly required to act in the best interests of both the company and the specific shareholder. However, the nominee director cannot prefer the individual shareholder who has nominated them unless the agreement between the majority shareholder and company provides so.

  • This has been somewhat eroded by Levin v Clark'the very reason the nominee directors had positions on the board was due to a prior agreement between the creditor and shareholder that if default on mortgage happened than allowed to prefer the creditors’ position (written into the agreement).
  • Circumscribed the scope of the fiduciary duties of the director concerned and allowed to act in certain interests against an old trustee basis which would have seen a conflict with the interests of the beneficiary.

Statutory principles governing corporate groups

There are some statutory provisions which provide for corporate groups:

  • s 588V – holding company has duty to prevent insolvent trading of a subsidiary. Liable to the liquidator of the subsidiary in such instances.
    • Quintex recognises that the law is out of date with the commercial world by failing to properly recognise corporate groups (ie, this section is too narrowly defined).
  • Ch 2E – aiming to deal with public companies which give some kind of benefit to a related party.
    • There are almost no cases on this enormous chapter – only ASIC v Adler.
    • S 208 (1) - a public company (or an entity controlled by it) can only give a financial benefit to a related party of the public company if it obtained approval.
  • S 259B - Capital Maintenance/Buying own shares: a company must not take security of shares of itself, or company which controls it (s 259E defines control in the same way as s 50AA).
    • See ss 259C, 260A.

See the textbook for other relevant sections.

Corporate personality within corporate groups

Briggs v James Hardie & Co Pty Ltd[1]

  • Facts: Briggs was poisoned with Asbestos and sued his former employers’ holding company, James Hardie
  • Held (Rogers AJA): problem arises from the fact there is no common, unifying principle, which underlies the occasional decision from courts to pierce the veil of incorporation. “The law pays scant regard to the commercial reality that every holding company has the potential and, more often than not, in fact, does, exercise complete control over a subsidiary. If the test were as absolute as the submission would suggest, then the corporate veil should have been pierced in the case of both Industrial Equity and Walker v Wimborne”.
    • Control and dominance by a holding company of a subsidiary do not in themselves increase the risk of injury to tort victims
    • Factors of shareholder control and dominance by a parent corporation may be equally irrelevant in determining in actions of tort whether the parent should be held liable
    • In the US, a court held that one of the requirements for piercing the veil of incorporation is that the parent company dominated the subsidiary so that it had no separate existence but was merely a conduit for the parent

Qintex Australia Finance Ltd v Schroders Australia Ltd:[2]

  • Facts: one deal made a profit and one made a loss, and different companies in the group were doing the buying and selling of currency. The contest is to identify the member of the Quintex group of companies on whose behalf the futures exchange contract had been purchased by the defendant
  • Held (Rogers CJ): there is a tension between the realities of commercial life and the applicable law in this circumstance - in everyday commercial life, participants in contractual transactions involving conglomerates rarely consider which of the subsidiaries should become the contracting party.
    • Thus, the principles on which Salomon was based did not take into account the fact individuals do not calculate the respective risk of the individuals they are operating with.
    • There is a great deal to be said for the proposition that the assets and liability of holding companies should be made available to the creditors of their subsidiaries
    • Shows tension in policy about what the law tries to do in this area. Doesn’t add anything to the law itself

The structure of liabilities of directors and managers

De facto directors

A person who was not appointed as a director may be deemed a de facto director if they, in reality, acted like a director. This will depend upon the particular role they have played within the company.

  • For a person to be a de facto director(DCT v Austin):
    • It is a necessity but not a sufficient condition that person exercises the top level of managerial functions.
    • The key is whether they were engaged in the affairs of the company in manner distinctive as a director.
  • A question of degree to be determined, looking at the operations and circumstances of the company including:
    • Size of the company – there is usually more discretion given to personnel to deal in large companies, and thus the characterisation of being a de facto director is less likely to be imposed in such situation.
    • Internal practices and structure of the company.
    • How the alleged director was reasonably perceived by outsiders.
  • Harris v S: the defendant had practical direction of the company, and was its driving force, the court considered defendant a de facto director.

Shadow directors

A shadow director is a person who was not appointed as a director but the directors of the company are accustomed to act in accordance with their instructions (s 9). As opposed to a de facto director, a shadow exists in situations in which control is unconscious, contested or carefully disguised. It covers those who are real, though not nominal controllers of the company, and may apply to a holding company, a controlling shareholder or even the nominee directors of a corporate shareholder.

A person is a shadow director when:

  • It can be shown that it was his will, and not the independent will of the appointed directors, which determined the resolutions of the board: Harris v S.
  • The question becomes where does the decision making power of the company reside? If this resides in a third person, and they cannot secure “Advisor” protection of s 9, they will be a director: Australian Securities Commission v AS Nominees
  • It is not sufficient to have a substantial shareholding resulting in “mere effective control” (s 50AA), nor have nominee directors to constitute a shadow director - requires actual control.

