Creation and Justification of the Parent Company’s Liability in the Case of Apparent Bankruptcy
Subject Areas : Commercial law
1 - Faculty of Law, Shahid Beheshti University, Tehran, Iran
Keywords: Fraud Prevention, Phantom Profit, Parent Company, Subsidiary Company, Fraudulent Bankruptcy, Lifting the Corporate Veil, Judicial Practice, Profit Injection, Unjust Enrichment, Full Compensation Principle.,
Abstract :
Today, holding companies attract individuals as shareholders, leading to the establishment of companies with a legitimate nature, where subsidiary companies are controlled under them. However, these subsidiaries are often created with the intent of generating illicit profits. This formation, along with transactions involving third parties, profit attraction, and capital increase, allows the main company’s structures to conceal fraudulent gain under the guise of corporate identity. By injecting immediate profits into its subsidiaries, the parent company may artificially present itself as bankrupt. The economic and managerial relationship between the parent company (at the top of the holding) and its subsidiaries enables control over the dependent companies, which, in turn, allows the parent company to assume liability and control. In cases where criminal elements emerge through the involvement of the subsidiary, the concept of agency theory can be invoked to eliminate the independent corporate entities, hold the primary parties accountable, and impose criminal liability for fraudulent activities. Every right that is exercised entails both positive and negative obligations. Consequently, when the true principal (the parent company) derives a benefit, it assumes responsibility and is barred from misusing that right. The unity of benefit and ownership between the parent and the subsidiary, along with the principle of preventing fraud and the requirement of good faith in the relative nature of contracts, leads to the obligation of the parent company or subsidiary to bear responsibility for any wrongdoing. This study examines the nature of this bankruptcy, the process of profit absorption and injection, and the potential liability of the companies' structures, particularly the directors, from both a theoretical and practical perspective.