Group Company Liability: Martin Petrin Barnali Choudhury

European Business Organization Law Review (2018) 19:771–796
https://doi.org/10.1007/s40804-018-0121-7
ARTICLE
Group Company Liability
Martin Petrin1 · Barnali Choudhury1
Published online: 23 October 2018

© The Author(s) 2018
Abstract
According to a universal bedrock principle of corporate law, corporations have
separate legal personality and limited liability. These principles apply equally to
corporate groups. Accordingly, a parent company is normally not liable for legal
infractions and unpaid debts of its subsidiaries. In relation to torts and other mis-
conduct committed by corporations, however, the bedrock principles of corporate
law are increasingly subject to criticism, in particular where such claims cannot be
brought by tort victims due to undercapitalization of subsidiaries, among other prob-
lems. While the doctrine of veil piercing may allow for relief in certain scenarios,
this practice has fallen out of favour with many courts and the legal requirements
for doing so have become increasingly strict. Thus, courts have developed new
approaches to holding parent companies liable such as holding the parent directly
liable. In view of these significant shifts, this article examines the law and policy
considerations governing parent company and—more broadly—group liability. It
argues that reform is necessary, which may be found in a model that involves combi-
nations of voting equity ownership-based enterprise liability concepts with modified
vicarious liability for corporations.
Keywords Group company · Liability · Corporate law · Tort law · Multinational

corporations
* Barnali Choudhury
[email protected]
Martin Petrin
[email protected]
1
University College London, Faculty of Laws, London, UK
123Vol.:(0123456789)
772 M. Petrin, B. Choudhury
1 Introduction
According to a universal bedrock principle of corporate law, corporations have sep-

