Journal of Private Law

Journal of Private Law

The Liability of Parent Company against the Debt of its Insolvent Subsidiaries

Authors
Korosh Kaviani
Saide Ghasemi Moghaddam
Abstract
Nowadays, most of commercial activities have been done through the Group Companies’ structure. The Insolvency of these Group Companies is a rather complicated subject which is derived from its feature as a "Group". The feature of acting as a Group may result in contrast between two realities: Legal and Economic. The Legal reality is that a group is comprised of some independent companies and each of them has a separate personality from the other and they are incorporated under different legal systems. Due to the principle of Sovereignty, the Insolvency procedure is preceded independently from the other procedures and the Parent company, as the main shareholder, has a limited liability against the debt of its subsidiary. However, the Economic reality is related to the operation of these companies which most of time they act as a unified and integrated group and the Parent company apply its control and management on them and it shall be deemed responsible as to the debt of subsidiary. By contrast of these two realities, two approaches have been emerged concerning the Group Companies. The approach of Entity Principle is based on legal reality and the main attention of Enterprise Principle is on the group’s operations.
This article was an attempt to consider mentioned realities and approaches results from the contrast of these two realities in order to make a balance between them.
Keywords
Group Company
Parent Company
Subsidiary
Enterprise Principle
Entity Principle
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Journal of Private Law
Volume 3, Issue 5
September 2015
Pages 27-50