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Hiding Behind Subsidiaries: Holding Parents Liable

Written by Douglas Kerr (Professional Diploma in Legal Practice)



There is increasing concern over the power and influence of companies and their involvement in ‘wide-scale unethical and illegal activities’[1] that result in environmental and social damage to local populations. For example, claims against mining companies for causing silicosis in South Africa[2] or the alleged environmental damage by the actions of oil companies in the Niger Delta.[3]  Of particular concern is the use of separate corporate personality and limited liability by parent companies to avoid accountability for the actions of their subsidiaries. In some cases subsidiaries may no longer exist, or it may be that they do not have the resources to pay damages claims. This leaves victims without a sufficient remedy if they cannot hold parent companies liable where appropriate. However, there are methods of redress, an understanding of which is essential not only for victims but for parent companies wishing to insulate themselves from the actions of their subsidiaries.

Limited Liability

Limited liability is a core concept of company law and refers to the fact that shareholders are only liable to the extent of the amount unpaid of their shares.[4] This encourages economic growth by enabling shareholders to invest in a company free from the risk of creditors reaching their personal assets. It also encourages creditors to be more aware in investment decisions and to conduct proper due diligence as they cannot retrieve assets from members, only from the company.[5] Limited liability is wrapped in the principle that the company enjoys legal personality distinct from its members, meaning it can be the bearer of rights and duties separate from its members.[6] This division between member and company is termed the ‘corporate veil.’

Limited liability and separate corporate personality apply equally in cases where a company becomes a shareholder in another company, creating a parent – subsidiary relationship where there is a controlling interest.[7] The parent is protected through limited liability from liabilities incurred by even wholly-owned subsidiaries because subsidiaries hold separate legal personality.[8]

However, this does not mean that a parent has the authority to dictate the actions and direction of its subsidiary. The constitutional positions of members and the board of directors are distinct and generally members have only limited capacity to make decisions, with duties and responsibilities of directors and shareholders detailed in the Companies Act 2006. A parent can use its vote to select the board but without formal internal group procedures their official power as regards the subsidiary ends there. The subsidiary’s directors, ‘are not agents…bound by the instructions of a principal’[9] parent company. Nevertheless, with a controlling interest a parent company can ‘dominate…the general meeting’[10] and effectively appoint the subsidiary’s directors. Thus, a relationship of control underlies the formal spheres of influence of the two company boards, in that the subsidiary’s directors owe their positions to the parent company. This ‘finds its expressions in the confidential directions issued by the controlling shareholders and with which the directors spontaneously comply’[11] and it may be that the principles of separate corporate personality and limited liability are used to shield the parent from liability when it actually exerts a degree of control over the activities of the subsidiary. There is thus a danger that the protection of the corporate veil can enable parent companies to escape accountability for their role in ‘morally and socially unacceptable’ harm caused by companies.[12]

Piercing the Veil

The reality that rules of corporate structure can be used to escape liability and result in injustices can be remedied by what is known as ‘piercing the corporate veil’ where courts will look behind the veil of incorporation, holding members liable for the company’s debts/conduct. The effect of this is that separate legal personality may be ignored and a parent held liable for the conduct of its subsidiaries. In some circumstances there is a form of statutory veil lifting, for instance group accounting requirements to create transparency for tax purposes.[13] This makes it harder for companies to hide evidence of economic crimes, corruption, bribery etc. by transferring assets within the group. Group accounting reports can also be used to prove the involvement of the parent in a subsidiary’s conduct by tracing funds.

Adams v. Cape Industries[14] is the leading authority on piercing the veil. It concerned enforcement of a US court judgment against the UK domiciled Cape Industries for personal injuries arising out the use of asbestos. The link to America was Cape’s US domiciled marketing subsidiary. The UK court developed three bases for piercing the veil.

Firstly, if the case turned on the interpretation of a statute or document that would require the group to be treated as a single unit.

Secondly, if there was a sham or façade behind the corporate structure, which was hiding what should actually be a single company. This is where the separate legal personality exists purely and deliberately to facilitate an injustice and avoid a known and existing (or confidently predicted) liability. However, designing a corporate structure to lessen liabilities in general is lawful and while it may be considered immoral, it will not alone justify piercing the veil.[15] This has been relaxed to an extent in subsequent cases where it is alleged a company was incorporated to hide true ownership of assets.[16]

Thirdly, by applying a form of agency to the corporate structure with the effect that the parent is principal to an agent subsidiary. The agency agreement can either be express or implied through the conduct of the parties. When the purpose behind the group structure is to avoid liabilities between group members then it is unlikely an express agency agreement will exist and it can be difficult to establish an implied agency agreement.[17] There may however be formal internal procedures within a group that amount to such. If such a relationship can be found and the subsidiary was acting within its actual and apparent authority, the conduct of the subsidiary would bind the parent irrespective of limited liability. Adams set a high standard of control – requiring day-to-day parent involvement.[18] The court held that none of the above applied to the facts in Adams. Applying the principle of separate corporate personality, the court held that Cape Industries was not present in America and was therefore not subject to the jurisdiction of US Courts.

