Limited Liability in Group Companies

Corporate groups can be defined as a company structure where several companies are interconnected through contract shareholding or as Dine says, “By interlocking dictatorships.” In these structure holding companies usually have control and influence over subsidiaries. Limited liability on the other hand, is the logical consequence of the existence of a separate legal entity or generally, the concept simply means that since the company is different from the shareholders, the members are only liable for the amount unpaid or their shares and not for the debts of the company When limited liability is easily and cheaply available can be explained as removing unnecessary legal bars which can be an inhibition to progress of economic activity and it can give to new forms of abuses of people in control of running corporate groups and they include the following: There is difficult in attaching liability to a parent company and decisions of courts have shown that attaching liability to a parent is difficult even where the acts of the parent company are visible. In the case of Kleinwort Berson V Malaysia Mining corporation (1898) 1 All ER 1789(Court of Appeal) the parent issued “comfort letters” to the subsidiary undertaking to meet any debt liability of subsidiary on liquidation but attempts to rely on this letters by creditors to recover failed as court held they weren’t legally binding on the parent. In Lindgner V Land P Estates, the court held that directors of a parent company have no duties to protect the subsidiaries where the subsidiaries have independent bodies while in Smith store and Knight Ltd Birmingham Co.(1939) 4 All ER 116, the court allowed the company to collect compensation on behalf of the subsidiary. In K, the parent avoided its obligation while in Smith, the parent benefitted from what ordinarily should have accrued to the subsidiary. Secondly, there can be fraudulent transfer of assets and fake companies: It is argued that because of the rule,

References: Corporate, Limited Liability and Lifting the Veil of Incorporation by Clement Chigbo Company law in Uganda (2001) fountain publishers by Bakibinga .J. David; The Anatomy of corporate Law by Kraakman, R, An analysis of limitations and proposals for reforms by Ivan. Engoru