Guarantees, letters of comfort and insolvency

Notwithstanding the protection afforded by the separate legal entity principle, there are circumstances that undermine the principle. There are various provisions in the Corporations Act 2001 (Cth) under which the activities of one company within the group may have an impact on another company within the group. Further, there is a risk which arises during insolvency which displaces the application of that principle and focuses on the common commercial practice of managing corporate groups as a single economic entity. This risk arises from the statutory pooling provisions which enable the assets of the companies within a corporate group to be pooled for the purposes of satisfying creditors’ claims in an insolvency. As such, while the implementation of an appropriate corporate structure is important, appropriate systems and measures must also be put in place to avoid the intermingling of assets between companies within the corporate group and to reduce confusion among creditors as to the precise identity of the debtor company.

See Guarantees, letters of comfort and insolvency.