Enterprise Liability for corporate groups: A safeguard for creditors

Abstract

The first systematic and comprehensive review of the application of Australian corporate law to corporate groups commenced in 1998, which resulted in the Companies and Securities Advisory Committee (CASAC) the precursor to the Companies and Markets Advisory Committee (CAMAC), publishing its Corporate Groups Final Report in May 2000. Of the Final Report's 24 Recommendations to date, only two recommendations, permitting the pooling of assets and liabilities in a liquidation of group companies have led to changes in Australian corporate law. Of the remaining 22 recommendations, ten involved no change to the current law, while the remaining 12 recommendations have not been implemented. One of the final report's objectives was to determine whether further safeguards were needed for those dealing with corporate groups, namely minority shareholders and outsiders including creditors. Unsecured creditors transacting with corporate group members may make inefficient investments as: corporate group members may misrepresent the availability and value of group assets when such assets are insulated from creditors' claims; there is an increased opportunity for debtor opportunism to arise within corporate groups. This article, considers, whether the adoption of enterprise liability within controlled and integrated corporate groups would efficiently enable creditors to identify and therefore price the limited recourse risk and debtor opportunism risk of transacting with such a corporate group member, thereby providing creditors with an additional level of protection.