When is a subsidiary not a separate legal entity?

A parent company can become liable for its subsidiary and the “corporate veil”, which would usually separate them, can be pierced in a number of circumstances.

Circumstances where the third parties will seek to lift the corporate veil and pursue the parent company for the liabilities of its subsidiary include situations where the subsidiary party does not have any assets to enforce a debt against or the subsidiary has become insolvent.  In these circumstances third party creditors will seek the assistance of the courts to go after the parent company and the courts have been willing to do so, particularly where there is evidence of fraud, wilful breach of trust, or some obvious sham to avoid or limit the liabilities of the subsidiary company.

The recent case of Chandler v Cape plc has established that a parent company may be liable for breaches of health and safety laws by a subsidiary without the need to consider lifting the corporate veil. 

The case involved a claim for negligence in connection with an asbestos production business. The claimant could no longer sue the company he had worked for as it had been dissolved some years before, but its parent company was still active.

The court had to decide if the parent company had taken on a direct duty of care to the employees of its subsidiary and was therefore responsible for their health and safety.  In this case the parent company’s knowledge of the dangers of activities operated by its subsidiary resulted in the finding of liability. Such knowledge can be acquired from the parent company’s direct interaction with the subsidiary’s operations on site, or by its control of the subsidiary itself.  The court created a test to assist future cases.  A parent company could be found liable for the acts of its subsidiary if:

• The parent and subsidiary share the same business;
• The parent knew or ought to have had ‘superior’ knowledge of the dangers of certain practices;
• The parent knew or ought to have known the subsidiary’s practices were unsafe;
• The parent knew or ought to have foreseen that the subsidiary or its employees would rely on that ‘superior’ knowledge to protect the employees.

Separate legal entities may not therefore be as separate as envisaged and parent companies should be aware of the extent to which they interact or control their subsidiaries.