Challenging the Limited Liability of Parent Companies:A Reform Agenda for Piercing the Corporate Veil

Helen Anderson

This article challenges the generally acceptedlegal principle that the full benefits of thecorporate veil, and particularly limited liability,

should be available to parent companies as owners,in the same way that it is available to shareholdersin companies with more dispersed ownership. Parentcompanies in corporate groups are not the same as ‘usual’shareholders, who are separate from management.Parent companies, through their ownership stake, retaina high degree of control over the activities of theirsubsidiaries, particularly if they are wholly owned.Nonetheless, to suggest that the veil of incorporationshould be pierced and that those shareholders should incertain circumstances be liable for the debts and claimsarising from the subsidiary’s operations challenges thefundamental conception of the modern corporation,even where the shareholder is itself a company.1

Increasingly, however, scholars are debating whether theveil should be pierced, particularly where the interests ofvulnerable parties such as tort creditors are involved.2

As discussed later, it must be acknowledged that therehas been some legislative intervention to the limitedliability and separate legal entity principles to facilitatethe external administration of insolvent companies. Forexample, the pooling of assets of insolvent groups bythe liquidator is permitted3 and holding companies canbe liable for the insolvent trading of its subsidiary inlimited circumstances.4 Apart from these provisions,Australian courts have consistently refused to pierce thecorporate veil to hold parent companies liable for thedebts, contractual or otherwise, of their subsidiaries.This article seeks to argue that this situation should bechanged. It analyses the theoretical underpinnings oflimited liability, identifies why it is difficult conceptuallyto pierce the corporate veil, and proposes solutionsto parent company liability, independent of insolvencyregimes.

Although challenged by academics, the right toincorporate a company that enjoys a separate legalexistence from its shareholders has been unquestionedby the business and legal communities since Salomonv Salomon & Co [1897] AC 22. It is similarly acceptedthat shareholders of limited liability companies are only

This article examines the liability of parent corporationswithin company groups in Australia, to determinewhether the law needs to be reformed. It gives an overviewof the theory behind limited liability and situations inwhich piercing the corporate veil is arguably justified. Itthen considers whether the veil should be pierced toimpose liability on parent companies. It makes the casethat fault should be the basis of liability, and it looks atexamples of veil-piercing laws overseas to determinewhether any of them might provide an appropriatetemplate for liability. Recent Australian initiatives areconsidered before making suggestions for reform.

CorrespondenceHelen Anderson, Melbourne Law School, University ofMelbourne, University Square, 185 Pelham Street, Carlton3053; Tel: +61 3 9035 5467; fax: + 61 3 8344 9971; email:h.anderson@unimelb.edu.au.

doi: 10.1111/j.1835-2561.2012.00168.x

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liable for the company’s debts to the extent of theircontributions to its capital.5 Companies as separate legalentities are said to be separated from their shareholdersby a veil of incorporation. The benefits of the groupstructure were famously celebrated by Templeman J inRe Southard & Co Ltd [1979] 1 WLR 1198 at 1208:

A parent company may spawn a number of subsidiarycompanies, all controlled directly or indirectly by theshareholders of the parent company. If one of thesubsidiary companies . . . turns out to be the runt ofthe litter and declines into insolvency to the dismayof its creditors, the parent company and the othersubsidiary companies may prosper to the joy of theshareholders without any liability for the debts of theinsolvent subsidiary.

However, trade creditors are not the only ones tosuffer from the veil of incorporation between parentand subsidiary companies. The James Hardie inquirydemonstrates concern for other, non-contractual,claimants who become corporate creditors when theiractions in negligence are successful.6 The New SouthWales Government’s inquiry into the shifting of assetsby companies in the James Hardie group, which limitedfunds available to asbestos claimants, led to a call forreform of the law (Report of the Special Commissionof Inquiry into the Medical Research and CompensationFoundation, hereinafter referred to as the ‘JacksonReport’). In the 2004 report following the conclusionof the James Hardie inquiry, Senior Counsel assistingthe Jackson Special Commission, Mr John SheahanQC, recommended (in Annexure T, 424 at [27]) that‘[t]he Commission should recommend reform of theCorporations Act so as to restrict the application of thelimited liability principle as regards liability for damagesfor personal injury or death caused by a company thatis part of a corporate group, confining the benefit oflimited liability to members of the ultimate holdingcompany’.7

Not surprisingly, Counsel for James Hardie arguedagainst such a solution (Allens Arthur Robinson2004). It warned of ‘a high likelihood of a broad,heated and extended debate’, as well as ‘substantialconstitutional and/or other legal issues’. In terms ofreforming the principle of limited liability, Counsel’ssubmission referred to the earlier discussion of theissue by CASAC (Companies and Securities AdvisoryCommittee 2000), Counsel stressing at [5.3.2] ‘thenegative effects of the imposition of unequivocal liabilityon parent companies on the sustainability, vitality andcompetitiveness of Australian industry on a regionaland global scale. . . . Apportioning liability to the parentcompany would undermine the principle of diversityand undermine the incentive for risk taking andentrepreneurial activity’.

This article examines the liability of parent corpora-tions within company groups in Australia, to determinewhether the law needs to be reformed. It begins withan overview of the theory behind limited liability, thereasons for maintaining limited liability and the veilof incorporation, and situations in which piercing theveil is arguably justified. It then considers whether theveil should be pierced to impose liability on parentcompanies for the debts of its subsidiary, whetherarising from contract, tort or some other legal basis.It makes the case that fault, defined to encompass theunique circumstances of corporate groups, should bethe basis of liability, and it looks at examples of veilpiercing laws overseas to determine whether any ofthem might provide an appropriate template for liability.The following section analyses these examples, considersrecent Australian initiatives and makes suggestions forreform, with the final section concluding.

Limited Liability, the Corporate Veil andJustifications for Piercing

This section examines the reasons for the shareholderlimited liability rule, explains the concept of thecorporate veil obscuring those who are behind thecompany, and looks at some factors and circumstancesthat arguably justify the piercing of the corporate veil.It shows that while limited liability is a key elementin the mechanism that encourages incorporation,liability properly should attach to those who abuse thecorporate form in some way. These include directorsand controllers of closely held corporations, and theirliability will be used as a template for parent companyliability in the sections that follow.

Limited liability is one of the default rules makingup the standard form contract that is corporate law.The aim of a set of default, or ‘off the shelf’, rulesis to lower the cost of transacting (Easterbrook andFischel 1989: 1444). Default rules save firms the cost ofnegotiating and inserting terms into each of the contractsthey form (Whincop 1999: 28). They aim to achievea balance between the objective of shareholder wealthmaximisation and the protection of those adverselyaffected by the activities of the corporation. However,being default rules, they can be overcome by expresscontract terms to the contrary. For example, a personalguarantee given by a shareholder overcomes the defaultrule of limited liability.