arate legal personality—which separates them from their shareholders, directors,
officers, and other individuals—as well as limited liability for shareholders.1 These
principles, which together form the corporate shield, apply equally to corporate
groups. Accordingly, a parent company is normally not liable for legal infractions
and unpaid debts at the level of subsidiaries of which it is a direct or indirect share-
holder. Particularly in relation to torts and other misconduct committed or facilitated
by large and multinational corporations, the principles encompassing the corporate
shield have increasingly been subject to criticism.2 The limits imposed by the cor-
porate shield do not normally give rise to issues in instances where third party tort
victims can pursue claims against the subsidiary and the subsidiary has sufficient
assets. However, problems arise when such claims are not possible or futile because
of a lack of assets of an entity, an issue which is predicted to become more prevalent
in the future.3
Nevertheless, there are exceptions to the default principles of corporate sepa-
rateness, which if applicable also allow courts to hold parent companies liable for
misconduct at the subsidiary level. The best known of these exceptions is referred
to as veil piercing. In these instances, a court may look for specific requirements
that allow it to disregard the separation between a company and its shareholder(s),
which can extend to a subsidiary and its parent company. However, veil piercing has
fallen out of favour with many courts and commentators, and the legal requirements
for doing so have become increasingly strict. Thus, courts have developed new
approaches to holding parent companies liable. The most significant recent devel-
opment is the recognition of duties of a parent company relating to its supervision
and management of subsidiaries, which, if there is a breach, may lead to the parent’s
own direct liability. Additionally, there are efforts underway that could result in an
internationally mandated liability regime for parent companies, which would hold
them directly responsible for subsidiaries’ human rights violations.
In view of these significant shifts, this article examines the law and policy consid-
erations governing parent company and—more broadly—group liability. The article
begins with a brief look at the phenomenon of corporate groups and the role of lim-
ited liability in this context. Next, it examines tools that currently can be used to cir-
cumvent limited liability in groups, providing an overview of traditional veil pierc-
ing and its demise, followed by a discussion and critique of the emerging doctrine
of direct liability based on the parent’s own duty of care. It then moves to exam-
ine the fundamental question whether there is a case for expanding liability within
corporate groups. The discussion then shifts to various reform proposals for parent
1
See, for example, Companies Act (2006), Sect. 3. Although the separate legal personality and limited
liability features often coincide, they are at least in theory conceptually distinct and independent of each
other.
2
See Sect. 5 below on efforts to reform the law on parent company and group liability.
3
Witting (2018), p 7.
123
Group Company Liability 773
company liability and their assessment. In the final section, the article outlines a pre-
ferred approach, which combines voting equity ownership-based enterprise liability
concepts with modified vicarious liability for corporations that allows for liability
within more loosely formed corporate networks, specifically including those based
on solely contractual relationships.
2 The Group Company and Limited Liability
Group companies (‘corporate groups’) are business enterprises or firms that order
their operations using a structure involving parent companies (‘holding companies’)
and subsidiaries. In the UK and the US, a common group structure involves a par-
ent company that owns shares, wholly or partially, in a group of subsidiaries, which
may themselves hold shares in or be intermediary parent/holding companies for
other subsidiaries.4 A core conception of the group company is thus one that is com-
prised of several companies related hierarchically through controlling shareholdings,
which can manifest itself in the form of majority as well as indirect and minority
shareholdings. In a wider conception, group companies can also refer to structures
without hierarchical shareholdings—such as where common control stems from
family ownership or in instances of significant but non-controlling cross-holdings
or circular holdings in conjunctions with common management5 or corporate net-
works. Although the distinction between groups and networks is not always clear
and can overlap, networks are companies whose relationship is not characterized by
the potential for equity-based control but rather through ‘detailed cooperation agree-
ments, and/or repeated transactions’.6 Typical examples are businesses that coop-
erate or support each other’s efforts in product development, manufacturing, and
distribution.7
When subsidiaries operate in jurisdictions other than where the (ultimate) parent
company is headquartered, a group may be described as a multinational corpora-
tion. Group companies that transcend borders are a common choice for structuring
business operations. Yet, despite this widespread occurrence in practice, the legal
status of corporate groups remains often somewhat obscure. The UK Companies
Act 2006, for example, contains only sparse references to groups, among a few
other instances most notably in relation to their accounting, reporting, and auditing
obligations.8 Additionally, the UK Corporate Governance Code does not explicitly
mention corporate groups anymore, apart from a reference to the Financial Conduct
Authority’s Disclosure and Transparency Rules on reporting requirements.9
4
Muchlinski (2007), p 56. The subsidiaries themselves can also be referred to as group companies. We
will however use this term for the group as a whole.
5
Witting (2018) pp 3–4.
6
Ibid., p 5.
7
See ibid., pp 39–47. A classic work on this topic is Teubner (2011).
8
See Parts 15 and 16 as well as sections 208, 611, 682, 834, 1161–1162 and 1164–1165 of the Compa-
nies Act; Davies et al. (2012), pp 247–249 and chapter 21.
9
See e.g., DTR 5.1.4B, Disclosure Guidance and Transparency Rules sourcebook (Feb. 2018).
123
The appeal of using group structures is myriad. Subsidiaries can be used to limit
the liability of the parent corporation or other entities in the group, to facilitate the
obtaining of financing, to establish domestic corporate residence, to avoid compli-
cations associated with the purchase of assets, and as a vehicle to avoid tax. The
use of subsidiaries may also facilitate international trade and enable large firms the
flexibility to enter into corporate ventures with new combinations of investors.10
Despite the variety of advantages that group structures can entail, it is likely that
the ability to asset partition—and therefore facilitate judgment-proofing and limit-
ing the group’s liability—is the largest benefit for businesses.11 While legislatures
introduced limited liability in Anglo-American companies without consideration of
whether or not it should also apply to corporate shareholders,12 when the practical
issue came up in the courts it was firmly accepted to extend to parent companies as
well. However, group companies’ ability to maintain asset partitioning is not abso-
lute. The following section will examine two exceptions.
3 Circumventing Limited Liability
Since limited liability for corporate groups can lead to undesirable effects for claim-
ants that were exposed to torts by subsidiaries, numerous efforts have been made to
circumvent limited liability for these entities in particular instances and gain access
to the assets of a parent company or even a group company’s combined assets. Indi-
viduals that have found themselves as claimants against these companies have turned
to veil piercing as a method of seeking redress. More recently, the emerging tool of
choice in these cases are claims based on a parent company’s own, direct liability.
3.1 The Traditional Approach: Veil Piercing
The House of Lords’ 1897 decision in Salomon v. A. Salomon & Co.13 famously
upheld statutory provisions stipulating a company’s separate legal personality and
limited liability, even as applied to a one-man company. Following this landmark
case, which also legitimised groups of connected yet legally separate companies,14
courts tended to be reluctant to disregard these principles. Nevertheless, especially
from the 1960s onwards, a number of cases later reflected a greater willingness on
the part of courts to impose liability on shareholders behind a company by ‘pierc-
ing’ or lifting the corporate veil.15 In doing so, courts relied on various legal the-
ories, including that a company was only a device or façade to avoid individual
obligations; that a company was another, controlling entity’s agent; that a group of
10
See, for example, Ramsay (1999), pp 338–339; Orts (2013), p 37; Witting (2018), pp 47–48.
11
On judgment-proofing strategies, see LoPucki (1996).
12
Blumberg (1986), p 610; Talbot (2013), pp 22–29; Muchlinski (2010), pp 916–918.
13
[1897] AC 22 (HL) (per Lord Halsbury L.C.).
14
Hannigan (2016), p 43.
15
For the difference between veil lifting and veil piercing see ibid., pp 53–57.
123
companies formed a single economic unit; or that piercing was necessary to uphold
justice.16
In the UK, however, the tendency to allow piercing in line with the traditional
principles came to a halt with the 1989 decision in Adams v. Cape Industries plc.17
The Court acknowledged that there were three main instances in which piercing may
be justified. First, when a parent’s responsibility for a subsidiary may be construed
based on specific circumstances, particularly where a statute or contract allows for
a broad interpretation to references to members of a group of companies. Second,
in cases indicating that a company is a mere façade to conceal true facts and avoid
legal obligations. Third, where a subsidiary acts as its parent company’s agent.18
The reluctance to pierce the veil was further reflected in cases after Adams, most
notably in the recent Prest v. Petrodel Resources Ltd.19 In that decision, the Supreme
Court held that veil piercing ‘applies when a person is under an existing legal obli-
gation or liability or subject to an existing legal restriction which he deliberately
evades or whose enforcement he deliberately frustrates by interposing a company
under his control’.20 The reference to existing legal obligations would, by itself,
apparently exclude most tortious conduct.21 Further, it currently appears that the
result of Prest is that there is one definite ground of veil-piercing. The other grounds
have not been done away with, but courts will need to re-consider them one by one
in future cases. Finally, it is worth noting that Lord Sumption in Prest also opined
that piercing should only apply in the absence of other possible remedies. Overall,
thus, the decision once more confirmed the restrictive approach to piercing under
English law, with veil piercing today remaining an exceptional event.
3.2 The Emerging Approach: Direct Parent Liability
After Adams greatly narrowed the possibilities for a successful veil piercing claim,
post-Adams, the focus shifted towards new avenues for holding parent companies
liable. In order to bypass the difficulties associated with veil piercing, parties injured
by conduct emanating from subsidiaries began to initiate claims against their parent
companies on the basis that the parent company itself owed the claimants a direct
duty of care and had been in breach thereof.
For instance, a decade after Adams, the UK courts began to recognize the pos-
sibility of parent company liability. Cases were brought in the UK courts by employ-
ees injured by subsidiaries outside of the UK and the courts demonstrated a willing-
ness to recognize parent company liability.22 However, often for procedural reasons,
no ruling on the issue was made.
16
For a discussion of relevant case law, see Dignam and Lowry (2014), pp 34–42.
17
[1990] Ch 433.
18
Ibid., pp 530–549.
19
[2013] 3 WLR 1. See also VTB Capital Plc v. Nutritek International Corp [2012] EWCA Civ 808.
20
[2013] 3 WLR 1, 20.
21
Cf., however, Lo (2017) arguing for a broad interpretation of ‘obligations’ that includes future tort
liabilities.
22
See, e.g., Connelly v. RTZ Corp plc [1999] CLC 533; Lubbe v. Cape plc [2000] 1 WLR 1545; New-
ton-Sealey v. ArmorGroup Services Ltd. [2008] EWHC 233 (QB).
123
In 2012, this changed with the first decision to establish parent company liabil-
ity, Chandler v. Cape.23 An employee of a subsidiary of Cape plc suffered injuries
due to exposure to asbestos and, as the subsidiary had been dissolved in the mean-
time, brought claims against the parent company. The Court of Appeal accepted a
broad view of the concept of ‘assumption of responsibility’ and validated its use as
a tool for tort victims that were injured by activities of a subsidiary and seek to hold
the parent company liable. In doing so, the Court also developed a novel approach
for assessing parent company duties relating to the health and safety of subsidiary
employees.
Under Chandler’s approach, the first inquiry is into the level of control that a par-
ent exercises over a subsidiary. If there is sufficient control,24 the parent company
may be found to have assumed responsibility towards subsidiary employees and
incur liability. Although the Court of Appeal did not specify what exactly would be
necessary to trigger such liability, it provided a four-part test that, if all parts can be
answered in the positive, was said to be one of the situations leading to parent com-
pany liability towards employees of its subsidiaries. The factors formulated by the
Court are that (1) the businesses of the parent and subsidiary need to be in a relevant
respect the same; (2) the parent has, or ought to have, superior knowledge on some
relevant aspect of health and safety in the particular industry; (3) the subsidiary’s
system of work is unsafe as the parent company knew, or ought to have known; and
(4) the parent knew or ought to have foreseen that the subsidiary or its employees
would rely on its using that superior knowledge for the employees’ protection.25
The Court of Appeal faced a variation of Chandler’s factual scenario in Thomp-
son v. The Renwick Group plc.26 The question for the Court to decide here was,
first, ‘whether a parent can be held to have assumed a duty of care to employees
of its subsidiary in health and safety matters by virtue of that parent company hav-
ing appointed an individual as director of its subsidiary company with responsibility
for health and safety matters’.27 The Court decided this question in the negative as
the director was not acting on behalf of the parent but rather exercised his duties
towards the subsidiary. Second, the Court also decided that apart from this specific
question the totality of evidence did not justify the imposition of a duty of care on
the parent company to protect the subsidiary company’s employees from the risk of
injury arising out of exposure to asbestos at work.
Finding however that the defendant parent company’s role was limited to hold-
ing shares in the subsidiary, the Court held that there was no basis upon which it
could infer that the parent was in a position of superior knowledge, which would
have enabled it to protect subsidiary employees and warranted further examination
of the exact circumstances of the injuries and the parent’s role. Nevertheless, while
Thompson made it clear that parent companies that limited their role to pure holding
23
[2012] 1 WLR 3111.
24
Ibid., p 3123.
25
Ibid., p 3131.
26
[2015] 2 BCC 855.
27
Ibid., p 860.
123
companies—holding subsidiary shares without having their own business activi-

