The Corporate Liability Shuffle – easy as A, B, CCorporations are adept at avoiding responsibility when risky ventures collapse. Frustrating though this may be to those on the receiving end of corporate misdemeanours it is all perfectly legal and above board. Dan Bennett spells out the corporate liability shuffle.
Simple parent - subsidiary
The Torrey Canyon ran aground in the English Channel in March 1967, polluting coastlines of England and France. When it sued the ship owner and the cargo owner for the costs of an expensive clean-up operation, the UK discovered that both owners were pennyless and had never possessed any assets at all other than the oil and the ship, both of which were lost. Worse still, they were resident in flag-of-convenience states, where no-one could discover which parent company owned the guilty subsidiaries.
This model of corporate evasion is simple and adaptable. When a ship leaves the dock, it is chartered to a subsidiary corporation with no assets. This corporation agrees to take all responsibility should anything go wrong. The same applies to the oil from the moment it ‘crosses the rail’ of the ship, with automatic transferal of ownership on arrival at its destination.
All ships are run this way. All dangerous cargoes are transported in this manner. In fact, all corporations run all risky activities through subsidiaries according to these rules.
Conglomerate liability shuffle
When a large company takes over a small one, you would expect the larger to buy all the assets of the smaller, so that the smaller would cease to exist. Wrong. If that were so, the larger company could be held responsible for the smaller’s misdemeanours. Buildings badly constructed by the smaller company might collapse. Workers exposed to harmful substances might become ill or die. And the larger company would be responsible.
Instead, the game runs something like this. When a large company buys a small one, the shares of the small company (‘A’) are bought by an even smaller company existing within the group (‘B’). This smaller company has typically been bought some time before but no longer trades.
However, B buys A’s shares not with its own money but with money loaned to B from C (yes, another company like B). In return for loaning the money for the shares, C is given a mortgage or charge over everything that A owns. The result of this is that if anyone wishes to sue A, they will find themselves behind C in the queue for the money.
Matters do not end there. Any assets A had are bought by D with a loan from E, with E not actually giving A any money but with A agreeing to accept an IOU from F, to whom E owes money. D then passes the assets from A to company G, to whom D owed money from a previous deal.
Confused? Try multiplying this process throughout a corporate structure involving hundreds of dormant companies (dormant except for these intra-group deals).
Question: When A’s employees start dying from asbestos exposures, who do they sue?
Answer: They attempt to follow the tracks of liability through the conglomerate shuffle – to a standard of proof that must be acceptable in court.
This relatively new strategy is intended to counter the obvious response to the conglomerate liability shuffle. Suing the parent company was the classic way of snuffling the shuffle. A parent company must have planned its shuffle, and only it could know the culprit. But what if the parent company has no assets?
Traditionally, corporate structures were designed in the form of pyramids. At the top was the public company (Plc) with the money and the power. In recent years, the Plc part of the corporate group moved down the pyramid, passing ownership of all its shares to a private holding company, and giving the public less access to the top.
This reached its logical conclusion when the purchase of the Plc’s shares by the private company changed from being a two-party to a three-party affair. Imagine a public company called X Plc. It is to sell its shares to Y Ltd. However, Y Ltd buys the X Plc shares with £10 million loaned to it by Z Ltd. In return, Z Ltd is given a mortgage or charge over all X Plc’s assets. And, as we know, if anyone now sues X Plc, they will be looking at Z Ltd’s backside all the way. Even if they try to sue Y Ltd, they will find that Y Ltd owes Z Ltd £10 million, and it wants paying first.
Doesn’t X Plc still have the £10 million? That would be too easy. You see, Z Ltd kept the money and simply agreed to pay it some time in the future. And you can’t sue Z Ltd as they are completely outside the corporate group, are registered in the Turks and Caicos Islands, and know nothing about your collapsed building.
This model of corporate structure - except for the Turks & Caicos bit - is currently that of T&N Ltd, formerly T&N Plc before the reshuffle. T&N Ltd were the UK’s biggest importer, manufacturer and installer of asbestos products into the 1990s, despite knowing about the dangers of asbestos since the 1920s. With an average lag between exposure and injury of 38 years and a maximum of 60, T&N’s workers, neighbours and consumers will continue to die in large numbers for years. Despite the billions in profit made by T&N, many may find their claims being made against an assetless company.