Despite the possibility that limited liability mighttempt shareholders to invest in projects with unaccept-ably high risk, externalising some of the risk of lossto creditors, it is the ‘majoritarian default’ (Bainbridge2001: 486, Korokbin 1998: 614, Scott 1990). This appearsto be because the difficulties for shareholders withinan unlimited liability regime exceed the difficulties for

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creditors within a limited liability regime. Shareholdersfacing unlimited liability would be concerned about therisk of losing their personal assets in the event of non-payment of a debt by the company, disproportionateto the return on their investment. To overcome thisconcern, shareholders would need to monitor thecompany’s behaviour, for example by becoming involvedin its management. While this is achievable for smallcompanies, it would be unworkable in large enterprises.Shareholders would therefore limit their investmentsto a small number of companies to reduce the riskof loss. This would effectively restrict investors’ abilityto reduce their risk through the diversification of theirportfolio of investments, driving up their required rateof return.8 The economy would suffer from a lack ofinvestment, in particular in those industries with aninherently high degree of risk. Share trading wouldalso suffer, as incoming investors would need to makesure they are investing in an entity with an acceptablerisk profile, adequate capitalisation and well-resourcedfellow shareholders. This is in contrast to limited liability,where the potential amount of each shareholder’s loss isfinite and known, giving the shares a stable price andaiding the transferability of shares.9

Creditors dealing with a limited liability regime areconsidered to be the ‘cheapest cost avoider’ because oftheir assumed capacity to protect most cheaply againstthe risk of loss at the time of making the contract(Bainbridge 2001: 501–2). This includes chargingtheir customers more for their goods, to offset theoccasional loss, charging interest on unpaid amounts,and diversifying away the risk of loss by trading withmany companies (Wishart 1991: 336). Creditors witha strong bargaining position can also seek security ina variety of ways. These include devices such as loancovenants, restricting the company’s ability to sell orfurther pledge its assets, security over the corporation’smajor assets, retention of title clauses or personalguarantees from the directors or shareholders. In reality,however, there are many impediments to the ability ofcreditors to self-protect under a limited liability regime,including a lack of full or timely information about therisk attaching to the investment or the debtor company’sfinancial position (Gordon and Kornhauser 1985: 770).Some creditors lack the bargaining power to charge apremium to compensate for risk, or lack the knowledgeand expertise to make accurate assessments of that risk inorder to calculate an appropriate premium. Competitionand market conditions can also make some creditorsunable to bargain for compensation for the risksthey run.

Nonetheless, it is only in extreme circumstances,noted below, that Australian courts are willing to piercethe corporate veil.10 While the phenomenon is morecommon in the United States, Easterbrook and Fischelhave famously commented that ‘“[p]iercing” seems

to happen freakishly. Like lightning, it is rare, severeand unprincipled’ (Easterbook and Fischel 1985: 89).11

However, there is a unifying theme underlying theseexamples of veil piercing. It is that some or all ofthe elements used to justify limited liability and theveil of incorporation are not present.12 For example,there may be some action on the part of the companywhich is deemed unacceptable, caused by the company’scontrollers who are then called to personal account.Alternatively, there may be a lack of ability for thecreditors to self-protect ex ante against the risk ofloss. In these circumstances, the balance between theobjective of shareholder wealth maximisation and theprotection of those adversely affected by the activitiesof the corporation, noted above, arguably tips back infavour of the creditors, justifying the piercing of thecorporate veil.

It is well accepted that a company’s directors maybe liable for their actions as directors.13 While somecourts and commentators conflate this liability with veilpiercing, it is more properly an example of liability forpersonal wrongdoing, which can be applied equally tothe behaviour of controlling shareholders or of a parentcompany. The wrongdoing can be through their ownactions and decisions, or through the actions of otherswho were subject to the control of the directors, wherethe law considers there was some culpability in the failureto exercise that control.

The reasons identified above for maintaining limitedliability and the corporate veil are not present whenconsidering the liability of directors. While directors risklosing their own assets if personal liability is imposed,they have control over the company in a way thatindividual shareholders generally do not. They are ableto monitor the actions of their fellow directors to assessthat only appropriate risks are taken. They are only liablewhere there is some wrongdoing on their part or lackof appropriate supervision or control, and not simplybecause there is a loss by a creditor. Diversification asa means of reducing risk is therefore not required. Theissue of transferability of shares is not relevant. Giventhat these usual shareholder justifications for limitedliability are absent, it is proper that liability is imposedon corporate agents such as directors in circumstancesspecified by the law.

In the case of closely held companies with one ortwo shareholders, the issue of imposing liability onshareholders may appear merely theoretical – if theshareholders are also the directors, as noted above,there are a number of established pathways to makethe wrongdoers liable in their capacity as director.However, where some of the shareholders of closelyheld companies are not directors, veil piercing for thoseshareholders becomes relevant. There are a number ofbases for liability here. The first relates to the behaviourof management, supported by these shareholders.

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Management of closely held companies is likely to engagein inappropriate behaviour because of limited liability.Lacking the reputational incentives that inhibit the risktaking of controllers of major corporations, these smallenterprises may take excessive risks to the detriment ofthe company’s creditors. If insolvency and the likelihoodof losing their shareholdings loom, risky behaviourbecomes more, rather than less probable: the gain fromrisk taking accrues to the shareholders but the loss willfall on the creditors (Easterbrook and Fischel 1991: 55,Bainbridge 2001: 501).

Second, the claim that shareholders need limitedliability in order to encourage them to invest is absent.14

Third, shareholders can readily take part in managementor monitor the company’s affairs, reducing the needto diversify shareholdings. Finally, the shares are notpublicly traded, obviating the need for a stable shareprice, which derives from the uniform risk inherent inlimited liability.

In any event, banks and other major creditorsfrequently demand a voluntary contractual ‘piercing ofthe veil’ for closely held companies, through companycontrollers giving personal guarantees (Bainbridge 2001:501–4). So while there are multiple reasons for managingshareholders of closely held corporations not to enjoylimited liability, it is difficult to impose liability onthese parties because of the problem of where to drawthe line (Halpern et al. 1980: 148, Bainbridge 2001:501). Any attempt to legislate for a ‘bright line’ rule15

for liability, which cuts out at a certain number ofshareholders, simply encourages companies to add onemore shareholder to avoid the rule’s application.

In the case of directors and shareholders of closelyheld companies, piercing the corporate veil is justifiedbecause of the control exercised by these parties overthe company’s activities and the lack of the ‘typical’shareholder reasons for limited liability, outlined earlier.The justifications for piercing the corporate veil forthe benefit of tort victims of companies, on the otherhand, is based on their inability to self-protect ex anteagainst the risk of non-payment, as a contract creditormight, through diversification, charging for the riskor obtaining security. Errant directors who cause theplaintiff ’s loss through their own negligence can, ofcourse, be sued in tort, although their status as thecompany’s ‘directing mind and will’ and the attributionof their actions to the company for the purpose offinding the company liable in tort has led to considerableconfusion by courts in imposing liability on the directorsthemselves.16 Similar reasons can be found for makingcontrolling shareholders of companies liable in tort,where their own actions have led to the damage sufferedby the victim.

