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From July 2012 update of Jordans Company Administration and Governance: IN FOCUS
A parent company generally enjoys the same protection of limited liability in regard to the liabilities of its subsidiary company as any other shareholder. This protection applies even where the parent is the 100% shareholder of the subsidiary. It is well known that because of the immunity from liability provided by the veil of incorporation a company will often seek to conduct its business through a raft of subsidiaries. However, in a recent decision the Court of Appeal ( EWCA Civ 525) has held that it is possible on occasion, by reason of the manner in which the parent acts, for it to have attached to it responsibility for some aspects of its subsidiary's business.
Cape Building Products Ltd (‘Products') was a subsidiary of what is now Cape plc (‘Cape'). Mr Chandler was employed by Products from 24 April to 9 October 1959 and again from 24 January 1961 to 9 February 1962. Between the times when Mr Chandler had worked for the company and the current litigation, Products was dissolved.
At the time when Mr Chandler worked for Products, its business had been substantially integrated into Cape's business. Cape had been manufacturing asbestos from as long ago as the nineteenth century. By 1953, Cape had become the 100% owner of Products, which operated out of two factory premises at Uxbridge. One of the factories was unused at this time and so Cape took it over for the production of Asbestolux, which was a new form of non-combustible asbestos board. Although at first Cape was a tenant of Products, the latter had modified the premises by late 1954 for Cape's use in the production of Asbestolux. Cape paid a rent and a share of the rates, and there was no evidence to show that the rent was at anything other than the market rate. Gradually, Products became part of the integrated group of companies headed by Cape. Although health and safety matters were dealt with both by Products, which employed its own works doctor, and at group level, it would seem that the bigger part of health supervision lay with Cape. There had been a group medical adviser employed by Cape since at least 1948. As Arden LJ said:
‘It is clear that from 1945 Cape kept statistics for asbestosis, lung cancer and mesothelioma among employees and former employees at Uxbridge. The evidence also showed that ... it had a group manual which provided for regular medical check-ups for employees having regular contact with asbestos and asbestos products, and other employees at the discretion of the manager.'
Further, it is apparent from correspondence produced in evidence between the Cape company doctor and a doctor at HM Factory Inspectorate at the Ministry of Labour towards the end of 1961 that there was concern about a particular case of asbestosis, though it is not clear whether the employee concerned worked for Products or Cape. It was also clear from board minutes at this time that Cape was taking decisions about the expansion of Products' business, and the two companies shared a number of persons as directors.
There was no dispute that during the course of his employment with Products, Mr Chandler was exposed to asbestos. In 2007, he was diagnosed with asbestosis. By this time Products had been dissolved. It had, of course, at the time when Mr Chandler had worked there, held employer's liability insurance, but in Cape plc v Iron Trades Employers Liability Association Ltd  Lloyd's Rep IR 75 Rix J had held that an exclusion clause in the policy excepting liability for pneumoconiosis was sufficient to extend to asbestosis. For this reason, there was no point in seeking to restore Products to the register so as to be able to bring proceedings against it and thus establish its own liability. Because of this, Mr Chandler's claim was brought against Cape itself.
Perhaps not surprisingly Cape sought to argue that the corporate veil protected it so as to ensure its freedom from liability in negligence. Mr Chandler's lawyers, on the other hand, argued that Cape had owed him a direct duty of care because it had assumed responsibility for the safety not only of its own employees but also for the employees of Products.
In giving the principal judgment in the Court of Appeal, Arden LJ found that Cape was indeed liable for Mr Chandler's asbestosis. Technically, the reason was not because of a piercing of the veil of incorporation but rather because Cape had assumed responsibility for Mr Chandler and the other employees of Products. What had occurred was more than a mere assumption of responsibility by Cape. Rather, Cape had been in a position where it owed a direct duty of care to the employees of Products. Cape was, for its own purposes, doing research into asbestosis and diseases related to that condition.
Arden LJ stated that for a parent company to have assumed responsibility for the welfare of the employees of its subsidiary, four factors had to be present:
(1) the businesses of the parent and the subsidiary are in a relevant respect the same;
(2) the parent has, or ought to have, superior knowledge on some relevant aspect of health and safety in the particular industry;
(3) the subsidiary's system of work is unsafe as the parent company knew, or ought to have known; and
(4) the parent knew or ought to have foreseen that the subsidiary or its employees would rely on its using its superior knowledge for the employees' protection.
The real significance of the case is to be found in the fourth of these points. It was stated that it was not necessary to show that the parent is in the practice of intervening in the health and safety policies of the subsidiary. Instead, the court will look at the relationship between the companies more widely. It might be sufficient simply to show that the parent has a practice of intervening in the trading operations of the subsidiary, for example, in regard to its production and funding issues.
As a result of this decision it is clear that all groups of companies need to review their internal governance practices to ensure that they do not cause the parent company to take on liability for aspects of its subsidiaries' businesses. In particular, they might consider the following:
â— the make-up of the various boards of directors and their reporting mechanisms;
â— the responsibilities of individual directors and senior staff;
â— the exercise by the parent of responsibilities in relation to matters such as health and safety, employment, environmental matters and the like;
â— the manner of content of communications within the group in relation to such matters.
The only book available that deals exclusively with such companies