The joint and several liability of a holding company and controlled company

On November 14, 2021, the Court of Milan granted the creditor of a controlled company a 20 million euro security interest as it partially granted a subrogation claim under Article 2497 of the Civil Code brought against the holding company.

1. What does the Italian law say?

According to Article 2497, third paragraph of the Civil Code, a creditor can act against a holding company only if its credit has not been satisfied by its direct debtor (the company that owes it directly).

A holding company has liability if damage occurred because of the management and coordination activities carried out by the holding company in violation of the principles of proper management. In the case of the company’s creditors, such damage is identified as “injury caused to the integrity of the company’s assets.”

2. What happened in this case?

In this specific case, the controlled company, which was in an arrangement procedure, had reached an agreement under which it managed to pay 80% of its debt. As a result, the creditor filed a subrogation claim against the holding company for the remaining 20% (amounting to 20 million euros).

3. What did the Court of Milan decide?

The court considered the liability action under Article 2497 against the holding company to be well-founded because:

1. the subsidiary had failed to ask the payment of large credits it owed to the holding company;
2. even though the controlled company found itself in a precarious economic situation, it distributed dividends to the holding company for two years in a row;
3. the holding company had not approved financial statements for years, so it did not provide up-to-date information on its financial position, to the detriment of creditors;
4. rather than distributing dividends, the subsidiary could have paid off its debt by supporting business continuity and improving the group’s financial structure.

The Milan court’s decision is significant in that it held the holding company liable for violating the principles of proper corporate management based not on the actions taken by directors (as in most cases), but based on a decision approved by the controlled company’s shareholders’ meeting, resulting from management decisions of the wholly owned group.