However, some academics have suggested that,regardless of issues of control or personal fault, asopposed to corporate fault, the corporate veil ought to

be pierced on shareholders for the benefit of corporatetort victims. A range of reasons have been offered.Because of their involuntary nature, tort creditors havenot agreed to the ‘majoritarian’ default term of limitedliability (Millon 2006: 6). Millon points out that thesocial cost caused by an enterprise’s tortious activity, withasbestos manufacture a prominent Australian example,may well exceed the economic benefits brought aboutby creation of employment, investment returns, andgoods and services for customers (Millon 2006: 8).Hansmann and Kraakman argue that limited liabilitycreates perverse incentives – to spend too little onaccident prevention and to invest too much in hazardousindustries (Hansmann and Kraakman 1991:1882–3).They concede that unlimited liability could encouragea number of liability evasion measures: debt rather thanequity financing; the premature liquidation of firmswhich may face ‘long-tail’ tort liabilities; and the disposalof personal assets to make the shareholder judge-ment proof (Hansmann and Kraakman 1991:1884–6,1909–16).

However, they consider that limited liability alreadyprovides incentives to conduct business throughunder-capitalised companies, and unlimited liabilitywould give shareholders the necessary incentive toobtain appropriate levels of insurance (Hansmann andKraakman 1991: 1888). An element of fault, therefore,would be the basis of liability, but the fault would relateto the way in which the company was set up and run,rather than specific to the actual tort committed bythe company. Imposing unlimited liability for corporatetorts on shareholders of all sizes of firms would also avoidthe ‘line drawing’ problem and remove incentives toartificially configure the firm’s structure (Hansmann andKraakman 1991:1888). It is this notion of fault – under-capitalisation of a subsidiary, inadequate insurance,and value reducing behaviour through intra-groupcontractual arrangements – that will be argued as thebasis for piercing the corporate veil on parent companiesin corporate groups.

Piercing the Corporate Veil on CorporateGroups17

The preceding section outlined justifications for limitedliability and circumstances in which some argue thatthe corporate veil should be lifted. By analogy with thosecircumstances, this section considers reasons for piercingthe corporate veil on parent companies of wholly-ownedsubsidiaries.18 It should be noted from the outset that theAustralian cases that have grappled with piercing in thecorporate group context have upheld the sanctity of thecorporate veil.19 While some judges have lamented theabuse of the group structure to defeat claims,20 courtshave based their decisions on the generally unassailable

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nature of limited liability. As noted in the previoussection, veil piercing in Australia is limited to quiteextreme circumstances. Nonetheless, it is the contentionof this article that the corporate group situation shouldbe distinguished from the treatment of individualsas shareholders. The principal argument is that thejustification for limited liability – namely that a regimeof unlimited liability would make shareholders unwillingto invest and diversify their investments because of theneed to monitor – is not present within corporate groups.Individual shareholders are the ones who need limitedliability to encourage wide investment: holding a parentcompany liable for the debts of its subsidiary does notimpose unlimited personal liability on these individuals(Easterbrook and Fischel 1991: 56, Blumberg 1985: 623).

A number of other reasons exist for piercing thecorporate veil on parent companies. One is the degreeof control of the subsidiary by the parent company,either through direct instructions or the nominationof its board, and the economic integration of the twoentities. This is analogous to the position of directors,and means that there are no increased information costsresulting from the legal independence of the subsidiary,as there is with individual shareholders (Blumberg 1985:623–4). As with closely held companies, there is nomarket for the subsidiary’s shares, negating the argumentthat unlimited liability affects the marketability of thoseshares (Blumberg 1985: 623–4).

Parent companies also stand to reap all the rewardsfrom the transactions undertaken by the subsidiary,21

further encouraging them to conduct dangerous andrisky activities through subsidiary companies withminimal capitalisation and a large amount of debt.Moreover, the ‘line drawing’ problem noted above doesnot occur with piercing the corporate veil on parentcompanies (Strasser 2004: 639).22 Collection costs forcreditors are the same when recovering from the parentcompany as from the subsidiary.23 In Australia at presentthe courts will only pierce the veil if the corporate formhas been used for fraud, to shield the parent companyfrom an existing legal obligation (the ‘sham/facade’basis), or for corporate groups if the level of controlis so complete that the parent company is deemed to bedirectly responsible for the activities of the subsidiary.24

However, as noted in the circumstances examined inthe preceding section, liability should not be imposedon parent companies as shareholders as a matter ofcourse. Some basis for liability must exist. Directors wereseen to be liable for their own improper or negligentactions while acting on behalf of the company. Veilpiercing was also advocated for controlling shareholdersof closely held companies where their risky behaviourputs creditors at a particular disadvantage. Fault, eitherpersonal in nature or through a failure to adequatelycontrol the actions of others in the company was alsoa factor in the arguments supporting veil piercing on

shareholders for their company’s tortious liability. Byanalogy, therefore, this section recommends a fault basisfor veil piercing on parent companies.

The fault of a shareholder is much easier to establishwhere that shareholder is a company in control ofanother company. In this context, fault should be definedin terms of what the parent company should have doneto ensure that the subsidiary acted properly and wasadequately capitalised and insured. Parent companieshave the power via their ability to vote in the board of asubsidiary to ensure that the subsidiary does not engagein excessively risky activities and carries an adequateamount of insurance to cover foreseeable risks.

Under-capitalisation is another area where the parentcompany could be considered to be at fault,25 and isa basis for veil piercing in the US. It is particularlyrelevant to creditors: where the transaction is too smallto justify full examination of the company’s finances;where the creditor lacks the bargaining power to demandfinancial information or to demand a personal guaranteefrom a director or majority shareholder; and in thecase of involuntary tort creditors and employees. Under-capitalisation could occur because of a lack of initialcapital or a reduction in the subsidiary’s assets overtime because of siphoning, commingling of assets of theparent company and subsidiary (Gervurtz 1997: 875), orexcessive dividends. Present legislation such as s. 588V ofthe Corporations Act , which imposes liability on parentcompanies for the insolvent trading of their subsidiaries,fails to address the core issues of under-capitalisation.It only applies to debts incurred by the subsidiarywhen there were reasonable grounds for suspecting itsinsolvency. It does not capture the prior transactionsof the solvent subsidiary that contributed to its laterinsolvency.

