Liability of Holding Company towards its Subsidiary under Company Law

This article discusses the liability of a holding company towards its subsidiary under Company Law. It talks about the principles of limited liability and the concept of separate entity of Corporate Law that regulates the liability of a parent or Holding Company toward its Subsidiary. It also talks about the liabilities of the shareholders towards the holding as well as the subsidiary company. The article also discusses the duty of the director towards the wholly owned subsidiary under section 187 of the Corporation Act.

Running head: COMPANY LAW
Company Law
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1COMPANY LAW
The principles of Limited Liability and the concept of separate entity of Corporate Law
regulates the liability of a parent or Holding Company toward its Subsidiary. The holding
company holds certain civil and criminal responsibility or liability under the Corporation Act
and under Common law when it comes to the formation or incorporation of a subsidiary
company to boost its growth and make additional profit out of it1.
The liabilities of the shareholders towards the holding as well as the subsidiary company
was thoroughly discussed in the Solomon v. Solomon, a landmark case that supported the
principle of limited liability under Common law as well as Company law of any modern state2.
The Holding company holds certain civil liabilities for incorporating a subsidiary company in
order to avoid the risk of a new venture and make use of the advantages of the principle of
limited liability and separate entity. When a holding company invests in a wholly owned
subsidiary company, it bears civil and criminal liabilities to such subsidiary company as well as
to its shareholder. Additionally, it has certain responsibilities to the public at large for the
product it produces must not be harmful to the people. Failure to comply with these liabilities
would attract penalties under Part 2.5 of the Criminal Code 1995 (Cth) which lays down the
corporate criminal liability.3
The parent or the holding company should be held liable for any misconduct or
wrongdoing of its subsidiary. However, there have been several instances under English law
where the courts have been reluctant to following the principle of holding the parent company
liable for the acts of subsidiary. The courts have always opted for the defense of the principle of
1 Corporation Act 2001 (Cth)
2 Solomon v. Solomon UKHL 1, AC 22
3 Criminal Code 1995 (Cth)

2COMPANY LAW
corporate veil4. In Littlewoods Mail Order Stores Ltd v. McGregor, Lord Denning stated that the
doctrine held in the Solomon case should be referred carefully5. While in the case of Westpac
Banking Corporation v Bell Group Ltd (in liq) (No. 3), it was observed by the court that the
directors had breached their duties towards the holding and the subsidiary company and therefore
would be held liable for such breach6.
The Corporations Act has laid down the duty of the director towards the wholly owned
subsidiary under section 1877. It states that a director must act for the best interest of the
subsidiary and must not act in such a way that it makes it insolvent. Similarly, the company and
the directors also have duty towards the consumers it is catering. The Corporation Act imposes
heavy penalty in case the company and the directors breaches their duties. The court in such case
would be bound to lift the corporate veil and bring the guilty directors and shareholders to light
for their incapability.
4 Adams v Cape Industries Plc [1990] Ch 433
5 Littlewoods Mail Order Stores Ltd v. McGregor 1 WLR 1241
6 Westpac Banking Corporation v Bell Group Ltd (in liq) (No. 3) (2012) 89ACSR 1; [2012] WASCA 157
7 Corporation Act 2001 (Cth), s 187

3COMPANY LAW
Bibliography
Legislation
Corporation Act 2001 (Cth)
Cases
Adams v Cape Industries Plc [1990] Ch 433
Littlewoods Mail Order Stores Ltd v. McGregor 1 WLR 1241
Solomon v. Solomon UKHL 1, AC 22
Westpac Banking Corporation v Bell Group Ltd (in liq) (No. 3) (2012) 89ACSR 1; [2012]
WASCA 157