Holding & Subsidiary

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

24 April 2010
We are creating a new company X which will be a Wholly owned subsidiary of Company Y. In the new company there directors will be 2 new persons nominated by the shareholders who is not having any any shareholding in the new company. Therafter some time we plans to transfer all the shareholding holds by the holding company to these 2 directors.

My question is in the MoA and AoA the clause of holding and subsidiary will be there. Once the Shareholding of holding has been transferred by the holding company to the new directors , the status of subsidiary will cease,

In such a situation suppose this directors in the new company is showing the MoA and AoA of this company to some other parties and is misrepresenting those parties by stating that it is a subsidiary of holding company Y. Whether Company Y will be having any legal liability to this misrepresentation by these directors as the clause in MoA and AoA will show that it is a subsidiary of hlding company.

Kindly brief out what all steps we can take in such a situation.

Jagruti (CS)

Jagruti (CS) (Expert)
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30 April 2010 For being subsidiary there are 2 mnian criteria as:

1. Other Co. controls the Board of Company or

2. Other Company holds more than 50% of equity shares or voting rights in the Company.

Now, in your case, as you first mentioned directors are nominee of Company Y, so Company X is controlled by Company Y.

if you are inserting a clause in AoA of x being subsidiary of y along with the other clauses regarding the transfer of shares or appointment of Director etc like in joint venture companies.

If now Company Y transfer shares to 2 director of X, still Company Y remain the subsidiary of X under Section 4(1)(a)i.e. Y controls the Board of Directors of X.

Hence in order to cease the Holing Company of X, Co. Y has to first chenge the designation from Nominee Director to other designationas Director or like and also change the AoA of Co. X and transfer the shares to such independent director.

Otherwise, Company Y will be liable as Holding Company if only shares are transfered.