Parent Company Case Study

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When is a Parent Company Liable for the Actions of Its Subsidiary?

From a purely legal perspective, a parent company is a legal entity that is separate from the juridical personality of its subsidiary. Still, a question arises as to whether the legal fiction of the juridical entity of each company is always strictly adhered to. In other words, may the legal separation between a parent company and its subsidiary be disregarded so that the former may be liable for the actions of the latter? If yes, in what circumstances should a court pierce the corporate veil?

It is a widely held view by lawyers, judges, and legal commentators that the general rule should be that the limited liability of a parent company as a separate legal entity should be …show more content…

For instance, in jurisdictions other than Jordan, the corporate veil was pierced where it was demonstrated that the parent company was a guarantor for its subsidiary or if the later acted as the agent of the former. Besides, where a parent company effectively makes the decisions issued in the name of its subsidiary, the former may well be found liable for the actions of the latter. Fraudulent transfer of the assets of one company to another affiliated company is another good justification for treating the relevant entities as one.

The Supreme Court of Jordan has tackled the issue of piercing the corporate veil in a case involving a holding company and its subsidiary. In broad terms, the Court held that a holding company is generally jointly with its subsidiary for the actions of the latter, at least, where the subsidiary is wholly-owned by the holding company.

The Decision of the Court of Appeal of Amman in the case number …show more content…

On the facts of the case, AL Qabas for Real Estate Development Ltd (Qabas) agreed to sell to the plaintiffs a piece of land within the Aqaba Special Economic Zone. Qabas received a sum of money from the plaintiffs as part of the price of the land. Yet, the parties failed to record the sale at the Lands Department, which is a legal requirement to perfect the sale. Then, the plaintiffs brought an action against Qabas and Taameer Jordan Holdings (Taameer) which owns Al Qabas.

Taameer argued that there was no privity as between it and the plaintiffs and asked the court of first instance to dismiss the action against it accordingly. The court of first instance rejected Taameer's motion to dismiss the case. The Court of Appeal affirmed the decision of the trial court, citing the fact that, by the definition of a holding company under section 204 of the Companies Law, Taameer owned and managed Qabas.

The Decision of the Supreme Court of Jordan in the case number 3186/2014 dated 22 January,

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