Tuesday, 23 August 2016

New Zealand: Court of Appeal upholds parent company's liability for debt of subsidiary company

The Court of Appeal gave judgment earlier this month in Steel & Tube Holdings Limited v Lewis Holdings Limited [2016] NZCA 366, on appeal from [2014] NZHC 3311. The case concerned a parent company that had placed one of its wholly-owned subsidiaries into liquidation. The liquidators of the subsidiary disclaimed a lease under section 269 ("Power to disclaim onerous property") of the Companies Act 1993. The lessor sought damages as well as an order that the parent company should be liable for those damages under section 271 ("Pooling of assets of related companies") of the 1993 Act.  Section 272 sets out the guidance the court is required to consider under section 271, including the extent to which the related company took part in the management of the company in liquidation and the extent to which the businesses of the companies were combined.

The trial judge held that it was just and equitable, as section 271 requires, for liability to be imposed on the parent company. The Court of Appeal upheld this decision.  Its judgment is important, not least because there are few authorities considering section 271. The first instance decision, which contains more analysis than the court of appeal judgment, remains a leading authority and its message remains clear: the separate legal personality of companies in groups will be respected where each company is conducted and governed as a separate entity.  To disregard the separate legal status of the companies will be to run the risk of liability being imposed under section 271 even where, as in the current case, the company's constitution permitted directors of the subsidiary to prefer the interests of the parent company (note also section 131(2) of the 1993 Act). Indeed, as the trial judge observed, provisions of this kind do not mean that the interests of both companies can be conflated or the subsidiary company's interests ignored.

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