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argue that there are reasonable grounds to expect that the company is solvent 268
if the information available indicates otherwise. It is possible for the holding
company, however, to use the defence under section 588X (3) if it can prove its
reliance on a reliable and competent third party. 269
It is unclear on how a holding company would raise the argument of absence
from taking part in the management due to illness or other good reasons as
envisaged in subsection (4). 270 A holding company does not take part in the
management of the subsidiary because, under the principle of separate legal
personality, the companies are regarded as two different companies, each with its
own board of directors. Likewise, the same reasoning applies in respect of the
plausibility of the defence that the holding company „took all reasonable steps‟ 271
the requirement of the holding company having taken all reasonable steps to
prevent the subsidiary from incurring debts clearly contravenes the very
foundation of the company law.
268 Section 588X (2) states:“ It is a defence if it is proved that, at the time when the debt was
incurred, the corporation, and each relevant director (if any), had reasonable grounds to expect,
and did expect, that the company was solvent at that time and would remain solvent even if it
incurred that debt and any other debts that it incurred at that time.”
269 Section 588X(3) states: “Without limiting the generality if subsection (2), it is a defence if it is
proved that, at the time when the debt was incurred, the corporation, and each relevant director
(if any):
(a) had reasonable grounds to believe, and did believe:
(i) that a competent and reliable person was responsible for providing to the
corporation adequate information about whether the company was solvent; and
(ii) that the person was fulfilling that responsibility; and
(b) expected, on the basis of the information provided to the corporation by the person, that
the company was solvent at that time and would remain solvent even if it incurred that
debt and other debts that it incurred at that time.
270 Section 588X(4) states: “ If it proved that, because of illness or for some other good reason, a
particular relevant director did not take part in management of the corporation at the time when
the company incurred the debt, the fact that the director was aware as mentioned in
subparagraph 588V(1)(d)(i) is to be disregarded."
271 Section 588X (5) states: “It is a defence if it is proved that the corporation took all reasonable
steps to prevent the company from incurring the debt."
293