## Facts

- A company (the subsidiary) owed a contractual debt to a creditor.
- The creditor sued the subsidiary’s parent corporation directly, seeking payment of the subsidiary’s unpaid contractual debt.
- The parent corporation provided funds to the subsidiary.
- The parent corporation instructed the subsidiary to use the provided funds to pay certain debts of the subsidiary.
- The subsidiary did not use those funds to pay the creditor’s contractual claim.
- The creditor argued that once the parent chose to fund the subsidiary and to direct which debts would be paid, the parent had a duty—based on good faith and fairness—to protect all creditors and not leave some creditors unpaid.

## Issues

1. Whether a parent corporation that provides funds to its subsidiary and directs payment of certain debts thereby owes a duty, based on good faith and fairness, to protect all of the subsidiary’s creditors.
2. If such a duty exists, whether it makes the parent corporation directly liable to an unpaid creditor for the subsidiary’s contractual debt.

## Decision

- The Tokyo District Court ruled for the parent corporation.
- The court rejected the creditor’s argument that the parent’s funding and directions about paying certain debts created a general duty owed to all of the subsidiary’s creditors.
- On these facts, the court declined to impose direct liability on the parent corporation for the subsidiary’s unpaid contractual obligation to the creditor.

## Legal Principles

- A parent corporation and its subsidiary are separate legal entities; a parent is not automatically responsible for a subsidiary’s contractual debts.
- Providing financial support to a subsidiary, including supplying funds for repayment and instructing that particular obligations be paid, does not by itself create a broad, direct duty running from the parent to all of the subsidiary’s creditors.
- General standards of good faith and fairness do not, without an additional legal basis, convert internal group financing decisions into parent-company liability to third-party creditors.
- Direct parent liability to a subsidiary’s creditor generally requires more than selective funding or payment instructions, such as a specific undertaking toward the creditor, a legally recognized wrongful act affecting the creditor, or legally sufficient grounds to disregard corporate separateness.

## Conclusion

Tokyo District Court refused to extend parent-company liability on a general good-faith theory, holding that a parent’s decision to fund its subsidiary and to direct payment of only certain debts did not, without more, create a duty to all creditors or make the parent directly liable for the subsidiary’s unpaid contractual debt.


Tokyo District Court, 29 November 2005, 29 November 2005, 1209 Hanrei Taimuzu 196 (2005)