UK Supreme Court enables expansive supply chain liability

A parent company’s liability for damage caused by its subsidiary is grounded in control

On 10 April 2019, in Vedanta v Lungowe, the UK Supreme Court confirmed the England and Wales Court of Appeal’s decision that Vedanta may owe a duty of care to neighbours of the copper mine operated by its Zambian subsidiary. The judgment is important in three respects. First, Vedanta v Lungowe marks the first time the UK Supreme Court found that a duty of care vis-à-vis parties other than the subsidiary’s employees may be owed by the parent company (albeit in its capacity of operator). Second, this duty of care is not novel and, therefore, the lenient test for adjudicatory jurisdiction is applicable. Third, in dicta, the UK Supreme Court clarified the legal basis and scope of supply chain liability.

In this post, the UK Supreme Court’s ruling is discussed, including the assessments of jurisdiction at a preliminary stage and the issue of novelty. It also reviews the implications of the Court’s dicta for the doctrine of supply chain liability. Continue reading “UK Supreme Court enables expansive supply chain liability”

The underestimated role of tax law in promoting asset partitioning ánd discouraging selective de-partitioning

Asset partitioning refers to limited liability (or: owner shielding) and entity shielding. In both cases a pool of assets is allocated to a pool of liabilities.

The economic justifications of limited liability and entity shielding typically refer – sometimes implicitly – to the situation of many shareholders in a business. Hansmann and Squire refer to this type of asset partitioning as external asset partitioning (“External and Internal Asset Partitioning: Corporations and Their Subsidiaries, The Oxford Handbook of Corporate Law and Governance (Forthcoming)”; Yale Law & Economics Research Paper No. 535, 2.). Asset partitioning is also used within a business to make separate pools of assets and liabilities; this is internal asset partitioning (ibid.). A typical example is a corporate group, where the business as an economic unity is internally, through affiliates, divided in separate pools of assets.  We also consider a company owned (or primarily owned) by a single shareholder as internal asset partitioning, even if that shareholder is a physical person. The economic unity between the single shareholder and the business of her company is similar to, if not stronger than, that between the separate entities of a corporate group.

Asset partitioning builds walls between pools of assets and liabilities. Sometimes the insiders themselves disregard the asset partitioning which they have set up themselves. This is referred to as selective de-partitioning. A crude example is the single shareholder or the parent company extracting assets from its company or subsidiary or shifting liabilities towards it. A more sophisticated example is a guarantee of one entity of a group towards another entity of the group. Often legal rules provide the creditors of the shareholders of a company with remedies against selective de-partitioning. In such a case the law reinforces the walls of asset partitioning.

We will use Belgian law as an example of how an entity-focussed tax law can favour asset partitioning and discourage selective de-partitioning. Continue reading “The underestimated role of tax law in promoting asset partitioning ánd discouraging selective de-partitioning”

Can directors be employees?

Can directors be employees? An array of answers are possible. A director may accept to perform the duties resulting from company law and the statutes of association by entering into eg a management contract, an agency agreement, or an employment contract. The diversity of plausible answers also impacts on EU private international law, as the applicability of the protective rules on jurisdiction in matters relating to employment contracts, contained in Art 18 et seq of the Brussels I Regulation Recast, depends on whether a relationship can be characterised as a ‘matter relating to an individual contract of employment’. At stake are among other things (1) the option of the director to sue the company in the courts of the place where he is domiciled, and (2) whether the company is restricted to pursue its actions against the director in the courts of the director’s domicile.

In his Opinion in C-603/17 EU:C:2019:65 Bosworth ea v Arcadia Petroleum ea, AG Saugmandsgaard Øe clarified the position of directors of a company in respect of the rules of jurisdiction applicable to employment contracts.

Continue reading “Can directors be employees?”

‘Enterprise liability’ for entities of a group?

Allowing creditors of one member of a corporate group to pierce horizontally to reach the assets of other members

Belgian private law is traditionally very distrustful of asset partitioning in the shape of both owner shielding and entity shielding. It has inherited from the 19th century French doctrine (Aubry & Rau) the idea that: (i) only persons have an estate; and (ii) every person has only one estate. An ‘estate’ (‘vermogen’ / ‘patrimoine’) is a pool of assets which serves as collateral for a pool of liabilities. Accordingly, the traditional théorie du patrimoine entails that a person cannot have separate pools of assets which serve as collateral for separate pools of liabilities. This theory betrays a strong distrust of asset partitioning, both internal and external.

