Until 2019, Aviation Ltd, which makes aviation fuel, was a wholly owned subsidiary of

Conch plc. In 2019, Conch sold all its shares in Aviation to Burnfast plc. It was a term of the
sale contract between Conch and Burnfast that Conch would not make or sell aviation fuel
for 10 years. In 2021, scientists working for Conch accidentally invented a new, and much
more efficient, type of aviation fuel. Conch has decided that Standby Ltd, another of its
wholly owned subsidiaries, will make and sell this aviation fuel. Petrol Ltd is another wholly
owned subsidiary of Conch. Delia, a director of Petrol, wrote a report for Conch’s board.
The report described a number of safety issues concerning the design and maintenance of
Petrol’s production facilities, and outlined a number of expensive safety improvements Delia
was intending to introduce. In response, Conch removed her as a director of Petrol. No
safety improvements were made at Petrol. However, Conch did issue detailed health and
safety guidelines to all its subsidiaries, although it takes no steps to enforce these guidelines.
Conch also states on its website that it ‘maintains the highest safety standards at all the
group’s operations’. A large number of Petrol’s employees have now suffered serious
injuries at work.

a) Will Standby or Conch be liable to Burnfast plc under the 2019 sale contract?
b) Will Conch be liable in tort for the injuries caused to Petrol’s employees?

In given situation, In 2019, Conch sold its subsidiary Aviation to Burnfast with a contract term
that prohibits Conch from making or selling aviation fuel for 10 years. In 2021, Conch
accidentally invented a new and efficient aviation fuel, and decided to have its subsidiary Standby
produce and sell it. A director of Conch's subsidiary Petrol, Delia, reported safety issues and
proposed safety improvements, but was removed as a director by Conch and no improvements
were made. Conch issued safety guidelines but did not enforce them, and many employees of
Petrol have since suffered serious injuries at work.

A) In advising whether Standby or Conch be liable to Burnfast plc under the 2019 sale contract,
first, according to the landmark case of Salomon which established that a company is a separate
legal entity from its shareholders or owners. As a result, neither the subsidiary nor its parent
company can be held liable in a strict legal sense for the actions of the other, nor can the parent
company be responsible for the losses incurred by its subsidiary. This principle has been upheld
in subsequent cases, such as Macaura v Northern, in which the court ruled that the timber
belonged to the company rather than Mr. Macaura, who had insured it in his own name. Similarly,
in Lee v Lee, the Privy Council held that the company and Mr. Lee were distinct legal entities,
capable of entering into legal relationships with one another, even though Mr. Lee owned all the
shares, was the sole director for life, and employed as chief pilot of the company. Applying this to
facts, Conch might argue Standby and Conch are two separate legal entity, thus, Standby does not
bound by the 2019 sale contract entered by Conch with Burnfast. Hence, Conch nor Standby will
held liable for breaching 2019 sale contract.
However, according to common law and statutory provisions, there are exceptional circumstances
where the veil of separate legal entity may be lifted, thus, Conch and Standby can be held liable
for breaching 2019 sale contact if proved. According to the case Adam v Cape, the lifting of the
veil of separate legal entity is only possible under three specific circumstances. One of these is
when a group of companies can be regarded as a single economic entity in cases where it’s
involved interpretation of statute or contract. This was demonstrated in the Samengo-Turner case,
where a group of companies were treated as a single entity when interpreting EU Regulation. This
is not applicable to the current situation. Next, where the subsidiary acts as an agent for the
company. In the case of Smith Stone V Birmingham Corporation, Atkinson J lifted the veil to
allow a subsidiary that operated on land owned by the parent company to claim compensation for
acting as an agent. Based on facts, there is no indication that Standby is the agent of Conch.

Lastly, where its involves a situation that the company is a mere facade and is being used to help
someone avoid an existing obligation. For example, in the cases of Jones v Lipman and Gilford v
Horne, the defendant created a company to avoid fulfilling a contract and to bypass a covenant
not to compete with the plaintiff. In both cases, the court lifted the veil and considered the
defendant and the company to be one and the same entity. It can be argue that Conch has used
Standby to escape the obligation under 2019 sale contact to not make or sell fuel. This principle
was affirmed in Petrodel v Prest by Lord Sumption which he referred as ‘evasion principle’.
Where the controller of a company was using that company to evade obligation which the
controller already had. Standby was used to evade such obligation.

