Court of Appeal upholds Steel & Tube decision on parent company’s liability for debt of subsidiary

The Court of Appeal gave judgment earlier this month in Steel & Tube Holdings Limited v Lewis Holdings Limited [2016] NZCA 366, on appeal from the High Court. It will be recalled that the case concerned a parent company that had placed one of its wholly-owned subsidiaries into liquidation. The liquidators of the subsidiary disclaimed a lease under section 269 (Power to disclaim onerous property) of the Companies Act. The landlord sought damages as well as an order that the parent company should be liable for those damages under section 271 (Pooling of assets of related companies) of the Companies Act. Section 272 sets out the matters the Court is required to consider under section 271, including the extent to which the related company took part in the management of the company in liquidation and the extent to which the businesses of the companies were combined.

The High Court held that it was just and equitable, as section 271 requires, for liability to be imposed on the parent. The Court of Appeal upheld this decision. This is an important decision, because there are few cases on section 271 – and insolvency practitioners have suggested that there are more instances where the pooling provisions in the Companies Act should be applied. The High Court decision contains more analysis than that the of the Court of Appeal – provides a clear message that the separate legal personality of group companies will be respected where each company is conducted and governed as a separate entity. To disregard the separate legal status of the companies will be to run the risk of liability being imposed under section 271 even where, as in Steel & Tube, the subsidiary’s constitution permitted directors of the subsidiary to prefer the interests of the parent. Indeed, as the High Court judgement observes, provisions of this kind do not mean that the interests of both companies can be conflated or the subsidiary’s interests ignored.