Parent company’s limited liability. Not quite so limited?
11 July 2019
It is a basic principle of company law that the liability of a shareholder of a limited company is limited to the amount unpaid on the shares it holds in that company. Right? That’s why it’s called a limited company? This is generally true. However, in some cases, a parent company can be considered to have assumed responsibility for the negligent acts of its subsidiary.
This is highlighted in Vedanta Resources Plc v Lungowe [2019] UKSC 20, a recent jurisdictional challenge heard in the Supreme Court.
In the case, 1,826 Zambian citizens, described in the judgment as “very poor members of rural farming communities”, brought a claim against Konkola Copper Mines plc (a Zambian company) and its ultimate parent company, Vedanta Resources plc (Vedanta). Vedanta is listed on the London Stock Exchange. The claimants alleged personal injury, damage to property and loss of income, amenity and enjoyment of land due to pollution and environmental damage caused by discharges from a copper mine run by the Zambian subsidiary. For the claim to continue in England and Wales, the claimants needed to show that there was a triable issue against Vedanta and not just the Zambian subsidiary.
The take home message from the judgment of the Supreme Court, our final court of appeal, is clear: the liability of a parent company is not, of itself, a distinct category of liability in common law negligence. A parent company is not automatically liable for the acts of its subsidiary - as a company may be for its employees or agents in certain circumstances. But it may be directly liable if it has “sufficiently intervened” in that subsidiary’s management to the extent that it has met the relevant test for the imposition of a duty of care.
As the judgment states: “everything depends on the extent to which, and the way in which, the parent availed itself of the opportunity to take over, intervene or control, supervise or advise the management of the relevant operations…All that the existence of a parent subsidiary relationship demonstrates is that the parent had such opportunity.”
As this was a preliminary hearing, there was no final decision on whether Vedanta was liable. The court held that “it is well arguable that a sufficient level of intervention by Vedanta in the conduct of operations at the mine may be demonstrable at trial” (emphasis added). This was based on:
- Vedanta asserting its responsibility for proper standards in its own published literature; and
- the implementation of those standards by training, monitoring and enforcement.
There are no hard and fast rules about what constitutes “sufficient intervention” for the purposes of determining parent company liability. But what is critical is that a parent company cannot assume that it will always be able to isolate any risk associated with the acts of a subsidiary at a local level, particularly where it is or has been actively involved in the management of the subsidiary.
A link to the judgment is here.
We will keep a look out for any developments in this case as it proceeds to trial.