Ordinarily, a holding company is not a shadow director of its subsidiaries/controlling entities merely because it has control of how the boards of the subsidiaries are appointed or has substantial shareholding. However, if there is such overwhelming actuality of control over the management and financial affairs of the entity then the parent/holding company may be considered a shadow director:

  • This doesn’t require that the holding company instructs regarding all matters – only that when the directors are indeed instructed, they basically abdicate their own power and do exactly as instructed: Australian Securities Commission v AS Nominees
  • Requires directors who fulfil their function as directors, but who carry out that role in accordance with directions given by someone and that the directors perform positive acts, not simply to desist from acting. It will not apply where control or influence is so complete that they effectively abdicate in their favour: Harris v S

Standard Chartered Bank of Australia Ltd v Antico:[3]

  • Facts: Giant was a listed company, in which Pioneer had 42% shareholding and 3 nominee directors on its board. Following default by Giant, Standard and Chartered Bank sought to recover from Pioneer, as a person who had taken part in the management of the company whilst insolvent
  • Held (Hodgson J): Pioneer had effective control, by virtue of the size of its shareholding in comparison to the other substantial shareholders. The conditions imposed upon Giant, following the decision to fund Giant, show a willingness and ability to exercise control, and an actuality of control over its management and financial affairs. Imposed financial reporting requirements consistent with requirements for its group.
    • Gave instructions that no new financial commitments be made without Pioneer approval, and all payments had to be approved.
    • Decision to fund Grant on basis of security was effectively made by Pioneer and accepted by Giant, and never the subject of careful consideration by Giant.
    • Pioneer was a director of Giant.

Australian Securities Commission v AS Nominees Ltd:[4]

  • Facts: ASN and Ample were trustee companies of superannuation funds with common boards of directors. ASC commenced proceedings to wind up 3 companies or for appointment of receiver and manager to property. Alleged that companies had been run largely at direction and interest of Windsor with extensive breaches of trust. The question was whether, Windsor is “a person in accordance with whose directions/instructions the directors of either ASN/Ample/both are accustomed to act” under s 9
  • Held (Finn J): the question to ask is: where is the locus of effective decision-making? If it resides in a third party who was doing more than merely advising the board, and, they cannot secure “Advisor” protection of s 9, they will be a director. The effect of being attributed the status of de facto or shadow director is that the ordinary duties and obligations of directors are imposed
    • Not necessary to show, within wording of s 9 definition that there was actual formal directions/instructions given - formal command is by no means always necessary to secure as of course compliance with what is sought
    • “The idea of the that the third party calls the tune and the directors dance in their capacity as members”
    • Found as fact that Windsor exercised control of a strategic character, which defined the context in which the companies operated - where Windsor intruded, the boards did not exercise independent role
    • The case was not merely one of directors acting on advice of a manager in proper performance of duties
    • Constant and Securities loans were for the benefit of companies under his direct control
    • Directors acted without due deliberation, recklessly entering into transactions introduced by Windsor
    • In this case, what was asked of, and conceded by, the boards was either to act partially to Windsor or to act in ways which, in furthering his designs, required the dereliction of their own and of their trust company’s duties.
    • Windsor peremptorily sacked the board of Ample, after a disagreement between Windsor and the Board and no question was asked by those sacked of Windsor’s power to do so

The liability of a holding company for insolvent trading by a subsidiary company

Under Pt 5.7B Div 5 an action for compensation can be brought against a holding company where it allows a subsidiary company to trade while insolvent. The subsidiary’s liquidator may sue for compensation for loss suffered by unsecured creditors as result of insolvent trading: s 588W

A holding company contravenes the Act, (which serves as one of the foundations for compensation proceedings), if each of the following four elements is satisfied:

  1. Co must be holding company of the subsidiary company at time when subsidiary incurs debt: s 588V(1)(a)
  2. Subsidiary company must be insolvent at that time or become insolvent by incurring that debt or by incurring at that time debts that include that debt: s 588V(1)(b).
  3. At time when subsidiary company incurs debt there must be reasonable grounds for suspecting that company is insolvent or would become insolvent or by incurring that debt or incurring at that time debts including that debt as case may be: s 588V(1)(c)
  4. Either:
    • If holding company or 1+ of its directors is aware when debt is incurred that there are reasonable grounds for suspecting such insolvency: s 588V(1)(d)(i)
    • If, having regard to the nature and extent of the holding company’s control over the subsidiary’s affairs and to any other relevant circumstances, it is reasonable to expect either that a holding company in the company’s circumstances would be so aware, or that 1+ directors of it would be so aware: s 588V(1)(d)(ii)

If the above can be made out, and the subsidiary is being wound-up, the liquidator of the subsidiary may recover compensation from the holding company if:

  1. The person to whom debt is owed must have suffered loss/damage in relation to debt because of company’s insolvency
  2. Debt must have been wholly/partly unsecured when loss/damage was suffered

Other relevant provisions:

  • Proceedings by liquidator must be begun within 6 years after beginning of winding up: s 588W(2).
  • The company’s unsecured debts must first be paid in full before secured debt can be paid to company: s 588Y(1)
  • If aggrieved party knew co was insolvent/would become insolvent and loaned anyway, debt may be postponed until insolvent company has paid unsecured debts in full first: s 588Y(2)

Defences to liability:

It is a defence if it is proved that, at the time when the debt was incurred, the corporation and each relevant director 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: s 588X(2).

