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Director and parent company liability
Under what circumstances can a director or parent company be held liable for a company’s insolvency?
Directors can be held liable for damages resulting from violation of their duties – in particular, their duty to:
- act with care;
- preserve and maximise the value of the company’s assets once a risk of insolvency emerges or share capital is lost; and
- refrain from acting in a conflict of interest.
Parent companies can be held liable for damages resulting from abusive direction and coordination activity over a subsidiary.
What defences are available to a liable director or parent company?
Directors can invoke the business judgement rule and object by claiming that the burden of proof is on the receiver to show precisely what conduct the director is being blamed for and the specific causal link of that conduct to the ensuing damage to the company. In particular, non-executive directors can object on the basis that they are entitled to act simply based on reliable information made available to them during board meetings.
As far as abusive direction and coordination causes of action are concerned, a parent company can object by stating that the damages should be assessed in light of the overall direction and coordination activity; therefore, so-called ‘compensatory advantages’ to the subsidiary should be considered. The burden of proof is on the receiver to show what abusive conduct has been performed in the interest of the parent company or a third party and the causal link to the ensuing damage to the subsidiary.
What due diligence should be conducted to limit liability?
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