The Cathedral and the Haystack: One View of Limited Liability and Corporate Groups

Abstract

This paper will examine the ways in which parent companies within corporate groups can be held liable by means of common law doctrines and statutory principles. Where a subsidiary company within a corporate group becomes insolvent and is unable to pay its creditors in full, the principles of separate legal personality and limited liability mean that a parent company will not normally be held liable. What will be explored further are the circumstances in which these default principles of corporate separateness can be ignored and liability be extended beyond the insolvent subsidiary to the solvent corporate shareholder. The support for enhanced liability is clear and represents an uncommon convergence of opinion and outcomes in corporate law scholarship. It is suggested that a complete reimagination of limited liability is not necessary. Rather, what is necessary is a modification of the current rules governing liability regarding involuntary creditors. This should be viewed as a mere readjustment to the relationship between companies and their tort victims, as opposed to a completely new form of liability.

Keywords: insolvency, "enhanced liability", "limited liability"

JEL Classification: K00, K20