ties—are normally safe from liability towards group company employees, this case
also reaffirmed the Court of Appeal’s commitment to Chandler and the theory of
liability developed therein.
Most recently, the Court of Appeal has been tasked with deciding three fur-
ther cases with factual scenarios similar to Chandler. In Lungowe v. Vedanta
Resources,28 the plaintiffs allege that they had been harmed by pollution and envi-
ronmental damage caused by the parent’s subsidiary in Zambia. The Court of
Appeal agreed with the High Court that the English courts have jurisdiction over the
matter despite the harm being caused in Zambia. It also offered some tentative hold-
ings on the parameters for establishing parent company liability for the acts of its
subsidiary. The Court noted that a parent may owe a duty of care to the employee of
a subsidiary, or a party directly affected by the operations of that subsidiary, in cer-
tain circumstances. Those circumstances may arise where the parent has taken direct
responsibility for devising a material health and safety policy the adequacy of which
is the subject of the claim, or, it controls the operations which give rise to the claim.
Indeed, the duty may arise because the parent is well placed, due to its knowledge
and expertise to protect the employees of the subsidiary. The Court also found that
the factors detailed in Chandler and Renwick are relevant.
Two further cases, Okpabi29 and Unilever,30 which again involve claims by
employees and third parties who have been harmed in foreign jurisdictions by the
parent’s subsidiary, have not been as well received by the courts. In both cases,
the High Court dismissed the action against the parent company based mainly on
evidentiary reasons, a conclusion that was confirmed by the Court of Appeal in
Okpabi.31 Unilever still remains on appeal.
3.3 The Limits of Direct Parent Liability
Direct (tortious) liability of parent companies in scenarios as outlined above should