In the beginning of the 19th century the rule ‘one person, one and only one estate’ was generally understood as referring to natural persons. The incorporation of legal persons, particularly of legal persons with owner shielding (limited liability), was exceptional and restricted. It was limited to certain types of activities and subject to governmental authorization. As a result, the 19th century doctrine of ‘one person, one and only one estate’, while at face value barely modified, presently has completely different practical consequences. Presently a natural person can easily incorporate, control and benefit from, one or more legal persons.

This raises the important question: Why is the traditional animus against asset partitioning not an issue, or less so,  in case the technique of the corporate form with legal personality is used to bring about such asset partitioning? Continue reading “‘Enterprise liability’ for entities of a group?”

Restructuring of Corporate Groups: Conference on Rescue of Business in Insolvency Law

The European Law Institute (ELI) and Business and Liability Research Network (BLRN) of the Leiden Law School organise a conference on restructuring of corporate groups in the afternoon of 5 December 2018. ELI’s Business Rescue Report of Prof. Em. Bob Wessels and Prof. Stephan Madaus is the starting point for discussions on the treatment of insolvent corporate groups.

Bob Wessels (Leiden University) and Stephan Madaus (Halle-Wittenberg University, Germany) will introduce the ELI Business Rescue Report and the results of this European study with respect to restructuring of corporate groups in Europe. Prof. Joeri Vananroye (KU Leuven, Belgium) will discuss Belgian perspectives on corporate restructuring and Prof. Reinout Vriesendorp will elaborate on issues of director’s liability. Leiden Law School researchers Jessie Pool, Ilya Kokorin and Gert-Jan Boon will present a case study on corporate groups.

ELI Business Rescue Report

Continue reading “Restructuring of Corporate Groups: Conference on Rescue of Business in Insolvency Law”

Schuldeisers tegen uitkeringen en bevoordeling bij rechtspersonen

Lab rat Gillis Lindemans verdedigt op 29 oktober aan de KU Leuven zijn proefschrift: “Actio pauliana: remedie met toekomst voor schuldeisers van rechtspersonen”. Meer info vindt u hier. In deze post krijgt u alvast een voorsmaakje.

Als een schuldenaar zijn schuld niet betaalt, dan kan de schuldeiser beslag leggen op zijn goederen. Holt de schuldenaar zijn vermogen uit, dan dus ook het onderpand van zijn schuldeiser. De schuldeiser heeft daartegen een krachtige remedie: de actio pauliana. De schuldeiser kan daarmee rechtshandelingen aanvechten waarmee zijn schuldenaar hem bewust of bedrieglijk benadeelt.

Het lijkt daarbij van geen belang of de schuldenaar een natuurlijke persoon of een rechtspersoon is. Nochtans scheppen rechtspersonen een bijzonder risico.

Continue reading “Schuldeisers tegen uitkeringen en bevoordeling bij rechtspersonen”

The regulatory competition continues: ook het Britse vennootschaps- en insolventierecht staat niet stil

Het antwoord van de Britse regering

Op 26 augustus 2018 heeft de Britse regering (the Department for Business, Energy and Industrial Strategy) haar antwoord gepubliceerd op de consultatieronde over insolventie en corporate governance die eerder dit jaar (maart 2018) werd gelanceerd om het Britse vennootschaps- en insolventierecht aantrekkelijk te houden (zie daarover reeds hier). Het antwoorddocument vat de ontvangen commentaren samen en geeft de stappen weer die de Britse regering in de nabije toekomst wilt nemen. Daarnaast bevat het document een antwoord van de regering op de Review of the Corporate Insolvency Framework dat reeds werd gepubliceerd in mei 2016.

In wat volgt geven we een korte opsomming van de te ondernemen stappen zoals beschreven in het antwoord van de regering: Continue reading “The regulatory competition continues: ook het Britse vennootschaps- en insolventierecht staat niet stil”