There are times when a creditor company is unable to recover the debt from the debtor company. In order to keep the cash flowing the creditor company can choose to sue the parent company of a subsidiary to recover their debts.
The debtor company may adopt a strategy of protecting assets by a group structure. The goal of subsidiaries and special purpose vehicle limited liability companies is to protect the parent company. In the eyes of the law, a parent business and its subsidiary are legally distinct, having separate liability for their actions and omissions. A parent corporation may, however, be held accountable for the acts of its subsidiary under certain circumstances.
Our Chief Shergroupie, Claire Sandbrook has been often approached by business owners to ask if they can sue the parent company of their debtor, perhaps because the debtor company itself has no assets or has gone into liquidation.
Both Companies Are Separate Legal Entities
The law treats parent companies and their subsidiaries as different legal entities, each in charge of its own company management, including separate finance, management, and recruitment. One company, including the parent, cannot be held liable for the debts of another firm within the group because each is an independent entity.
When the corporate veil is lifted, there are some exceptions
The “corporate veil” is a term used to describe the separation of legal entities. In some cases, a court may lift this veil and hold the parent company accountable for the subsidiary’s acts.
These instances usually involve acts of fraud, such as the wrongful transfer of assets or shares, as well as other dishonest tactics to escape the subsidiary company’s liabilities, or impropriety in the duty of care.
Court Judgments for Money
In the instance of a judgment against a subsidiary, the court is unlikely to allow the claimant to pursue their claim against the parent without sufficient evidence of fraud or that subsidiaries were established up as a deceptive façade to hide assets from the creditor.
Unfortunately, if the debtor corporation with which the creditor had a contract fails to pay, there is usually always no other choice.
Shergroup is your friend in business and will help you recover your debt from your debtor by enforcing the court order against them. Our High Court Enforcement Officers as seen on the TV Show Call The Bailiffs – Time To Pay Up are experienced in dealing with difficult situations and debtors and can get the most stubborn debtors to pay. So take a sigh of relief and contact our business solutions advisors today to know more.
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