in principle be approached the same way as tort claims against any company,
whether or not they are part of a group company. According to the currently applica-
ble mechanisms for holding companies liable, responsibility can be incurred through
vicarious liability for individuals or direct liability. Nevertheless, claims against
parent companies, when they stem from occurrences involving a subsidiary, are not
treated as simply an application of general liability principles. The reason for the
special treatment and attention that such claims receive stems from their potential to
circumvent limits on veil piercing, as imposed by Adams and other cases, and—ulti-
mately—their potential to undermine the principles of separate legal personality and
limited liability. The inquiry in these cases is not so much on the parent company’s
28
Lungowe & Others v. Vedanta Resources Plc & Amor [2016] EWHC 975; [2017] EWCA Civ 1528.
29
His Royal Highness Okpabi v. Royal Dutch Shell plc [2017] EWHC 89 (TCC).
30
AAAet al v. Unilever and Unilever Tea Kenya Ltd. [2017] EWHC 371 (QB).
31
Okpabi v. Royal Dutch Shell Plc and Shell Petroleum Development Company of Nigeria Ltd [2018]
EWCA Civ 191.
123
wrongs directly vis-à-vis a third party, but on the presence of actions or omissions
that allegedly constitute a fault on the part of the parent company because they in
turn resulted in actions or omissions at a subsidiary that harmed an employee or
third party.
An important example for the potential effects and mechanics of modern
approaches to parent company liability is provided in Chandler. Instead of relying
on traditional piercing or claims that actions or omissions by parent company repre-
sentatives were the immediate cause of the claimant’s harm, it was a looser notion
of the parent’s control over its subsidiary that together with notions of proximity,
fairness, and reliance32 led the Court to find a special relationship between the par-
ent and the subsidiary’s employee, resulting in the former’s assumption of respon-
sibility. In conjunction with the four-part test mentioned above, this gave rise to the
parent’s own liability.
The approach taken in Chandler was in various ways unsuitable for the facts at
hand, but it is also of limited utility as a general basis for future decisions. First, it is
unclear what type and level of control is needed to meet the court’s requirement for
there to be ‘relevant control’. Chandler appears to indicate that a general practice of
involvement in a subsidiary’s trading operations is sufficient, even if these interven-
tions are unrelated to the area that led to an injury. Apart from the lack of clarity
and issues with causation, using ‘control’ in this manner is problematic because it
is both over- and underinclusive. It is overinclusive because it includes in its ambit
practices that are common in almost every corporate group, where there are at least
some aspects that are subject to a uniform group policy; thus, almost every parent
would satisfy this part of the test for liability. It is also underinclusive because the
fact that a parent company failed to exercise control should not disqualify claims
against it. A parent company that does not intervene in any way in its subsidiar-
ies’ business—including the type of ‘pure’ holding company that was the defend-
ant in Renwick33—may still be an appropriate defendant, as we will explain in fur-
ther detail when we discuss the case for expanded group company liability below.
Finally, control (as used in Chandler) as a prerequisite for liability is also bad policy
as it may deter the development of desirable overarching group policies by parent
companies that promote health, safety, or good financial and operational practices.
The other, more specific elements of Chandler’s liability test are also problem-
atic. While the first prong of the Chandler test’s idea that the parent and subsidiary
should be in the same business and thus form one enterprise has merit—although
it should be defined quite differently from and more broadly than Chandler)—the
other elements of the test are limited. Thus, the parent’s superior knowledge on rel-
evant aspects of health and safety in the industry and its knowledge of safety issues
at the subsidiary are unnecessary requirements. If parent and group company lia-
bility is conceptualised as an effort to internalise business risks—which it should
32
Thompson v. The Renwick Group plc [2015] 2 BCC 855 suggests that reliance needs to occur on the
part of the subsidiary and not the injured third party.
33
Ibid.
123
be—then liability can be assigned without inquiring into the parent’s state of mind,
knowledge, and own actions.
At the same time, direct parent liability that is so remote that it appears to be
disguised veil piercing or an attempt to circumvent the corporate shield is problem-
atic—not because it has the potential to overcome limited liability—but because in
its current form it creates uncertainty and unduly stretches established tort princi-
ples. Indeed Chandler, with its references to the tort law concept of fairness, raises
the question to what extent the finding of liability in this and other cases is influ-
enced by policy and justice considerations. After all, it is understandable that courts
would be sympathetic towards and would seek to facilitate claims brought by vic-
tims of corporate torts that would remain uncompensated but for a finding of par-
ent company liability. Indeed, as will be expanded upon in the following section,
such policy objectives are defensible and find support both on grounds of fairness
as well as economic considerations. However, a test that is stretched and misguided
is objectionable. Rather, there should be alternative, more principled means of hold-
ing parent companies—and in fact entire group companies—liable that lead both
to better outcomes for tort claimants and result in more ex ante legal certainty for
potential defendants.
4 The (Economic) Case for Group Company Liability
Having discussed the demise of veil piercing and identified weaknesses in the
emerging trend to hold parent companies directly liable based on their own mis-
conduct, it becomes apparent that other approaches are needed. This is, of course,
based on the assumption that expanding the liability of group companies is a desir-
able development. However, in outlining the case for expanded liability, the article
focuses on the law and economics point of view concerning group liability. This is
because although stakeholder theorists of corporate law will likely welcome group
companies’ increased liability towards third parties affected by a subsidiary compa-
ny’s tortious conduct,34 one would expect law and economics proponents to oppose
this notion. However, this is not the case. Indeed, when it comes to group company
liability, there is a convergence of opinion between stakeholderism and law and
economics.
The starting point of this inquiry is the basic notion of companies’ limited liability
generally, that is outside of the group context. Limited liability has been considered
by many commentators—from an efficiency perspective—to be welfare maximising
for society as a whole.35 The main argument is that by reducing risks for sharehold-
ers, limited liability facilitates the aggregation of capital and encourages investment,
which is especially helpful for large, capital intensive ventures.36 In addition, given
the protections it provides to shareholders, limited liability (among other benefits)
34
See, e.g., Dine (2012); Skinner (2015), pp 1862–1863.
35
See Bainbridge and Henderson (2016).
36
Easterbrook and Fischel (1985), p 97; Bainbridge (2001); Posner (2007), p 425.
123
reduces the time and resources that shareholders need to spend on monitoring the
corporate agents that manage the companies in which they have invested, further
encouraging diversified and passive investments.37 Limited liability is thus thought
to have played an essential role in developing modern economic systems.38
Yet despite the numerous benefits it purportedly bestows, the idea of limited
liability has also been subject to numerous criticisms. In particular, criticism has
stemmed from the clash between tort law and corporate law principles that limited
liability entails.39 While limited liability towards voluntary (contractual) creditors
has not sparked major concerns, some commentators view the principle’s effects
towards involuntary creditors, in particular tort victims, as highly problematic,
including as applied to corporate groups.40 Principally, these critics have noted that
limited liability can externalize costs by imposing damages or losses caused by a
corporation onto third parties or the public at large, instead of the shareholders, if a
corporation’s assets are insufficient to cover the losses. Moreover, while voluntary
creditors can protect themselves through ex ante due diligence and negotiated pro-
tections and rewards, such as adjusted interest rates for lenders, this is not the case
for involuntary creditors.
However, even among scholars who have advocated strongly in favour of limited
liability, there are notable voices suggesting that the principle may be less appropri-
ate or even wholly inappropriate in the group company context. The general thrust
of these arguments is that the main economic reasons that justify limited liability for
individual shareholders in a stand-along company do not normally apply—or not
with the same force—to companies that hold shares in other companies. Blumberg,
for instance, concluded that ‘most, but not all, of the suggested arguments for lim-
ited liability simply do not apply to corporate groups, or at least are not always fully
applicable’.41 This argument can be broken down into three broader objections.
First, it has been noted that allowing creditors to reach the assets of parent com-
panies does not create unlimited liability for individual investors, which means
that for them the benefits of diversification, liquidity, and monitoring by the capital
market are unaffected even if limited liability were to be abolished for corporate
shareholders.42 This insight then forms the basis for the argument that as long as the
ultimate parent company’s limited liability protects individual shareholders, these
shareholders are unlikely to be less inclined to invest capital in business ventures,
even if the individual ventures themselves do not benefit from additional layers of
limited liability in their intra-group relations. Similarly, as long as the risk associ-
ated with the individual shareholders’ investment in the ultimate parent company is
capped by limited liability, they will also not need to increase their level of costly
monitoring or involvement in managerial decisions.
37
Easterbrook and Fischel (1985), pp 94–98.
38
See, for example, Bainbridge (2001), pp 495–496.
39
For example, Alexander (1992); Gabaldon (1992); Glynn (2004); Fettet (1995).
40
See Lipton (2014), p 479.
41
Blumberg (1986), pp 623–626.
42
Easterbrook and Fischel (1991), pp 56–57; Bainbridge (2001), pp 526–534; Blumberg (1986), p 623.
123
Second, it has been argued that considerations pertaining to monitoring and other
agency costs, aggregation of capital, and diversification are far less important in the
group company context.43 Parent companies are not in the position of an ‘absentee
owner’ but can more easily monitor, manage, and access information from subsidi-
aries; the need for incentives encouraging widespread distribution of shares/invest-
ment does not apply at the level of the parent company (as opposed to the ultimate
individual investors); and the issue of risk avoidance and diversification is less perti-
nent for parent companies compared to individual shareholders.
Third, commentators have opined that the moral-hazard problem stemming from
limited liability is greater in parent-subsidiary situations, an issue of special impor-
tance in considering the corporation’s role for the public. One reason for this is that
managers of subsidiaries also tend to be (perhaps primarily) managers in the par-
ent company and as such their continued employment at the parent company level
diminishes the negative effects that they may personally experience in the case of
a subsidiary’s insolvency.44 This smaller exposure reduces managerial incentives to
arrange suitable levels of insurance at the subsidiary level. Further, and more fun-
damentally, commentators have suggested that because of the imbalance between
potentials risks and rewards, there is a heightened possibility that excessively risky
activities within groups will be conducted through minimally capitalised subsidiar-
ies, with potentially severe consequences for tort creditors. Specifically, groups can
contractually structure their affairs in such a way that a thinly capitalised subsidi-
ary can carry out operational activities (which could result in corporate torts) while
the main assets are concentrated in the parent or other affiliated companies.45 In the
same vein, Hansmann and Kraakman have argued that limited liability for compa-
nies ‘cannot be rationalized’ as it incentivizes subsidiaries to underspend on pre-
cautions to avoid accidents and can lead to overspending on hazardous activities.46
They also posit that while unlimited liability puts shareholders in the position of an
insurer, this is particularly justified in the case of corporate shareholders given their
superior ability to avoid costs and bear risks.47 This leads them ultimately to argue
in favour of a system of pro rata shareholder liability for torts.
Leebron’s nuanced study of limited liability—which distinguishes between
wholly-owned corporate groups and corporate groups with partial ownership—also
argues in favour of rejecting limited liability for groups in certain cases.48 In the case
of wholly-owned groups, irrespective of whether a group company is an integrated
company with operational activities or solely a holding company, Leebron finds that
limited liability should not apply. As he explains, investments in integrated compa-
nies do not represent a diversification of risk and hence should not benefit from lim-
ited liability, while true risk diversification through a conglomerate structure does
43
Blumberg (1986), pp 624–626.
44
Easterbrook and Fischel (1991), pp 56–57.
45
Ibid.; Bainbridge (2001), pp 529–531, referring to LoPucki (1998).
46
Hansmann and Kraakman (1991), pp 1880–1885.
47
Ibid., pp 1916–1919.
48
Leebron (1991).
123
not deserve it either ‘since shareholders can achieve such diversification on their
own’.49 While considering that there may be a case for allowing group structures as
a means to diversify managerial risks, Leebron concludes that this is undesirable in
cases of catastrophic losses to tort claimants and unlimited liability may help align
managerial interests with those of society.50
Leebron then moves on to examine group companies that are not wholly-owned
by another company, but where in addition to a parent company there are other
(individual or corporate) shareholders.51 If unlimited liability would only apply to
wholly-owned companies, it would be easy to avoid this regime by adding a small
number of outside shareholders to each group company. But if unlimited liability
also were to apply to partially owned companies, the question is how the law should
define the term subsidiary—with the particular problem of how to account for share-
holdings by financial intermediaries—and how liability should be allocated between
the shareholders. Seeking a pragmatic solution, Leebron proposes unlimited liability
for tort claims among companies that are connected through majority positions in
shares, where parents are liable for subsidiaries and vice versa, and with tort claim-
ants being granted priority over financial creditors throughout the group.
5 Reforming Liability for Group Companies
Given the longstanding recognition of the problematic nature and effects of limited
liability within group companies, it is not surprising that significant efforts have
been put forward to address these limitations. While practical developments in this
area have been largely driven by courts that responded to and refined theories of
liability raised by claimants, the issue of group company liability has also piqued
considerable interest by legal scholars and led to various proposals on legal reform,
including in a proposed UN-sanctioned business and human rights treaty, which
may include a component specifying the parameters of group company liability.52
In this part, the focus is on five categories of potential approaches to reforming
group company liability. These include: specifying and clarifying areas in which
corporate veil piercing is permissible; statutory liability based on a direct duty of
care for parent companies; the concept of rebuttable or presumed liability for group
companies; recognition of the principle of enterprise liability; and disregarding or
modifying shareholders’ limited liability through changes in corporate law and/or
insolvency law. The aim is to explore and understand these approaches as a means of
proposing reforms in this area.
49
Ibid., p 1617.
50
Ibid.
51
Ibid., pp 1620–1623.
52
Deva (2015).
123
5.1 Clarify and Improve Veil Piercing
A first option for reforming group company liability is through continued reliance
on veil piercing, with the expectation that the tools for piercing would be improved
through further specification and clarification of the grounds under which piercing
is permitted. The exceptions for veil piercing would ideally apply uniformly across
borders, which could be accomplished either by specifying these grounds in an
international treaty or in a model law.
While options based on veil piercing have the benefit that there is a wealth of case
law and academic commentary that can be used as a basis to improve this tool,53
piercing likely represents the least desirable way forward. The merits of veil piercing
are limited and it is unlikely that this doctrine’s known weaknesses can be overcome
in a satisfactory manner and to a degree that it can serve as the principal mecha-
nism for addressing the problem of group company liability. Veil piercing involves
disputes over difficult questions of fact and law with concepts including ‘façade’
and ‘equity’ that are not only open to interpretation but may also lead to complex
litigation.54 It is unlikely that veil piercing will simplify redress for tort victims as
the different grounds are difficult to clearly delineate and prove. In addition, well-
advised companies will likely be able to circumvent veil piercing requirements and,
in any event, veil piercing as normally applied between a company/subsidiary and
its shareholder/parent are not helpful where assets of members of a corporate group
other than parent companies (such as sister companies) must be reached to satisfy
debts. The limited utility of veil piercing thus prompts the need to seek solutions for
parent/group liability elsewhere.
5.2 The Parent’s Duty of Care
A second option is to implement the direct duty of care approach and its precondi-
tions, laid down in Chandler and a number of other cases decided in foreign juris-
dictions, on a statutory basis. However, as already discussed in more detail above,
the direct duty of care approach is limited—often even highly flawed—and does by
itself not represent a sufficient solution to address the liability of corporate groups.
Determining the precise scope and contents of a parent company’s duty of care is
difficult and courts may be tempted to unduly stretch the boundaries of tort law in
order to arrive at a desired result.
In short, weaknesses of approaches relying on a parent company’s own duties
include that it raises the question of how to define the necessary level and nature
of control that will result in a duty and may trigger liability; that it tends to depend
on the parent’s own state of mind or knowledge of certain items such as health and
safety issues at the subsidiary; that it can be circumvented by the parent transform-
ing itself into a holding company as in Renwick; and that it may rely—and in the UK
53
For example, Lee (2015); Oh (2013); Cheng (2010); Anderson (2009); Moore (2006).
54
See Muchlinski (2007), p 315; Deva (2015), p 3.
123
indeed does rely according to the approach accepted in Chandler—on the concept
of assumption of responsibility. Assumption of responsibility however is for vari-
ous reasons often ill-suited to serve as a basis for parent company liability.55 Using
direct duties of corporate parents as a basis for group company liability also does
not fare much better than veil piercing in terms of legal certainty or avoidance of
complex litigation. Furthermore, even if more refined tests are introduced to impose
direct duties on parent companies, this would not address problems for tort victims
where group company assets are concentrated not in a parent company but in other
subsidiaries (sister companies or affiliated companies). Under current case law—
with the exception of one singular case56—it is unlikely that these companies will be
found to owe duties to third parties affected by activities at another subsidiary.
5.3 Presumption of Liability
A third option is the introduction of a rebuttable presumption of parent company lia-