The adequacy of the capitalisation could be assessedin conjunction with the level of insurance held by thecompany: the greater the insurance available, the lesscapitalisation would be required. Adequacy might notrefer to whether the subsidiary has sufficient capital tocover a possible loss26 but rather there being enough ofthe parent company’s own money at stake to give theman incentive not to engage in excessively risky activities.27

Such a recommendation, however, is likely to meetsubstantial opposition. It appears to be widely acceptedthat the corporate group form will be used preciselyto quarantine the assets of the parent from the riskybehaviour of the subsidiary, without any considerationfor the harm to be suffered by the subsidiary’s creditors,especially its tort creditors. Indeed, the 2000 CASACReport on corporate groups, in its examination of the‘economic and commercial benefits’ from operating abusiness through a corporate group (CASAC 2000: 1.8),openly acknowledges the detriment likely to be sufferedby the creditors of subsidiary companies by noting asone of these benefits ‘lowering the risk of legal liability

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by confining high liability risks, including environmentaland consumer liability, to particular group companies,with a view to isolating the remaining groups assetsfrom this potential liability’ (CASAC 2000: 1.8). Despitethis discouraging finding, this section will now lookat two types of measures undertaken overseas thatpierce the corporate veil on parent companies, to seewhether either can, or should be, adapted for use inAustralia.

Equitable subordination

Equitable subordination occurs where the payment ofdebts owed by a company to shareholders is deferredbehind the payment of outside creditors. This can takeplace even though the debt is secured. While equitablesubordination does not extinguish the claim of thelender, in practical terms it may result in the lenderreceiving nothing once the claims of other creditors aremet. The aim of the doctrine of equitable subordinationis to deter the opportunistic use by controllingshareholders of their insider positions to prioritise theirown claims ahead of those of external creditors. Thisdoctrine may therefore be useful where solvent parentcompanies have used inadequately funded subsidiariesas vehicles for risky enterprises. Shareholders may useinformational advantages to the detriment of othercreditors, and give a misleading perception of thecompany’s capitalisation.

One of the disadvantages of equitable subordinationis that it may hinder the genuine efforts of shareholdersto save the subsidiary through the provision of new debtcapital. Where the subsidiary is facing severe financialdifficulties, these funds may be the only source available,as outside lenders decline to risk funds to a failing entitywith possibly few unencumbered assets.28 Shareholderloans also have the advantage of lower transaction coststhan outside loans (Skeel and Krause-Vilmar 2006: 280).However, the decision to extend loan capital, rather thanfurther equity, may well be intended to improve thecontrolling shareholders’ chances of recovering someof their investment should the company succumb toinsolvency (Cahn 2006: 288). This arguably justifies thesubordination of these claims and the clawing back ofamounts repaid pursuant to these loans. The two leadingjurisdictions to use equitable subordination are the USand Germany, although their laws differ in significantways.29

Australia has not adopted equitable subordinationexcept in its most limited form. There is provisionfor a creditor to subordinate its claim voluntarily, andthis could include the debts owed by subsidiaries toparent companies.30 In addition, debts owed to membersas members are subordinated behind those of othercreditors.31 As a result of this section, dividends declared

but not yet paid do not rank pari passu with theclaims of other creditors in a liquidation.32 However,the provisions do not apply to debt capital lent bymembers to the company. The question of subordinationof intra-group claims was considered by the CASACReport,33 and the Committee recommended againstits adoption, on the basis that it might ‘detrimentallyaffect the interests of creditors and/or shareholders ofthe parent company [and] discourage parent companiesfrom putting loan capital into their controlled entities’.34

This comment illustrates a frankly anti-creditor stanceon the part of CASAC. Discouraging parent companiesfrom putting loan capital into their subsidiaries isprecisely the purpose of equitable subordination. Theparent company’s aim in granting the loan is to maximisethe return on its equity investment in the subsidiary.35

It is not a bank in the business of making moneythrough loans. It provides the additional funds to thesubsidiary through debt for the very reason of avoidinglosses in its capacity as a shareholder. The lack of bonafides in extending debt capital rather than equity to thesubsidiary therefore arguably justifies the adoption ofequitable subordination to deal with abuse of limitedliability by parent companies.

Substantive consolidation, pooling and contributionorders

Another method of overcoming the corporate veilbetween parent and subsidiary companies is to ordereither that their assets be pooled upon the insolvencyof all of the companies in the group (pooling), or thata solvent group company be ordered to contribute tothe debts of an insolvent group company (contributionorders).

The principal reasons given for pooling are max-imising returns to creditors and facilitating corporaterescue.36 The assets and liabilities of companies withina group are aggregated, and creditors are paid fromthe common pool. Returns are maximised by makingavailable assets owned by other companies in the group,as well as by eliminating intra-group claims that mightrob creditors of individual companies of some or all oftheir recovery. Moreover, the cost saving resulting fromthe liquidator not having to trace extensive intra-grouptransactions and sort out considerable interminglingof assets flows back as increased creditor returns.Reorganisation on a consolidated basis can more easilybe achieved, for the benefit of both companies andcreditors, where the group companies have alreadysubstantially integrated their finances and operations.

In the US, American bankruptcy courts use the equitypowers provided in s. 105 of the Bankruptcy Code toorder substantive consolidation, as pooling is knownthere,37 but the substantive law is based on a body

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of case law that is not always consistent.38 Generally,all the companies to be consolidated are insolvent.39

In contrast, New Zealand provides one of the clearestexamples of comprehensive legislation40 to allow bothpooling of the affairs of an insolvent group of companies,as well as contribution orders to be made against solventcompanies in aid of related insolvent companies. Thelegislation provides wide powers to the courts to orderrelated companies to contribute to the payment of arelated company’s debts or for their liquidation to takeplace as though they were one company, where it isjust and equitable to do so.41 This is determined inaccordance with specified factors.42

However, despite the breadth of the legislation,New Zealand courts have made relatively few poolingorders.43 Another country with comprehensive poolingand contribution order provisions is the Republicof Ireland.44 As in New Zealand, pooling is subjectto judicial discretion, with identical factors for thecourt’s consideration,45 although in the Irish legislation,the connection between the culpability of the relatedcompany and the demise of the insolvent company isexpressed in much stronger terms than its New Zealandequivalent.46

Analysis and Suggestions for Reform

This section analyses the international examples of veilpiercing law, considers recent Australian initiatives inrelation to pooling where all group companies areinsolvent and makes suggestions for reform.

It is clearly evident that a number of other countriesallow some form of veil piercing on parent companieswhere its conduct or where the corporate arrangementsit has put in place make it appropriate to do so.These will include where the subsidiary has been under-capitalised, where its affairs are intermingled with thoseof the parent company, or where there has been otherinequitable behaviour. In each case, the control of theparent company over the subsidiary is the foundationof the basis for liability. It will be recalled from thefirst section that Counsel for James Hardie, in rejectinga call for reform of the law, cautioned against ‘thenegative effects of the imposition of unequivocal liabilityon parent companies on the sustainability, vitality andcompetitiveness of Australian industry on a regionaland global scale’. This is a well-worn and somewhathollow threat, which appears to have the desiredeffect of discouraging Australian governments fromlegislating to increase parent company liability. The veilpiercing measures in some of the world’s most successfuleconomies – the US, Germany and the Republic ofIreland – shows that these laws, some of which havebeen in place for decades, have not had a negativeeffect on their economic growth. These economies have

undoubtedly suffered during the global financial crisisand recent Eurozone crisis, but they all experiencedhuge financial growth during the periods when theircorporations law imposed liability in various forms onparent companies for the debts of their subsidiaries.

