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equirement of insolvency and it does not relieve directors of their obligation to
cease trading upon insolvency. 161
5.2.3.3.2 Australian Approach
5.2.3.3.2.1 Liability of a Holding Company for Insolvent
Trading by a Subsidiary 162
Section 588V of the Corporations Act 2001 imposes civil liability on the holding
company for the debt of its subsidiary if the subsidiary is insolvent or becomes
insolvent as a result of incurring the debt. The provision imposes liability in
circumstances where the holding company or its directors has reasonable grounds to
suspect that the company is insolvent or becomes insolvent; or having regard to the
holding company‟s control over the subsidiary, it is reasonable to expect that the
holding company or its directors would be aware that the subsidiary is insolvent or
becomes insolvent by incurring the debt.
5.2.3.3.2.2 Defences 163
The holding company will escape liability under section 588V if the holding
company or any of its directors can show that there are reasonable grounds to expect,
and did expect, that the subsidiary was solvent and would remain so at the time the
debt was incurred. 164 It is also a defence if the holding company or any of its
directors can display reasonable grounds to believe, and did believe, on a competent
161 Mountford v Tasman Pacific Airlines of NZ Limited [2006] 1 NZLR 104 at 128; see also
Gunasekara and Toy above n157 at 29; Taylor above n157 at [30.1.7(3)]
162 See Chapters 11 and 12 for further discussion.
163 See Chapter 11 for detailed discussions on this topic.
164 Section 588X(2) of the Australian Corporations Act 2001.
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