A company once registered, has a legal personality.[1] Corporate groups are identified as a legal individual/body/entity, independent from the group’s directors and shareholders. Ergo the officers, directors or shareholder can act on behalf of the legal body without any liability as it remains with the entity.[2]

A subsidiary is also a corporate group which is wholly owned by a parent company (by owning the shares). The subsidiary has limited liability and a separate legal entity.[3] This separate corporate personality of the subsidiary reveals the partition among the investor’s assets and the company’s liability. It generates a process where the parent company claims profit from the subsidiary while supervising its actions and shielding the shareholder from the subsidiary’s liability. Hence, a subsidiary is an effective tool to outsource the risk from the affluent parent group.

Muchinski’s description of limited liability raises an important issue as it is meant to provide safeguard to small-scale investors but ends up protecting Multi-national companies(MNCs).[4] ‘Piercing the corporate veil’ is the only way for the judiciary to impose an exception to the earlier principle by separating the company and a shareholder and holding the shareholder responsible for the company’s action in such a way that it was the shareholder’s action.[5]

Foreign subsidiaries are often exploited to benefit from hazardous activities carried out in areas of weak jurisdiction. The parent company can circumvent the current law to gain immunity from any liability arising from foreign subsidiaries, Adams v Cape Industries Plc[6] being the prominent example. In this particular case,  the subsidiary was based in South Africa and the claimants sued for tortious damage relating to health hazards.[7] Parent companies create a proliferation of negative externalities through their subsidiaries while they are protected by the veil at the same time. The petitioners argued ‘lifting the corporate veil’ to demonstrate the parent company’s control and presence on the subsidiary.[8] However, Lord Keith’s obiter in Woolfson[9] was followed, which stated it could only be pierced to deal with limitations in law and if a party could evade any existing legal obligations. As these injuries occurred after the company’s creation, it implied a future relief, thus, not authorizing the veil piercing. Hence the appeal was dismissed. This is an influential case that marks the long-established question of the conflict in English law, whether a parent company native to an external jurisdiction can be held liable on standard legal principles of tort for the activities of their subsidiary.[10]

This is not present without caveat, as the barriers of protection for the MNCs enables them to hide behind the veil by the application of the doctrine of forum non-conveniens(FNC) and jurisdiction. While it is a reasonable assumption to hear a case in the country where the injury took place, in reality, the judicial system in the parent company’s jurisdiction is significantly evolved and reasonable to a higher degree. Generally, the parent’s jurisdiction has an efficient administration, which makes it unpredictable and risky to hear a claim in their country, but parent companies can avail FNC doctrine to prevent any case proceedings regarding the damage caused by subsidiaries.[11] Subsidiaries are usually located in the global south to utilise the inept law administration. This advantage is appealing to the MNCs as the governance is fragile and it is possible to ‘deal with’ judges and claimants, with ‘unethical’ being the polite euphemist way to put it.

I am always open to constructive criticism and debate over the area of law.

BIBLIOGRAPHY

[1] Salomon v A Salomon & Co Ltd [1897] UKHL 1, AC 22

[2] Robert B Thompson “Piercing the Corporate Veil: An Empirical Study.”  [1991]  76(5) CLR 1036-1074

[3] Arad Reisberg and Anna Donovan, ‘Pettet, Lowry & Reisberg’s company law’ (5th edn Pearson, 2018)

[4] Peter T. Muchlinski, ‘Holding Multinationals to account: recent developments in English litigation and the Company Law Review I’ [2002] 39 Amicus Curiae 3,8

[5] Lorraine Talbot, Critical Company Law (2nd edn Routledge, 2016)

[6] Adams v Cape Industries plc [1990] Ch 433

[7] ibid

[8] (n 5)

[9] Woolfson v Strathclyde Regional Council [1978] UKHL 5

[10] (n 6)

[11] Spillada Maritime Corp. v Cansulux [1986] UKHL 10

Author Bio

Qualification: LL.B / Advocate
Company: N/A
Location: New Delhi, IN
Member Since: 07 Jul 2020 | Total Posts: 1

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