A parent company must under company law produce accounts which include the

A parent company must under company law produce

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performance-related pay and borrowing capacity. A parent company must, under company law, produce accounts, which include the profits/losses and assets/liabilities of its subsidiaries. The idea is that it should provide the full picture for all the companies it controls, and not hide away poor performances or liabilities in a separate entity whose details it does not disclose. But what if parent company A sets up a company B which it controls, but which is nonetheless carefully structured to fall outside the legal definitions of a subsidiary? In this ‘orphan subsidiary’ it would have the perfect vehicle to use in ventures which involved high risk or high borrowings – such as a highly leveraged acquisition – without the losses or liabilities appearing, detrimentally, in its group accounts.
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232 Taxing Democracy The statutory definition of a subsidiary under Section 736(1) of the Companies Act 1985 involved two criteria. Company B was a subsidiary of company A if (a) A owned more than half B’s equity capital, or if (b) A controlled the composition of B’s board of directors. With a little creativity, both criteria could be readily circumvented. There were many ways of achieving this, one of the simplest being to set up two types of shares, ordinary shares and preference shares, 50 per cent of each. Company A would own the ordinary shares, while its bank would own the preference shares. Company A would not therefore own more than 50 per cent of the equity capital. Company A and its bank would each appoint half the directors. Company A would not therefore control the composition of the board of directors. But the directors representing the ordinary shareholder (Company A) would have two votes to the preference share directors’ one. Company A would not control the composition of the board of directors, but it would control the board’s votes. These are typical examples of creative compliance at work, and they demonstrate how the material of law is actively used to circumvent legal control. The constructs that emerge are backed with legal arguments and the opinions of leading counsel and, if challenged, a case can be produced (however ‘bullish’ – see ahead) to claim compliance with the law. And these are merely examples. Creative compliance is not a practice operating at the statistical margins, or at the margins of society. On the contrary, it is pervasive, and pervasive among leading lights in the social and corporate world. The orphan subsidiary, for example, was just one of a vast range of creative accounting devices, used routinely in the UK by household name companies. Creative Compliance and Non-compliance That creative compliance is compliance is, of course, only a claim. Whether it is perfectly legal or not is an unanswerable question, until it has won or lost in court.
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  • Fall '16
  • tax authority, Australian Taxation Office, Tax Office, Compliance Model

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