Daughter company facing bankruptcy –

Three positions of a parent company in relation to a subsidiary

For liability for exercising influence, the size of the shareholding is not the decisive factor, but rather how the group is actually managed. An influential person is one who, through their influence in a business corporation, decisively and significantly influences its conduct to its detriment (Section 71 of the Business Corporations Act). This is the broadest category and also covers situations where the parent company formally manages nothing but de facto decides on suppliers, prices, or where the cash goes.

The second position is that of a controlling person, i.e., one who can directly or indirectly exercise decisive influence in a corporation. In this position, the size of the shareholding does play a role: a majority shareholder is fundamentally a controlling person, and the law also works with presumptions tied to forty percent of the votes, and under further conditions, thirty percent, and the ability to appoint or dismiss the majority of board members. The third and strongest position is that of a managing person in a concern, i.e., one who has subjected the subsidiary to unified management.

The difference between these positions is not academic, as each carries a different defence. A person who is merely influential can defend themselves by proving that they could have reasonably assumed in good faith that they were acting on an informed basis and in the defensible interest of the influenced person. A managing person in a concern also has the concern defence at their disposal, which is discussed further on. Determining one's position is therefore the first step, not a formality.

Unified management does not arise from a decision, but from practice. It is understood as the influence of the managing person on the activity of the managed person, aimed at the long-term promotion of concern interests within a unified concern policy through the coordination and conceptual management of at least one of the significant components or activities within the concern's business (Section 79 of the Business Corporations Act). Shared purchasing, a common treasury, or a unified business policy do not in themselves establish a concern, but they are precisely the indicators from which unified management is inferred in a dispute.

Moreover, influence is counted even when it is not direct. Influence is also understood as influence exercised through another person or persons, so an intermediate layer of holding companies or a natural person at the top of the group does not interrupt liability. The rule on influence does not apply to the actions of members of the elected bodies of the influenced person; they are liable under the rules of due managerial care.

When does liability for damages and for the subsidiary's debts arise

An influential person shall compensate for the harm caused to the subsidiary by their influence, unless they prove that they could have reasonably assumed in good faith that they were acting on an informed basis and in the defensible interest of the influenced person. The burden of proof is thus divided: the claimant must allege and prove the influence itself, the harm, and the causal link between them, while the parent company proves its defence. This is inconvenient for parent companies, as defensibility is proven by something that took place in meetings without minutes.

For creditors, however, the second layer, namely the guarantee, is more significant. The influential person guarantees to the creditors of the influenced person the fulfilment of those debts which the influenced person cannot fully or partially meet as a result of the influence. The creditor therefore does not have to wait for insolvency proceedings or the outcome of a dispute between the subsidiary and the parent; they can turn directly to the parent company and claim that the subsidiary cannot pay precisely because of what the parent company caused.

The third layer is the harm to shareholders. If the influential person does not compensate for the harm caused by the end of the accounting period in which the harm arose, or within another agreed reasonable period, they shall also compensate for the harm that arose in this context to the shareholders of the influenced person. The group can therefore agree on another reasonable period, but it must actually be agreed upon; a tacitly postponed settlement until cash is available does not meet this condition.

The fourth layer is the position of a de facto director, which is activated only in insolvency. If a member of the statutory body contributed to the corporation's insolvency by breaching their duties, and a decision has already been made on the method of resolving the insolvency, the insolvency court shall, at the administrator's request, order the surrender of the benefit obtained, and in the case of bankruptcy, may also decide on the obligation to provide a contribution to the insolvency estate up to the difference between the total debts and the value of the assets (Section 66 of the Business Corporations Act). According to a joint provision, these rules shall apply mutatis mutandis to any other person who is de facto in such a position, even if they are not a member of a body.

The fifth layer, which is often forgotten, is the liability of the subsidiary's own statutory body. The managing director of a subsidiary who has carried out the parent's instructions is not relieved of the duty to act with due managerial care; they are only exonerated if they prove that they could have reasonably expected the conditions for concern compensation to be met. The managing person's body may issue instructions concerning business management, provided they are in the interest of the concern.

