Holding a parent company liable for the debts of its subsidiary
A recent High Court decision, Lewis Holdings Ltd v Steel & Tube Holdings Ltd (2014), demonstrates that structuring a business or entering into new business ventures through separate companies to ring fence risk may not always be as effective as people think.
The case involved a property that had been leased by Lewis Holding Limited (Lewis) to Stube Industries Limited (Stube). Stube is a subsidiary of Steel & Tube Holding Limited (STH). In 2013, Stube was placed into liquidation and Lewis filed a claim against Stube for debts owed under the lease agreement. However, under a rarely utilised provision of the Companies Act, the liquidator sought an order requiring STH to pay Stube’s debts. The provision looks at to what extent a company took part in the management of, and is responsible for the company being placed in liquidation.
The High Court decided in favour of Lewis, requiring STH to pay the full amount claimed by Lewis, i.e. a parent company was held liable for the debts of its subsidiary. The Court based its decision on the following key findings:
- The CEO and CFO of STH were directors of Stube and did not approach their duties as directors in a way that recognised Stube as a separate legal entity.
- The STH group of companies acted as a single unit. Stube was more akin to a division of that unit, for example, their financial affairs were intertwined and Stube had no separate bank account.
- STH treated the lease as their own and made lease payments to Lewis. This provided Lewis with the impression that Stube was not treated as a separate legal entity by STH.
- Stube had no employees, but used STH’s employees to conduct business. This supply of services was not reflected in a written agreement, and no intercompany charge occurred.
- Stube did not obtain independent advice when entering major transactions.
- Stube’s fate was sealed when STH stopped financially supporting it.
The decision flags the need to take a best practice approach when operating what is essentially a single business across multiple companies, which is extremely common in New Zealand.
The decision is to be appealed and the final outcome might change. But regardless of the outcome, it won’t change the need to take a best practice approach.