1. The organisers of the Conference thank the following for their support Conference Sponsor Academic Forum SponsorConference Supporter www.buse.de www.cndcec.itwww.edwincoe.com Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili

2. Welcome Back Chris Laughton, President of INSOL Europe

3. Third Session: Reform of National Insolvency Laws III Chair: Simeon Gilchrist, Edwin Coe LLP

4. Insolvent Subsidiaries Christian Witting, University of Durham

5. Context: Limited liability allows for ‘risk sharing’ Corporate form and limited liability pre-date corporate group Dangers of these attributes in groups: moral hazard of controllers structuring of legal relations to protect main assets

6. Context (continued): Adams v Cape Industries plc (1990) holds structuring to be lawful – so long as not attempting to evade current debts. It is impermissible to lift the corporate veil as against a defendant company which is the member of a corporate group merely because the corporate structure has been used so as to ensure that the legal liability (if any) in respect of particular future activities … will fall on another member of the group rather than the defendant company

7. Context (continued): Trade suppliers can assess creditworthiness take security build the risk of default into contract price take out insurance diversify customer base Tort claimants cannot do these things; they are vulnerable

8. Context (continued): Various statutory provisions reduce risks of trading while insolvent and evading creditors – eg Insolvency Act 1986 (UK), s 214 (wrongful trading) But statutory provisions are not effective where directors are not risk averse Note debate in Australia – CAMAC Report on Long-tail liabilities (2008)

9. Context (continued): In most cases – no need to go beyond the debtor company itself or beyond the group for recourse Paper considers broader liability within groups: Extended recourse against shareholders in cases of personal injury Ability to bind together corporate and non-corporate elements within a group in cases of financial loss

10. Extended recourse: Veil piercing permits outsiders to each into shareholder assets; considers ‘reality of relationships between the parties otherwise obscured by the veil’ Responsibility might fall on parent company or natural person shareholders, but is exceptional In the group, veil piercing is based on ‘common ownership and common enterprise’; control is the crucial factor Most likely to succeed in closely held companies

11. Extended recourse (continued): There is an overlap between piercing in groups and piercing on the basis of agency But subsidiaries rarely have the ability to bind parents And piercing on the basis of agency contradicts case law regarding the competence of the company when dealing with its controllers: Salomon v Salomon (1897); In re Wragg (1897)

12. Extended recourse (continued): Bainbridge (2000) suggests that veil piercing ‘brings a shotgun approach to a context in which more carefully targeted solutions are preferable’; suggests abolishing the doctrine Other writers have argued for extended liability of shareholders on the basis of control However this is unsatisfactory: definitional issues potential attempts to evade liability disincentive to engagement

13. Extended recourse (continued): Most defensible rule: pro-rata unlimited liability for death and personal injury, on basis of: stronger comparative claim of personal injury claimants as against shareholders who suffer mere financial loss function of shareholders as providers of capital to the wrongdoing company This proposal requires modification of priorities rule

14. Binding together: What should be our attitude to the group in which an insolvent company exists and the risk to creditors is of financial loss only? Berle (1947) proposed enterprise liability; argued that ‘large scale businesses’ operated through a ‘constellation of corporations’ Argued that we need to recognise the reality of the corporate group, bounded by economics and not legal form

15. Binding together (continued): Berle observed a line of cases in which it could be said that: several corporations became in effect a single enterprise and merged their operations, their several entities were disregarded and their respective assets and liabilities were pooled in a common pot which represented, substantially, the actual enterprise of which they were parts

16. Binding together (continued): Blumberg (1993) believes that the multinational group involves ‘a business being conducted collectively by interlinked companies under common ownership and control’ In growing areas of the law – of which statutory law is the leading example but also including tort law and areas of bankruptcy law … American law is moving from the universal, indiscriminate reliance on entity concepts to formulating and utilizing new concepts of enterprise or group law where required to implement the underlying policies and objectives of the law in the area

17. Binding together (continued): The effect of the application of enterprise liability is intended to be both immediate in that it provides further avenues of redress for particular creditors and systemic in that it forces the parent to absorb the externalities of group activity ‘by purchasing insurance or adequately capitalizing the subsidiary’

18. Binding together (continued): The problem with the enterprise approach is that there are no standards for determining when sufficient economic integration arises The ‘enterprise’ might spill over recognised boundaries…

19. Binding together (continued): Courts cannot ignore the separate legal personality of the company; they should defend this – this being the ‘internal point of view’ – the view within the legal system itself Courts need to fasten liability to specific wrongful acts; they can do this through ordinary civil liability doctrines Greater use can be made of a tort aimed at groups – civil conspiracy

20. Binding together (continued): Conspiracy arises where persons agree upon a course of action with the aim of injuring another and where the latter suffers loss as a result by lawful means – with the predominant intention to injure; or by unlawful means – with a purpose of injuring another, the unlawful means being ‘aimed at’ the claimant

21. Binding together (continued): Conspiracy provides a more secure basis of liability than does veil piercing: emphasises the separate legal personality and competence of the company and does not depend on a weighing of factors But there is some uncertainty about the combinations that will suffice to attract liability

22. Binding together (continued): In Canadian Dredge (1985), a conceptual barrier to use of conspiracy was identified: The person who is the directing mind of the company ‘is not guilty additionally of the [tort] of conspiring with the [company] to commit the wrongful act in question because in the identification theory there is only one entity, the natural and legal person[s] having merged into one identity, and hence the basic requirement of two persons in a conspiracy is not met’

23. Binding together (continued): US courts have objected to the ‘intra- corporate’ conspiracy doctrine because of the likely economic unity between the parent and subsidiary companies, demonstrating the absence of ‘independent’ conspirators Yet incorporation was never intended to shield controllers from personal liability for wrongs

24. Binding together (continued): Rationale of corporate conspiracy: threat of combinations to the power and stability of the state weight and authority of combinations in their dealings with outsiders

25. Binding together (continued): Corporate controllers have enhanced bargaining power: financial might and reputation of the company advantage of limited liability in fighting chosen battles through the company form

26. The organisers of the Conference thank the following for their support Conference Sponsor Academic Forum SponsorConference Supporter www.buse.de www.cndcec.itwww.edwincoe.com Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili

27. The organisers of the Conference thank the following for their support Conference Sponsor Academic Forum SponsorConference Supporter www.buse.de www.cndcec.itwww.edwincoe.com Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili

28. The organisers of the Conference thank the following for their support Conference Sponsor Academic Forum SponsorConference Supporter www.buse.de www.cndcec.itwww.edwincoe.com Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili