Petro Plc is a wholly owned subsidiary of Holdings Plc.

The
directors of Petro are also the directors of Holdings.
Previously, Petro owned Substrata Ltd, an oil-drilling
company. However, in 2016 Petro sold all its shares in
Substrata to Oilgroup Plc (so that Substrata became a
subsidiary of Oilgroup).

It was a term of the sale contract between Petro and

Oilgroup that Petro would not engage in oil-drilling for five
years. In March 2018, Petro held a board meeting, at which
its directors decided to recommence oil-drilling. However,
to avoid breaching the 2016 contract with Oilgroup, it was
decided that the oil-drilling would be carried on by Easyco
Ltd, an existing subsidiary of Holdings that was formed 10
years ago.

Since Substrata was acquired by Oilgroup, Substrata’s

safety record has deteriorated sharply. There have been a
number of leaks or explosions at Substrata’s oil-drilling
facilities. These accidents have resulted from Substrata’s
negligence, and they have injured both employees of, and
neighbours of, Substrata. Substrata is on the verge of
insolvency. Oilgroup itself also undertakes extensive oil-
drilling activities.

Advise Oilgroup whether:

a) it can take any action against Petro or Easyco for

breach of the 2016 contract; and

b) it is likely to face any liability in respect of the

accidents caused to the employees and neighbours of
Substrata, and whether it could do anything in the
future (apart from improving Substrata’s safety
record) to reduce its chances of being held liable for
any future accidents.
The Plan:

a) Claimant – Oilgroup
Defendant - Easyco & Petro

b) Claimant - Employees / Neighbours

Defendant - Substrate or Oilgroup

a) Answer

Issue:

In 2016, Petro (subsidiary of Holdings) had a contract

with O (when it sold S) that it will not engage in oil
drilling for 5 years.

In 2018, it used Easyco Ltd (another subsidiary of

Holdings Ltd) to recommence oil-drilling.

Petro had avoided the restriction of its contract by

using Easyco to run the drilling business.

Can oilgroup make Easyco liable and stop it from

running the drilling?

The only way is to show that both Petro and Easyco

are one and the same entity.
 1. Salomon v Salomon – companies are separate legal
entity. Hence Easyco cannot be liable for Petro’ s
breach.

2. Adams v Cape – the concept of separate legal

personality applies to group of companies too.

3. Agency? The directors of Petro seem to be able to

make decision for Easyco to be used for running the
business. Could that mean Petro has a great control
over Easyco that it can be construed as agency
relationship?

Atkin J found an agency relationship by asking the

following in Smith, Stone & knight Ltd v Birmingham
Corp (1939):

(1) Profits of the subsidiary must be treated as profits

of the holding company;
(2) The persons conducting the subsidiary's business
must be appointed by the holding company;
(3) The holding company must be the head and brain
of the trading venture;
(4) The holding company must be in control of the
venture and must decide what capital should be spent
and what should be done;
(5) The profits made by the subsidiary's business must
be made by the holding company's skill and direction;
and
(6) The holding company must be in constant and
effective control.

But agency was not found in Salomon although all the

above was found.
Adams v Cape and Yukong line Ltd v Rendsburg Invst -
More is required than Atkinson J’s control factors to find
agency. The control factors are not enough.

Proper agency principle (actual or apparent) must be found

that. Subsidiary must be able to bind the parent.

4. Single Economic Unit? Could it be argued that these

subsidiaries of Holdings Ltd are all in fact single unit
but organised in separate legal entities?

DHN Food Distributors Ltd v Tower Hamlets London

Borough Council (1976) CA
Lord Denning : Where a group of companies makes up
a single economic entity it may sometimes be treated
as one legal entity.

• Woolfson v Strathclyde RC [1978] – similar facts with

DHN

- The House of Lords specifically disapproved of

Denning’s views on group structures, and declared
that the veil of incorporation could be lifted only if
a company was a façade.

5. Adams v Cape – veil can be pierced for reasons:

1. where the court is interpreting a statute or

document – (to show parent and sub are one
entity).
2. where the company is a mere façade.
 3. where the subsidiary is an agent of the company.

6. Adams v Cape – veil cannot be pierced for reasons:

a. Single economic unit

b. Interest of justice

7. A company would be considered a mere façade where

it was being used to enable someone to avoid a pre-
existing obligation (i.e. an obligation that they had
already incurred themselves) – Salomon.

