According to long-standing and fundamental English corporate law principles, limited liability applies in the context of group companies to the same extent as it does in stand-alone entities. As a consequence, a parent company is normally not liable for legal infractions and unpaid debts at the level of its subsidiaries. However, particularly in relation to torts committed or facilitated by multinational corporations, the wisdom of insulating parent companies from liability is questionable.
In a recent article, and in more depth also in a chapter of our new book, we explore this issue and propose a new framework for group company liability in English law and beyond. We first describe how the traditional veil piercing exception to limited liability has fallen out of favor with many courts. Instead, the most recent trend, in the UK and a number of other jurisdictions such as Canada and Australia, is to hold parent companies directly liable based on duties relating to their own supervision and management of subsidiaries. Beyond this judicially driven approach, commentators have proposed several other possible avenues for increased parent or group company liability, which we review as well. Interestingly, we find that in terms of the overarching justifications in favor of increased group/parent company liability, there is a rare convergence of stakeholderist and contractarian thinking. Proponents from both schools of thought have noted, albeit based on different reasons, that limited liability for corporate groups is not justified or at least highly questionable.
Having reviewed the leading reform options, and based on the convincing twin case for increased group company liability from both a stakeholderist as well as an economic viewpoint, we find that the ideal solution would consist of a two-tiered approach: A system of enterprise liability for traditional corporate groups combined with a form of adjusted or modified vicarious liability of companies and groups for ‘network’ companies.
In terms of the first prong, enterprise liability, we suggest that corporate shareholders should not be able to invoke limited liability when it comes to claims by tort victims that were affected by actions stemming from a subsidiary. Indeed, to avoid the possibility of risk-shifting within groups, if a subsidiary is unable to satisfy claims against it, tort victims—as opposed to those in a voluntary contractual relationship with corporations—should have redress against the entire group and any individual company that forms part of that group. We also note that an appropriate definition of group or ‘enterprise’ for liability purposes could be based on Section 1159(1) of the Companies Act 2006 or, alternatively, rely on the presence of controlling equity stakes between parent and subsidiary companies, with the size or threshold for finding a ‘controlling’ stake to be defined by a fixed percentage in order to provide increased clarity.
The second prong is meant to avoid gaps that may arise when defining the group company solely in the manner described above. This should address situations where entities can be said to be sufficiently connected even in the absence of equity ownership or rights to control voting or board composition. Instead, for scenarios that involve sufficiently strong ties between two or more businesses, liability should be based on a modern iteration of vicarious liability that is tailored to the context of connected business entities. Hence, a company or entire group may be liable for torts of a more loosely affiliated network company if there is a sufficient degree of integration based on an analysis of the totality of economic, organizational, and legal links. Guiding questions in this regard could be whether a company furthers the economic goals or business of another company/group; is functionally part of another company/group’s business; or serves the purpose of externalizing another company/group’s liability. Additionally, as part of this inquiry, an element analogous to traditional vicarious liability’s ‘course of employment’ requirement would have to be considered.
Establishing parent company or group company liability for the acts of subsidiaries, which was once viewed as a ‘political non-starter’ may now be a real and definite possibility. This is a welcome outcome given that it justifiably enhances duties and accountability of corporate groups to the public.
Martin Petrin is an Associate Professor and Deputy Director of the Centre for Commercial Law at the Faculty of Laws, University College London.
Barnali Choudhury is an Associate Professor at the Faculty of Laws, University College London.