Parent company liable for debt of subsidiary company in liquidation

Kaimai_Law_Bethlehem_-_Winter_2015_Commercial_eSpeaking.pdf

If you are a director of a company in a corporate group, a recent High Court decision^[1] should serve as a timely reminder of the need to preserve each company’s separate legal identity within the group.

It’s an important principle of New Zealand company law that a company is a legal entity in its own right which is separate from its shareholders.

In this case, however, the High Court ordered Steel & Tube Holdings Ltd to pay all or part of a claim against a wholly owned subsidiary in liquidation in relation to a lease of property from Lewis Holdings Ltd. The decision was based on the seldom applied section 271(1)(a) of the Companies Act, which provides an exception to the general principle of separate legal personality, by allowing the court to order a related company to pay the whole or part of the claims against a company in liquidation where it is just and equitable to do so.

While the decision was based on the specific facts, adopting sensible commercial practices is prudent, including making sure:

• Each group company’s business is run as a separate commercial and legal entity from its parent, rather than being run as a division of the parent
• Each group company’s board gives separate consideration to the interests and position of that company when making decisions, as distinct from the interests of the parent company or other group companies (even where a subsidiary’s constitution expressly allows the board to have regard to such interests)
• Separate records (board minutes, resolutions, etc) are kept for the parent and each group company
• Arrangements for financial and management support from the parent company to a subsidiary are formally documented, and
• Invoices are addressed to, and paid by, the relevant group company.

If you don’t maintain a clear distinction between parent, subsidiary or other related companies, you may find the parent, or a related company, is ordered to pay certain debts of the subsidiary if the subsidiary is put into liquidation.