1.

Answer BOTH of the following:

(a) ‘A parent company should be liable for any injuries negligently inflicted by its subsidiaries.
Unfortunately, despite the decision in Chandler v Cape plc [2012] EWCA Civ 525, UK law is
moving away from this position.’

Discuss.

(b) ‘The case of Prest v Petrodel Resources Ltd [2013] UKSC 32 has made the law regarding the
piercing of the corporate veil much more certain, but much less effective.’

Discuss. (2019 A)

In certain circumstances a parent company can be held liable for injuries caused due to negligence of
subsidiaries. If a parent is exerting control over the subsidiary which commits a tort, then the parent can
be held liable to the victim of the tort irrespective of the fact that the parent and subsidiary are two
separate entities. To understand the extent of this statement we first need to know what corporate
personality is.

Corporate personality refers to the fact that, as far as the law is concerned, a company really exists i.e.
separate legal entity. This means that a company can sue and be sued in its own name, hold its own
property and be liable for its own debts. In Salomon v Salomon & Co., Mr. Salomon who was initially a
sole proprietor sold his business to Salomon Ltd which was family based incorporated company. Later
when the company went failed and went into liquidation, the liquidator hired by the court argued that
the company was a mere sham. He stated that since the company was an agent of Mr. Salomon, he was
liable to pay off the debts. The Court of Appeal (CoA) agreed with the liquidator however, the House of
Lords (HoL) disagreed where Lord McNaughten stated that a company is a separate legal entity and
therefore Mr. Salomon is not liable for the debts incurred in the name of the company. In Macaura v.
Northern Assurance, Mr. Macaura who owned certain timber sold it to a company which he owned as
well. Later when the timber was destroyed he tried to claim insurance for the timber. The insurance
company refused and argued that he was no longer the owner of the timber but rather the company.
The HoL agreed with the insurance company and held the property of the company is distinct and
separate from its shareholders. Similarly, in the Baring PLC case it was held that corporate personality
also applied to parent and subsidiary companies. This means that a parent cannot sue on behalf of the
subsidiary.

As complex company structures evolved over time, chances of fraud increased. Hence, there are
circumstances when veil of incorporation will be lifted to impose liability on the officers and owners of
the company. One of these circumstances is tortious liability under personal injury.
In the case of Chandler v Cape, Chandler was an employee of cape’s wholly owned (which no longer
existed) who suffered asbestos related injury during the course of employment. Chandler, therefore,
brought an action against Cape in light of Cape’s control over the subsidiaries health and safety policy.
Court held that the assumption of responsibility by the parent over health and safety policy of the
subsidiary created a special relationship between the employee and the parent which gave rise to a duty
of care.

In order to give rise to tortious liability, the following prongs must be met; a) the parent and the
subsidiary must be in the same line of business. In Thompson v Renwick, the parent company was not
liable for the torts of subsidiary as they were not operating in same line of business. Similarly, in
Okpablv Royal Dutch Shell, the parent was not liable as it was pure holding company.
b) The parent company exerted control over the subsidiary’s matters where the tort was committed.
c) The parent company knew or ought to have known that actions of the subsidiary exerted risk of injury
to the victim and they also knew or ought to have known that the subsidiary and its employees were
relying on the parent to solve the issues.

However, later it was held in the case of AAA v. Unilever that it is not necessary to prove the control of
subsidiary. Advice given to the subsidiary which is then acted upon and causes the loss to the victim
would also suffice. As of today same line of business, knowledge and reliance needs to be proven
making the test easier. The tortious liability of parent under Chandler v. Cape is not only limited to being
owed towards the employees of the subsidiary (Vendanta Resources PLC).

This principle was further expanded to other areas of tort such in case of negligent misstatement claim
where special relationship is required i.e. there is an assumption of personal responsibility by the
directors (Williams v Natural Life Health Foods). Moreover, it was held in the case of Standard
Chartered Bank v Pakistan National Shipping Corporation that courts are more likely to impose liability
in cases involving tort of deceit.

