This article was first published in the October 2012 UK edition of Accounting and Business magazine.
Limiting exposure to risk is a key aspect of corporate governance. Many businesses protect themselves by trading through a raft of separate companies. However, the Court of Appeal recently held (in Chandler v Cape plc  EWCA Civ 525) that it is possible on occasion, by the way in which the parent acts, for it to be held responsible for aspects of its subsidiary’s business.
Cape Building Products Ltd (Products) was a subsidiary of what is now Cape plc (Cape). A Mr Chandler was employed by Products for two separate periods between April 1959 and February 1962. By the time the case arose, Products had been dissolved.
While Chandler was working for Products, its business was substantially integrated into Cape’s business and included the manufacture of a non-combustible asbestos board.
Within the group, health and safety matters were dealt with both by Products itself, which employed its own doctor, and at the group level. The major part of health supervision lay with Cape, which employed a group medical adviser.
It was also apparent from correspondence between the Cape company doctor and HM Factory Inspectorate in 1961 that there was concern about asbestosis suffered by an employee of one of the companies. Board minutes from the time showed Cape to be taking decisions about Products’ business, with the two companies sharing some directors.
During the course of his employment Chandler had been exposed to asbestos and was diagnosed with asbestosis in 2007. A case in 2004 had held that an exclusion clause in Products’ employer’s liability insurance policy exempted the insurer from liability for asbestosis. There was therefore no point in seeking to restore Products to the register so that proceedings could be brought against it, and Chandler’s claim was brought against Cape itself.
Cape sought to argue that the corporate veil protected it and gave it freedom from liability. Chandler’s lawyers, on the other hand, argued that Cape owed him a direct duty of care because it had assumed responsibility for the safety of Products’ employees.
It was held that Cape was indeed liable for Chandler’s asbestosis – not because the veil of incorporation had been pierced but because of Cape’s assumption of responsibility for Products’ employees. Cape therefore owed them a direct duty of care.
For a parent company to assume responsibility for the welfare of employees at a subsidiary, four factors have to be present:
- the businesses of the parent and the subsidiary must effectively be the same;
- the parent must have superior knowledge of health and safety;
- the parent must know that the subsidiary’s system of work is unsafe;
- the parent must be aware that employees look to it for protection.
The significance of this case is to be found in the fourth of these points. The court looked at the relationship between the companies. It might be sufficient simply to show that the parent has a practice of intervening in the trading operations of its subsidiary.
All groups of companies need to consider their internal governance practices to ensure that the parent company does not take on liability for aspects of its subsidiaries’ businesses. In particular they should consider:
- the make-up of the various boards of directors and their reporting mechanisms;
- the responsibilities of individual directors and senior staff;
- the exercise by the parent of responsibilities in relation to matters such as health and safety, employment, environmental matters and the like;
- the manner of content of communications within the group in relation to such matters.
Mike Griffiths is a contributor to Gore Browne on Companies and other publications, and a member of ACCA’s Global Forum for Business Law.