Counsel also warned that ‘[a]pportioning liability tothe parent company would undermine the principle ofdiversity and undermine the incentive for risk takingand entrepreneurial activity’. Again, this is an emptythreat. All companies should take appropriate levelsof risk. If the shareholders judge their investment tobe at excessive risk, they will replace the board withthose more trustworthy. Parent companies should not beencouraged to take excessive levels of risk because theycan be safe in the knowledge that their own shareholdersare quarantined from the effect of this irresponsibility.Proper risk taking and entrepreneurship are not underthreat here. The question then becomes how excessiverisk taking can be deterred.

Equitable subordination might appear to be agenerous option for reaching parent company assets. Itdeals with subsidiaries that are underfunded in terms ofequity but operate instead with debt capital provided bythe parent company. In doing so, it tackles one of themajor concerns of the abuse of limited liability and thegroup structure. However, equitable subordination hasits drawbacks. It relies on the subsidiary owing debts tothe parent company. If the subsidiary is under-capitalisedwith equity, but is funded through debt capital providedby a third party, the doctrine has no benefit. It alsowill not deal with the payment of excessive dividendsby the subsidiary or the situation where the subsidiarybegan with adequate capital but this has been diminishedby value transfers.47 In other words, it is not a generalveil-piercing doctrine able to be utilised whenever thereis some degree of exploitation of the subsidiary at thehands of the parent company.

Pooling was also examined to see whether it wouldbe a useful device for the protection of subsidiarycompany creditors. Following a number of governmentenquiries,48 legislation was passed in Australia to makepooling available for insolvent group companies.49

Prior to the passage of the legislation, poolingwas, and remains, possible informally under variousforms of external administration,50 such schemes ofarrangement51 and voluntary administration.52 Despitethe variety of means available to achieve pooling in groupinsolvencies, there were difficulties in some cases inattaining the required court approval,53 which promptedcalls for a statutory pooling scheme. In 1988, the HarmerReport recommended that the New Zealand model ofliability be adopted.54 Instead, Australia followed theBritish wrongful trading model,55 by adding a provisionfor holding company liability for insolvent trading.56

Statutory provisions to expressly permit pooling wereagain suggested by the CASAC Report in 2000,57 which

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considered the New Zealand pooling legislation and theAmerican substantive consolidation law extensively. Noaction was taken by the legislature following this report.

In 2004, CAMAC58 recommended that legislation bepassed permitting pooling where all or some of the groupcompanies are insolvent.59 Finally in 2007, provisionswere inserted into the Corporations Act .60 They allowpooling of corporate group assets, where a number ofconditions is satisfied, including the fact that each ofthe companies in a group is being wound up. Thus,contrary to CAMAC’s recommendation, pooling ordersdo not assist creditors of insolvent companies where oneor more group companies remain solvent.61

Under the new provisions, intra-group claims areextinguished.62 Each company in the group is taken to bejointly and severally liable for each debt payable by, andeach claim against, each other company in the group.63

External secured creditors are excluded from claimingfrom the pool, unless they forfeit their security.64

The pooling process involves the liquidator making apooling determination, then seeking the approval ofeligible unsecured creditors.65 The vote need not beunanimous66 and the court can make a pooling orderwhere it is satisfied that it is just and equitable, even ifsome creditors object. 67

In making a pooling order, the court considers avariety of matters,68 including the extent to which themanagement, activities and business of the variouscompanies were intermingled, the conduct of companiesand their officers towards the creditors of other groupcompanies, the advantage and disadvantage to creditors,and the culpability of companies and their officers inthe windings up. Courts can also consider any otherrelevant matter.69 While the new legislation will havethe effect of simplifying and clarifying the right to poolgroup company assets where all companies in the groupare insolvent, nonetheless it does nothing to assist thecreditors of an insolvent subsidiary of a solvent parentcompany. Indeed, while it may benefit the creditorsof some insolvent group companies to have access tofunds pooled from other members of the group, it maydisadvantage them if their own debtor company was theone holding more assets.

Arguably the newly introduced Australian versionof pooling is better than the American substantiveconsolidation, which suffers from the common lawdifferences of opinion. Australia’s legislation largelyfollows the New Zealand and Irish models on pooling,and therefore is likely to be ‘safe’. It is unlikely to causelarge amounts of litigation or a major upheaval amongstparent companies fearing that limited liability has beenlost. At the same time, it does nothing to hold a solventparent company to account for its mistreatment of itssubsidiary.

The provisions examined by this article that aremost beneficial to subsidiary companies’ creditors

are the New Zealand and Irish contribution orderpowers. By allowing courts to order that solvent parentcompanies are required to contribute to the debts oftheir insolvent subsidiaries where it is just and equitable,the contribution order opens up the possibility of aremedy for creditors in gaining access to parent companyassets. The discretion afforded to the court should ensurethat limited liability is only overcome in appropriatecircumstances.

However, it is of concern that the provision is littleutilised in New Zealand.70 Milman also comments that‘there is no evidence of [the pooling and contributionorder] provisions having been invoked in Ireland sincetheir introduction and it is difficult to judge their impact’(Milman 1999: 230). Perhaps the provision appears toogenerous and appears to go against judges’ long-heldbelief in the sanctity of limited liability and separatelegal entity for corporations. Perhaps the concern forthe parent company’s creditors blinds the court to theclaims of the subsidiary’s creditors. What is needed isan approach that is broad enough to be beneficial forsubsidiary creditors, but not so wide that courts are timidin using their powers.

A rebuttable presumption – where the parentcompany is liable unless it can produce evidenceof its lack of fault – might be useful in achievingsuch a balance.71 The parent company could escapeliability by establishing that the subsidiary had beenproperly capitalised and insured, and that the parentcompany had not misused its domination of the sub-sidiary to unduly benefit itself, or cause detriment to thesubsidiary.72 Capitalisation and insurance levels woulddepend on the company’s particular circumstances,and would interrelate. They would not be specifiedin the legislation.73 Fear of liability should ensurethat companies over-provide rather than under-provide,avoiding the difficulties of trying to set appropriate levelsin legislation.

