Limiting Liabilities Structuring holding companies to withstand insolvency Virtual Round Table Series Insolvency Working Group 2018 Virtual Series |Limiting Liabilities IR Virtual Series, issue #35. First published September 2018. irglobal.com | page 3 Limiting Liabilities Structuring holding companies to withstand insolvency The concept of limited liability is one well A good example of best practice technique, As another example, if a subsidiary fails to meet known in the international corporate lexicon. is the development of separate corporate its obligations to the tax authorities for sales tax Companies are organised to minimise their governance, ensuring that different directors sit or employee contributions, the directors of the liability for the actions of related but legally on the board of a subsidiary than sit on the holding company can be held personally liable separate entities, be they partners, suppliers or board of a holding company. If it appears that if it can be determined that they influenced customers. the subsidiary is fully under the control of the those decisions. In extreme cases, money used parent company it is harder to resist liability for for mortgage payments or children’s tuition fees These divisions are generally fairly clear, but its actions. has been reclaimed. they become less so when applied to groups of companies, with subsidiaries and holding Another would be the rigorous maintenance of It is clear that correct corporate structuring and companies legally bound to each other via board minutes, financial accounts, and appro- governance are required at the formation of ownership. In these situations, under certain priate documentation of intercompany transac- a company group to avoid any future liability circumstances, a holding company and its tions. This helps to rebuff accusations of prefer- issues in the event of insolvency. The behaviour directors may be held liable for the actions or ential transactions. of directors and responsible employees during performance of a subsidiary despite the fact and immediately prior to an insolvency is also Failure to adhere to these best practices can the subsidiary is a separate business. critical to the outcome of any liability claims be easily tested under the insolvency laws of outside the immediate legal entity. Insolvency is one such circumstance when various jurisdictions around the world. The liabilities within a group of companies are Instrumentality Test and the Identity Theory, for The following feature draws upon the expertise examined forensically. The insolvency or bank- example, are used by courts in the US when of five insolvency practitioners from around the ruptcy of a subsidiary will usually leave a range deciding whether to pierce the corporate veil in world who are members of IR Global. Each of creditors out of pocket and practitioners pursuit of damages. of them gives a unique perspective from his employed by those creditors will make every or her jurisdiction on the issues to consider In the event of a subsidiary insolvency, the effort to recover losses, including exploring the when attempting to limit holding companies’ behaviour of holding companies and their potential liability of a holding company and its liability during the insolvency of a subsidiary directors can have a significant bearing on directors. in a company group and further considers liability. In some jurisdictions, related party the possible damages and defences available As a consequence, it is imperative that transactions (between a subsidiary and a should the worst happen. corporate structures are maintained using holding company) made up to five years prior best practice techniques, prior to any future to the insolvency could be examined. If any are insolvency, to make it as difficult as possible found to have been made at an undervalue, the for creditors to ‘pierce the corporate veil’ and holding company can, in some cases, be forced make charges against assets held outside the to repay the entire consideration received by insolvent business. the transferee for distribution to creditors. The View from IR Thomas Wheeler Each discussion features just one represent- Founder ative per jurisdiction, with the subject matter Our Virtual Series publications bring together a chosen by the steering committee of the number of the network’s members to discuss a relevant working group. The goal is to provide different practice area-related topic. The partic- insight into challenges and opportunities iden- ipants share their expertise and offer a unique tified by specialist practitioners. perspective from the jurisdiction they operate in. We firmly believe the power of a global network This initiative highlights the emphasis we place comes from sharing ideas and expertise, on collaboration within the IR Global community enabling our members to better serve their and the need for effective knowledge sharing. clients’ international needs. irglobal.com | page 3 Virtual Series |Limiting Liabilities ITALY ENGLAND CANADA EAST Massimo Boni David Foster S. Fay Sulley Partner, Ferrari Pedeferri Boni Partner, Barlow Robbins Partner, Torkin Manes LLP 39 02 72 73 061 44 1483 464243 1 416 777 5419 [email protected] [email protected] [email protected] Massimo Boni is the founding partner of FPB David is the Head of Dispute Resolution at Fay is a partner at Torkin Manes, and head of Legal, an Italian business law firm with offices in Barlow Robbins, a leading UK law firm. His areas the Banking, Finance and Insolvency Group. Milan and Trieste, and focuses his practice on of practice include insolvency, professional negli- She acts extensively for institutional and private three main areas: corporate and commercial liti- gence, commercial litigation, property disputes lenders and borrowers in a wide range of gation; insolvency and corporate restructuring; and inheritance disputes. financing transactions, derivative products, corporate and commercial contracts. factoring arrangements, asset securitisations and David regularly handles cases in the higher securitised loans. Over the years, he has acted for Italian and courts for clients of all sizes, including banks, foreign companies, but also international organ- insurers and educational institutions. He has She advises banks with respect to regulatory isations (either UN or non-UN agencies), before handled more than 200 mediations across the and other issues that may arise under the Bank Italian Courts and arbitrators or prominent inter- UK with a success rate of over 90%. Act, or other similar legislation, including a broad national arbitration institutions. range of issues of concern, such as cost of David is a member of the Commercial Liti- borrowing disclosures, privacy, identification of Massimo has gained a significant expertise gation Association, the Professional Negligence clients, money laundering, electronic banking in the highly specialised field of corporate liti- Lawyers’ Association, the Institute of Directors, and other day-to-day issues affecting banks and gation, handling disputes among shareholders and the International Bar Association. other financial institutions. for winning the control of the company or among He is also a member of the standing conference companies and their directors and statutory Fay is involved in corporate restructurings, insol- of Mediation Advocates and a mediator member auditors for liability for mismanagement and vency and related litigation of a number of mediation groups including the fraud or among sellers and purchasers following ADR Group, Expedite Resolution and Law South matters of all sizes. She offers expertise under M&A transactions. Mediators. He is actively involved in a number of the Bankruptcy and Insolvency Act, Companies Massimo is regularly involved in insolvency charities and organisations, including as trustee. Creditors Arrangement Act, Personal Property matter cases, either defending and representing Securities Act, and Financial Administration Act. A recent independent guide to the UK Legal companies, directors and auditors from claims Profession named him as a ‘very good lawyer’ Fay works closely with other members of her brought by bankruptcy trustees (directors liability, who ‘gets down to the heart of an issue’. Karen firm’s Banking, Finance and Insolvency Group to claw-back actions, parent company liability, Schuman, Counsel of 1 Chancery Lane said that assure clients that someone is always available etc.) or counselling and representing distressed David has a ‘calm authority’ and can ‘find the to provide the advice they need, when they need companies throughout their restructuring phase. solution’ in a difficult case. it. He also assists Italian and foreign investors purchasing businesses and assets from insol- vency procedures. irglobal.com | page 5 AUSTRALIA U.S – WASHINGTON, D.C. James Conomos Trevor (Ted) Swett Founder and Principal Partner, Member, Caplin & Drysdale, James Conomos Lawyers Chartered 61 7 3004 8200 1 202 862-5081 [email protected] [email protected] James was admitted as a solicitor in 1987, Trevor (Ted) Swett is a Member in Caplin & Drys- having completed a year in 1986 as associate dale's Washington, D.C., office. He was elected to to the then Chief Justice of the Supreme Court membership in 1989, having joined the firm as of Queensland, The Honourable DG Andrews. In an associate in 1985. Mr. Swett has been recog- his early years, he gained experience in a wide nised as a "Leading Lawyer" by Chambers USA, range