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Law for Business

Knowhow - guidance - precedents

19 JUN 2014

The use of tort law to lift the corporate veil

The use of tort law to lift the corporate veil
Taken as a whole, the rules governing the lifting of the corporate veil are exceedingly confusing, and it is a matter of debate as to whether last year’s decision of the Supreme Court in Prest v Petrodel Resources Ltd has clarified matters. Some aspects of the law are, however, less confusing than others. In Chandler v Cape plc, the Court of Appeal pioneered the use of normal tort principles to hold a parent company liable in respect of illness suffered by an employee of its subsidiary, and in the course of doing so set out clear guidance as to the circumstances in which such liability might arise. The May 2014 decision of the Court of Appeal in Thompson v The Renwick Group plc, the first case to consider the ruling in Chandler v Cape plc in detail, clarified the law on this point further, and should serve to reassure parent companies that the courts do not appear to be inclined to use tort law to lift the corporate veil save in relatively unusual circumstances.

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Lifting the corporate veil 
A company limited by shares is a legal entity in its own right, distinct from its shareholders, and its shareholders are liable for its debts only to the extent, if any, that their shares are not fully paid up. The concepts of separate corporate personality and shareholders’ limited liability form the foundation of English company law, and the courts are prepared to question them only in exceptional circumstances. Until recently, the Court of Appeal’s decision in Adams v Cape Industries plc [1990] 1 Ch 433 was regarded as the most authoritative statement of the law on the question as to what those exceptional circumstances might be, but last year’s Supreme Court decision in Prest v Petrodel Resources Ltd [2013] UKSC 34 must now be taken to have assumed the mantle of the most important decision in this area. On the basis of these two cases, one can identify a number of situations in which the courts may be prepared to “lift the corporate veil”, so as to blur the distinction between a company and its shareholders, and potentially to compromise the shareholders’ limited liability by fixing them with responsibility for the company’s debts. For example, a shareholder will not be allowed to use a company to evade an existing legal obligation, and the courts may be prepared to interpret specific statutory provisions or provisions in contracts in such a way as to identify a company with its shareholders. However, the precise scope of the potential grounds on which the veil may be lifted is not entirely clear, and although the Supreme Court’s ruling in Prest v Petrodel Resources Ltd, and in particular the judgment of Lord Sumption, marked an attempt to rationalise at least certain parts of the law, it remains to be seen whether it will be thought, in the long run, to have achieved its aim. Be that as it may, the law in this area is not uniformly confusing, and one of the more well-defined grounds upon which the veil may be lifted involves the use of conventional tort principles.

The application of tort law - Chandler v Cape plc 
In Chandler v Cape plc [2012] EWCA Civ 525, the Court of Appeal was asked to decide whether a parent company owed an employee of its subsidiary company a duty to ensure his welfare. (The underlying facts were that the employee had been exposed to dust from an asbestos factory during the course of his work and had subsequently contracted asbestosis. The subsidiary company (ie his employer) was no longer in existence and, in any case, its insurance would not cover his claim.) The court undertook a wide-ranging review of the facts and concluded that, in the particular circumstances which obtained, the parent company did, indeed, owe the employee a duty of care. Arden LJ, who delivered the only substantive judgment, summed up her thoughts as follows:
“In summary, this case demonstrates that in appropriate circumstances the law may impose on a parent company responsibility for the health and safety of its subsidiary’s employees. Those circumstances include a situation where, as in the present case, (1) the businesses of the parent and 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 that superior knowledge for the employees’ protection. For the purposes of (4) it is not necessary to show that the parent is in the practice of intervening in the health and safety policies of the subsidiary. The court will look at the relationship between the companies more widely. The court may find that element (4) is established where the evidence shows that the parent has a practice of intervening in the trading operations of the subsidiary, for example production and funding issues.”
Arden LJ was at pains to point out that she was simply applying normal tort law principles, and was not technically lifting the veil. The effect, nevertheless, was that a shareholder was found to be liable in respect of an employee of the company, an entity from which, on the basis of normal company law principles, it was notionally quite distinct.

Thompson v The Renwick Group plc 
Companies which use a group structure to carry on their business will hardly have welcomed Arden LJ’s judgment, but they will at least have felt that she presented them with helpful guidance as to the circumstances in which a duty of care might arise. The one point which might have concerned them, though, was the indication, in the opening words of the second sentence of the judge’s summary of the law as extracted above, that she was not purporting to provide an exhaustive account of those circumstances. In the first case properly to consider the decision in Chandler v Cape plc, the Court of Appeal in Thompson v The Renwick Group plc [2014] EWCA Civ 635 confirmed that this is a correct reading of her judgment, but showed no inclination to develop the law so as to impose a duty on parent companies otherwise than in the sort of unusual situation envisaged by Arden LJ. Thompson v The Renwick Group plc was another case in which an individual who had allegedly suffered illness as a result of his employment brought proceedings not against the company which employed him, but against the company’s parent. However, whereas in Chandler v Cape plc the parent company was in the same line of business as the subsidiary company, had greater knowledge of the risks associated with asbestos and had involved itself in the subsidiary company’s affairs, in Thompson v The Renwick Group plc the parent company had no business of its own beyond acting as a holding company, and had no special knowledge of the risks associated with asbestos. In light of these facts (and notwithstanding the fact that the subsidiary company’s affairs had apparently been conducted by a director appointed by the parent company), the court declined to impose a duty of care on the parent company. The only substantive judgment was delivered by Tomlinson LJ, whose assessment of the legal position was as follows: “what one is looking for here is a situation in which the parent company is better placed, because of its superior knowledge or expertise, to protect the employees of subsidiary companies against the risk of injury and moreover where, because of that feature, it is fair to infer that the subsidiary will rely upon the parent deploying its superior knowledge in order to protect its employees from risk of injury”. The fact that Tomlinson LJ did not find a duty of care, despite his obvious sympathy for the plight of the employee in the case before him, suggests that the courts will not be prepared to stretch orthodox principles of tort law in order to circumvent a company’s separate personality simply because they feel that justice so demands.

In Adams v Cape Industries plc, the court noted that it is perfectly acceptable for a group structure to be used so as to ensure that risks flowing from particular future activities of the group fall on one company rather than another. As Slade LJ observed: “the right to use a corporate structure in this manner is inherent in our corporate law”. This has long been, and still remains, the position in English law, and shareholders should keep in mind the fact that the corporate veil is, in practice, very rarely lifted. Of course, a sound understanding of the grounds on which the veil may, exceptionally, be lifted will assist a shareholder who wants to reduce still further the risk that he will be identified with his company, and in this context the complexity of much of the law in this area is to be regretted. That general complexity should not deter those who wish to take steps to reduce the risk from doing so, however, for some aspects of the law are relatively clear. As far as the use of tort law to, in effect, lift the veil is concerned, the legal position is stated succinctly in Chandler v Cape plc, and the decision in Thompson v The Renwick Group plc has clarified matters further. Parent companies should take note of these cases, and should be prepared to take action if they wish to minimise the chances that they will be found to owe a duty of care to their subsidiaries’ employees. For example, a parent company which is in the same line of business as one of its subsidiaries may want to ensure that it does not interfere in that subsidiary’s affairs.
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