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section 187 of the Australian Corporations Act 2001, which deals specifically with a
director‟s duty in a wholly-owned subsidiary. 115
Likewise, New Zealand also has similar provisions which allow a director of a
wholly-owned subsidiary to act in the best interests of a parent company even though
the act may not be in the best interest of the subsidiary. Section 131(2) of the
Companies Act 1993 provides a director of a wholly-owned subsidiary may, when
exercising powers or performing duties as a director, act in a manner he or she
believes is in the best interests of its holding company even though it may not be in
the best interests of the subsidiary.
Australia has adopted the provision of section 131(2) into its Corporations Act 2001;
however, it is stricter when compared to section 131(2) of the New Zealand
Companies Act 1993. 116 In Australia, a director is allowed to act in the best interests
of the parent company as long as the act is also in the best interests of the subsidiary.
The act is taken to be in the interests of the subsidiary if the subsidiary is not
insolvent and does not become insolvent as a result of the director‟s act. Hence, only
when the company is solvent can the director consider the interest of the parent
company, and even then the director must ensure that his action will not affect the
solvency of the company. If the company is insolvent at the time of his action or
insolvency ensues from his action, then the director is not acting in good faith in the
interest of the subsidiary, thus he has breached his duty.
115 Section 187 of the Australian Corporations Act 2001provides that a director of a corporation that is
a wholly-owned subsidiary of a body corporate is taken to act in good faith in the best interests of
the subsidiary if:
(a) the constitution of the subsidiary expressly authorises the director to act in the best interest of
the holding company; and
(b) the directors acts in good faith in the best interests of the holding company; and
(c) the subsidiary is not insolvent at the time the director acts and does not become insolvent
because of the director‟s act.
116 Farrar Corporate Governance above n79 at 269.
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