  • Reasonableness is assessed with regard to factors such as the size and complexity of the coy concerned, the size of debt incurred, and nature of the grounds which gave rise to the suspicion of insolvency

Fiduciary loyalty within corporate groups

There are two issues which principally arise with respect to the duties of directors within corporate groups, each exploring the precise focus of fiduciary loyalty:

  • Concerns scope for any latitude for directors to have regard to collective welfare considerations within a financially integrated/centrally managed corporate group
  • The significance for traditional doctrine of the licence accorded to nominee directors under case law to pay social regard to their appointer’s interests

Walker v Wimborne (1976) 137 CLR 1'

  • Mason J:
    • “Group” defined by Mason J as a term “generally applied to a number of companies which are associated by common/interlocking shareholdings, allied to unified control or capacity to control
    • Three real/key principles emerge from this case:
      • A derivative benefit can flow between separate entities of a group but directors must think about their own company: “it was the duty of the directors… to consult its interests and its interests alone...”
      • It may be in the interest of a director in a group of companies to shovel money to another company if there is a derivative flow to other companies.
      • Mentions consideration of interests of creditors, although there is ultimately no duty and thus creditors cannot sue - creditors can only look to the company (as in Salomon, however, remember Kinsela): “ this respect it should be emphasised that the directors of a company in discharging their duty to the company must take account of the interests of its shareholders and its creditors”

Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50

  • Clarke and Cripps JJA:
    • Looks at the English law in Charterbridge doctrine: that “the proper the absence of actual separate consideration, must be whether an intelligent and honest man in the position of a director of the company concerned (objective test), could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company
      • The court noted its reservations with regard to this test
    • Noted that even Pennycuick J in case was of the view that this test should arise only when it is clear directors had not considered interests of relevant company at all
    • Say a preferable view would be that not considering own company would amount to breach but that when objectively viewed, in interests of company, then consequence of breach would be determined
    • Despite this, as both parties had said this was the test, the court was bound to apply it.
    • Looked at whether this was the test or whether it should be a subjective test of honest and reasonable decisions, like a business judgement rule - loss of Bank of NZ support would have been disastrous for Equiticorp, and welfare of group was intimately tied with welfare of individual companies
    • Having regard to liquidity, and holding company’s guarantee of debt, those responsible thought that the steps taken would protect the group as a whole, and thus of benefit to the companies
    • Their conclusion was to apply the objective test. But no punishment. Practical result no difference. So in a way applies both Charterbridge and W v W.
    • [Dissent] Per Kirby J: Though Equiticorp was not insolvent, they had liquidity problems, which an intelligent and honest director should give consideration to. This is because of the impact that would befall creditors and shareholders

Applications of directors’ duties to corporate groups

Directors owe their fiduciary duties to their company even in the context of intra-group (within group) financial dealings. Directors can be held liable for breaches of their duties subject to shareholder ratification:

  • Unanimous ratification: SHs of a solvent company may unanimously ratify, either prospectively or retrospectively, particular actions of directors which could otherwise constitute a breach of fiduciary duty
  • Majority ratification: In some instances, a majority of SHs can ratify acts of directors. It cannot authorise any irregular act of directors that would be oppressive or unfairly prejudicial to the minority SHs.

Directors are meant to act in the company’s interest, but to what extent?

  • Directors of a company within a group are obliged to act by reference to their perception of its interests, and not that of the group generally: Charterbridge
  • They cannot treat the corporate group as a single unit for the purpose of internally transferring funds or assets, or providing security
  • The separate legal entity of each group must be respected, and the merits of the transaction must be viewed by reference to its interests alone: Walker v Wimborne
    • Exceptions to this rule is where the interests of the company, which is part of a group, is so inextricably bound up with the welfare of the group, that what is in the interests of the group is in the interests of the company: Equiticorp
    • From 2000 the Act has provided that a director of a wholly owned subsidiary is taken to act in good faith in interests of subsidiary where constitution of subsidiary expressly authorises the director to act in best interests of the holding company and the director acts in good faith in best interests of holding company;
    • the licence applies only where subsidiary is solvent at time director acts and does not become insolvent because of director’s action:s 187
      • This provision reflects developments in doctrine in relation to nominee directors’ duties.


This is the end of this topic. Click here to go back to the main subject page for Business Associations.


Textbook refers to Redmond, Paul Corporations and Financial Markets Law 6th ed, 2013, LBC.

  1. (1989) 7 ACLC .
  2. (1990) 3 ACSR 267.
  3. (1995) 38 NSWLR 290.
  4. (1995) 133 ALR 1.
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