Parent Company, Subsidiaries and Bankruptcy Procedure

Parent or Subsidiary Companies. Who has to be solvent?

The Supreme Court, in 2016, responded strongly: The argument of “group interest” and the claim of “the benefits which, in theory, integration into a corporate group entails”, if they are not accompanied by a reasonable and adequate justification that the board of directors´ action was also beneficial to the subsidiary, does not exclude the existence of direct damage for which the board of directors must respond.

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The Supreme Court – exercising its nomophilactic function – clarifies this

It is usual that in these publications we remember that the Supreme Court tries to “unify criteria” in its resolutions and that it also does so, with the determined intention of not re-examining the cases in which the criteria is consolidated.

Often, it even tries to be “didactic and informative” at the same time. And that is what it does in this very recent resolution of 2016 that we are now commenting on.

To the extent possible, insofar as the text is digestible by people with little legal training, we respect the original text, because in that way we facilitate access to the very relevant words of the Supreme Court.

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Branches: What are they and how do they differ from a subsidiary or a permanent establishment?

Branches: What are they and how do they differ from a subsidiary or a permanent establishment?.

Rational balance between the social interest of the subsidiary and the social interest of the parent company

“Certainly, the existence of a group of companies means that, when conflicts arise between the interest of the group and the particular interest of one of the companies in the group, a reasonable balance must be sought between one interest and the other, i.e. between the interest of the group and the particular corporate interest of each subsidiary, that makes possible the efficient and flexible operation of the business unit that the group of companies represents, but at the same time prevents the plunder of the subsidiaries and the unnecessary postponement of their corporate interest, so that external partners and creditors of any kind, public, commercial or labour, are protected.

Isolated advantages of a countervailing nature

This balance can be sought in the existence of countervailing advantages that justify that some action, considered in isolation, could be detrimental to society. Such advantages do not necessarily have to be simultaneous or subsequent (i.e. at the same time or after the harmful action to the subsidiary another beneficial action is taken that compensates the damage), but could also have been prior (for example, that prior to the harmful action there was an appreciable financial benefit generated by the group in favour of its subsidiary or derived from the company’s membership of the group, which has to be taken into account when the action that harmed the subsidiary subsequently takes place).

Verifiable advantages

This involves an examination of the benefits provided or services rendered in both directions (from the company to the group and from the group to the company) and concluding whether or not there is a negative result for the subsidiary. The advantages or services provided by the group to the subsidiary must be verifiable. Thus, mere hypotheses, rhetorical invocations of “synergies” or other advantages lacking the necessary concreteness, lacking real consistency should not be sufficient. Although they may consist of specific business opportunities with a value in terms of assets, such as those inherent in the transfer of customers.

In any case, they must have an economic value and be proportionate to the damage suffered by the subsidiary company in the action for which liability is claimed, in this case, exclusively from the director of the subsidiary company. They must also be duly justified, since otherwise the direct damage to the subsidiary from which the defendant director’s liability arises must be deemed to have occurred. The argument of group interest and the argument of the benefits that, in theory, integration into a corporate group entails, if they are not accompanied by a reasonable and adequate justification that the director’s actions were also beneficial to the subsidiary, does not exclude the existence of direct damage for which the director must be held liable.

There can never be any justification for action in the interests of the group that would endanger the viability and solvency of the subsidiary,

“There can never be any justification for action in the interests of the group that would endanger the viability and solvency of the subsidiary, to the detriment of external shareholders and creditors”.

Does the fact that there is no malice involved absolves you of responsibility?

For the board of directors to be responsible for the damage caused to society it is not necessary that their action were fraudulent, it is enough that it was a voluntary and conscious action, which may be merely guilty, and that the damage was actually caused

Conclusions

Does the fact that there is no personal benefit in the decision limit responsibility?

Not obtaining a personal gain does not relieve you of responsibility.

Does the fact that the action is carried out with publicity and transparency relieve you of responsibility?

The fact that the appellant’s conduct was not secret does not in itself eliminate its harmful nature for society and the infringement of the duty of loyalty that this entails.

If you have been interested in this article you can read more about it in the following pages:

Non-compliance with accounting duties

Relevant accounting irregularities