Q&As

A wholly-owned trading subsidiary is being forced by its shareholder/parent company to join a Group VAT registration regime. Its contingent liabilities (to be liable to pay taxes owed by the parent) will, as a result, be too large for its balance sheet and the subsidiary will technically be insolvent. Is there any way to protect the subsidiary from insolvency, for example by the parent indemnifying the subsidiary for its own VAT liability?

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Published on LexisPSL on 27/08/2019

The following Restructuring & Insolvency Q&A provides comprehensive and up to date legal information covering:

  • A wholly-owned trading subsidiary is being forced by its shareholder/parent company to join a Group VAT registration regime. Its contingent liabilities (to be liable to pay taxes owed by the parent) will, as a result, be too large for its balance sheet and the subsidiary will technically be insolvent. Is there any way to protect the subsidiary from insolvency, for example by the parent indemnifying the subsidiary for its own VAT liability?

There is nothing wrong per se with a company being insolvent on a balance sheet basis, and, in fact, many businesses start out being balance sheet insolvent. The test in relation to balance sheet insolvency was considered by the Supreme Court in BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc, in which the following passage from Toulson LJ’s judgment in the Court of Appeal in that case was approved:

‘Essentially, section 123(2) [of the Insolvency Act 1986 (IA 1986)] requires the court to make a judgment whether it has been established that, looking at the company’s assets and making proper allowance for its prospective and contingent liabilities, it cannot reasonably be expected to be able to meet those liabilities. If so, it will be deemed to be insolvent although it is currently able to

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