Question

Light Pty Ltd is one of the companies in the Heavy Industries group of companies. Light is a subsidiary of Heavy Ltd, the holding company of the group. Heavy owns most of the group’s assets. Light has two directors: a managing director and a chief financial officer. While the group as a whole has been doing well, Light has been having financial difficulties. Light’s financial crisis came to a head when it was revealed that it is likely to become liable for extensive damages as a result of environmental damage it has committed. This damage has been caused by Light’s negligent management of certain chemicals used in the manufacturing process, which has resulted in some of those chemicals finding their way into nearby waterways. Light is not adequately insured against the potential claims. The bad publicity Light has suffered has led to Light becoming insolvent and its creditors (i.e., those who have supplied goods and services to Light) have commenced proceedings to wind up Light.

(a) Advise Heavy Ltd whether it is likely to be liable for:

(i) Light’s debts? and
(ii) Environmental damage caused by Light’s negligence?

(b) Do you consider that Heavy Ltd should be liable in (i) and (ii)?

Answer 1

Ans.(a)(i) Yes

In certain circumstances, a holding company may be liable for debts incurred by a subsidiary company when the subsidiary company could not pay its debts. If the directors of the holding company were aware of, or should have been aware of, the insolvency, then the holding company may be liable for the debt.

Ans.(a)(ii) Yes

Liability for environmental contamination, under both state and federal law, can complicate any transaction and can threaten the existence of even a profitable enterprise. Worse yet, parent corporations, in some cases, can be held liable for their subsidiaries' environmental liabilities.

Ans.(b) Yes