This article argues that fault on the part of the parentcompany should be the basis on which the veil is pierced.A clear definition of parent company fault might bepreferable to the more vague ‘just and equitable’ teststhat underlie both pooling and equitable subordination.Legislation could be enacted74 to impose on parentcompanies, rather than their directors, the equivalentof directors’ duties – in particular the duties of care anddiligence75 and of good faith.76 This would build onthe presently available, but significantly under-utilised,liability of parent companies as shadow directors.77

Under the Corporations Act , the term ‘director’ isdefined to include a person in accordance with whoseinstructions or wishes the directors of a company areaccustomed to act.78 Therefore, a parent company incontrol of a subsidiary can be considered to be a shadowdirector of that subsidiary and therefore subject todirectors’ duties.79 For this reason, the changes would not

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result in significant upheaval to the substance of the law.Rather, the suggested change would act as a signallingmechanism to parent companies that their control andtheir wrongdoing through that control would result in astatutory lifting of the veil.

The idea of fault as the basis of parent companyliability and of comprehensive legislation in Australiato relax the separate legal entity principle for corporategroups is not new. The Harmer Report, which precededthe introduction of insolvent trading liability by theinsertion of s. 588V, was in favour of piercing the veilwhere the court was satisfied that it was just.80 Threespecific criteria to which the court should have regardin making this determination were specified: ‘the extentto the company which the related company took partin the management of the company; the conduct of therelated company towards the creditors of the [defaulting]company; and the extent to which the circumstancesthat gave rise to the winding up of the company areattributable to the actions of the related company.’81 TheReport made it clear that ‘[i]t should not, of course, besufficient that creditors have merely relied on the assetsof the related company in their decision to deal withthe company.’82 However, this recommendation was notadopted.

The certainty provided by enacting legislation wouldsend a crucial message of deterrence to controllers ofparent companies who might choose to use the corporategroup form to engage in excessive risk taking. In doingso, it would provide valuable protection particularly totort claimants. At the same time, the flexibility affordedby a section equivalent to directors’ duties ensuresthat technicalities in highly specific legislation are notexploited.

Conclusion

This article has considered the liability of parentcorporations within company groups. It began with anexamination of the theory behind limited liability andmaintaining the veil of incorporation. Despite creditorsfacing problems with the limited liability of shareholders,as an issue of balance, it remains the majoritarian default.However, scholars and courts, particularly in the USand some international legislatures, have shown supportfor veil piercing, where some or all of the elementsthat are used to justify limited liability and the veil ofincorporation are not present. This occurs particularlywhere there is effective control of the operations of thecompany by the directors or the shareholders. Removalof limited liability is meant to encourage more acceptablelevels of risk taking or protection strategies, such asadequate capitalisation or insurance.

Australia has passed legislation allowing the poolingof the assets of insolvent companies within a group,

but this does nothing to deter parent companies andother solvent subsidiaries from using an impoverished‘runt of the litter’ for excessively risky enterprises, then‘prosper[ing] to the joy of the shareholders without anyliability for the debts of the insolvent subsidiary’.83

The New Zealand and Irish contribution provisionswould appear to be a suitable way of deterring this kind ofbehaviour, but their lack of use is worrying. An automaticliability provision would overcome a possible reluctanceof courts to utilise these powers, with a defence availableto parent companies which can show that they werenot responsible for the inability of the subsidiary tomeet its financial commitments. In addition, equitablesubordination would be a useful addition to the rangeof remedies available to liquidators. As noted, however,it has its limitations.

It was therefore suggested that legislation be passed touse the parent company’s fault as a basis for liability. Thedirectors’ fiduciary duty to act with care and diligenceand in good faith was suggested as the model for suchlegislation. This would build on and codify the presentliability of parent companies as shadow directors. Whatwould amount to a breach of the duty would be leftfor courts to decide, as they do at present in the caseof directors’ breaches of duty. However, a number ofareas of likely breach were suggested, drawn from theliterature concerning the factors that underpin Americanveil piercing. These include under-capitalisation, valuetransfers away from the subsidiary to the parent companyor lack of adequate insurance of the subsidiary.

Helen Anderson is at the University of Melbourne. She isgrateful for the comments of two anonymous referees.

Notes

1 Corporate groups were recognised by courts by the 1860s in theUnited Kingdom (Blumberg 1986).

2 See for example, Gelb 1982: 1–22; Ottolenghi 1990: 338–53;Hansmann and Kraakman 1991: 1879–1934; Thompson 1991:1036–74; Thompson 1994: 1–42; Gevurtz 1997: 853–908; Payne1997: 284–90; Thompson 1998: 379–96; Cohen 1998: 427–500;Bainbridge 2001: 479–536; Neyers 2000: 173–240; Strasser 2004:637–66; Thompson 2005: 619–36.

3 Corporations Act 2001 (Clwth), Div 8, Part 5.6.4 Corporations Act 2001 (Clwth), s. 588V.5 Corporations Act 2001 (Clwth), s. 516.6 The James Hardie case is not the focus of this article. For further

discussion, see Spender 2003: 223; Spender 2005: 280; Dunn 2005:15; O’Meally 2007: 1209.

7 In his final report, Commissioner Jackson (2004: 30.67) statedthat the issues raised in the Special Commission demonstratedthat ‘there are significant deficiencies in Australian corporate law’.

8 This is a summary and simplification of the work of a largenumber of prominent ‘law and economics’ scholars. A few ofthe leading publications in this area are Posner (1976: 499–526);Jensen and Meckling (1976: 305–60); Landers (1975: 589–652);Manne (1967: 259–84); Halpern, Trebilcock and Turnbull (1980:117–50); Easterbrook and Fischel (1991: 41). The arguments arenicely summarised by Blumberg (1986: 611–23).

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9 These arguments are well considered in Halpern et al. (1980).10 See note 19 and accompanying text.11 Courts have considered fraud and misrepresentation, situations

where the subsidiary has acted as an agent, lack of separationbetween the companies, and under-capitalisation of thesubsidiary. These are a combination of acts of acknowledgedwrongdoing and legal, if improper, behaviours, and some amountto no more than control itself.

12 Easterbrook and Fischel (1991: 55) make a similar point:‘[Piercing] cases may be understood, at least roughly, asattempts to balance the benefits of limited liability against thecosts’.

13 Examples include Corporations Act 2001 (Cwlth) s. 588G(1)), s.596AB(1)), and a multitude of actions specified as civil penaltyprovisions under Part 9.4B of the Corporations Act 2001 (Cwlth).Others outside of corporate law include s. 75B of the TradePractices Act 1974 (Cwlth); Environment Protection Act 1970 (Vic),s. 66B(1); Occupational Health and Safety Act 2004 (Vic), s. 144.

14 See for example, Freedman 2000: 317, 319–20, 327–35;Easterbrook and Fischel 1991: 55; Bainbridge 2001: 500–1; Millon2006: 6.

