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liability under section 588G. However, only a liquidator of the subsidiary has a
right to bring an action under section 588V. Creditors have no such right since
the rights only accrue once the company is wound up. 260 The liquidator has to
bring an action against the holding company within six years of the filing of the
petition. 261
The liquidator must prove to the satisfaction of the court when the subsidiary
incurs a debt, that the company is insolvent or became insolvent and the holding
company has reasonable grounds for suspecting that the subsidiary is insolvent or
would become insolvent. 262 Section 588V only applies to voluntary debts and
therefore excludes involuntary creditors such as tort claimants from having the
benefit of the provisions. The omission of torts victims from the provision has
been criticised as one of the main defects of insolvent trading.
Although tort claimants are also left uncompensated in respect of debts in a single
company, the situation is more precarious in the groups of companies. It is not
uncommon for a holding company to set up an undercapitalised subsidiary for
hazardous activities such as asbestos mining. 263 The victims of these hazardous
activities are often left without compensation for there are minimal assets in the
subsidiary which can be used to compensate them. The holding company,
therefore, can insulate its assets from the potential tort claimants.
260 See section 588W of the Australian Corporations Act 2001. Section 588W (1) states " where:
(a) a corporation has contravened section 588V in relation to the incurring of a debt by a
company; and
(b) the person to whom the debt is owed has suffered loss or damage in relation to the debt
because of the company‟s insolvency; and
(c) the debt was wholly or partly unsecured when the loss or damage was suffered; and
(d) the company was wound up;
the company‟s liquidator may recover from the corporation, as a debt due to the company, an
amount equal to the amount of the loss or damage."
261 Section 588W(2) of the Australian Corporations Act 2001 provides "Proceedings under this
section may only be begun within six years after the beginning of the winding up."
262 See section 588V (1) of the Australian Corporations Act 2001.
263 Ian M Ramsay “Holding Company Liability for the Debts of an Insolvent Subsidiaries: A Law
and Economic Perspectives” (1994) 17 UNSWLJ 520 at 542; see also Damien Murphy
“Holding Company Liability for Debts of Its Subsidiaries: Corporate Governance Implications
(1998) 10 Bond LR 241 at 258.
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