Holding Company Liability for Debts of Its Subsidiaries

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Bond Law Review
Volume 10 | Issue 2 Article 6

12-1-1998

Holding Company Liability for Debts of its Subsidiaries: Corporate Governance Implications Damien Murphy

Follow this and additional works at: http://epublications.bond.edu.au/blr Recommended Citation Murphy, Damien (1998) "Holding Company Liability for Debts of its Subsidiaries: Corporate Governance Implications," Bond Law Review: Vol. 10: Iss. 2, Article 6. Available at: http://epublications.bond.edu.au/blr/vol10/iss2/6

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Holding Company Liability for Debts of its Subsidiaries: Corporate Governance Implications Abstract

[extract] This article will attempt to consider the corporate governance implications for groups of companies arising from an analysis of the circumstances in which a holding company may be liable for the debts and obligations of its subsidiaries. I consider this methodology is appropriate because it suggests restraints upon the management or control of a subsidiary by a holding company. If a holding company is responsible also for the liabilities incurred by a subsidiary, then we can expect that circumstance to result in careful consideration by the management or controllers of the holding company of that company’s relationship with the subsidiary and how, if at all, the holding company controls or manages the resources of the subsidiary. Keywords

holding companies, corporate governance, subsidiaries, liability, shadow directors

This article is available in Bond Law Review: http://epublications.bond.edu.au/blr/vol10/iss2/6

Murphy: Holding Company Liability for Debts of its Subsidiaries

HOLDING COMPANY LIABILITY FOR DEBTS OF ITS SUBSIDIARIES: CORPORATE GOVERNANCE IMPLICATIONS

By DAMIEN MURPHY, BEc (Hons), LLB, Monash University, LLM, Melbourne University, General Counsel, Wealth Management, National Bank Limited.

Introduction
Groups of companies are a modern fact of commercial life. It is common for large publicly listed Australian companies with substantial operations overseas to have literally hundreds of wholly-owned subsidiaries 1. From a commercial perspective this practice is so prevalent that it is unusual to question the practice or ask why large enterprises conduct their business in this way. But from a traditional legal perspective, each of these corporations is a separate legal person with its own board of directors (or equivalent with overseas subsidiaries) responsible for supervising the operations and affairs of that particular corporation. It is a principle of corporate governance2 that each of those boards should act in the best interests of that corporation as opposed to the interests of third parties or the group as a whole 3. Consequently, assuming the principles of corporate governance applied, there is no prima facie reason why the hundreds of subsidiary corporations in a corporate group should act in a co-ordinated manner at all, particularly if the relevant boards were acting in the best interests of each individual corporation as opposed to the interests of other members of the group or the ultimate holding company. Of course the corporations comprising a group do act in a co-ordinated manner because of the imposition of one ‘management’ and the ultimate commonality of ownership 4. As a matter of commercial practice, management of the individual corporations is aligned with the interests of the entire group. What then for the principles of corporate governance?

Approach

1 2

3 4

This can be readily demonstrated by an examination of the published annual reports of large publicly listed Australian companies. The expression ‘corporate governance’ when used in this article has it plain meaning, being the manner in which...
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