Can A Parent Company Be Made Liable for the Debt of a Subsidiary Under Insolvency and Bankruptcy Code?

Abstract

Recently businesses frequently choose to operate as two or more autonomous subsidiaries. The limited liability theory regards the firm as a legal persona that is an independent entity apart from its members. Similarly, subsidiary firms are also considered independent legal entities if they are registered under the Firms Act where the corporate veil comes into the picture.  The UNCITRAL Model Law on Enterprise Group Insolvency  was created globally to address these challenges. The Model Law acknowledges that to enable an enterprise's entities to become insolvent, a clear and predictable framework is required. The principle established in Salomon v. Salomon  is still used by UK and Canadian courts, however, there have been recent examples where a parent corporation has been found to have a duty of care to its subsidiaries, even when the corporate veil has not been lifted. Third parties are typically not held accountable for harm under common law. To ascertain the degree of control the parent firm exerted on its subsidiary in terms of operations or policy formulation, it is crucial to comprehend the proximity between the parent and subsidiary companies. It was encapsulated that “foreseeability, proximity, and fairness”  are the three criteria needed to prove a duty of care between a parent and its subsidiary. In other words, the law applies the traditional three-pronged test from negligence (as established in cases like Caparo Industries Plc v. Dickman ) to determine if a parent owes a duty of care to its subsidiary’s stakeholders. Under this test, the harm must be reasonably foreseeable, there must be a relationship of sufficient proximity between the parent and the subsidiary, and it should be fair, just and reasonable to impose such a duty. Courts have indeed recognized parent company liability in negligence when these criteria are met. A notable example is Chandler v. Cape plc [2012] EWCA Civ 525 , where the UK Court of Appeal held a parent company liable for an employee’s asbestos-related illness at its subsidiary; the parent had foreseen the risk, was intimately involved in the subsidiary’s health and safety policy, and it was deemed just to impose a duty. This demonstrates that even without piercing the corporate veil, a parent’s direct duty of care can arise given sufficient foreseeability, proximity, and fairness. However, under the Indian insolvency law framework, this article examines the fascinating interaction between the controlling company and its subsidiaries. Hence, this article will examine the fascinating interaction between the controlling company and its subsidiaries.