Australia: Taming the solvency sea dragon
What directors need to know about corporate group solvency risk in short Directors of business groups can have greater peace of mind when relying on financial support from related entities, according to a recent ruling by the Full Court of the Federal Court.1 Last year, questions were raised about the adequacy of financial support, which was not fully documented or binding to determine the solvency of associated companies. This decision recalibrates the position in favor of such an arrangement, for which practical support may be sufficient. Directors of companies within a corporate group must ensure that each company they appoint is solvent. Solvency is not assessed purely at a group level. In such cases, subsidiaries often rely on informal or non-binding arrangements. This reliance may include consistent intra-group funding (without further formalities) as well as non-binding letters of comfort backed by actual payments. Directors should be aware that, in the absence of formal, binding inter-company support arrangements, establishing a system…
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