Liability for Actions of Subsidiaries

by Sharon Fryer

Groups often operate businesses through separate subsidiaries with the aim of ring-fencing and limiting the liabilities of each of those businesses. The High Court recently considered the circumstances in which a parent company could be liable for the actions of its subsidiary.1

In asking the Court to find the parent liable for the acts of its subsidiary, a claimant was required show that the parent itself owed him a duty of care. This case was not about “piercing the corporate veil” but rather whether a distinct duty of care could attach to the parent.

In considering this, the Court began with the familiar three-fold test, that there would be such a duty if2:

  • the damage was foreseeable;
  • there was a relationship of proximity between the parent and the claimant; and
  • it would be ‘fair, just and reasonable’ to impose such a duty in the circumstances.

The Court noted that the likelihood of a parent company owing a duty of care will increase if:

  • the parent and subsidiary operate the same business;
  • the parent has superior or specialist knowledge compared to the subsidiary;
  • the parent knows about the subsidiary’s working systems; and
  • the parent knew or ought to have foreseen that the subsidiary was relying on it using that superior knowledge to protect the claimant.

In this case, the Court was satisfied that the parent was an investment holding company, with only a very superficial view of the business of this indirectly-held and highly-autonomous subsidiary (one of over 1,300 subsidiaries in the group). The Court also found that the subsidiary’s knowledge was far more specialist than the parent’s and the subsidiary was not relying on the parent for any expertise. The claimant’s application therefore failed.

However, this case re-emphasises the importance of proper separation between group companies’ operation and management, if they are not to become liable for damage caused by one another.

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1HRH Emere Godwin Bebe Okpabi and Others v Royal Dutch Shell PLC and Shell Petroleum Development Company of Nigeria Ltd [2017]

2Caparo v Dickman [1990]

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About the contributor

  • Sharon Fryer Partner

    Sharon has broad experience of advising on all matters of company law and practice, including acquisitions and disposals of businesses and companies, investments by majority and minority stakeholders and management teams.

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