8. Gilford Motor Company Ltd v Horne [1933] - Horne

was a former employee of Gilford. As an employee, he
had agreed with Gilford not to solicit its customers (if,
for example, he set up his own business in competition
with Gilford later). Horne then left his job with Gilford
and wanted to set up his own business and to solicit
its customers – the very thing he had already
promised not to do. To get around that promise, he
formed a company to operate his new business and
then argued that it was the company – and not him,
Horne – that was now soliciting Gilford’s customers.

The court found that the company was merely a front

for Horne and issued an injunction against both him
and the company, even though the company itself had
never signed any covenant not to solicit Gilford’s
customers.

(Also discuss Jones v Lipman)

Today this is known as evasion principle and can only be

used as a last resort when no other remedy is available.
 Prest v Petrodel

..when a person is under an existing legal obligation

or liability or subject to an existing legal restriction
which he deliberately evades of those enforcement
he deliberately frustrates by interposing a company
under his control. The court may then pierce the
corporate veil for the purpose, and only for the
purpose, of depriving the company or its controller
of the advantage that they would otherwise have
obtained by the company’s separate legal
personality.

In most cases the facts necessary to establish this

will disclose a legal relationship between the
company and its controller giving rise to legal or
equitable rights of the controller over the company’s
property, thus making it unnecessary to pierce the
veil

Lord Sumption :

Prest v Petrodel affirmed Adams: Lord Sumption

distinguished between what he referred to as the
‘evasion’ principle and the ‘concealment’ principle.
The veil could be pierced, he argued, only on the
evasion principle – where the controller of a company
was using that company to evade an obligation that
the controller already had. However, for the veil to be
pierced, it was not necessary that the company that
was being used in this way had been formed to enable
an obligation to be evaded. It was sufficient simply
that it was now being used to enable its controller to
escape their obligation.
By the concealment principle, Lord Sumption referred
to the court’s ability to see through someone’s
 attempt to hide their behaviour. There are, of course,
many ways in which a person might conceal their
actions. Lord Sumption was noting that using a
company was one such way. In Lord Sumption’s view,
the court always has the power to see through such a
use and, in doing so, identify what someone is really
doing. The court does not need to pierce the veil to do
this: the court can simply get to the ‘truth’ of a
person’s behaviour.

(If, for example, I decide to blackmail someone and

make my victim pay the money I demand over to a
company I own, the court can still regard me as a
blackmailer and receiver of that money, even though I
have used a company to try to conceal my receipt).

Concealment principle is a legal banal – to find a basis

for the claim / not by piercing the veil.

OTFs: The use the ‘concealment’ principle from Prest to

argue that Petro is really engaged in oil-drilling –
analogous to Lord Sumption’s analysis of Gilford v Horne
(that Mr Horne could be viewed as breaching the covenant,
albeit through the medium of another company). This
argument would not work to hold Easyco liable.

Alternatively, might seek to hold either Petro, or Easyco,

liable, through veil piercing.

In order to establish evasion (veil piercing) it must be

proven that:

1. Someone in control of the company;

2. Using the company for improper purpose (impropriety)
3. To evade their existing obligation
The impropriety (improper purpose) must be linked to the
claim – Trustor AB v Smallbone (2001)

Petro had such an obligation but is Petro in control of

Easyco? Arguably not? Holdings Ltd controls Easyco. But
the board of directors could be the same for Petro to make
the decision to use Easyco, is that sufficient proof of
control?
Not relevant that Easyco was formed many years earlier,
and not formed to evade the obligation.

Question b)

b) Since Substrata was acquired by Oilgroup,

Substrata’s safety record has deteriorated sharply.
There have been a number of leaks or explosions at
Substrata’s oil-drilling facilities. These accidents
have resulted from Substrata’s negligence, and they
have injured both employees of, and neighbours of,
Substrata. Substrata is on the verge of insolvency.
Oilgroup itself also undertakes extensive oil-drilling
activities.

Advise Oilgroup whether:

b) it is likely to face any liability in respect of the

accidents caused to the employees and neighbours of
Substrata, and whether it could do anything in the
future (apart from improving Substrata’s safety
record) to reduce its chances of being held liable for
any future accidents.

