The Liability of a Company for the Debts of a Sister Company within a Group

Legal Insight

November 2023

Danae Stamarga, LL.M.

Abstracts: Companies belonging to a group of companies share common economic interests, but this does not mean that they do not maintain their autonomy as legal entities. In principle, each company in a group is responsible only for its own debts and liabilities. However, it is not excluded, under certain conditions, that a member company of a group may be called upon to assume liability for the debts of another 'sister' member company of the same group. In this article we will examine the conditions under which such a situation may arise, setting out some examples where our courts have held that such a circumstance exists.

1. Introduction - Principle of the autonomy of the legal person

A basic principle of commercial law is the principle of the autonomy of the legal person, which means that the legal personality of a company is separated from the natural persons who constitute it, with the further practical consequence of separating the property of the legal person from the property of its members, i.e. the natural persons who own its shares or units. In this way, the liability of the legal person is separated from the liability of its members and only the legal person's own property and not the property of its members is liable to its creditors, while conversely, its property is not liable to the individual creditors of its members. For this reason, many entrepreneurs will choose a limited liability company to carry on business through it, with the aim of the company acting as a mechanism for absorbing any adverse consequences of their business activity. Thus, in principle, the various entrepreneurs who choose a type of company limited by shares in order to shield their business activity with the advantages it offers are not acting unfairly (see Athens Court of First Instance 16999/2010). The above principle also applies to the member companies of a group, which have a separate legal personality and each of which is liable only for its own debts and not for the debts of other companies in the group.

2. The removal of the autonomy of the legal person

However, this rule is undermined when the separate existence of a legal person is abused, i.e. when the invocation of the separate personality of a company serves to legitimise an effect contrary to the rules of good faith. This may occur when the acts of the company are in fact acts of its dominant shareholder or partner which are deliberately made to appear to be acts of the company or, conversely, when the acts of the natural person are in fact consistent with the company from which an unfair attempt is being made to separate them. This form of abuse of the company's legal personality occurs mainly in cases where the dominant shareholder or partner uses the legal personality of the company to circumvent the law (e.g. to circumvent a prohibition that binds him as a natural person) or to fraudulently cause damage to a third party, or to avoid fulfilling either his corporate or individual obligations. While, abusive is also the conduct of a principal shareholder or partner who deals with the company by proxy, when the company has no corporate organization or has not developed a business activity and it is he (the principal shareholder) in fact who deals under the corporate name for his own benefit (Supreme Court 2/2013).

3. Removal of independence at the expense of another legal entity - a sister company of a member of the same group

The above mechanism for the removal of autonomy may also operate, according to the case law of our courts, against a third legal entity belonging to the same business group. This is because, just as the invocation of the autonomy of the property of the legal person in relation to the property of its members, so the insistence on the property autonomy of the individual legal persons that make up the group may be abusive. A classic case of such an abuse is, for example, the use of the legal personality of a group member company, e.g. a subsidiary, by another company of the same group, e.g. a parent company or another subsidiary, in order for the latter to avoid meeting its obligations. This issue becomes particularly important in cases where the second of the above-mentioned companies in the group is the only one with sufficient assets against which the creditors of the first company could turn. In such a case, the first will usually be insolvent and will act as an ostensible trader with the second company as a covered and de facto contracting party.

In practice, it is highly likely that in groups of companies either the common interests of the group or the superior business plans of the parent company will be promoted to the detriment of the subsidiary's objectives, resulting in unequal treatment of the latter's creditors. In this case, the responsibility should be spread within the group. In this case, the removal of autonomy will therefore take the form of a transfer of the liability of the insolvent legal person not only to its members but also to the other legal persons belonging to the same group. In other words, in such cases the different companies should be treated as a single legal entity, since their separation as separate legal entities would be contrary to the rule of law. 

Such liability is established where there are circumstances which make it manifestly abusive to set up more than one legal entity. Such circumstances, which usually reveal personal action by the parent company through the subsidiary or by a legal person, or by a legal person in general, through another legal person, include: the omission of corporate formalities, a common or almost common name, the same staff, and, more generally, any conduct from which it is clear that the sole or main reason for the existence of several legal persons is to avoid liability. Furthermore, such liability of the parent company may also be established in cases where third parties have been legitimately led to believe that there is a unity of the undertakings. Such unity may be manifested by the joint activity of a parent company and a subsidiary or a legal person with another legal person, the pursuit of common objectives, the existence of common property or common administration and organisation. In practice, such unity can be said to exist when two undertakings have a common registered office, a common (or confusingly common) name, common premises, common offices, common staff, common telephone numbers, etc.

4. Legislative examples of the removal of the autonomy of a legal person to the detriment of another legal person belonging to the same group

On the basis of all of the above, the Greek courts have held that there is a case for the removal of the autonomy of legal personality between two limited liability companies in the following cases:

a)  In the case where the plaintiffs were all employees of a subsidiary of a group company were employed by the legal representative of the parent company, when, following the termination of their contracts, they were employed by the legal representative of the parent company, the first company owed them accrued wages and compensation for dismissal, the court decided that the legal autonomy of that company should be curtailed and that both companies should be held jointly and severally liable, on the basis of the criteria set out in particular below, namely: "(a) the assignment to the plaintiffs of claims of the second defendant parent company for the purpose of paying accrued wages plus bonuses to employees of the first defendant subsidiary; (b) the payment of wages (accrued wages and bonuses) or part thereof in return for payment by the second defendant company to employees of the first defendant company (in this case also to the plaintiffs), (c) the invoicing by the first defendant, a subsidiary company, of health services which it provided directly to the second defendant parent company, which received the corresponding sums of money each time, in order, inter alia, to settle its own outstanding financial obligations and to settle the financial obligations of the members of the Board of Directors. (d) the receipt of orders and general instructions from the employees of the first defendant subsidiary directly from members of the Board of Directors and other managers of the first defendant subsidiary; (e) the receipt of orders and general instructions from the employees of the first defendant subsidiary directly from members of the Board of Directors and other managers of the first defendant subsidiary, thus draining the reserves of the first defendant subsidiary, which appeared to be insolvent and lacking, if not non-existent, in liquidity; (f) the receipt of orders and general instructions from the employees of the first defendant subsidiary directly from members of the Board of Directors and other managers of the first defendant subsidiary. ... of the second defendant parent company [... (g) the channelling of the proceeds of its commercial activity, initially to various subsidiaries and/or affiliated companies and subsequently to third parties, with the result, on the one hand, that the creditors of that company (the parent company) were defrauded by the removal of funds from its seized assets, and, secondly, the depletion of the capital of the subsidiaries, as happened in the present case with the first defendant company, which did not have sufficient funds to pay, in the present case, the accrued remuneration, including to the plaintiffs, (h) the existence of a common and uniform accounting department, namely that of the second defendant parent company; (i) the second defendant parent company itself took decisions on salary cuts and partial salary payments (salary advances) in return for payment, even to employees of the first defendant subsidiary, which only formally acted as their employer; (k) payment of accrued wages and severance payments to former employees of the first defendant subsidiary directly by the second defendant parent company".