Corporate Personality is one of the most crucial principles of Company Law therefore the courts are less
likely for the incorporation of veil to be lifted. But based on the arguments above it is safe to assume
that Chandler v Cape has increased its odds therefore we do not fully agree with the statement in
question.
The company law is primarily based on the concept of corporate personality. The principle dictates that
a company is a separate legal entity (Solomon v Solomon). The biggest advantage of this principle is
limited liability for the shareholders. This being said the shareholder under certain defined
circumstances can be held liable by piercing of the veil of incorporation. There are two type of veil lifting
namely; statutory veil lifting and common law veil lifting. In the essay below we will discuss the
importance of the case of Prest v. Petrodel Resources for judicial veil lifting.

Initially the veil lifting occurred only in limited number of cases. The Soloman principle dominated the
judicial thought process. Veil was only lifted where the company was made as a mere façade or policy
reasons.

In the case of Gilford Motors, Mr. Horne was bound not to solicit the customers of his former employer.
In order to avoid this clause he incorporated a company which started soliciting the former employer’s
customers. Courts held that the company is a mere facade. Similarly, in Jones v Lipman, a person had
entered into a contract for sale of certain land to a merchant. In order to avoid the sale to the merchant,
he incorporated a company and transferred the title to the company. According to Soloman principle,
the merchant contract was with individual and not the company and he cannot sue the company.
However, the courts lifted the veil and stated that the individual and the company are a single entity and
the company was nothing but a mere façade. Nonetheless, in the case of Re FG Films, the courts
disregarded to pierce the veil of incorporating even though the FG Films which was a UK based company
was a mere sham/façade.

This not only proves that the courts will not necessarily lift the veil every time but also proves that the
concept of mere façade was uncertain and created uncertainty. However, as time passed the court took
a more relaxed approach towards the Soloman principle and intervened and lifted the veil more openly.
This is evident from the fact that Lord Denning in the case of DHN Foods held that a group of companies
was in reality a single economic unit and should be treated as such. Nevertheless, it was a criticized case
and in was overruled by HOL in the case of Woolfson v. Strathdyde.

Since the concept of mere façade was still uncertain the courts clearly set out three points in Adams v.
Cape Industries where veil will be lifted if one of them is met; a) a company is a “mere façade
concealing true facts”. A company will be considered a mere façade if it’s used to enable someone to
avoid a pre-existing obligation. (Jones v. Lipman). b) Where on a proper interpretation of a contract or a
statute, it appears that two or more companies in a group be treated as a single entity. c) Where the
subsidiary is the agent of the parent company and is acting within the scope of authority, then the
parent will be liable for the acts of the subsidiary on the basis of agency (Principal-Agent relationship).

However, certain exceptions to the Adams rule were created. One such exception came in the case of
Creasey v Breachwood Motor but this was later overruled by Ord v Belhaven Pubs. Other exceptions
came in the cases of Samengo-Turner and Ratiu v Conway which were never expressly overruled.

This being said an argument can be raised that these exception have been implied repealed through the
case of Prest v. Petrodel Resource. The facts were such that Mr and Mrs. Prest were a divorced couple
and Mrs. Prest raised the issue that Mr. Prest was hiding his real wealth through the various companies
he “wholly owned and controlled” were in actuality owned by him (sole proprietorship). The Supreme
Court overruled the decision of Court of Appeal and, Lord Sumption reasserted the principle established
under Adams Case and reaffirmed the interpretation of the term “façade”. The façade ground will only
be used where an existing legal obligation is deliberately evaded. The concealment principle was
abolished.

In the latest case of Boyle Transport, the Court of Appeal held that the veil will not be lifted only on the
grounds of justice thereby, upholding the Adams principle. This eventually led to some sort of certainty
under the concept of veil lifting. Since the concept of certainty and effectiveness are in co-relation with
one another it may be safe to conclude that the Prest case has made the law more certain and effective.
Therefore, we do not agree with the statement in question.