Legal Updates

A company may act for the benefit of the group of companies in which it is a member in addition to the benefit of the company but not instead of it

December 11, 2016
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A Court appointed officer sought to cancel a transaction of a company in which it gave securities to debts of another company in the group of which it was a member, arguing that it was not for the benefit of the company but to the benefit of another company in the group and because it was not approved as an “irregular transaction.”

The Court held that a company need act as an independent profit maximizer even when part of a group. A company may act for the benefit of the group but the benefit of the group is not in lieu of the benefit of the company but in addition thereto.  However, sometimes the profit center of the company is from the group and in this case the group was managed as one unit and the reciprocal relationship between the group companies was so tight that the companies were inseparable and thus the company was allowed to act for the benefit of other companies in the group.  As to the required approval, the question of what will be deemed an “irregular transaction” depends on the circumstances as to the manner of activity of the company and in this case transferring funds and securities from one company to another in the group was a regular act for all companies and thus it is not an irregular transaction.  Also, the transaction was approved both at the board of directors and the general meeting.  Thus, the motion of the Court officer was dismissed.