Liability under the law of Negligence

Under Adams it is only in narrow circumstances that a subsidiary can create liabilities for its parent company. There have however been developments since Adams that deal with the level of operational control by the parent. In the recent case of Chandler v. Cape[19] an employee of a subsidiary sued the parent after he contracted asbestosis. The court conducted a detailed examination of company documents and practices, finding that: a group medical adviser was responsible for the health and welfare of all employees within the group, that employees of the parent investigated illnesses (arising from asbestos) of employees of the subsidiary, that working practices were adopted by the subsidiary from the parent, and that many aspects of the overall production process were discussed by the parent board and ‘when it felt appropriate the Defendant [parent] did control’[20] what the subsidiary was doing. By retaining overall responsibility for health and safety, a direct duty of care was created between the parent and the employees.[21] This was not a piercing of the veil, but rather an alternative – attaching direct liability under the law of negligence through the parent’s involvement in the affairs of its subsidiary. This creates a relationship between parent and victim rather than ignoring the separate legal personality of parent/subsidiary. Importantly, day-to-day control was not required for the duty of care to attach. Instead, sufficient control over  the subsidiary's health and safety policy created the duty. In these circumstances the parent and subsidiary are presumably jointly liable. The judgment has since been upheld by the Court of Appeal.[22]

Thus the liability of the parent for the conduct of the subsidiary engages when a sufficient level of control over the policies and actions of the subsidiary creates a duty of care. However, exactly what amounts to control is unclear, with US and Australian authorities showing ‘few cases accepting that the parent will be liable even where there is a high degree of integrated management.’[23] This route is also predicated on adducing sufficient evidence of this control, which can be a very difficult task.[24] Still, the importance of the ability to seek remedy from the parent is highlighted by the fact that in Chandler the subsidiary company no longer existed, and that even if it had, it had no insurance policy to indemnify against asbestos related claims. Being able to target parent companies will also result in potentially larger pots for compensation. The judgment has opened up a much-needed route of redress for employees of subsidiary companies.

However, there is the danger that the judgment in Chandler will be limited to employees and that it will not extend to more remote third parties, such as a local population. Further litigation will be required for a firm answer, but in Lubbe v Cape,[25] both employees and nearby residents of Cape’s wholly owned South African subsidiary sued in UK courts. The case was settled out of court but the fact that it survived a forum non-conveniens challenge implies that UK courts were willing to entertain a claim from non-employees seeking to establish that the parent owed them a duty of care.

Concluding Remarks

It is a long standing and core principal of company law that parent companies enjoy limited liability and separate legal personality from their subsidiaries. This encourages investment, and also facilitates multi-national companies operating in numerous States to do business. The corporate veil can be pierced under the Adams test but an overly restrictive application means that parent companies can too easily avoid liability for personal injury or environmental harm caused by their subsidiaries. The UK takes the approach of starting with the Salomon principle of separate legal personality and then determines if it is appropriate to depart and attach liability to the parent.[26] Some commentators consider the application of limited liability within group structures as an over-extension of the Salomon principle.[27] Muchlinski advocates a presumption of parent liability for the whole group, which can then be rebutted with ‘conclusive proof of the independence of the subsidiary’[28] However, this risks eroding the principal of separate corporate personality too far.

A balance needs to be found to allow redress for victims while still maintaining the advantages of separate corporate personality. The approach taken in Chandler will be helpful in striking this balance. It allows victims to seek remedy from parent companies under the law of negligence but only where there is sufficient operational control by the parent over the subsidiary. Thus parents will only be held to owe a duty of care when the group is a de facto single entity and where it is appropriate that separate legal personality should not prevent redress. Chandler is thus of significant importance for this area.


[1] A.Clapham, Human Rights Obligations of Non-State Actors, (2006), 201

[2] Leigh Day, Gold Mining Silicosis, available: [accessed 30/12/13]

[3] Essex Business and Human Rights Project, Corporate Liability in a New Setting, (2012), available: [accessed 30/12/13]

[4] Companies Act 2006 (CA), s.3

[5]P.Muchlinski, ‘Limited Liability and Multinationals Enterprises: a Case for Reform?’ 34(5) Cambridge Journal of Economics (2010), 915-928, 915

[6] Salomon v. Salomon & Co [1897] AC 22

[7] CA, s.1159

[8] A.Dignam & J.Lowry, Company Law, 5th edn., (2009), 32

[9] F.Galgano, ‘The Allocation of Power and the Public Company in Europe’ in Dury and Xuereb (eds.), European Company Laws: A Comparative Approach, (1991), 85-101, 97

[10] Ibid, 92

[11] Ibid, 97

[12] Muchlinski supra, 916

[13] CA, ss.399-400

[14] [1990] Ch.433

[15] Ibid, 544

[16] Raja v. Can Hoogstraten [2006] EWHC 2564

[17] Dignam & Lowry supra, 40

[18] Adams supra, 538

[19] [2011] EWHC 951 (QB)

[20] Ibid, §61

[21] Ibid, §75

[22] [2012] 1 WLR 3111

[23] Muchlinski supra, 922

[24] Ibid, 919

[25] 2000 UKHL 41

[26] J.Zerk, Multinationals and Corporate Social Responsibility (2006), 55

[27] Dignam & Lowry supra, 49

[28] Muchlinski supra, 924

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