We are sometimes asked by clients whether they can sue the parent company of their debtor, perhaps because the debtor company itself has no assets or has gone into liquidation.
The first point to clarify in this instance is to check who the claimant had a contract with, as that is the entity that they will need to sue.
Separate legal entities
The law treats parent companies and their subsidiaries as separate legal entities, each responsible for the management of that business, including separate finance, management, recruitment etc. As each is a separate entity, then one company, including the parent, cannot be held liable for the debts of another company within the group.
Exceptions when the corporate veil is lifted
This separation of the legal entities is commonly referred to as the “corporate veil”. There are some instances when a court may lift this veil and hold the parent company liable for the actions of a subsidiary.
These instances normally relate to circumstances where there has been fraud committed, such as the improper transfer of assets or shares and other fraudulent means to avoid the subsidiary company’s liabilities, or impropriety in the duty of care. There is a recent health and safety case (Chandler v Cape plc) where the claimant, Mr Chandler, successfully sued the parent company for the asbestosis he suffered while working for their subsidiary fifty years ago.
Judgments for money
However, in the case of a judgment against a subsidiary, it is highly unlikely that the court would allow the lifting of the corporate veil for the claimant to pursue their claim against a parent without substantial evidence that fraud had been committed or that subsidiaries had been set up as a fraudulent façade to hide assets from the creditor.
Unfortunately, if the debtor company with which the creditor had the contract is unable to pay, in almost every case there is no further option.
David is the former CEO of The Sheriffs Office.