Here, the focus should be on whether Oilgroup owed a duty

of care to prevent Substrata from injuring the employees
and neighbours.
In a situation where there is a parent and subsidiary
company concerning personal injury cases, the law has
established several cases that deal with this issue.

o Conelly v RTZ (1997) (HOL) Mr Conelly worked in a

subsidiary company of RTZ in Namibia of Uranium
Mines , later developed health problems (Cancer)
wanted to sue RTZ ( Parent Company)in London as
it owed a duty of care to its subsidiaries. Courts
held that the matter could not be heard in Namibia
as there was an issue of complexity, cost and
evidence. London was held to be the best forum. As
much as the courts were able to establish
jurisdiction when it came to a claim in the English
Courts the action was time barred under the
Limitation Act 1980.

o Lubbe v Cape 2000(HOL) there was a subsidiary

company in South Africa mining asbestos which
lead to injuries. Over 3000 claims were brought
against the parent company in London for death
and personal injury. HOL London was the most
appropriate forum as it was easier to establish
evidence and had better expert evidence to
 substantiate claims. But here the parties decided
for an out of court settlement for £ 21 million

o Chandler v Cape 2012 CA was able to clarify the law

in this case the claimant, Mr Chandler, was
employed for a short time by Cape Building
Products Limited ("Cape Products") in the later
1950s and early 1960s. During the course of his
employment he was exposed to asbestos fibres. Mr
Chandler was diagnosed with asbestosis in 2007.
Cape Products was dissolved some time ago and, in
any event, its insurance policy contained a very
broad exclusion that would have prevented
recovery for this illness against its insurer. In view
of this, Mr Chandler began proceedings against
Cape Products' parent company, Cape PLC.

As a general proposition, parent companies are not

liable for the negligence of their subsidiaries on the
basis that each has a distinct legal personality and
it should, as a rule, not be possible to "pierce the
corporate veil". In this case, however, the Court of
Appeal held that the parent company, Cape PLC,
was liable (although, technically, the corporate
veil was not pierced). The courts held that the
parent was liable to the subsidiary through a duty
of care, among the factors that were considered
were as follows:

▪ Are the businesses of the parent and

subsidiary in a relevant respect the same?
 ▪ Does the parent have, or ought it to have,
superior knowledge on some relevant aspect
of health and safety in the particular
industry?
▪ Does the parent know (or ought it to know)
that the subsidiary's system of work is unsafe
in some way?
▪ Does the parent know (or ought it to have
foreseen) that the subsidiary or its employees
would rely on its using that superior
knowledge for the employees' protection?

o Thompson v The Renwick Group Ltd 2014

o The claimant developed diffuse pleural thickening
as a result of exposure to asbestos whilst employed
by two companies between 1969 and 1978.
o In this case the director of the parent company was
a director of the subsidiary.
o The question was will the parent company be liable
since the director was the same.
o With this the first instance court found that
through the new director, Renwick had taken
control of the daily operation of the business to a
sufficient extent to give rise to a duty of care to
Mr Thompson. By such the parent company is
liable.

o COA overruled this:

o The courts explained that in regards to the

appointment as director it was a well-
established principle that a director does not
 by reason only of his position as a director owe
a duty to the shareholder that nominated
him.

Just a fiduciary.
o With respect to the first Chandler factor) that
there was no evidence that Renwick carried
on any business at all apart from holding the
shares of subsidiaries. That meant this was
not a situation, as in Chandler, where the
parent company was better placed, because of
its superior knowledge or expertise, to protect
the employees of subsidiary companies
against the risk of injury so that it was fair to
infer that the subsidiary would rely on the
parent

o The businesses of the subsidiaries were to

some extent merged amounted to no more
than a finding that these companies were
operating as a division of the group carrying
on a single business. That did not mean that
the separate legal personalities of the
subsidiaries were not retained or respected.

o Renwick was not going beyond its role as a

shareholding company and was not
interfering with the business of the employer
in a way that meant it owed employees a duty
of care
His Royal Highness Okpabi v Royal Dutch Shell Plc
[2018]

UK-based Royal Dutch Shell (RDS) had a Nigerian

subsidiary that was involved in an oil spill.

o The claimants argue that Shell failed to

adequately prevent oil spills and subsequently
to conduct proper clean-up in order to avoid
serious contamination of agricultural lands
and waterways.

o High Court held that the communities could

not seek redress against Shell in English
courts. The Judge concluded that there was
not sufficient evidence that Shell exercised a
high degree of oversight, control or direction
over SPDC, and therefore that the parent
company had no legal responsibility for
pollution by its Nigerian subsidiary

o The Court of Appeal dismissed the claims

based on the absence of evidence to
demonstrate operational control of Shell over
its subsidiary.

c) What might Oilgroup do in the future? Its best

strategy would be to try to take such steps as might
ensure that some of the four preconditions for
liability in Chandler will not be satisfied, for
example by restructuring so that it becomes a pure
holding company, by trying to ensure that those
injured do not assume that Oilgroup will attend to
their health and safety, by insulating itself from
knowledge of the health and safety problems within
Substrata, etc.