Subject: Affiliated Companies: The Danger of the Intermingled Business

In line with the recent and more famous cases in the news about insolvencies and the corporate abuses in related party transactions, I have recently encountered a similar, but more subtle problem: companies that are affiliated through common ownership. From a legal and financial standpoint, there was a clear separation of the entities. One of the companies (my client) was insolvent, and the other company was solvent. Additionally, both companies operated in the same industry, had common customers and suppliers, shared management, and conducted transactions with each other.

In this situation, the owners of the solvent company were partial owners of the insolvent company and used their knowledge and position with the insolvent company to the advantage of the solvent company. Although management had engaged me as the CRO, the company’s insolvency required me to shift my fiduciary responsibilities toward the creditors. Because of this complicated situation, negotiations with customers and suppliers were strained, as we worked to resolve the troubled company’s financial crisis. In this process, we had to unravel the complex commercial relationship of the affiliated companies without damaging the inherent value of the respective business. This issue was further complicated by the fact that common management had abused the sanctity of the legal entities, overstepping legal constraints and violating the financial covenants with their lenders.