In the realm of business, the structures of holding companies and subsidiary companies play pivotal roles in the organizational landscape. These structures provide avenues for diversification, risk management, and strategic expansion. In Australia, where a robust legal framework governs corporate entities, understanding the nuances of these structures and their associated liabilities is crucial for businesses aiming to operate efficiently and compliantly.
HOLDING COMPANY
A holding company, also known as a parent company, is an entity that controls one or more subsidiary companies. The control is typically established through ownership of the subsidiary’s voting stock. However, it is essential to note that control can also be exercised through contractual agreements or other means.
In Australia, a holding company typically does not engage in the day-to-day operations of its subsidiaries but instead focuses on strategic planning, resource allocation, and oversight. The primary purpose of a holding company is to own and manage other companies rather than to produce goods or services directly.
One of the key advantages of a holding company structure is the limitation of liability. Generally, the liabilities incurred by a subsidiary company do not automatically extend to the holding company. This means that if a subsidiary faces financial difficulties or legal issues, the holding company’s assets are typically shielded from direct exposure.
However, it is essential for holding companies to exercise caution to avoid scenarios where they might be held liable for the actions of their subsidiaries. Instances where a holding company could be held liable include situations where there is evidence of negligence or fraudulent activities at the holding company level, where the holding company has provided guarantees or assurances for the subsidiary’s obligations, or where there is a piercing of the corporate veil due to improper conduct, such as allowing the subsidiary to continue trading while the holding company knew or should have known that the subsidiary was insolvent (s 588G of the Corporations Act 2001 (Cth)) (Corporations Act).
SUBSIDIARY COMPANY
A subsidiary company is a company that is controlled by another entity, known as the parent or holding company. While a subsidiary operates as a separate legal entity, it is ultimately under the control of the holding company. Subsidiaries can be wholly owned or partially owned by the holding company.
In Australia, subsidiary companies must comply with regulatory requirements applicable to all corporations, including registration with the Australian Securities and Investments Commission (ASIC), compliance with taxation laws, and adherence to corporate governance standards.
Subsidiary companies are separate legal entities from their holding companies, which means that they are responsible for their own debts, obligations, and liabilities. In most cases, the liabilities of a subsidiary company do not directly impact the holding company or its other subsidiaries.
However, there are exceptions to this rule. If a subsidiary is found to be operating as a mere instrumentality or alter ego of the holding company, courts may disregard the separate legal identity of the subsidiary and hold the holding company liable for the subsidiary’s actions. This doctrine, known as piercing the corporate veil, is applied in cases of fraud, improper conduct, or situations where the subsidiary is undercapitalised or lacks independent operations.
REGULATORY COMPLIANCE AND GOVERNANCE
Both holding companies and subsidiary companies in Australia are subject to a range of regulatory requirements aimed at ensuring transparency, accountability, and fair business practices. These requirements include financial reporting obligations, compliance with corporate governance standards, adherence to taxation laws, and regulatory oversight by bodies such as ASIC.
Maintaining proper corporate governance structures, implementing robust internal controls, and conducting regular audits are essential for holding and subsidiary companies to mitigate the risk of liabilities and ensure compliance with legal and regulatory requirements.
DEFENCES FOR THE HOLDING COMPANY
Section 588X of the Corporations Act provides defences such as the holding company had reasonable grounds to believe and did believe the subsidiary company was solvent and would remain solvent, had not participated in the company management due to illness or for some other good reason or took all reasonable steps to prevent the subsidiary company from incurring the debt or trading while insolvent.
Moreover, section 588GA of the Corporations Act enables the holding company to develop one or more courses of action that are reasonably likely to lead to a better outcome for the subsidiary company. This rule encourages the holding company to take reasonable risks and manage to better the subsidiary company’s financial difficulty or avoid insolvency.
If you require any advice on setting up the holding and subsidiary company structure or understanding your companies’ obligations and liabilities, please contact The IP House Lawyers.
For any further information or queries on the above content, please contact us.
The Author
Jean Kallmyr | Lawyer, The IP House Lawyers | t: 0435 799 831 | e: admin@theiphouse.com.au
Key Contact
Claire Darby | Managing Director/Lawyer, The IP House Lawyers | t: 0412 998 951 | e: claire@theiphouse.com.au
Disclaimer
The information and contents of this publication do not constitute any legal or financial advice. This publication is intended only for reference purposes for The IP House Lawyers’ clients and prospective clients.
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