Company Registration in Tirupur
Liability of holding company for insolvent subsidiary
English company law possesses some curious features, which may generate various results. A parent company may spawn a number of subsidiary companies, all controlled directly or indirectly by the shareholders of the parent company. If one of the subsidiary companies turns out to be the runt of the litter and declines into insolvency to the dismay of its creditors, the parent company and the other subsidiary companies may prosper to the joy of the shareholders without any liability for the debts of the insolvent subsidiary. It is not surprising that when a subsidiary collapses, the unsecured creditors wish the finances of the company and its relationship with other members of the group to be narrowly examined, to ensure that no assets of the subsidiary company have leaked away; that no liabilities of the subsidiary company ought to be laid at the door of the other members of the group and that no indemnity from or right of action against any other company, or against any individual is by some mischief overlooked. The anxiety of the creditors will be increased where, as in the present case, all the assets of the subsidiary company are claimed by another member of the group in the right of a debenture holder.
In Kleinwort Benson Ltd., versus Malaysia Mining Corporation Bhd., (1989) CA the principle of non-liability was applied even where the holding company had given comfort letter to a creditor of the subsidiary. In Reed versus Nova Securities, cases where observed that the theoretical independent existence of every corporation enables a group of companies to escape liability at common law for the losses of an insolvent member of the group. Corporate veil is normally lifted in cases of holding-subsidiary relationship with a view to making the holding company liable for the commitments of its subsidiary unless it has guaranteed the subsidiary's debts. But the question of piercing the veil was held to be irrelevant where the holding company was sought to be held liable for the debt of a company in which the holding company's subsidiary had a substantial interest, particularly when it had not accepted any such liability.
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