15 In the US, where veil piercing on closely held corporationsis done by courts rather than through statute, the line-drawing problem becomes evident. Thompson (1991: 1054–5)reports that ‘[a]mong close corporations, those with only oneshareholder were pierced in almost 50% of the cases; for twoor three shareholder corporations, the percentage dropped tojust over 46%, and for close corporations with more than threeshareholders, the percentage dropped to about 35%’. See also,Thompson 1994: 9. This is confirmed in Australia by Ramsay andNoakes (2001: 263).

16 See further, Anderson (2004) and cases and commentators citedtherein; Payne 1997; Watson and Willekes 2001.

17 The meaning of the expression ‘corporate group’ is considered atlength in van der Laan and Dean (2010: 122–3).

18 The 2010 study by van der Laan and Dean (2010: 126) found that‘the vast majority (over 91%) of controlled entities are whollyowned’. This confirmed the finding of the study by Ramsay andStapledon (1998: 3), which found 90% of controlled entities to bewholly owned.

19 See for example, Industrial Equity Ltd v Blackburn (1977) 137 CLR567; Walker v Wimborne (1976) 137 CLR 1; Briggs v James Hardie &Company Pty Ltd (1989) 16 NSWLR 549; Pioneer Concrete Servicesv Yelnah Pty Ltd (1986) 5 NSWLR 254, 264; Qintex AustraliaFinance Ltd v Schroeders Australia Ltd (1990) 3 ACSR 267. InEquiticorp v Bank of New Zealand (1993) 32 NSWLR 50, 147–8,the court found no breach of fiduciary duty where actions forthe benefit of the corporate group as a whole also benefitted theindividual company. See further Ramsay 1994: 520; Ramsay andNoakes 2001: 250; Ramsay and Stapledon 1998.

20 For example, Rogers AJA in Briggs v James Hardie & Company PtyLtd (1989) 16 NSWLR 549.

21 Thompson (1994: 4–5) makes the point that shareholders getthe residual gain from transactions undertaken on their behalf;directors enjoy control of the decision making. In the case ofparent companies, they have both.

22 ‘The parent is not an independent investor. Whatever thecorporate formalities chosen, the parent typically has very realcontrol over the operations and decisions of the subsidiaryand the extent to which the parent exercises that controlis based on business strategy for the enterprise rather thanmeaningful separation of the legally independent corporateentities. The various companies within the corporate group arereally fragments that collectively conduct the integrated enterpriseunder the coordination of the parent. Within corporate groups,many of the contemporary economic efficiency justificationsfor limited liability do not apply, and neither should the rules

for applying that liability or determining its outer boundary’.(Strasser 2004: 638).

23 This is in contrast to recovery from a large number of individualshareholders, where the cost of taking action against them singlymay exceed the benefit (Thompson 1994: 4, 20).

24 Kluwer (2004: 766) refers to the Report of the CompaniesSecurities Advisory Committee (CASAC 2000: 1.48).

25 While this is a recognised ground of veil piercing in the US, it hasnot been accepted by Australian courts (CASAC 2000: 1.49).

26 Millon (2006: 28) notes that ‘If the point of the court’s relianceon the undercapitalization idea is that the shareholders areexpected not only to contribute initially but also to maintainat all times a particular net worth in the corporation for thebenefit of corporate creditors, such a requirement would not differfundamentally from a rule of unlimited liability. Either way, theshareholders would function as personal guarantors of corporateobligations. The cost of such a requirement to the shareholderscould be prohibitively high, and the benefit of limited liabilityas a risk reallocation device would be lost. The threat of veil-piercing should not amount to a requirement that all corporationsmaintain a shareholder-financed insurance fund’.

27 Easterbrook and Fischel (1991: 59) recommend that ‘[t]hefirm should have a duty to notify the creditor of any unusualcapitalization. It is cheaper for the firm (which has the bestinformation about its capital structure) to notify creditorsin the unusual case than for creditors to investigate in allcases. . . . Allowing creditors to look beyond the assets of theundercapitalized corporate debtor provides the debtor with theincentive to disclose the situation at the time of the transaction.The creditor can then decide not to transact or charge increasedcompensation for the increased risk. Alternatively, the creditorcould ask for pre-payment, personal guarantees or other security.Under any of these alternatives, the debtor will have to pay forengaging in risky activities and thus will have better incentives tobalance social benefits and costs’.

28 Skeel and Krause-Vilmar (2006: 280) observe that shareholderloans have long been an essential source of finance for small- andmedium-sized German companies.

29 The US law was codified in 1978, and it allows a court tosubordinate the claim or interest of a creditor, being a shareholderor affiliated entity, who has acted inequitably (Bankruptcy Act1978, 11 USC § 510 (1978)). In contrast, German law doesnot require control by the shareholder or abuse of their insiderposition to unfairly extract value from the company; rather, theloan needed to be made when the company was in a state offinancial ‘crisis’, as defined by statute. Other differences betweenthe laws of the two countries exist as well.

30 Corporations Act 2001 (Cwlth), s. 563C (1): ‘Nothing in thisDivision renders a debt subordination by a creditor of a companyunlawful or unenforceable, except so far as the debt subordinationwould disadvantage any creditor of the company who was not aparty to, or otherwise concerned in, the debt subordination’.

31 Corporations Act 2001 (Cwlth), s. 563A.32 Similar postponement applies under the Corporations Act 2001

(Cwlth), s. 563AA in relation to proceeds of share buybacks.33 CASAC 2000: 6.99–6.112.34 CASAC 2000: 6.110.35 Landers 1975: 599. Landers’ views did not go unchallenged.

Posner replied immediately (Posner 1976), sparking an instantrejoinder (Landers 1975). Even 30 years later, these views aredebated when the issue of making parent company resourcesavailable to meet the claims of subsidiaries is raised: See forexample Widen 2007: 262–7.

36 Widen 2007; Baird 2005. See also, Baird 2006.37 11 USC § 105(a) provides that ‘[t]he court may issue any order,

process, or judgment that is necessary or appropriate to carry outthe provisions of this title’.

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38 See Drabkin v Midland-Ross Corp (in re Auto-Train Corp) 810 F.2d270, 276 (D.C. Cir. 1987), cf Union Savings Bank v Augie/RestivoBaking Company Ltd 860 F.2d 515, 518–9 (2d Cir. 1988); In reOwens Corning 419 F.3d 195 (3d Cir. 2005). Baird (2005: 15)comments that ‘[s]ubstantive consolidation lacks the solidfoundation one usually expects of doctrines so firmly embeddedin day-to-day practice. The US Supreme Court has never formallyembraced the concept’.

39 However, in some circumstances, it is possible for substantiveconsolidation to take place between both solvent and insolventcompanies. See in re 1438 Meridian Place, NW, Inc, 15 Bankr.89 (Bankr DDC 1981); in re Crabtree, 39 Bankr. 718 (Bankr. EDTenn. 1984).

