Corporate structure is the arrangement of separate legal entities within a group of entities with a common ultimate controller. Corporate structures are often established on an ad hoc basis, sometimes without much consideration for the appropriate makeup of the group.

Each company within the corporate group is a separate and independent legal entity capable of incurring its own debts and having its own creditors. However, arrangements could be made that result in liability shifting between companies within the corporate group, sometimes deliberately, sometimes unintentionally. Further, there are provisions in the Corporations Act 2001 (Cth) under which the activities of one company within the corporate group have an impact on another company within the group.

When implementing an appropriate corporate structure, all aspects of the group’s business should be considered, including the nature of the assets, particularly intellectual property, and the nature of liabilities, particularly intra-group finance facilities.

See Corporate structure explained.

A basic corporate structure commonly consists of a holding company with a number of subsidiaries which may be operating or holding subsidiaries. Operating subsidiaries are subsidiaries which operate a business within a particular field or geographical region. Holding subsidiaries are subsidiaries which do not conduct any business but merely hold shares in one or more operating subsidiaries. The assets required to conduct such business are ideally held by the holding company or by holding subsidiaries. However, often transaction costs, including capital gains tax, prevent the moving of assets to appropriate locations so alternative asset protection strategies need consideration.

See Basic structure.

Corporate groups commonly utilise an asset protection strategy whereby the holding company provides financing to an operating subsidiary in return for security over the assets of that operating subsidiary. Adopting this strategy is designed to protect the assets against unsecured creditors of the subsidiary as it keeps the debt level of the operating subsidiaries high and secured and enables the holding company to take possession of those assets and retain or sell and apply the proceeds to its debts ahead of other creditors.

When considering a financed-based asset protection strategy in respect of foreign operations, the thin capitalisation rules, which limit a company’s deductible interest expense in respect of foreign operations, may reduce the commerciality of such arrangements.

See Asset ownership and licensing of intellectual property.

In circumstances where external finance is sought, where possible, an appropriate policy should be adopted to minimise cross-collateralisation of the companies within the group so that assets are not linked together. Cross-collateralisation exposes other assets to additional risk as they are used to secure a loan for a different asset.

Corporate groups commonly implement financing and securities structures designed to protect the group’s assets from claims by creditors. This strategy aims to reduce the level of recourse available to creditors and creates a limited recourse risk. To manage this risk to those who deal with the group, creditors may require guarantees to be provided.

See Finance and securities.

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.