By Claire Mansell - 29 Jan 2015
Generally speaking, a company is a separate legal entity in its
own right and its shareholders will not generally be liable for the
company's obligations. However, there are exceptions to this rule,
as illustrated in the recent case Lewis Holdings Ltd v Steel
& Tube Holdings Ltd.
In that case, the plaintiff leased a property to a wholly owned
subsidiary of the defendant. The subsidiary was placed into
liquidation and the lease was disclaimed by the liquidators,
leaving the plaintiff out of pocket.
The plaintiff applied for orders under s.271(1)(a) of the
Companies Act that the defendant be liable for the debt owed to it
by the subsidiary. They claimed that the subsidiary was not run as
a separate legal entity and it was just and equitable for the
defendant to be liable for its subsidiary debts.
The court agreed. While the subsidiary was technically a
separate legal entity, it was not run as a separate commercial
entity. In coming to this view, the Court looked at a number of
factors including:
- the subsidiary was run as a division of the parent company
- the directors of the subsidiary did not distinguish between the
interests of the subsidiary and its parent
- the parent had total control of the subsidiary and the
subsidiary was completely reliant on the parent company to meet its
obligations
- there were no legal arrangements in place to manage the
transactions between the companies. They were simply treated as one
entity.
The Judge did point out that s.271 will not apply to all (or
even most) group structures. However, this case is an important
reminder that if you are using a group structure, you must be
careful to ensure that each company is run as a separate commercial
entity.
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