bility for subsidiaries. In case of harm to third parties emanating from a subsidiary,
the parent would thus bear the onus of demonstrating that it should not be responsi-
ble to the third party victims. This is the approach favoured by the Committee work-
ing on the proposed Business and Human Rights treaty and it has, separately, also
garnered interest or come to fruition in certain jurisdictions.57 The UN committee,
for instance, suggests that the system of presumption be based on proof that ‘[t]he
parent company […] did not know (or had no reasons to know)’ about the infrac-
tions in question ‘or that the violations took place despite the parent company taking
appropriate preventive and redressive due diligence steps’.58
In France, a newly introduced statutory duty of vigilance now requires certain
corporations to take reasonable care in identifying and preventing risks to human
rights and fundamental freedoms, serious bodily injury or environmental damage
or health risks resulting directly or indirectly from the operations of the company.59
The vigilance obligations are relevant for group liability as they extend to subsidiar-
ies (controlled companies) as well as subcontractors or suppliers. Similarly, a popu-
lar initiative ‘for responsible enterprises’ in Switzerland proposes a due diligence
obligation on companies to respect human rights and environmental standards.60 If
accepted, this duty would require companies to identify real and potential impacts
on internationally recognized human rights and the environment; take appropriate
measures to prevent violation of these standards, and account for the actions taken.
This obligation extends to both the parent company as well as any domestic and
55
On this see Petrin (2013).
56
Newton-Sealey v. ArmorGroup Services Ltd. [2008] EWHC 233 (QB).
57
See Deva (2015), p 4; Muchlinski (2010), pp 923–924; Muchlinski (2007), p 322.
58
Deva (2015), p 4.
59
The law applies to corporations with more than 5000 employees with a registered office in France.
60
Popular initiative ‘For responsible enterprises—for the protection of humans and the environment
(enterprise responsibility initiative)’ (authors’ translation). For official information on the initiative, see
www.bj.admin.ch/bj/de/home/wirtschaft/gesetzgebung/konzernverantwortungsinitiative.html (last visited
26 January 2018).
123
foreign companies it controls. Both the French law and the Swiss initiative aim to
hold companies liable for failure to adhere to the delineated obligations unless the
company can demonstrate that it took due care, for which it bears the onus of proof.
From the victims’ perspective, approaches that place a duty on corporations and
shift the burden on them to show that they did not breach their obligations obviously
facilitates the process for them.61 However, upon examining the various iterations of
the ‘presumption’ approach it also becomes clear that it is very similar to liability
based on parent companies’ own duties of care, with the main difference being that
the burden of proof is shifted to the defendant company. For this reason, the actual
approach itself fundamentally still suffers from the same or similar problems that
were identified and discussed in the context of Chandler and parents’ direct duties
of care. Principally, it still remains unclear why liability should (exclusively) depend
on ‘ineffective control’, lack of knowledge, or other omissions on the part of the par-
ent company, given the convincing case for broader liability of corporate sharehold-
ers independent of such factors, which are more akin to strict enterprise liability.
5.4 Enterprise Liability
Another option for reform consists of moving towards a form of ‘enterprise liabil-
ity’. Although there is no singular definition of this term, enterprise liability is often
equated with treating all companies in a group as a single enterprise and holding
the single enterprise responsible for harm caused by any individual company within
the group. This negates the separate legal personality of related corporate entities
and allows for both horizontal and vertical piercing—that is directing claims against
parent and/or sister companies. This approach is thought to bring the ‘legal reality
of corporate groups closer to their economic reality’ and to force group companies
to assess business activities that are potentially harmful for third parties ‘holistically
for the entire group, rather than move risky or hazardous businesses to distant or
under-funded subsidiaries’.62
In the UK, enterprise liability had a short-lived appearance when Lord Denning
championed it in the form of the ‘single economic unity’ theory in DHN Food Dis-
tributors v. Tower Hamlets.63 However, Denning’s single economic unit approach
did not gain acceptance as a general principle for veil piercing.
In several other jurisdictions, however, certain forms of enterprise liability are
recognised.64 For instance, in the US creditors can reach the collective assets of
all of the corporations making up the enterprise under certain circumstances and
according to some courts.65 The enterprise liability doctrine thus acts as a supple-
mentary doctrine to veil piercing (which applies between parents and subsidiaries
and governs ‘vertical’ liability) by enabling courts to hold a company that is part of
61
Deva (2015), p 4.
62
Deva (2015), p 3.
63
[1976] 1 WLR 852.
64
Dearborn (2009), pp 220–230.
65
Bainbridge and Henderson (2016), p 192. See also Strasser (2005), pp 646–647.
123
a corporate group liable for the debts of a sister company, or ‘horizontal’ liability.
Enterprise liability is therefore particularly useful where a subsidiary company is
unable to satisfy debts or claims but the corporate group as a whole, but not neces-
sarily the insolvent company’s parent company, has sufficient assets.
The test for enterprise liability as developed by certain US courts tends to consist
of two elements. First, there has to be such a high degree of unity between the enti-
ties in question that their separate existence has de facto ceased. Second, in light
of this unity, treating the entities as separate would promote injustice.66 Although
courts have taken differing approaches to interpreting the precise requirements
under this test, elements that show how the separateness of the group entities was
disregarded (such as intermingling of assets or other evidence that they were not
treated as independent entities) as well as an improper fraudulent motive for using
group structures is normally required.67
In Germany, the Konzernrecht (law of corporate groups) provides for a distinct
regime of corporate group liability—this is in contrast to EU law, where propos-
als for the purpose of developing a common body of law for corporate groups were
developed in the 1970s but did not come to fruition. It provides among others, in
short, a contractual (optional) and a mandatory model applicable to de facto groups,
which both provide for instances of the parent’s or dominating company’s liability.68
German law recognizes group companies in this manner in an effort to address the
inherent conflict of interest that exists between parents and their subsidiaries, which
could benefit the parent’s shareholders at the expense of the subsidiary’s sharehold-
ers and creditors. However, this also means that the Konzernrecht regime is mostly
geared towards the protection of minority shareholders and contractual creditors, not
victims of torts or human rights violations that are the focus of the present inquiry.
India has similarly made efforts at recognizing enterprise liability, although only
in a narrow set of circumstances. After the Bhopal disaster in which a gas leak by
an American parent company’s subsidiary caused widespread injuries and deaths in
Bhopal, India, the Indian government argued in the ensuing case that a multinational
enterprise should ‘necessarily assume responsibility’ for harms caused by it ‘for it
alone has the resources to discover and guard against hazards and to provide warn-
ings of potential hazards’.69 The Indian Supreme Court later recognised this argu-
ment by holding that:
[A]n enterprise […] engaged in a hazardous or inherently dangerous indus-
try […] owes an absolute and non-delegable duty to the community that no
harm results to any one on account of the dangerous nature of the activity it
has undertaken […] If the enterprise is permitted to carry on the hazardous or
66
See, e.g., Pan Pacific Sash & Door Co. v. Greendale Park, Inc., 166 Cal. App. 2d 652 (1958) and its
progeny.
67
Bainbridge and Henderson (2016), pp 191–199.
68
See Engrácia Antunes (2017), pp 8–12; Reich-Graefe (2005); Davies et al. (2012), pp 245–247.
69
Indian government’s complaint before the US District Court, Southern District of New York (8 April
1985), cited in Muchlinski (2007), p 319.
123
inherently dangerous activity for its profit, the law must presume that such per-
mission is conditional on the enterprise absorbing the cost of any accident.70
This doctrine became subsequently accepted as defining enterprise liability in
India, although only with respect to corporations engaged in hazardous or inherently
dangerous industries.
Enterprise liability, in varying forms, has also received a great deal of interest in
the academic literature. A number of scholars have analysed limited liability between
parent and subsidiary companies from a law and economics perspective and found
that there is only weak support for it, which has led some commentators to argue in
favour of enterprise liability mechanisms. Bainbridge has found that the prospect
of judgment-proofing within groups means that parent company liability alone is
insufficient and that enterprise liability theories appear better suited, although not
ideal, to deal with large-scale risk-externalizing.71 Blumberg, one of the leading pro-
ponents of the enterprise conception of corporate groups, has suggested that such
groups are characterized by the unifying factors of control and economic interrela-
tionship. While Blumberg acknowledges the relevance of added elements such as
administrative and financial interdependence, integration of employee relationships,
and use of a common group persona,72 control remains the central tenet of conceptu-
alizing corporate groups and as such, according to Blumberg, accordingly also justi-
fies a ‘control-based form of enterprise liability’.73
In recent years, notable scholarly proposals building upon enterprise liability con-
cepts have also been outlined by other commentators. Skinner suggests, for instance,
that parent company liability be imposed through a statutory enactment for viola-
tions of customary international human rights and serious environmental torts.74
However, she limits her suggestion of imposing statutory liability to corporations
operating as part of a unified economic enterprise in ‘high risk host countries’.75
Conversely, Dearborn proposes a model of enterprise liability that requires an eco-
nomically integrated enterprise, which is defined on a case specific ‘inquiry of eco-
nomic, and not behavioral, control’; and an instance of a mass tort, human rights
violation, or environmental harm.76
5.5 Disregard or Modify Limited Liability
Finally, the problem of group company liability could be addressed through changes
in corporate law rules that govern limited liability as well as by adjusting relevant
insolvency rules. In its most radical form, the solution to problems of group liability
70
MC. Mehta v. Shriram Food and Fertilizer Industries (Oleum Gas Leak), AIR 1987 SC 1965.
71
Bainbridge (2001), pp 529–531.
72
Blumberg (1993), pp 245–246; Blumberg (2005). See also Orts (2013), p 146; Dine (2012) (discuss-
ing Albania’s enterprise liability).
73
Dearborn (2009), p 231.
74
Skinner (2015), p 1849.
75
Ibid.
76
Dearborn (2009), p 252.
123
would lie in complete abolition of limited liability for voluntary and involuntary
claims.77 Less drastic solutions would see limited liability being abolished for tort
claims in groups that are wholly-owned or connected through majority positions
groups,78 liability for torts and statutory violations being imposed for sharehold-
ers that have the capacity to control corporate activity79; abolishing limited liabil-
ity in closely-held companies80; making limited liability contingent upon financially
responsible conduct of controlling shareholders81; disregarding limited liability for
corporate shareholders ‘when the corporate arrangement has increased risks over
what they would be if firms generally were organized as separate ventures’82; and
adopting a system of pro rata shareholder liability for torts.83
Modification of limited liability rules is equally a central theme in a new lead-
ing book on group liability. Christian Witting proposes a two-pronged approach for
dealing with claims in corporate groups and networks. The first prong of his test
for liability consists of statutory modifications to achieve modified limited liability.
This would apply when a company becomes insolvent and there are unsatisfied per-
sonal injury claims against it. In these instances, both the parent company and indi-
vidual shareholders in the insolvent company would become liable, pro rata, in an
unlimited amount for those personal injury claims.84 In addition, the personal injury
claims would be prioritized—ahead of both secured creditors and other unsecured
creditors—in winding-up or corporate insolvency procedures.85
Witting’s second proposed liability prong is directed at network companies,
where liability through shareholders’ modified limited liability may not apply or
prove insufficient.86 For these instances, he proposes introducing a new tort of ‘mul-
tiple entity recklessness’, which would apply when a company acts in a way which is
objectively reckless in undertaking physical processes which give rise to significant
risks of injury. In these instances, liability could be extended to other companies
having significant commercial relationships87 with the risk-taking company and its
reckless conduct. Each would become prima facie jointly liable with the risk-tak-
ing company for personal injury claims on the basis of their deemed agreement. It
would then be up to the prima facie liable parties to prove that they took every step
to avoid the future causation of personal injury to others by doing such things as
77
Muchlinski (2010), p 925 (referring to a proposal by Rothbard).
78
Leebron (1991).
79
Mendelson (2002), pp 1271–1272.
80
Halpern et al. (1980), pp 148–149.
81
Millon (2007). See also Engrácia Antunes (1994), pp 396–406.
82
Easterbrook and Fischel (1991), p 57.
83
Hansmann and Kraakman (1991).
84
Witting (2018), p 420.
85
Ibid.
86
Ibid., p 421.
87
This involves the other companies having an explicit agreement with the first company or where they
pursue a common objective. Ibid., p 383.
123
blowing the whistle on the reckless conduct and ceasing coordination with the risk-
creating company.88
6 Two‑Tiered Strict Liability Based on Risk Internalization
Having reviewed the leading reform options, and based on the convincing twin case
of increased group company liability from both a stakeholderist as well as an eco-
nomic viewpoint, this article argues in favour of a combined system of enterprise
liability for traditional corporate groups with a form of adjusted or modified vicari-
ous liability of companies and groups for ‘network’ companies.89 To be clear, the
proposals outlined in the following sections are directed at reforming parent com-
pany and group company liability, they do not pertain to individual shareholders’
liability.
6.1 Enterprise Liability for Traditional Groups
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 subsidi-
ary. 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 vol-
untary contractual relationship with corporations—should have redress against the
entire group and any individual company that forms part of that group. This liability
should extend beyond the parent company and include the group as a whole. Apart
from risk compartmentalization as a shielding device against extra-contractual
claims, however, the various benefits of corporate group structures can and should
be preserved.
The enterprise liability approach offers more promise than the proposals sug-
gesting abolishing or limiting limited liability for several reasons. First, exempting
individual shareholders from limited liability—whether it is pro rata or not—can be
an untenable and potentially dangerous deterrent to investment and entrepreneurial
activity, despite commentators’ efforts to diffuse this concern.90 In addition, at the
risk of stating the obvious, limited liability for individual shareholders is far from
a system where individuals are free from liability. When it comes to instances such
as mass torts that lead to their company’s insolvency, individual shareholders inves-
tors stand to lose their entire contributed capital, which for many retail investors
may already represent a substantial wealth loss even in the absence of additional
personal liability over and above this amount. Further, while the idea of abolishing
88
Ibid., p 422.
89
Enterprise liability as proposed herein does not stand in isolation. It is supplemented by other legal
tools, including direct tortious liability of companies and corporate agents as well as rules that provide
remedies in case of an entity’s insolvency, such as rules on preferences, transfers, and fraudulent or
wrongful trading.
90
For counterarguments supporting individual shareholders’ liability, see Witting (2018), p 276.
123
limited liability for corporate shareholders and, specifically, parent companies

