A recent High Court decision, allowing a landlord to recover rent owing by a tenant company that is in liquidation from the tenant’s parent company, is a reminder that the “shareholders have no liability for a company’s debts” principal has its limits.
The case, which considered the breadth of section 271 of the Companies Act, was an application by a landlord to recover rent owing by Stube Industries Limited (in liquidation) from its parent company, Steel and Tube Holdings Limited. Justice McKenzie decided that it was “just and equitable” that the parent company should pay the subsidiary’s debts to the liquidator. He found that Stube had been operated as a division of Steel & Tube – and not as a separate legal entity. The judge noted that while the directors of a subsidiary could prefer the interests of the parent company ahead of the subsidiary’s best interests (if the constitution allows), the directors could not simply ignore the interests of the subsidiary (and, by extension, the subsidiary’s creditors) in discharging their duties.
Section 272 of the Companies Act sets out the factors that the judge must consider:
- the extent to which the [parent] took part in the management of the [subsidiary] in liquidation;
- the conduct of the [parent] towards the creditors of the [subsidiary];
- the extent to which the circumstances that gave rise to the liquidation of the subsdiary are attributable to the actions of the parent; and
- such other matters as the court thinks fit.
It is possible that this judgment will be appealed but, as it stands, this interpretation of section 271 has implications for all company group structures. For example, where a group of companies includes separate operating and asset owning companies, it is possible that the asset owning company may not be protected from the creditors of the operating company following liquidation of the operating company. The key lesson for directors and business owners is that, as with the use of trusts for asset protection, you need to make sure that when you have separate companies holding different assets, you don’t just bundle all of the assets together and treat them as being part of the same enterprise. This means holding separate meetings, preparing separate accounts and ensuring that each company retains its own discreet identity.