40 Sections 315A, 315B and 315C of the Companies Amendment Act1980 (NZ), which amended the Companies Act 1955 (NZ).

41 Companies Act 1993 (NZ), s. 271.42 The factors are specified under Companies Act 1993 (NZ), s. 272.

Subsection 1 deals with contribution orders under s. 271(1)(a)and subsection 2 deals with pooling orders under s. 271(1)(b). Thefactors for the latter are the extent to which the related companytook part in the management of the company in liquidation;the conduct of the related company towards the creditors of thecompany in liquidation; the extent to which the circumstancesthat gave rise to the liquidation of the company are attributableto the actions of the related company; and such other mattersas the Court thinks fit. An additional factor is specified forpooling, namely ‘[t]he extent to which the businesses of thecompanies have been combined’ (Companies Act 1993 (NZ),s. 272(2)(d)).

43 CASAC 2000: 6.64.44 See Companies Act 1990 (Ireland), ss. 140 (contribution), 141

(pooling).45 The only difference is that s. 141(4)(d) speaks of the companies’

businesses being ‘intermingled’ (the American term), rather than‘combined’.

46 Note that under the New Zealand legislation, the relatedcompany’s contribution to the insolvent company’s liquidation issimply one factor to which the court must have regard in makingits assessment that the order is just and equitable (Companies Act1993 (NZ), s. 272(1)(c)).

47 This occurs where the subsidiary sells goods or services to theparent company at an undervalue, or buys goods or services fromthe parent company at an overvalue.

48 These include enquiries by the Corporations and MarketsAdvisory Committee (see CAMAC 1998; CAMAC 2000; CAMAC2004), by the Parliamentary Joint Committee on Corporationsand Financial Services (2004), and by the Special Commission ofInquiry into the Medical Research and Compensation Foundation(the James Hardie Special Commission of Inquiry) (2004).

49 Corporations Amendment (Insolvency) Act 2007 (Cwlth), Part 4.50 These were outlined by Barrett J in Tayeh v De Vries re The Black

Stump Enterprises Pty Ltd [2005] NSWSC 475. See also Harris:2007.

51 Corporations Act 2001 (Cwlth), Part 5.1.52 Corporations Act 2001 (Cwlth), Part 5.3A.53 Courts have been concerned about the position of dissenting

creditors and distributions which are not pari passu. See Harris2007: 91.

54 Harmer Report, vol 1, 1988: paras 336, 857; Harmer Report, vol2, 1988: D13, PR9. See further, Farrar 2001: 240.

55 Insolvency Act 1986 (UK), s. 214.56 Corporations Act 2001 (Cwlth), s. 588V.57 CASAC 2000: chapter 6 and Recommendation 22, para. 6.85.58 The Corporations and Markets Advisory Committee (CAMAC)

is the successor to CASAC.59 CAMAC 2004: recommendations 40 and 41. The reasons given

for Recommendation 41 were as follows: ‘There may be instances

where the affairs of a solvent group company are so intertwinedwith those of other group companies that are, or are likely tobe, insolvent that it may be beneficial to pool all of them in VA.Examples would be where the solvent group company: dependson commercial arrangements between one of the insolvent groupcompanies and outsiders; relies on information technology orother logistical support; or relies on financial support, from aninsolvent group company. The pooling procedure should be thesame as for insolvent companies participating in a group pool(6.4.3, below), except that the directors of the solvent company,rather than the administrator, should have the discretion toresolve that the company join the pool’ (CAMAC 2004: 6.4.2).

60 The passing of the Corporations Amendment (Insolvency) Act 2007(Cwlth) included Division 8 into Part 5.6 of the Corporations Act2001 (Cwlth). See further Dickfos et al. 2007.

61 Corporations Act 2001 (Cwlth), s. 571. See further Ex-planatory Memorandum to Part 4 Facilitating Pooling inExternal Administration, Corporations Amendment (Insolvency)Bill 2007.

62 Corporations Act 2001 (Cwlth), s. 579Q. Creditors who arecompanies in the pooled group are excluded from the definitionof an eligible unsecured creditor. See also ss. 571(2)(b), (c).

63 Corporations Act 2001 (Cwlth), s. 571(2).64 Corporations Act 2001 (Cwlth), s. 571(6)(b).65 Corporations Act 2001 (Cwlth), s. 574.66 Corporations Act 2001 (Cwlth), s. 577.67 Corporations Act 2001 (Cwlth), s. 579E.68 Corporations Act 2001 (Cwlth), s. 579E(12).69 Corporations Act 2001 (Cwlth), s. 579E(12)(f).70 See Farrar 1998.71 Milman (1999: 232) stated: ‘A significant improvement might

be . . . a rebuttable presumption . . . to the effect that parents wereto be held liable for subsidiary obligations unless they couldestablish that there had been no interference in the businessmanagement of the subsidiary and that the subsidiary had notbeen able to obtain any credit by virtue of its relationship with theparent. By reversing the burden of proof in this way the policy ofthe law would be directed very much towards enterprise liabilityand would reflect the realities of the situation’.

72 Section 588FB of the Corporations Act 2001 (Cwlth), which dealswith liability for uncommercial transactions, could be used as amodel here.

73 See Gevurtz (1997: 884) who states: ‘The repeal of those[minimum capitalisation] provisions simply recognizes thefutility of attempting to attack the adequate capital questionthrough across-the-board legislative requirements. Case-by-casejudicial evaluation through piercing decisions is a differentmatter’.

74 Elements from ss. 9, 180 and 588V of the Corporations Act 2001(Cwlth) could be used to craft such a provision dealing with afailure to use care and diligence. One possibility is the following:A corporation contravenes this section if:(a) the corporation is the holding company of a company; and(b) at that time, the directors of the company are accustomed toact in accordance with the corporation’s instructions or wishes;and(c) having regard to the nature and extent of the corporation’scontrol over the company’s affairs and to any other relevantcircumstances, the corporation, or one or more of its directors,fails to exercise their powers or discharge their duties as a shadowdirector of the company with the degree of care and diligence thata reasonable person would exercise if they:i. were a director of the company in the company’s circumstances;andii. occupied the office held by, and had the same responsibilitieswithin the corporation as, the director.

75 Corporations Act 2001 (Cwlth), s. 180.

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76 Corporations Act 2001 (Cwlth), s. 181.77 for example, Standard Chartered Bank of Australia Ltd v Antico

(1995) 131 ALR 1.78 Corporations Act 2001 (Cwlth), s. 9.79 These are contained in Corporations Act 2001 (Cwlth), Part 2D.1,

Div 1 and elsewhere, including the duty to prevent insolventtrading under s. 588G.

80 Harmer Report, vol 1, 1988: para. 335.81 Harmer Report, vol 1, 1988: para. 335. See the draft legislation in

the Harmer Report, vol 2 (1988: D13).82 Harmer Report, vol 1, 1988: para. 335.83 Re Southard & Co Ltd [1979] 1 WLR 1198, 1208.

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