View/Open - Research Commons - The University of Waikato

A holding company may use a subsidiary to minimize risks by transferring all risky
projects for the latter to handle. 102 This subsidiary is often undercapitalized and if the
venture fails, creditors of the subsidiary are left without any compensation because it
lacks funding. 103 The holding company is free of liability and could set up another
company to carry on similar activity.
The other type of activity within the group which is tantamount to abuse is the
integrated economic enterprise in which all companies in the group are controlled by
a holding company. 104 In this group of companies, each subsidiary will have its own
commercial function which connects and complements the others. 105 The holding
company often controls the finance of these subsidiaries and creditors may be
prejudiced in the event of default because it is highly probable that the subsidiary
does not have the capacity to pay. 106
5.2.3.2.2 Duty of Directors of Wholly-Owned Subsidiaries
In Walker v Wimborne, 107 Mason J stressed the principle of separate legal entity and
held that directors of each company within the group should act in its interests and its
interest alone in deciding whether payment should be made to another company. 108
102 Ibid, at 84-92.
103 Ibid.
104 Ibid, at 92-95.
105 Ibid.
106 Ibid.
107 (1976) 3 ACLR 529.
108 See also Industrial Equity Ltd v Blackburn (1977) 17 ALR 575 where the court upheld the separate
legal personality principle and held that dividends can only be declared from profits made by it and
not from any other companies within the group.
93