Liabilities of Subsidiaries Passed onto Related Companies

closed The 2014 Companies Act brought in a provision that has received limited commentary but could have a significant effect on groups of companies owned and controlled by similar or related persons.

Section S.599 of the Companies Act 2014

On the application of a liquidator or any creditor or contributory of a company that is being wound up, the court, if it is satisfied that it is “just and equitable” to do so may make an order that any company that is or has been related to the company being wound up shall pay to the liquidator/creditor an amount equivalent to the whole or part of all or any of the debts provable in the winding up. In deciding whether it is just and equitable to make the order, the court shall have regard to the following matters:
  1. The extent to which the related company took part in the management of the company being wound up;
  2. The conduct of the related company towards the creditors;
  3. The effect which such order would be likely to have on the creditors of the related company concerned.
It shall not be just and equitable to make an order under this section if the only ground is:-
  1. The fact that a company is related to another, or
  2. That the creditors of the company being wound up have relied on the fact that another company is or has been related to the first mentioned company.

Clery’s liquidation

The report prepared by Minister of State for Business and Employment Ged Nash in 2015 found that it may be possible for the liquidators of Clery’s to recover money from companies related to the subsidiary, which was put into liquidation in order to offset its debts. The report also outlined the concerns about the fact that the valuable Clery’s building was held in one subsidiary while liabilities, including the staff, were held in a separate subsidiary that was placed in liquidation. The report states that under Section 599 of the Companies Act 2014, in certain circumstances, liquidators and creditors can have recourse to provisions that allow assets transferred from a company to be recovered and creditors’ interests protected. It says the law does make remedies potentially available where the use of a corporate group structure results in profits being kept in one company, while losses accumulate in another, and the insolvent loss-making entity is then liquidated. The law has not yet been tested, but the minister says that he has no reason to believe that this provision would be ineffective - though if it were, it would be necessary to review it. The report also states the State may end up as the biggest loser in the liquidation, as the Department of Social Protection will have to pay out a significant amount of money in redundancy payments.

Final thoughts

In the past a lot of groups of companies and related companies have been structured to prevent contagion in the instance of an insolvency event affecting one part of the group’s business and this has resulted in multi-company group structures. Directors should be aware of the new legislation and how it could impact other entities under their control and pay heed to the guidance regarding “just and equitable” in the legislation.

What questions do you have?

We are happy to help. Please post your comment below or call Paul Leonard, Partner at Cooney Carey, on 01 677 9000. Alternatively, send him an email: pleonard@cooneycarey.ie

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Photo credit: Jason