Existing Corporate Legal Provisions

The problems dealt with here are only indirectly addressed by statutory provisions dealing with transactions undertaken by companies that reduce their ability to satisfy creditor claims. These provisions include: Corporations Act 2001 (Cth) Chap 2J, which restricts the circumstances in which the assets of the company might be diminished by transfers to shareholders; Chap 2E, which restricts the circumstances in which financial benefits can be paid to parties related to corporate controllers; and Part 5.7B Division 2, dealing with uncommercial transactions and unfair preferences. The provisions on uncommercial transactions are aimed at preventing transactions in insolvency that would prejudice creditors.

Perhaps of greater relevance are the statutory directors’ duties, which determine the standards of conduct expected of directors in decision making and which aim to prevent insolvent trading. Corporations Act 2001 (Cth) s 588V makes a holding company liable for the debts of a subsidiary in circumstances where there are ‘reasonable grounds for suspecting that the [subsidiary] company is insolvent’ or would become insolvent by incurring further debt and that the holding company or one of its directors should have been aware of those grounds for suspicion. The liquidator of the subsidiary company is empowered to bring proceedings for recovery of the losses of the subsidiary and unsecured creditors.[1] The principal provision is accompanied by s 588G, which imposes a duty upon directors to prevent insolvent trading by their companies.[2] Section 588G creates rights to bring proceedings for compensation against directors for losses caused to the company and to unsecured creditors

[1] Corporations Act 2001 (Cth), s 588W(1).

[2] A parent or other company within a group might be treated as a director for these purposes where the board of the subsidiary is accustomed to act on the directions of that other company. Corporations Act 2001 (Cth), s 9. See Standard Chartered Bank of Australia v Antico (1995) 38 NSWLR 290, 328 and Abogados de accidentes