Corporate Groups, Creditor Protection and Cross Guarantees - Some Australian Perspectives
Jennifer G. Hill
University of Sydney - Faculty of Law; European Corporate Governance Institute (ECGI)
Canadian Business Law Journal, Vol 24, p. 321, 1995
Corporate Practice Commentator, Vol. 38, p. 381, 1996 (reprinted with permission)
The adequacy of creditor protection is an on-going issue in corporate law. The traditional vulnerability of creditors can be traced to an entity theory of the corporation, coupled with limited liability. Creditor vulnerability is exacerbated by the existence of the corporate group, which has been described as achieving "limited liability within limited liability". Nonetheless, modern corporate law has retreated in a number of significant ways from its former "self-help" attitude to creditors, by shifting risk away from creditors to other parties, such as directors.
The aim of this article is to identify a number of areas of corporate law where the allocation of risk established under limited liability and corporate entity principles has been questioned, and where a variety of devices has been suggested or implemented to shift established patterns of liability and corporate accountability. In tracing these developments, the article considers whether limited liability, particularly with its implications for involuntary creditors, should remain a benchmark in corporate law. In the context of corporate groups, the article discusses theoretical literature suggesting that the entity theory is inadequate to capture the reality of corporate groups, where actions, but not responsibility, may be collectivized. The article then analyses several legal doctrines and specific legislative provisions, which may disrupt traditional allocation of liability.
Cross guarantees lie at the intersection of creditor protection and corporate groups. The article examines the impact of cross guarantees in corporate groups, and the inherent tension between entity and enterprise principles in their operation as a liability shifting device. Focusing on a particular scheme of cross guarantees implemented by the Australian securities regulator, it assesses the ability of cross guarantees to circumvent standard patterns of liability under an entity theory of corporate groups and enhance creditor protection. The article argues that the law in this area needs to be more attuned to commercial reality of contemporary group enterprises and be sufficiently flexible to achieve desired policies.
Number of Pages in PDF File: 39
Keywords: Creditors, limited liability, corporate groups, corporate theory, separate entity doctrine, shareholders, directors, directors' duties, insolvency, insolvent trading, cross guarantees, cross guaranties, corporate responsibility
JEL Classification: D21, D23, G33, G34, G38, J38, K19, K22, K33, M14
Date posted: July 27, 2006