b) In the Athens Court of Appeal No. 3240/2016, which addressed the issue in question in the context of again an employment law dispute, it was held that there is a case of removal of separate legal personality between two limited liability companies that have an identical purpose, are managed by the same family, with a common distinctive title and assets and appear to be carrying on one business - obviously when their activity in general is aimed at avoiding liability. More specifically, according to the facts of that judgment, the first defendant limited liability company, which operated a bookshop, having already become in default in the payment of the accrued wages of the plaintiffs - its employees, ceased trading without paying those wages. The second defendant limited liability company operated, in parallel, a bookshop shop under the same distinctive title, presenting it, in its transactions, as a bookshop of the same family business, while the conduct of the legal representatives of the said companies, towards third parties and employees of the business, created in the latter the belief that they (the companies) could be identified, that is, that they were employees of the family business. For this reason, the above judgment concludes that the second defendant, after the establishment of the first defendant, 'continued its business activity of marketing a bookshop and publishing house and all related work, with the first defendant, who did not have sufficient assets, as a surrogate, carrying on the same business activities as the first defendant, in order to avoid paying its obligations, including those towards the employees in the bookshop of its business. In view of the above, in the specific case at issue, the conditions for the removal of the legal independence of the defendant companies are met, with the result that the second defendant - the plaintiff - is also liable for the obligations of the first defendant. The liquidator is therefore jointly and severally liable with the first defendant to pay to the applicants the sums awarded to them in the judgment under appeal in respect of accrued wages, wages in arrears due to stoppage of work, holiday and vacation allowances and compensation for dismissal...'.

c) Similarly, the decision of the Thessaloniki Court of First Instance in Case No. 9210/2016, according to which: "This allegation is completely untrue, because in reality the plaintiff was working on behalf of the first defendant, legally represented by the second defendant, and his brothers, who, covered behind the corporate cloak of several companies with similar business activity, used them as surrogates and in abuse of their legal personality for the exercise of their personal commercial activities under the same headquarters in Nea Eukarpia Thessaloniki on the street . ..............., following the instructions of the brothers ................, who decided only sovereignly on their fate and reaped the profits from their activities. Accordingly, there is a legitimate reason for the removal of the independence of the legal entity of the first defendant and the other named companies, resulting in the affirmation of the liability parallel and joint and several liability of the first defendant company with the other companies for the payment of the claims requested by the plaintiff, from the services offered by the plaintiff. Therefore, the plaintiff is entitled to pursue his disputed claims against any of the companies jointly and severally liable to him, and therefore also against the first defendant parent company of the group, the second defendant, is in any event - and irrespective of the Court's finding that he is the main shareholder and manager of all the undertakings in the group - personally and jointly and severally liable with the first defendant as a general partner of the latter.

(d) Similarly, in Case No 873/2009 of Supreme Court, it was held that foreign companies (parent company and subsidiary limited liability company) systematically exercised employer functions in relation to employees of a domestic subsidiary limited liability company, with the result that the former was liable to the employees of the latter. The facts which led the court in this case to the above judgment were as follows: "...all subsidiaries are required to apply in each case and in their entirety the guidelines which are binding ... Furthermore, the second foreign parent company, when the sixth respondent was formed, set the minimum amount of 6,000,000 drachmas (Article 4 of Law 3190/1955) required by the law in force at the time as its capital, which meant that its survival depended on the parent companies' financing. This indicates the complete control and dominant influence of the Greek subsidiary by the appellant parent companies, since the former had no real possibility of deciding for itself on its future and even on its existence. .... The plaintiffs - the first five appellants - provided their services regularly without any problem until 31-5-2002, when for the first time they were not paid their accrued wages, namely the salary for May 2002. In their complaints to the manager of the sixth respondent and the appellants' legal representatives, the latter assured them that it was a temporary cash flow problem due to the delay in the remittances from Germany. In view of those assurances, the applicants continued to work as normal until 1-7-2002, when the manager of the sixth respondent X1, together with the appellants' representative E1, who appeared, informed them that the latter had decided to terminate their employment contracts without payment of their statutory compensation [... ] The conduct of the appellant foreign companies, in relation to the first five appellants, was in bad faith, since, although they were in fact carrying out the employer functions themselves, they had been orchestrating the collapse of their Greek subsidiary since May 2002...'.

Epilogue

It follows from all the above that, in principle, even if each company, belonging to a group of companies, serves the financial interests of its main shareholders or those of another company, e.g. a parent company, it still retains its legal autonomy (financial, property, etc.) and is liable only for its own debts. However, it is not excluded, under certain conditions and subject to certain facts, that the Court may rule that its legal autonomy should be removed and that it should thus be held jointly and severally liable for the debts of another sister company in the same group.