When is a parent company liable for the debts of its subsidiary?
In law, parent and subsidiary are separate entities. Yet the parent is regularly held to account. When is it genuinely at risk?
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A group of companies often operates economically as a single business, but in law each company is a separate legal entity with its own assets. The starting point is therefore that a parent company is not liable for the debts of its subsidiary. There are exceptions to that rule, and they become especially relevant when the subsidiary goes bankrupt. Our founder wrote his doctoral thesis on this very subject.
Exception 1: the parent has committed itself
The simplest exception is where the parent has itself entered into an obligation, for example by giving a guarantee or surety for the subsidiary. In the Netherlands, the so-called 403 declaration is also common. A parent company that files such a declaration assumes joint and several liability for the debts arising from the subsidiary's legal acts. In return, the subsidiary is, subject to conditions, exempt from publishing its own annual accounts. Many groups do not realise that this declaration entails wide-ranging liability, which does not simply disappear once it is withdrawn.
Exception 2: wrongful conduct by the parent
Even without its own commitment, the parent may be liable if it acts wrongfully towards the subsidiary's creditors. Case law on this point depends heavily on the circumstances. Relevant factors may be that the parent was closely involved in the subsidiary's policy, knew or ought to have known that creditors would be prejudiced, and nevertheless, for example, withdrew assets from the subsidiary, allowed it to continue trading with no prospect of payment, or gave creditors the impression that the parent would guarantee payment.
Exception 3: piercing the corporate veil
In very exceptional cases, the court disregards the distinction between parent and subsidiary altogether, for example where the assets are completely intermingled and the structure is used solely to evade creditors. In practice, this situation is rare.
What does this mean in practice?
A parent company that actively steers its subsidiaries would do well to organise its role and decision-making with care. Think of a clear separation of assets, arm's length terms for intra-group transactions, restraint with dividends and management fees in difficult times, and clear communication with suppliers and lenders. Also check which guarantees and 403 declarations have been issued within the group.
And under German law?
German law likewise starts from the separate legal personality of the GmbH and recognises exceptions to it, but the legal doctrine and the conditions differ. In a Dutch and German group, it is therefore important to know which law applies to each company.
Before and after the event
We advise groups in advance on a structure and decision-making process that limit the risk, and we act for parent companies and creditors when the question of liability arises in a specific case.
This article contains general information and does not constitute legal advice. Legislation and case law may change, and the outcome always depends on the circumstances of your situation. For advice on your matter, please get in touch with us.
