Part 13 Groups

June 2011

75.262 Introduction

Many businesses are organised into a number of different companies. The structure as a whole is generally referred to as a group of companies and each company within it may fulfil a different function. For example, one company may provide the accounting and other administrative services to the whole group, another company may own all the groups’ freehold property, another company may manufacture the finished product and another company may be responsible for selling the product. A final company may be the holding or parent company and be responsible for the overall management of the group. It is not unusual for a court to make a winding-up order against one or more members of a group.

75.263 Holding and subsidiary companies

A holding company is defined in a number of different ways. A holding company is:

  • a company that holds a majority of the voting rights in another company, called a subsidiary;
  • a company that if it is a member of another company it has the right to appoint or remove a majority of the board of directors; and  
  • a company which if it is a member of another company controls (with the agreement of the other members) a majority of the voting rights.

A holding company may have a number of subsidiaries and may also control a number of other companies who are subsidiaries of its subsidiaries [Note 1].

75.264 Current legal position

Each company within a group is a separate legal entity with its own rights, duties and responsibilities. In general this means that each company has a distinct legal personality regardless of ownership, the members of each company have limited liability, the creditors of each company have claims only against that company and the directors are subject to general duties and must act in the company’s interests, see part 8.

75.265 Veil of incorporation

The principle that a registered company is a legal entity separate from its members is referred to as the “veil of incorporation”, the “veil” separating the members from the company. Generally, the law will not go behind the veil to examine its members. The “veil of incorporation” applies to each company in the group and the Companies Act 2006 applies to them individually with the exception of the sections dealing with the preparation of accounts.

75.266 Removing the “veil of incorporation”

The judiciary have been reluctant to remove the “veil of incorporation” however there are three instances where they could do so. In Adams v Cape Industries [1990] W.L.R. 657  it was held that the “veil of incorporation” could be lifted where the court is interpreting a statute or document, where the company is a mere façade and where the company is an agent of another company. In this case the Court of Appeal declined to lift the veil of incorporation.

75.267 “Veil of incorporation” – recent developments

However, the courts when considering contracts of employment, in particular, post-termination restrictive covenants, have adopted a slightly different approach. In Samengo-Turner v J & H Marsh & McLennan (Services) Ltd [2007] 2 C.L.C. 104  and  Beckett Investment Group Ltd v Hall [2007] I.C.R. 1539 it was held that clauses restricting the future employment opportunities in a contract of employment covered not only the business of the immediate employer but also included the business conducted by other companies within the group.

75.268 “Veil of incorporation” and the official receiver

The official receiver when administering a group company, or a number of group companies may consider whether it would be advantageous to lift the “veil of incorporation”. The official receiver may discover the company has a claim on assets held by other group companies who are not in liquidation. In addition the official receiver may be able to refuse to admit proofs of debt for one or more of the company’s creditors who provided goods or services to other group companies. Any decision to reject a proof of debt is likely to be challenged in the court by the creditor, so, the official receiver must be prepared to justify his/her decision.  For further information on antecedent recoveries see Chapter 31.4B. For more information on rejecting proofs of debt see paragraph 40.17. 

75.269 Group Accounts

A holding company must prepare group accounts at the end of the financial period, see paragraph 75.144, unless it has a small group (see paragraph 75.147) or other exemption [Note 2].

75.270 Small Group Exemption

A holding company that qualifies for a small group exemption must produce individual accounts and has the option of producing group accounts as well [Note 3].

75.271 Other exemptions

A holding company is exempt from preparing group accounts if:

  • its accounts are consolidated in the European Economic Area (EEA) accounts of a larger group [Note 4];
  • its accounts are consolidated in the non-EEA accounts of a larger group [Note 5]; and
  • it only has subsidiaries that do not need to be consolidated, see paragraph 75.272 [Note 6].

A holding company may prepare group accounts if it qualifies under these exemptions.

75.272 Group accounts

Group accounts consist of a consolidated balance sheet of the holding company and its subsidiaries as at the last day of the financial year and a consolidated profit and loss account of the holding company and its subsidiaries. The accounts must give a true and fair view of the group’s financial position and trading [Note 7]. A small number of groups the official receiver deals with may have prepared their consolidated accounts in accordance with international accounting standards. This is allowed under the Companies Act 2006 [Note 8] the directors must state that the consolidated accounts have been prepared in this way in their notes [Note 9].

75.273 Subsidiary accounts

A subsidiary may be excluded from a holding companies group accounts if its inclusion is not material in providing a true and fair view of the group’s trading, if obtaining the information necessary for the preparation of group accounts is too costly or time-consuming, the holding company’s interest is solely for resale or there are severe long-term restrictions, such as a restrictive covenant on a property, that substantially restricts the exercise of the holding company rights [Note 10].  

75.274 A holding company’s published accounts

A holding company when publishing its accounts is not required to publish its individual profit and loss account. If a holding company does not publish its profit and loss account it must confirm in the accounts that the exemption has been applied, that the profit and loss account complies with section 414 (1) of the Companies Act 2006 and that the profit or loss is disclosed in the notes to its individual balance sheet [Note 11].

75.275 Group reporting

The holding company’s directors are responsible for ensuring that the individual accounts of the holding company and each of its subsidiaries are prepared using the same financial reporting framework, unless there are good reasons for not doing so [Note 12].

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