The fact that the parent company appoints and dismisses the subsidiary's managing directors does not in itself create a conflict of interest. It is a sign of control, not a conflict; a conflict arises only in a specific situation where the managing director's conduct comes under the influence of the parent and their interest diverges from the interest of the subsidiary. In such a case, the rules on conflict of interest apply mutatis mutandis, and the managing director has a duty to inform the supervisory body or, failing that, the supreme body. If the subsidiary is about to conclude a contract with an influential or controlling person or with a sister company, this information duty also applies, with the exception of contracts within a concern.

Whether the parent company in your group has reached the position of a de facto director is not assessed according to the organisational chart, but according to who actually made decisions about the subsidiary's business management — that is why the lawyers at ARROWS law firm examine this from communications and minutes, not from the commercial register extract.

The concern defence and the conditions under which it works at all

Groups usually rely on the fact that a transaction disadvantageous to one subsidiary will be compensated for elsewhere. The law permits this: the provisions on compensation for harm and on guarantees do not apply if the managing person proves that the harm arose in the interest of the concern and was or will be compensated for within that concern (Section 72 of the Business Corporations Act). Compensation is understood as adequate consideration or other demonstrable benefits arising from membership in the concern, provided within a reasonable time.

However, this defence has an exception that turns the entire institute on its head. If the insolvency of the managed person occurs as a result of the managing person's actions towards the managed person, the concern defence does not apply. Thus, it is not available precisely in the situation where the parent company needs it most. The lesson for group management is that compensating for harm within a concern works as a tool during normal operations, not as a safeguard for a crisis.

The second condition on which the defence fails even earlier is publication. The members of a concern must publish its existence on their websites without undue delay, otherwise the rule on compensation for harm cannot be applied. This is an obligation that a significant portion of domestic groups fail to meet, and its non-fulfilment is immediately apparent, as it can be verified by looking at the website.

Whether a specific consideration within the group will stand as compensation for harm, or whether it is just another transaction, depends on its value, timing, and what the specific subsidiary actually gains from its membership in the concern — that is why the lawyers at ARROWS law firm assess this for each transaction separately.

The practical consequence is twofold and can be summarised in two tasks. The first is to publish the concern on the websites of all group members and have proof of the date from which the information is present. The second is to keep a record of how each disadvantageous transaction was compensated, including the date and value. Although the law does not prescribe that compensation can only be proven by a contemporaneous record, it is significantly harder to prove in a dispute without one.

The report on relations as the document by which it will be judged

The statutory body of a controlled person shall prepare a written report on relations for the past accounting period within three months of the end of the accounting period (Section 82 of the Business Corporations Act). The report shall state the structure of relations, the role of the controlled person, the method and means of control, an overview of acts made at the instigation of or in the interest of the controlling person, and an overview of mutual contracts.

For the overview of acts, the law has a specific threshold that is advisable to know before preparing the report. Acts from the last accounting period are listed if they concerned assets exceeding ten percent of the controlled person's equity as determined by the financial statements for the immediately preceding period. The overview of mutual contracts, however, is listed regardless of this threshold, so smaller transactions do not automatically drop out of the report just because they do not reach the value.

The report also assesses whether advantages or disadvantages prevail in the group and what risks this entails for the subsidiary. The statutory body shall state in it whether, how, and in what period any harm was or will be compensated. This is where the future position of the parent company is decided: what the subsidiary itself writes about the compensation of harm will later be read as its own admission or as proof that the group addressed the matter.

The Supreme Court has concluded regarding this document that the report must be sufficiently specific and concrete to allow for an informed assessment of the success or failure of any claims arising from influence and concern compensation. It followed this with a rule that the report can be corrected and supplemented even after it has been discussed and filed in the collection of deeds, and that the court will take these corrections into account when deciding on the appointment of an expert; if the group rectifies the identified defects, the serious grounds for an expert review will cease to exist (Supreme Court resolution file no. 27 Cdo 2745/2024 of 19 June 2025, available at rozhodnuti.nsoud.cz).

However, a motion to appoint an expert cannot be filed by just anyone. In a limited liability company, it must be a qualified shareholder, i.e., one whose contribution amounts to at least ten percent of the share capital or who holds a ten percent share of the voting rights, for serious reasons and within one year from the day they learned or could have learned of the report's content. For the parent company, this means that a formally perfunctory report is not a time-saver, but a one-year open window for a motion.

