A recent Court of Appeal case has clarified the principles to be taken into account when considering a parent company’s liability for its subsidiaries’ acts.

In English law the ‘corporate veil’ is an important principle – the idea that every company has its own legal identity, distinct from its shareholders or parent company. The liability of shareholders of limited companies (the majority of UK companies) is limited to payment for their shares and they are not liable for the debts of the company they own. 

There have been exceptions to the rule for a long time, usually involving wrongdoing by a sole shareholder, when the courts have been prepared to ‘pierce the corporate veil’ and make a shareholder liable. A number of Acts of Parliament have provided for situations where the corporate veil can be pierced, too: for example, the Proceeds of Crime Act enables confiscation orders in relation to the benefit from criminal conduct and these can be used to get at company assets.

Several court decisions have established that parents can be liable for acts of subsidiaries under principles of the law of tort – quite distinct from the company law principles of the corporate veil. The Court of Appeal recently gave its decision (Lungowe v Vedanta Resources Plc) in a case relating to the liability of a parent for the acts of its overseas subsidiary in tort. It confirmed that a parent company can owe a duty of care to employees of a subsidiary or to a party directly affected by the operations of that subsidiary, in certain circumstances. This may include where the parent has taken direct responsibility for developing a material health and safety policy, or controls the operations that give rise to the claim.

Although there had been cases before that imposed a liability on parent companies for the safety of employees of subsidiaries, there had been none reported in which a parent company had been held to owe a duty of care to a person affected by the operation of a subsidiary (in this case, local residents affected by pollution and environmental damage caused by the subsidiary’s mining activities). The decision therefore potentially extends the scope of liability imposed on parent companies.

If you would like to talk to us about your group structure, to see if you might be at risk please contact one of our specialists. I am based at our Chelmsford Office and  can be reached on  01245 453817 or david.wisbey@birkettlong.co.uk.