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Subsidiary and parent firms are separate entities.

If a company wishes to expand its business, it may decide to incorporate another company. The new entity is a subsidiary company of the original company i.e. the holding. Some call them parent and sister companies.

However, I believe this is not the accurate legal translation. The subsidiary may carry same business or vary with the original operation, the main reason behind "holding" concept is specialisation.

A contracting company can go for subsidiaries specialising in construction, electrical, interior design etc. A good example, we find in Nike with more than 100 subsidiary companies.

Even there is direct relation between the holding and affiliates, however, both companies are independent legal entities. This is very important point, which explains that no-one is legally responsible for the liabilities of the other. This is the case, even though, the holding company holds majority of shares in the subsidiary.

The Company Law of Bahrain provides for establishment of holding companies, the purpose of which is to own shares in a Bahraini or foreign companies or to participate in the establishment of such companies. The affiliated company shall not own shares or stakes in the holding company, and the holding company shall appoint its representatives on the boards of directors of the affiliated companies in proportion to its holdings or as agreed upon with other shareholders or partners in the affiliated companies.

There are other provisions related to the holding company type.

In Bahrain, we have Ithmmar Bank which is the subsidiary company of the holding company, Ithmmar Holding Company. It was reported that Kuwait Securities Market has issued an order to stop trading in the shares of Ithimar Holding Company as the company is facing major capital losses.

Will the action taken by Kuwait Securities Market, regarding the holding company (Ithmmar Holding Company) affect the subsidiary company (Ithmmar Bank) in Bahrain?

As we explained above, both entities are legally different entities and based on this, Ithmmar Bank in Bahrain is not responsible for the liabilities of its holding company.

No doubt, any difficult time faced by the holding company or otherwise by the subsidiary company will lead to some difficulties to the other. However, without any legal responsibility whatsoever as they are independent legal bodies of two different companies.

The author is a legal consultant

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Publication:Gulf Daily News (Manama, Bahrain)
Date:Apr 12, 2019
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