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In a corporate group , the entities that make up the group are legal persons that retain their legal independence from each other. Furthermore, it is important to note that the group as a whole does not have legal personality. Accordingly, the principle of the relative effect of agreements prohibits the creditor of a subsidiary from suing the parent company, unless the faulty interference of the parent company creates a misleading appearance which leads the creditor to believe that the parent company is also co-contractor.
Legal independence of Group companies
Each entity within a group of companies has its own separate legal personality and operates independently of the other members of the group. This means that the actions, obligations and responsibilities of a company within the group do not automatically extend to the others. Each entity is responsible for its own contractual obligations, debts and legal consequences.
Relative effect of agreements and responsibility of the parent company
The principle of the relative effect of agreements governs the relationship between the parties involved in a contract. In the context of a group of companies, this principle limits the ability of the creditor of a subsidiary to take legal action against the parent company. Unless the actions of the parent corporation create a misleading appearance, leading the creditor to reasonably believe that the parent corporation is a co-contractor, the parent corporation is generally not held liable for the debts or obligations of the subsidiary.
In other words, for a creditor to hold the parent company liable, there must be evidence of wrongful interference by the parent company which misleads the creditor into believing that the parent company has a relationship direct contract with him. This misleading appearance must be created by the actions of the parent company and not simply by the existence of a group relationship.
Entities within a group of companies retain their legal independence and the group itself has no legal personality. Consequently, the principle of the relative effect of agreements prohibits the creditor of a subsidiary from suing the parent company, unless the faulty interference of the parent company creates a misleading appearance leading the creditor to believe that the parent company is also co-contractor. This principle preserves the independence of each entity within the group and underlines the need for clarity and transparency in contractual relations.