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Can a holding company be held liable for the acts of its subsidiary? Explain.

Posted by jobseeker Lavanya Bhardwaj | Approved
Answers (4)

The Companies Act in India and jurisdictions all over the world have statutorily recognised subsidiaries as a separate legal entity. Section 2(87)[1] of the Companies Act, 2013 (“CA 2013”), defines “subsidiary company” or “subsidiary” as a company in which the holding company controls the composition of the Board of Directors; or exercises or controls more than one-half of the total voting power either on its own or together with one or more of its subsidiary companies.

The Supreme Court in Vodafone International Holdings BV v. Union of India[2] (“Vodafone judgement”)held thatthe legal relationship between a holding company and its wholly owned subsidiary is that they are two distinct legal persons, and the holding company does not own the assets of the subsidiary and, in law, the management of the subsidiary’s business vests in its Board of Directors.

A company has a separate legal existence, irrespective of whether one person or one company (the holding/parent company) owns all its shares. When a holding company has a wholly owned subsidiary, it may appoint or remove any director through a resolution in the general body meeting of the subsidiary.

In the Vodafone judgment, the Supreme Court held that the parent company’s control or power over the subsidiary depended on the specific circumstances of each case. The Court observed that, “The decisive criterion is whether the parent company’s management has such steering interference with the subsidiary’s core activities that the subsidiary can no longer be regarded to perform those activities on the authority of its executive Directors.”
Conclusion
It is a settled legal position that a subsidiary is a separate legal entity and is different from its holding/parent company. However, the holding companies and their subsidiaries cannot take shelter under the legal position that they are two distinct legal entities in the following instances:
“Parent company’s management has steering influence on the subsidiary’s core activities that the subsidiary can no longer be regarded as performing those activities on the authority of its executive directors”;
“The company is the creature of the group and the mask which is held before its face in an attempt to avoid recognition by the eye of equity, or is a mere cloak or sham, and in truth the business was being carried on by one person and not by the company as a separate entity”;
“Two companies are inextricably inter-linked corporate entities”.
In such cases, the Court can always lift the corporate veil, examine the substance of the transaction, and hold the holding company liable for the acts and omissions of its subsidiary.

Answered by jobseeker Aanchal Jha | Approved

Generally, a holding company is not liable for the debts and obligations of its subsidiary, as they are considered separate legal entities. However, there are exceptions where the holding company can be held liable, particularly when the subsidiary is deemed its "alter ego" or when the holding company has exerted excessive control and involvement in the subsidiary's operations, potentially leading to fraud, injustice, or improper conduct.

Answered by jobseeker Garima Rajput | Approved

Generally, a holding company is not liable for the debts and obligations of its subsidiary because they are considered separate legal entities. However, there are exceptions, such as when the subsidiary is deemed the "alter ego" of the holding company, or when the corporate veil is pierced due to fraud, improper conduct, or when the subsidiary is undercapitalized.
Explanation:
Separate Legal Entity:
A core principle of corporate law is that a subsidiary company is a separate legal entity from its holding company, meaning they have distinct assets, liabilities, and legal responsibilities.
Limited Liability:
Shareholders (including holding companies) generally have limited liability, meaning their personal assets are typically protected from the debts and obligations of the company.
Piercing the Corporate Veil:
In certain situations, courts may disregard the separate legal entity of a subsidiary and hold the holding company liable. This is often referred to as "piercing the corporate veil".
Alter Ego Theory:
If a subsidiary is essentially a puppet of the holding company, with no independent decision-making or operations, a court may find the holding company liable.
Fraud and Improper Conduct:
If the subsidiary is used to perpetrate fraud or engage in other improper conduct, the holding company may be held accountable.
Undercapitalization:
If the subsidiary is deliberately undercapitalized by the holding company, making it unable to meet its obligations, the holding company may be liable.
Control and Influence:
While a holding company can exert significant control and influence over its subsidiaries, this alone does not automatically make it liable for the subsidiary's actions. The key is whether the subsidiary is truly an independent entity or merely an extension of the holding company.

Answered by jobseeker Chanchal Bhati | Approved

Yes, a holding company can be held liable for the acts of its subsidiary in certain exceptional circumstances, though both are generally treated as separate legal entities under corporate law. The principle of separate legal personality, established in Salomon v. Salomon & Co. Ltd., protects holding companies from liability for their subsidiaries' actions.

However, courts may “lift the corporate veil” when the subsidiary is found to be a mere sham or alter ego of the holding company, especially in cases involving fraud, evasion of law, or misuse of the corporate structure. Indian courts, under the Companies Act, 2013 and general legal principles, have held holding companies liable where they exercised complete control over the subsidiary’s decisions, or where such control was used to perpetrate wrongful acts.

Therefore, while limited liability is the norm, liability may arise in cases of fraud, misrepresentation, or abuse of corporate form by the holding company.

Answered by jobseeker Vipra | Approved

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