DISCLAIMER: This article does not create an attorney-client relationship between the author and the reader.  The answer of the author on the issue is just an expression of his general opinion based on Philippine law and hence does not constitute legal advice.

Investopedia.com defines subsidiary company as the company that belongs to another company, which is usually referred to as the parent company or the holding company. Applying this definition to a layman’s lingo, the parent company is the mother company while the subsidiary company is the child company. 

So, may a creditor of the subsidiary company reach the asset of the parent company to satisfy its claim in case the subsidiary company is unable to pay upon demand?

As a general rule, the parent company cannot be asked to pay for the obligation of the subsidiary company (and vice versa) because, under the law, the subsidiary company has a personality separate and distinct from the parent company.  This is the doctrine of separate juridical personality as embodied in the Revised Corporation Code of the Philippines.  As such, the liabilities of the subsidiary company are solely its obligations and not the obligations of the parent company (and vice versa).  The same principle applies with respect to their assets such that the assets of the parent company are solely its assets and thus, cannot be used to satisfy or pay for the obligations of the subsidiary company.

Are there exemptions to the general rule? Yes, there are:

1) The doctrine of separate juridical personality may be disregarded or pierced if the separate juridical personality doctrine is being used to commit fraud or illegality.  This is the doctrine of piercing the veil of corporate fiction (Kukan International Corporation vs Hon. Amor Reyes, G.R. No. 182729, September 29, 2010).  Under this doctrine, the property of the parent company may be held to answer for the obligations of the subsidiary company.

2)    If the parent company is a surety to the obligation of the subsidiary company.  Under Article 2047 of the Civil Code, the surety is solidarily liable with the principal debtor.  As such, the parent company being a surety can be compelled to pay for the obligation of the subsidiary company upon demand. It is not necessary that the original debtor first failed to pay before the surety could be made liable; it is enough that a demand for payment is made by the creditor for the surety’s liability to attach (Trade and Investment Development Corporation of the Philippines vs Asia Paces Corporation, et. al, G.R. No. 187403, February 12, 2014).  

3) If the parent company is a guarantor to the obligation of the subsidiary company.  Under Article 2058 of the Civil Code, the guarantor can be compelled to pay for any remaining credit after the creditor has exhausted all the assets of the debtor and has resorted to all the legal remedies against the debtor. 

Any other doctrine or provision of law that may also be invoked to make the parent company liable for the obligation of the subsidiary company?

As CPA-Lawyer, I submit that the doctrine of estoppel may also be invoked by the creditor of the subsidiary company to reach the assets of the parent company for the satisfaction of its claim against the subsidiary company in case the latter is unable to pay upon demand.  How?

The Philippine Financial Reporting Standards (PFRS), as a general rule, requires the parent company to consolidate the financial statements of its subsidiaries with its financial statements and thereafter, to submit the consolidated financial statements to the Securities and Exchange Commission (SEC) as required under SRC Rule 68, as amended.

By submitting the consolidated financial statements to the SEC, the parent company admits and represents publicly that the liabilities of its subsidiary company are also its liabilities to the extent of its ownership and as such, the parent company may then be estopped from claiming otherwise later.  Under the doctrine of estoppel, an admission or representation is rendered conclusive upon the party making it and cannot be denied or disproved as against the person relying thereon (Article 1431 of the Civil Code).  Hence, this admission and representation may then be the basis of the creditor of the subsidiary company to institute an attachment proceeding in court to reach the assets of the parent company to the extent of its ownership, in case of failure by the subsidiary to pay its obligation upon demand.

(July 5, 2024)