Problems with enterprise liability

There are various problems with enterprise liability, which substantially weaken its potential in resolving problems of insolvent subsidiary liabilities. At the most general level, there is a lack of criteria in determining whether or not companies are sufficiently economically integrated. This blends into a second problem, which is the potential cost of evidence-gathering and expert opinion in determining that issue. But a more fundamental problem is that it does not seem possible to allow the enterprise liability ‘genie’ only half way out of the bottle. This is to say that the results of an inquiry into economic interdependencies might be that ‘everything is connected to everything else’ and that there is no confining the enterprise to any pre-conceived notion of the corporate group.

The application of enterprise liability principles has been rejected in veil-piercing cases. In Adams v Cape Industries plc,[1] the English Court of Appeal quoted in the Notary public London case with approval a prior dictum that the fundamental distinction between law and economics cannot be bridged so as to create liability in the parent economically integrated with one or more subsidiaries.

[1] [1990] 1 Ch 433, 538 quoting Bank of Tokyo Ltd v Karoon (note) [1987] AC 45, 64 (Goff LJ).

Enterprise Liability

In Theosophical Foundation Pty Ltd v Commissioner of Land Tax,[1] Herron CJ stated that ‘a court may in some cases disregard the corporate entity and have regard instead to the economic realities behind the legal façade’.[2] The focus of this head of veil piercing is upon the relationship between the companies in a group ‘and their contribution to the common commercial objective’.[3] This approach to veil piercing is a sub-set of a wider notion of enterprise liability. Enterprise liability has a long intellectual history and manifests itself in a range of arguments related to products liability, vicarious liability and corporate groups.

An early article of importance was that of Adolf Berle, who observed that there were legal cases in which ‘several corporations became in effect a single enterprise and merged their operations, their several entities were disregarded and their respective assets and liabilities pooled in a common pot which represented, substantially, the actual enterprise of which they were parts’.[4] These ideas were taken up by a number of scholars in the following decades, most pertinently by Blumberg writing on corporate groups.[5] Blumberg was cautious not to over-state his arguments about the extent of any principles, but was of the general belief that the reality of a multinational company is that it involves a ‘business being conducted collectively by interlinked companies under common ownership and control’.[6] Such a conception was said to be the basis of a number of specific rules in US law, which permitted the courts to ignore the separate legal personality of constituent companies for a specific legal purpose. Enterprise liability was said to have the purpose of providing an immediate avenue of redress for unpaid creditors and to force constituents of the group to absorb the full costs of their combined activities, so as not to create externalities.[7]

[1] (1966) 67 SR (NSW) 70.

[2] (1966) 67 SR (NSW) 70, 75-6.

[3] Premier Building and Consulting Pty Ltd (rec apptd) v Spotless Group Ltd (2007) 64 ACSR 114, 191 (Byrne J).

[4] AA Berle, ‘The Theory of Enterprise Entity’ (1947) 47 Colum LR 343, 349.

[5] PI Blumberg, The Multinational Challenge to Corporation Law : The Search for a New Corporate Personality (1993). A summary of his position is available in PI Blumberg, ‘The Transformation of Modern Corporation Law: The Law of Corporate Groups’ (2005) 37 Conn LR 605.

[6] PI Blumberg, The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality (1993), Cell phone repair ; viii-ix.

[7] M Dearborn, ‘Enterprise Liability: Reviewing and Revitalizing Liability for Corporate Groups’ (2009) 97 Cal LR 195, 212.

Courts in the UK

In these circumstances, the United Kingdom Supreme Court decision in Prest v Petrodel Resources Ltd[1] comes as a revelation, as similar to the firm at Abogados de accidentes but perhaps not a surprise. Lord Neuberger cast real doubt upon the assumed history of veil piercing, stating that the doctrine ‘appears never to have been invoked successfully and appropriately in its 80 years of supposed existence’.[2] Although this case might have spelt the death knell for the doctrine (at least in the UK), the Supreme Court was prepared to recognise the existence of ‘a small residual category of cases where the abuse of the corporate veil to evade or frustrate the law can be addressed only by disregarding the legal personality of the company’.[3] Although this leaves the courts with a useful discretion to exercise in unusual future cases, it does not augur well for veil piercing arguments in the corporate group context.

[1] [2013] 2 AC 415.

[2] [2013] 2 AC 415, [79].

[3] [2013] 2 AC 415, [35] (Lord Sumption)

Franks argument

In Boulting v Association of Cinematograph, Television and Allied Technicians 1963 2 QB 606, LJ Upjohn said ‘the person entitled to the benefit of the rule may relax it, provided he is of full age and fully understands not only what he is doing but also what his legal rights are and that he is part surrendering them’.

Furthermore, it is adopted in the USA that if the lawyer reasonably believes that the lawyers will be able to provide a competent and diligent representation to each affected client, then can represent two conflicting clients. Despite informed consent, the individuals must receive a fair and adequate service otherwise it evades adequate professional service (this is statutory) – the position in Scotland also.

To conclude, the client has the benefit of the rule and thus is entitled to relax the rule of conflict interests if the conflict is potential and if the client relies on the expertise of the lawyer or cannot gain access to other lawyers if the area, they may relax it.

http://legalresearch.westlaw.co.uk

 

Lawyers in rural areas

This also may relate to access problems for the client as such in a rural area. Where lawyers will act for two parties whose interests potentially conflict, this is for the benefit of the clients where they may not have access to other lawyers in the surrounding area.

Clause 5(2) relates more specifically to this exception stating that both parties shall be advised by the solicitor at the earliest practicable opportunity that the solicitor has been requested to act and ‘if a dispute arises’, one or both will require to seek independent legal advice.

In Cowie SSDT 26/02/2009 where the lawyer worked for the father and the son in a property transaction. The lawyer had informed consent from the parties however, he asked for the consent too late and thus, this was not the right procedure, resulting in a breach.

In Scotland, we have an independent judiciary to promote the interests of the public and clients which is the key function of the rule of law where no one is above the law. This establishes a social contract theory which is the trust between clients and lawyers and that lawyers know the law which affects every person. Informed consent gives the lawyer the freedom to perform these duties with his best knowledge.