A recent interim judgement by the High Court holding a parent company liable to pay the debts of its subsidiary should act as a warning, according to one lawyer.
In the case of Lewis Holdings Limited v Steel & Tube Holdings Limited,
the outcome relied on a rarely used provision in the Companies Act 1993.
The provision provides an exception to the general rule that a company is a legal entity in its own right, separate from its shareholders.
Martin Dalgleish, partner at Kensington Swan, said the interim judgement served as ‘an important reminder’ that the courts may be willing to look behind the corporate veil to uncover the true operating identity of subsidiaries.
“The case illustrates the risks of holding companies poorly managing subsidiaries,” Dalgleish this week told clients in a legal update.
Dalgleish said a subsidiary’s business must be conducted so that the company has a separate commercial and legal existence from its parent.
“Many corporate groups pay lip service to this concept and operate as a ‘whole of group’. This case suggests there are real dangers with this approach.”
Dalgleish said directors must structure decision-making to observe a subsidiary’s separate legal status by holding formal board meetings and consciously appreciating they are making decisions as directors of the subsidiary.
Where a holding company is providing financial or managerial support to a subsidiary, there should also be appropriate legal and commercial arrangements in place to reinforce and give effect to the separate legal status of the subsidiary. These formal support arrangements will also help to avoid breaching directors’ duties, Dalgleish said.
The judgment confirmed that the practice of appointing holding company employees as directors of a subsidiary is appropriate.
“Those directors may act in the best interests of the holding company provided that the constitution permits and the separation of interests is observed.”
Dalgleish said the decision was based on a unique set of facts, and holding companies could avoid this fate if they followed accepted commercial practice and ensured directors recognise the different interests involved.