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If you’re a company director, you may have heard of a holding company and the protection that it offers to your business structure. Most people set up a holding company to reduce tax and risks while their company grows, but it’s important to note that a holding company can still be liable for any debts incurred by its subsidiary companies.
This all depends on the situation, and there are a number of questions to ask before deciding whether the holding company is liable. But before we discuss these circumstances, it’s important to go through some key terms.
What Is A Holding Company?
A holding company is usually set up to own shares or stock in its subsidiary companies, but is generally uninvolved in day-to-day activities like manufacturing or selling. It’s a good way to reduce the risks of a growing business structure because it protects your company assets.
For example, if a customer wanted to sue your company, they could only sue the subsidiary company that they had a legal relationship with. This means that all the company’s assets that are owned (or being ‘held’) by the holding company are protected.
What Is A Subsidiary Company?
A subsidiary company is the company that is owned by a parent or holding company. Following on from the example above, the subsidiary company would be the one exposed to the most risk of being sued. This is why a holding company is used as a safeguard, and generally owns most of the company assets.
This kind of company structure is also known as a dual company structure.
What Happens When The Subsidiary Company Is In Debt?
Even though a subsidiary company is technically separate from its parent company, liability can still extend to the holding company.
More specifically, the holding company can be liable for the debts of its subsidiaries where the subsidiary company is trading while insolvent and a director knew, or should have known, about it.
If you’re unsure about whether a holding company could be liable, you can ask the following questions:
- Was it a holding company of the subsidiary at the time that the debt was incurred?
- Was the subsidiary company insolvent at that time?
- Were there reasonable grounds for suspecting that the subsidiary company was insolvent, or would become insolvent?
- Were one or more directors aware (or should have been aware) that there were reasonable grounds for suspecting insolvency?
If any of these points apply to your situation, your holding company can be liable for your subsidiary company’s debts.
As a director of a holding company, it’s important to closely monitor the financial status of your subsidiary companies.
What Defences Can I Use?
Setting up a holding company doesn’t exclude all risks of liability. Thankfully, there are some defences available should you ever find yourself in this kind of situation.
Wrongful Trading
If the director can prove that they took steps to reduce the loss of the company, then this can be a valid defence to liability.
Similarly, you can use a misfeasance claim, which claims that the director acted ‘honestly and reasonably’ in the circumstances.
Next Steps
Setting up a holding company has its benefits, but it doesn’t necessarily rule out the possibility of liability for your subsidiary’s debts.
Luckily, we have a team of lawyers you can chat to about a Dual Company Structure and any concerns you have regarding liability.
Feel free to reach out to us at [email protected] or contact us on 08081347754 for an obligation free chat.
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