Group company or not?

Frederik van Beek & Joop Werner  |  8 March 2022  |  Reading time: approximately 4 minutes

Large companies often use group companies to spread financial risks. However, the so-called group concept is not strictly defined in law, as a result of which the spreading of those risks sometimes goes wrong in practice, or contracting parties have less security than they thought.

In the practice of company law and contract law, there is often talk about group companies. Larger companies are usually set up in such a way that the economic activities are divided over several legal entities. This set-up makes it possible to spread risks, including financial risks, over the companies within the group. In addition, this set-up makes it relatively easy to sell off separate economic activities from, or add them to, the group.

Being a group or group company has consequences for creating, for example, the consolidated financial statements. In addition, the group concept can play an important role in contractual relationships with third parties. For example, contracting parties may agree that they may also set off a claim against a debt owed to the other party’s group company.

Legal framework

But what constitutes a group or a group company? The legislator has included the definition of a group and a group company in the law. A group is defined as “an economic unit in which legal entities and partnerships are united in one organization”. Group companies are those “legal entities and partnerships which are united in one group”. In order to fall within the definition of a group, there must therefore be:

  • an organizational affiliation, and
  • an economic unit.

We elaborate how this is done in practice by using the following case.

Case

In March 2021, the Zeeland-West Brabant Court ruled on the following case.

A BV (A) entered into an agreement with another BV (B). The agreement between A and B is governed by A’s general terms and conditions. These general terms and conditions stipulate, amongst other things, that A can set off a claim of B against claims of A on a group company of B.

A has also entered into an agreement with a German company (C). Under that agreement, C owes an amount to A. The German company C has the same director and sole shareholder as B. This director communicates to A both on behalf of B and on behalf of C. A argues that, partly for that reason, C is a group company of B. In the relationship with B, A relies on the general terms and conditions and the possibility of setting off the claim against C laid down therein.

B is of the opinion that C is not a group company and that setoff is therefore not possible. A must ‘simply’ pay to B, according to B. The central question for the Court is whether C is a group company of B.

Judgment of the Court

To start with, the Court made it clear that the abovementioned requirements of economic unity and organizational affiliation are necessary to be able to speak of a group. The Court added that it follows from the legislative history that it is essential that there is central management within the group. There is central management if the legal entity at the head of the group can influence the underlying companies and actually does so. There is already central management if one legal entity determines the policy in the other legal entity. The court emphasized that this must be established on the basis of the actual situation.

A especially pointed out the personal union between within B and C, which both have the same shareholder and director. The director of both companies used the same e‑mail address to report on both B’s and C’s affairs. In addition, according to A, C’s accounts were kept by an accountant employed by B. According to the Court, the personal union described by A, however, does not mean that there is central management from one of the companies.

According to the Court, this is a situation where the director of B and of C both managed the companies without one of the companies having a leading role. There was also no holding company that was in charge in both B and C. B and C are therefore not group companies. This means that A could not set off debts from B against alleged claims on C. A must ‘just’ pay to B.

Actual situation

This judgment makes clear that the group concept is not strictly defined. To determine whether there is a group or group company, the economic reality is decisive. The literature on this subject is therefore also called the ‘economic group concept’. In practice, it is important that the actual situation is decisive in answering the question of whether there is a group or group company. The formal controlling relationships are not important. The actual situation must be examined, in which the element of central management plays an essential role. The central management must be in the hands of one of the legal entities within the group.

Do you have any questions? Please contact Frederik van Beek or Joop Werner.

This article was previously published on Accountant.nl.

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