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If you’re a company director, you may have heard of a holding company and the protection that it offers to your business structure. Most people set up a holding company to reduce tax burdens and risks while their company grows, but it’s important to note that even a holding company can still be liable for any debts incurred by its subsidiary companies.
This all depends on the circumstances, and there are a number of questions to ask before deciding whether the holding company is liable. Before we discuss these situations further, it’s important to go through some key terms and understand how modern corporate practices in 2025 affect these structures.
What Is A Holding Company?
A holding company is typically set up to own shares or stock in one or more subsidiary companies, while remaining generally uninvolved in day-to-day operations such as manufacturing or selling. In today’s 2025 climate, this structure is even more popular as it not only helps safeguard your company assets but also aligns with enhanced corporate governance standards. If you’re exploring different business structures, you may also want to review our guide on Operating as a Sole Trader for comparison.
For example, if a customer wishes to sue your business, they would typically only have recourse against the subsidiary company with which they have a direct legal relationship. This arrangement means that the assets held by the holding company remain protected, provided the structure is managed correctly.
What Is A Subsidiary Company?
A subsidiary company is one that is owned by a parent or holding company. In the example above, the subsidiary is the entity that is exposed to the main risks, such as legal claims or financial losses. In 2025, with stricter reporting requirements and increased regulatory oversight, subsidiary companies must adhere to robust compliance protocols, ensuring that any liabilities are contained.
This kind of arrangement is also known as a dual company structure.
Here’s a diagram to explain how holding companies and subsidiaries work:
What Happens When The Subsidiary Company Is In Debt?
Even though a subsidiary company is technically separate from its parent, liability can still extend to the holding company under certain circumstances. This is particularly relevant in 2025, as enhanced legal frameworks and digital financial reporting have increased transparency across corporate groups.
More specifically, the holding company can become liable for the debts of its subsidiaries if the subsidiary was trading while insolvent and if a director knew-or should have known-about the insolvency. It is therefore crucial to maintain strict oversight of your subsidiary’s financial health.
If you’re unsure about whether a holding company could be liable, you can ask the following questions:
- Was it a holding company of the subsidiary at the time the debt was incurred?
- Was the subsidiary company insolvent at that time?
- Were there reasonable grounds for suspecting that the subsidiary was insolvent, or would become insolvent?
- Were one or more directors aware (or should have been aware) of the potential insolvency risks?
If any of these points apply to your situation, your holding company may be liable for the subsidiary company’s debts.
As a director of a holding company, it’s vital to closely monitor the financial status of your subsidiary companies. Regular reviews combined with professional advice-such as our Company Registration Service-can help protect your interests.
What Can A Liquidator Do?
If your subsidiary company is in debt, a liquidator will be appointed to manage its financial affairs. Under section 588W of the Corporations Act 2001 (as amended for 2025), the subsidiary’s liquidator can recover money from the holding company if:
- The holding company has breached section 588V (which states that a holding company is liable if it knew, or should have known, about the subsidiary’s insolvency);
- The creditor has suffered loss or damage due to the insolvency;
- The debt was wholly or partly unsecured at the time the loss or damage occurred;
- The subsidiary company is in the process of being wound up.
If these conditions apply, the liquidator can pursue recovery of the debt from the holding company.
What Defences Can I Use?
Setting up a holding company doesn’t eliminate all risks of liability. Fortunately, there are several defences available if your holding company faces such claims, as set out in section 588X of the Corporations Act.
Safe Harbour Provisions
If your holding company is held liable for the subsidiary’s debts, you may invoke a safe harbour provision by demonstrating that you were developing a plan that was ‘reasonably likely to lead to a better outcome’ for the company. In today’s environment, safe harbour provisions remain an invaluable defence, allowing directors to show that proactive measures were in place despite emerging financial challenges.
Reasonable Grounds
You can argue that there were reasonable grounds to believe that the subsidiary was solvent-that is, you had conducted thorough financial assessments and internal audits confirming its ability to meet its debts. This approach aligns with modern best practices as outlined in our Business Structure guide.
Reliance On Information
The holding company may also claim that it relied on information provided by a ‘competent and reliable person’-for example, through modern digital financial reporting systems-to conclude that the subsidiary was solvent. With advancements in technology, such as automated compliance tools recommended in our Legal Updates, this defence carries greater weight in 2025.
Director’s Non-Participation
A further defence is to demonstrate that the directors were unable to participate in managing the company due to illness or other unforeseeable personal circumstances. This non-participation can be used to argue that it was impractical to detect or address the subsidiary’s insolvency in a timely manner.
Reasonable Steps Taken To Prevent Insolvent Trading
Lastly, you can argue that your holding company took reasonable steps to prevent the subsidiary from incurring further debt or trading while insolvent. Adopting state-of-the-art accounting software and seeking timely legal advice-such as through our expert consultancy services-can support this defence.
While there are several defences available, it’s generally best to avoid liability from the outset by diligently monitoring your subsidiary’s finances. Regular audits and robust internal controls are essential. In addition, leveraging tools and guidance from our comprehensive Business Partners and Company Set-Up resources can make a significant difference.
In 2025, with digital transformation and increased regulatory oversight, it is crucial for holding companies to combine sound legal advice with modern technology. Regular financial audits, coupled with automated compliance systems, help maintain transparency and guard against unexpected liabilities.
Next Steps
Setting up a holding company carries many benefits, but it doesn’t automatically shield you from potential liability for your subsidiary’s debts. It is essential to ensure that your financial and governance practices are up to date with current 2025 standards.
Luckily, we have a team of experienced lawyers who can advise you on a Dual Company Structure and address any concerns you may have about liability. Whether you need guidance on company registration, ongoing compliance or corporate governance best practices, we’re here to help. Feel free to reach out to us at team@sprintlaw.com.au or call us on 1800 730 617 for an obligation-free chat.
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