However, this subject to strict interpretation where there is a requirement that the company was
created as a mere facade from the start (Creasy v Breachwood). Creasey had been the manager of
a garage owned by Breachwood, but was dismissed from his post and intended to sue for
wrongful dismissal. In anticipation of his claim, and wanting to avoid having to pay him
damages, the proprietors of Breachwood formed another company, named Breachwood Motors
Ltd (“Motors”), and transferred the entire business of the old company to it. Creasey obtained
judgment in default against Breachwood, which was then struck off of the register of companies.
It was held that Motors could be substituted as defendants, and that the veil could be lifted
because Breachwood’s assets had been deliberately transferred to Motors in full knowledge of
Creasey’s claim.

This case was overruled by Ord v Belhaven. In Ord the defendant company had made various
misrepresentations to the claimant. By the time these came to light, the company had all but
ceased trading, and had negligible assets. The claimant sought to substitute the defendant
company’s holding company and the judge at first instance followed Creasey and allowed the
substitution. The Court of Appeal decided that this was incorrect, as the original company had not
been a mere facade for the holding company, nor vice versa. Conch might argue Standby was
created even before the 2019 sale contract and wasn’t used it as mere facade from the start.
Nevertheless, Ord was subjected to many criticism. PNG 1999 argue that Creasy is the right
decision but with the wrong reasoning. However, In Petrodel, it was stated , it was not necessary
that the company which was being used in such way had been formed to enable an obligation to
be evaded. Hence, Conch will be held liable for breaching the 2019 sale contract by using
Standby.

B) As the general rule established in Saloman, a company is a separate legal entity from its
shareholders or owners. Thus, parent company will not be held liable for any torts committed by
the subsidiary. Thus, the employees of Petrol who suffered serious injuries at work are unable to
sue Conch.

However, there are exceptions to the general rule, where if proven that the parent company
directly responsible for the consequences, they will be held liable. The famous case of Chandler
provides the circumstances and the conditions which needs to be satisfied before a parent
company could be held liable for any torts committed by its subsidiary company provided the
Caparo test is satisfied. First in order to establish duty of care on parent, the claimant has to show
that the parent and the subsidiary are engaged in the same line of business. Based on facts, there
is no clear indication on this.
Secondly, the parent company knew or ought to have known that the subsidiary’s operations were
unsafe. On the facts, Delia, the director of Petrol reported to Conch’s board about the safety
issues and also proposed safety improvements.Delia removed as a director by Conch. Thus,
Conch cannot denied the facts they knew about the safety issues of Petrol. Thirdly, it is also
necessary to show that the employee and the subsidiary has reasonable reliance on the safety from
the parent. Applying this to facts, Petrol did relied on Conch on improving the safety issues where
Delia has proposed expensive safety improvements.

Although Chandler suggested a parent company might be liable for non feasance yet Okpabi v
Royal Dutch Shell take a stricter approach where the parent must commit an active misfeasance
to satisfy the threshold of liability before the court is willing to impose duty of care on parent
company. Conch did commit an active misfeasance where they directly responsible to the injuries
suffered by Petrol employees. Moreover, Conch also didn’t enforce the health and safety
guidelines which was issued to all its subsidiaries and didn’t safeguard the employees even after
they knew about the safety issues faced by Petrol. Furthermore, Conch’s statement on its website
that it ‘maintains the highest safety standards at all the group’s operations’ would reinforce the
argument that Conch would be found liable

Moreover, in AAA v Unilever, it was held that a parent company can be held liable if it takes
control of its subsidiary's management or specific activities that lead to harm. This is the case
where the claimant attempted to bring mass tort claims against Unilever Plc and its Kenyan
subsidiary, the owner of a tea plantation in Kenya, at which the Claimants allegedly suffered
ethnic violence at the hands of third-party criminals. On the facts, Conch has the control of
Petrol’s management, this can be seen where Conch removed Delia, the director of Petrol after
she reported about the safety issues. Relying on the criteria as stated by Chandler v Cape, Okpabi
and AAA v Unilever which is satisfied, Conch owed a duty of care to employees of Petrol.

In conclusion, Conch will be held liable for breaching the 2019 sale contract and the tort
committed by the Subsidiary, Petrol. As argued by Muchilinki 2002, Saloman principle is aim to
protect shareholder only.

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