within groups is not per se an idea without merit, the weakness of this approach is
that it does not allow, in and of itself, tort victims to reach the assets of sister com-
panies. Accordingly, it may not adequately counter instances of judgment proofing
within groups. Finally, concepts that limit or modify limited liability are inferior to
enterprise liability approaches when considering the causality of wrongs that stem
from group activities. Typical group structures include strongly interconnected enti-
ties (in operational, financial, strategic, and other matters) and may feature top-down
instructions and control. In these structures, it may be difficult, if not arbitrary, to
pinpoint a single entity whose behaviour is the clear cause of a third party’s loss.
Instead, the group as a whole is more likely responsible, supporting the view of an
enterprise conception of groups.
Thus, using enterprise liability as a base for a reformed liability approach, this
article argues in favour of a model that uses equity ownership and voting rights to
establish the existence of a group (on which see below) but is otherwise independ-
ent of whether control existed and was or was not properly exercised.91 Similarly,
liability should not depend on improper motives, wrongdoing and other subjective
aspects. Even the level of capitalization (thin capitalization or under-capitaliza-
tion)—which according to some enterprise liability approaches is required for group
liability—should not be decisive. Instead of relying on control and (mis)behaviour
of a parent or controlling entity, a group’s liability for one of its member compa-
nies’ torts should be conceptualized as a cost of doing business, which—according
to economic theory and in line with social considerations—should be internalised.
Indeed, the idea of internalization or risk alignment is inherent to enterprise liability
thinking.92 It has also long been an overarching principle of vicarious liability and
corporate liability generally that the benefits of doing business have to be aligned
with the costs of doing so, including liability to third parties.
As a broader movement in the US, enterprise liability gave birth to strict products
liability and other forms of expansive and no-fault liability. The underlying consider-
ation of ‘you profit, you pay’93 can be applied not only to single entities, but equally
to corporate groups pursuing a common goal. The entire group benefits from the
existence and activities of group structures and there is a mutual benefit between the
various companies that together form the group. This also suggests that the group
should bear the full costs that flow from operating a business that utilizes a group
structure—specifically externalities that arise when a subsidiary is unable to fully
compensate third parties for torts that stem from its activities. In light of this consid-
eration, it is unnecessary to distinguish between different kinds of tortious acts and,
for instance, allow enterprise liability only for mass torts, human rights violations,
91
Witting (2018), pp 282–287 has convincingly made the case against control as the basis for group
liability.
92
See Dearborn (2009), pp 210–212; Witting (2018), p 290; Morgan (2015), pp 290–291; Ramsay
(1999), p 373. Beyond economics-based considerations, Skinner translates the benefits derived from
subsidiaries into an ethical obligation on the part of parent companies to compensate victims of human
rights violations stemming from subsidiary operations. Skinner (2015), pp 1807–1809.
93
Dearborn (2009), p 200.
123
personal injury, or environmental harm as some reform proposals have suggested.94

