Q6. 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 neighbors 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.
We understand from the facts of the case that Petro Plc (“P”), is a wholly owned subsidiary
of Holdings Plc (“H”). In the past, P used to own Substrata Ltd (“S”), whose shares they sold
to Oilgroup Plc (“O”). Furthermore, it was also agreed between P & O that P shall not
engage in any oil drilling activities for five-years. But we note that soon afterwards, P
decided to recommence oil-drilling, which they did so by using Easyco Ltd (“E”), a sister
company of P and subsidiary of H. The facts also indicate that S’s safety records deteriorated
sharply which caused injuries to employees and neighbors of S. the main issues here are
whether there has been a breach of contract, and secondly whether S will be tortiously
liable for the injuries. We shall advise O by discussing each case separately in light of the
relevant case laws, arguments and legal analysis.
(a) We shall first be advising O as to whether they can take any action against P or E for
breach of the 2016 contract. The main issue here is that P had a contract with O that they
shall not carry out oil drilling activities for five years, but the facts indicate that E a sister
company of P was carrying out such activities. So, can O sue E for breach of contract? In
order to answer this question, we refer to the concept of “corporate personality”. Law
treats the registered company as a separate legal entity with its own corporate personality,
and can sue, be sued in its own name and can own its own assets and liabilities will be
separate from its shareholders or anyone else. We can refer to the case of “Salomon v
Salomon” where Mr. Salomon registered a company to carry out leather merchant business.
But soon the company got liquidated and the liquidator appointed to wind up the company
alleged that the company was a sham and a mere agent, therefore Mr. Salomon should be
held personally liable for the debts. But the House of Lords (HOLs, now the Supreme Court),
disagreed and stated that company was a separate legal entity and so the losses cannot be
recovered from Mrs. Salomon’s pockets (similar cases: Macura v NA; Giles v Rhind; Lee v
Lee’s AF; Barings v Coopers & Lybrand (No. 4); Shaker v Al-Bedrawi; Hashem v Shayif).
In our case, we note that P & E are two separate companies, therefore, they both have their
separate legal corporate personality and one cannot be held liable for the actions of the
other based on the argument of “limited liability”. Therefore, in light of the above we can
state that O cannot sue P for the drilling activities carried out by E, likewise O cannot sue E
as well because they did not have a contract with E. But O will try to argue the concept of
“lifting the veil of incorporation”, which is a Statue and Common law governed law in place
to control and avoid the abuse of the limited liability. Statutory veil lifting rules are set out
under “Insolvency Act, 1986”, but as we see from the facts of the case that there is no such
issue of insolvency involved, therefore Statute law is inapplicable. Hence, rules of common
law shall apply.
Initially, the courts adopted an interventionist approach in order to ensure flexibility and to
achieve more just outcomes. Multiple cases have been adjudicated and veil has been lifted
in various circumstances such as where policy reasons are concerned (Daimler v
Continental Tyres; Re FG Films), or where there is evidence that the company is being used
as a mere façade (Gilford Motor v Horne; Jones v Lipman; Anglo German v Chelsea; Trustor
AB v Smallbone cases), or in cases where the interests of justice required the veil to be
lifted. There has been a lot of criticism on such approach, which we see Lord Denning also
adopted by introducing the “single economic entity” in the case of “DHN v Tower Hamlets”,
where he treated the group companies as one for tax purposes. As the law became so
uncertain and due to the heavy criticism, the HOLs intervened in the case of “Woolfson v
Strathclyde RC” and disregarded Lord Denning’s approach. Further COA clarified the law in
the case of “Adams v Cape plc”, which is the law of today, inclined at the more restricted
end of the spectrum. It was stated that veil will only be lifted in three (03) situations: where
any statute or other supreme law requires the veil to be lifted; where the parent and
subsidiary have a principal-agent relationship; where the company is being used as a mere
façade – the company is being used to avoid/evade a pre-existing obligation, veil will not be
lifted in evading future obligations.
The pendulum of lifting the veil has shifted to an approach which is conservative and
narrow. Further to the above, the narrow approach has been reaffirmed in the cases of
“VTB Capital v Nutritek; Petrodel v Prest”. The courts will only lift the veil as the remedy of
the last resort and only where the liability is being evaded and not where liability was being
concealed. Referring the law to our case, we note that there is no such statute law which
requires the veil to lifted, nor is there any agency relationship. But the third situation may
be said to apply but the problem here is that veil is lifted between a subsidiary and a parent
company (vertically) but we see that that E is another subsidiary of H, and so the courts will
not get so beyond as to hold E liable because the law is narrow. Here, we can argue the
principle of “alter ego” (Clegg v Pache), by the fact that the directors of both H and P are
the same and that E is also a subsidiary of H. The decision to recommence oil drilling was
taken by P’s board of directors, and because both P and E are effectively controlled by the
same persons, the court is likely to find E to be the alter ego of Petro. In the light of
“Lennards Carrying v Asiatic”, the controlling minds of both P and E are the same because
the connecting link between them is the mutual parent company holdings, which has the
same directors as P. As this forms basis of a clinching argument in this matter, the court is
most likely to find P liable, both jointly with E and severally, even without having a
contractual obligation.
(b) We shall now be advising O as to whether it will be held liable in respect of the accidents
caused to the employees and neighbors of S, and whether it could do anything in the future
to reduce its chances of being held liable for any future accidents. The main issue here is
that O is a parent company of S, and it is most likely that the claimants will come after O for
the injuries caused due to S. But we have to determine whether O will be held actionable for
such torts. As stated above, we note that company is a separate legal entity and so both of
them will be treated as separate. But the claimants will try to argue to lift the veil of
incorporation (law is already stated above) to hold O liable for damages.
In order to get compensation, under tort law, a claim can be initiated through establishment
of duty of care for Pure Economic loss. Initially the law was such that if a parent company
does not intervene to solve the unsafe system of work of its subsidiary and this causes loss
to the employees or third parties then compensation can be claimed from the parent
company if the four conditions set out in the case of “Chandler v Cape” are met: the parent
& subsidiary are in the same line of business; the parent controls the subsidiary; the parent
knew or ought to know that there was an unsafe system of work but failed to intervene; the
subsidiary or the employee were relying on the parent to safeguard the employee’s health
& safety. But it must be noted that there is a growing reluctance on part of the UK courts to
impose this duty of care on parent companies as per the recent cases of “Thompson v
Renwick; AAA v Unilever”, and so as of now, the courts will hold the parent companies
liable only for a wrongful act (misfeasance) and not for an omission (nonfeasance). This
approach has been confirmed by the Supreme Court in “Vedanta Resources v Lungowe;
Okpabi v RDS”. Active misfeasance can be considered only where the parent company takes
over, or intervenes, or controls, supervises or advise the management of those subsidiary
activities which have caused harm to others.
Applying the law to our case we note that, there are no such elements of active misfeasance
involved on part of O which could lead to the tortious liability because O is a “ pure holding
company”, not itself engaged directly in the industry in which its subsidiary has operated.
Therefore, we can conclude that S will be held liable for the injuries caused to the parties,
and O being the parent company shall not be held liable for the injuries caused to the
parties. For future, the 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 O will attend to their health and safety, by insulating itself from
knowledge of the health and safety problems within Substrata, etc.