On 1 August 2016, the Court of Appeal released its decision in Steel & Tube Holdings Limited v Lewis Holdings Limited [2016] NZCA 366. The case offers guidance on pooling orders under section 271(1)(a) of the Companies Act 1993, which states that when a company is in liquidation, a court may order a “related company” to pay some or all of the claims in the liquidation, if satisfied that it would be “just and equitable” to do so. A “related company” notably includes the relationship of holding company and subsidiary.
Here, Steel & Tube Holdings was the holding company of Stube Industries Limited, and ultimately had to pay out Lewis Holdings’ claim in Stube’s liquidation. The Court of Appeal upheld the findings of the High Court. Upon review of the considerations in section 272 of the Act, the key factors influencing the Court were:
- Steel & Tube was fully responsible for Stube’s management;
- Steel & Tube took full responsibility in its dealings with Lewis Holdings; and
- Steel & Tube was fully responsible for Stube going into liquidation.
This decision reflects an exception to the general principle that a company is its own legal entity. The courts held that a balance must be struck between recognition of the separate corporate identity of the liquidated company on the one hand, and prevention of mischief that might result from too strict an application of that concept, on the other. Here the focus was on the fact that the directors of the related companies had never distinguished between their duties to Steel & Tube, and those owed to Stube.
The case is a warning that a wholly owned subsidiary’s interests must be kept separate from those of the holding company. Directors who do not preserve a subsidiary’s independence risk a pooling order being made against the holding company, rendering it liable for debts of the subsidiary.