Internalisation of any liability costs is desirable, independent of their precise nature
and scale. Additionally, the corporate group will normally be in a better position
than tort victims to bear the losses that are caused by one of its members’ torts. In
economic terms, this speaks to a party’s ability to absorb or bear risks. As Muchlin-
ski has noted, the corporation, rather than involuntary creditors, should bear the risk
since the risk is created by the corporation that ‘profits from the activities giving
rise to the risk’. Internalisation is not the current legislative position, however, and
achieving it in the manner suggested herein would necessitate statutory changes.95
Perhaps the biggest problem facing enterprise liability approaches is to find an
appropriate definition of what constitutes the enterprise and, relatedly, which com-
panies should be liable within the group or how such liability is to be allocated
among them. A possible approach is to adopt the definition of holding company and
subsidiary provided in Section 1159(1) of the Companies Act 2006. It notes that a
relationship of holding company and subsidiary exists between companies where the
former has majority voting rights, the right to control the majority of the board com-
position or the majority voting rights in the latter, or where the latter is a subsidiary
of a company that itself is a subsidiary of that holding company. Holding companies
and subsidiaries that are connected in this manner would thus form a group for the
purposes of enterprise liability. Alternatively, the basis for establishing the exist-
ence of a group company could rely solely on the existence of controlling equity
stakes between parent and subsidiary companies, with the size or threshold for find-
ing a ‘controlling’ stake to be defined by a fixed percentage (instead of an ad hoc
basis in view of specific facts) in order to provide clarity. Of course, the existence of
an ‘enterprise’ (as defined above) as a pre-condition of liability means that there is
no recovery in its absence. We do not, however, regard this as problematic as, first,
there are no grounds for internalisation in the absence of an enterprise and second,
because we propose to fill certain gaps by way of the additional tier of liability out-
lined in the next section.
6.2 ‘Vicarious Liability’ for Non‑Traditional Groups (Involving Network