What to set up in a holding before a subsidiary's performance starts to decline

The first step is to determine and record who exercises influence within the group and in what form. You need a map of the group indicating where decisions are made about the business management of individual subsidiaries, who approves their investments, and who manages their cash. This map also serves as a basis for publishing the concern and for the report on relations, so it is prepared once and used three times.

The second step is to establish how mutual performances are valued within the group. Leases of machinery, shared services, licenses, and intra-group financing must have a documented method for determining the price. Without this, every performance becomes a candidate for harm, because no one can show that it was reasonable. The context of contractual arrangements within a group is discussed in the text on preventing disputes in a holding.

The corporate assessment asks a different question than the tax documentation for transfer pricing. The tax question is whether the price was at arm's length between related parties; the corporate question is whether the transaction was in the interest of that particular subsidiary, and within a concern, additionally, whether any harm was or will be compensated. Groups that have their transfer pricing in order have therefore not yet resolved the issue of liability for influence.

The third step is to introduce a record of compensations and decision-making records for transactions that burden one subsidiary. For each such transaction, record what the concern's interest is, what harm is caused to the subsidiary, and how it will be compensated. A one-page note made at the time of the decision has a higher value in a later dispute than an expert opinion prepared three years later.

The fourth step is to separate management from decision-making where it matters. If the parent company interferes in the subsidiary's business management with direct instructions outside the corporate bodies, it strengthens the claim of de facto management. Instructions regarding business management can be given in a concern, but they should go through the corporate bodies and records should be kept of them, showing what was considered.

Typical mistakes and their cost

The most common mistake is draining cash from a subsidiary when it is already struggling. An intra-group loan, an extraordinary dividend, or the payment of another sister company's debt at such a moment opens up two risks at once: it can be influence to the detriment and is also often challenged as an ineffective legal act in insolvency. The context of personal liability in insolvency is discussed in the text on contribution to cover negative equity in insolvency.

The second mistake is an unpublished concern with simultaneous concern management. The group behaves like a concern, issues instructions, and compensates for harm internally, but there is nothing about the concern on the website. In a dispute, the parent company then argues for compensation, and the opposing party shows them that they are not entitled to this defence. One cannot safely rely on subsequent publication to defend transactions from a period when the obligation was not met.

The third mistake is a report on relations written as a form. Sentences like "mutual contracts were concluded under standard business conditions" without specifying which contracts and how the price was determined are of no help to anyone. On the contrary, they create the impression that the group has no overview of what is happening internally and give a qualified shareholder an argument for a motion to appoint an expert.

The fourth mistake is a late decision on whether to support or let go of a subsidiary. Financing a subsidiary does not in itself establish liability and often just postpones insolvency; the decisive factor is whether the parent's specific actions contributed to the insolvency. When supporting a subsidiary is still a defensible interest and when it already establishes liability is assessed by the lawyers at ARROWS law firm based on the subsidiary's condition and what was known at the time.

A different situation, namely the protection of subsidiaries during the parent's difficulties, is discussed in the text on the protection of subsidiaries in the event of the parent company's insolvency.

Where the holding structure fails

Final summary

The article has shown that a parent company's liability for a subsidiary's insolvency is not based on ownership, but on the exercise of influence, and that it consists of three layers: compensation for harm to the subsidiary, a guarantee to its creditors, and harm to its shareholders. A concern defence exists, but it is conditional on publication and does not apply at the moment of insolvency.

For group management, this raises two questions that can be answered today. The first is whether the concern is published on the websites of all group members. The second is whether there is a record for disadvantageous intra-group transactions over the last three years of how they were compensated. A negative answer to the first means that the compensation defence is not available at all; a negative answer to the second means that it will be difficult to prove.

Procrastination is more expensive here than elsewhere, because the publication of a concern is effective from the moment it is on the web, and proof of compensation is easier to produce during normal operations than under the pressure of a dispute. Groups that have this in order usually arranged it when they were doing well and no one was pushing them.

The lawyers at ARROWS law firm will review your group's structure and the division of roles, set up intra-group documentation and valuation of performances, prepare a report on relations that will stand up to scrutiny, and represent you in negotiations with creditors and in any subsequent dispute. Write to us at consultation@arws.cz or browse our service Corporate Law, Holdings and Structures.