Companies)
Defining the group company solely in the manner as described above fails to 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. For example, a
single company or a group company could have a deep contractual relationship with
another company—such as in the case of a mutually exclusive supplier-customer
relationship—but without any equity interests on either side. This is the problem of
corporate networks mentioned at the outset. While networks normally lack the same
level of ‘groupness’ as traditional groups,96 they may nonetheless be connected and
94
See Ibid., p 252; Skinner (2015); Witting (2018), p 288.
95
Muchlinski (2010), p 923.
96
See Witting (2018), p 173.
123
pursue a common economic goal with another company or entire group to a degree
that makes it appropriate to treat them as a non-traditional group or enterprise and
extended liability beyond the single entity approach. Specifically, looking at this
question once more through a cost-benefit and cost internalization prism, the net-
work company scenarios also warrant broader liability in the case of torts, going
beyond isolated liability of individual companies. Closely connected entities that are
pursuing and benefiting from coordinated business efforts should also have to col-
lectively bear the risks for third parties that flow from their mutual cooperation.
However, an assessment whether relations between companies that do not meet
equity or voting-related tests amount to the formation of a non-traditional group for
tort liability purposes would have to be conducted on a case-by-case basis. Also,
applying the model of allowing tort victims to hold any group member liable for
torts committed by another group member may lead to overly far-reaching results
in the case of network companies/non-traditional groups. Specifically, while it may
be justifiable to hold a corporate group liable for torts by one of its suppliers that
appears to be a network company (abusive working conditions at the supplier would
be an example), it may not be justifiable in turn to hold the supplier liable for torts
committed by one of the companies that make up the customer’s group company. In
case of looser and less formalized non-traditional groups that involve network com-
panies, the question of liability should be answered based on integration. In the cus-
tomer–supplier example mentioned above, it may be that the supplier is integrated in
the customer’s business but not vice versa. This would entail the customer’s respon-
sibility (and the customer may be a single company or an entire traditional group)
for the supplier’s tort but there would be no liability in the other direction, that is no
liability on the part of the supplier (network company) for the customer.
Instead, for scenarios such as the customer–supplier or other relationship that
suggest strong ties between two or more businesses or a traditional group and
another business, liability of a company or traditional group of companies based on
a modern iteration of vicarious liability tailored to the context of connected busi-
ness entities should be allowed. Hence, a company or entire group should 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, organisational, and
legal links between the entities.97 Guiding questions based on factors proposed by
Dearborn (pertaining to the definition of groups) could be helpful in this regard,
including 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.98 Additionally, and
as part of this inquiry, an element analogous to classic vicarious liability’s ‘course
of employment’ requirement would have to be considered. This could consist of
97
A similar test was applied, in the parent-subsidiary context, by the Court of Justice of the European
Union in Case C-97/08 P, Akzo Nobel NV v. Commission of the European Communities [2009] ECR
I-08,237; [2009] 5 CMLR 23.
98
Dearborn (2009), p 252–253.
123
assessing whether tortious conduct occurred in the course of coordinated business

conduct between a company/group and a network company.
English courts have been reluctant to apply vicarious liability in the parent-sub-
sidiary relationship. Nevertheless, two scholars have suggested that in light of recent
developments vicarious liability law might allow for this doctrine to become ame-
nable for application in the corporate/group context.99 Indeed, foreign jurisdictions
have already used or contemplated the use of vicarious liability in this context and it
has also long been recognized in the field of competition law (where fines for acts of
subsidiaries can be imposed upon a parent).100 Although liability for network com-
panies based on establishing a group or enterprise through integration has disadvan-
tages—it lacks ex ante certainty on whether a group has been formed and can attract
criticism of being open-ended, meandering through entire economies101—it appears
necessary as a way to properly deal with the widespread economic reality of busi-
ness structures that go beyond traditional notions of a group company.
6.3 Some Limitations
To be sure, enhanced group company liability may have consequences that are dif-
ficult to foresee. As Bainbridge and Henderson suggest, unlimited liability for con-
trolling corporate shareholders might initiate a trend back to previously popular
highly diversified corporate conglomerates, which based on newer evidence may not
be a desirable development.102 Conversely, there could also be the opposite effect,
with groups reducing diversification in order to avoid liability contamination stem-
ming from one activity or industry that they are invested in onto another in a bid to
avoid spill-over liability from risky to less risky areas. Further, if general unlimited
liability for parent companies would cause high-risk business to be conducted by
smaller businesses without group structures,103 then tort victims would be worse off.
This is true because it would leave offending companies with smaller pools of assets
and limited liability, because without group structures the company would have only
individual shareholders that remain protected by the corporate shield. Still, given
that liability insulation is not the only benefit of group structures104 and in light of
some jurisdictions’ requirements that business be conducted through local compa-
nies, it is unlikely that group structures would disappear entirely.105 This problem
would also be mitigated—through the proposal for liability for network compa-
nies—since a lack of group structures would not per se exclude the possibility of
liability for other entities. Finally, if enterprise liability allows claimants to direct
99
Morgan (2015), p 288–299; Witting (2018), pp 398, 18–19, 416.
100
See Nygh (2002), p 66; Rands (1999), pp 443–446; Hofstetter (1990), p 591; Witting (2018), p 400;
Morgan (2015), p 288.
101
See LoPucki (1998), p 158.
102
Bainbridge and Henderson (2016).
103
As suggested by Easterbrook and Fischel (1985), p 111.
104
See Leebron (1991), p 1614.
105
As Leebron noted, as long as the benefits to having a group structure exceed the increased liability
exposure related to subsidiaries’ activities, then corporations will opt for such structures. Ibid., p 1615.
123
their claims against one or several parent or subsidiary companies of their choos-
ing (joint and several liability), this might result in negative effects on the affected
entities’ existing creditors and minority shareholders. It appears however difficult to
avoid such issues without introducing complex additional provisions that allocate
liability within groups and potentially necessitates revised priorities for enterprise
liability tort claims in insolvency.
7 Conclusion
Group companies have an increasingly difficult time insulating themselves from lia-
bilities incurred at the subsidiary level. Although courts frequently state that they do
not pierce the corporate veil, the emerging trend to broaden corporate parents’ direct
liability towards third parties that suffered tortious loss due to a subsidiary’s conduct
has the same result. In fact, establishing parent company or group company liability
for the acts of subsidiaries, which was once viewed as a ‘political non-starter’106
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,
which finds solid support both based on economic views of group liability as well as
stakeholderist or pluralist perspectives on the corporate purpose. Indeed, the support
for enhanced liability from these normally diametrically opposed schools of thought
is an encouraging, albeit rare, convergence of opinion and outcomes in corporate
law scholarship.
Open Access This article is distributed under the terms of the Creative Commons Attribution 4.0 Interna-
tional License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution,
and reproduction in any medium, provided you give appropriate credit to the original author(s) and the
source, provide a link to the Creative Commons license, and indicate if changes were made.
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European Business Organization Law Review (2018) 19:771–796

Group Company Liability

Published online: 23 October 2018

Keywords Group company · Liability · Corporate law · Tort law · Multinational

According to a universal bedrock principle of corporate law, corporations have sep-

2 The Group Company and Limited Liability

3 Circumventing Limited Liability

3.1 The Traditional Approach: Veil Piercing

3.2 The Emerging Approach: Direct Parent Liability

companies—holding subsidiary shares without having their own business activi-

3.3 The Limits of Direct Parent Liability

Direct (tortious) liability of parent companies in scenarios as outlined above should

4 The (Economic) Case for Group Company Liability

5 Reforming Liability for Group Companies

5.1 Clarify and Improve Veil Piercing

5.2 The Parent’s Duty of Care

A third option is the introduction of a rebuttable presumption of parent company lia-

5.5 Disregard or Modify Limited Liability

6 Two‑Tiered Strict Liability Based on Risk Internalization

6.1 Enterprise Liability for Traditional Groups

limited liability for corporate shareholders and, specifically, parent companies

personal injury, or environmental harm as some reform proposals have suggested.94

6.2 ‘Vicarious Liability’ for Non‑Traditional Groups (Involving Network

assessing whether tortious conduct occurred in the course of coordinated business

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2 The Group Company and Limited Liability

3 Circumventing Limited Liability

3.1 The Traditional Approach: Veil Piercing

3.2 The Emerging Approach: Direct Parent Liability

3.3 The Limits of Direct Parent Liability

4 The (Economic) Case for Group Company Liability

5 Reforming Liability for Group Companies

5.1 Clarify and Improve Veil Piercing

5.2 The Parent’s Duty of Care

5.5 Disregard or Modify Limited Liability

6 Two‑Tiered Strict Liability Based on Risk Internalization

6.1 Enterprise Liability for Traditional Groups

6.2 ‘Vicarious Liability’ for Non‑Traditional Groups (Involving Network