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Parent company liability for asbestos claims: some international insights

Published online by Cambridge University Press:  02 January 2018

Helen Anderson
Helen Anderson*
Affiliation:
Melbourne Law School
*
*[email protected]
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Abstract

Throughout the world, the corporate group structure has long proved troublesome to the creditors, and particularly the tort creditors, of undercapitalised subsidiary companies. In the wake of Australia's James Hardie asbestos compensation inquiry, Senior Counsel assisting the Jackson Special Commission, Mr John Sheahan QC, called for the Commission to ‘recommend reform of the Corporations Act so as to restrict the application of the limited liability principle as regards liability for damages for personal injury or death caused by a company that is part of a corporate group...’. Following this call, in May 2008 the Corporations and Markets Advisory Committee released a report on long-tail liabilities, making various recommendations for reform. Separately, legislation was passed making pooling available for insolvent group companies in Australia. This paper examines the long-tail liability suggestions and the 2007 pooling amendments. It will be argued that neither of these is adequate for the proper protection of tort creditors of insolvent subsidiaries. It then considers international alternatives which might satisfy Mr Sheahan's appeal for reform.

Type
Research Article
Information
Legal Studies , Volume 31 , Issue 4 , December 2011 , pp. 547 - 569
Copyright
Copyright © Society of Legal Scholars 2011

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References

1 For a European perspective into the prevalence of the problems caused by asbestos exposure, see Peto et.al, J ‘the European mesothelioma epidemic’ (1999) 79 British Journal of Cancer 666 CrossRefGoogle Scholar at 670. They anticipate a quarter of a million Western European male deaths before 2035, at 671. See also Wyckoff, J and McBride, M ‘a comparison of Us and Uk asbestos liability’ (2003) 15 Environmental Claims Journal 417 CrossRefGoogle Scholar at 420.

2 See further Spender, P ‘Blue asbestos and golden eggs: evaluating bankruptcy and class actions as just responses to mass tort liability’ (2003) 25 Syd LR 223 Google Scholar; Spender, P ‘Weapons of mass dispassion: James Hardie and corporate law’ (2005) 14 GLR 280 Google Scholar; Dunn, E ‘James Hardie: no soul to be damned and no body to be kicked’ (2005) Syd LR 15 Google Scholar; O’Meally, J ‘Asbestos litigation in New South Wales’ (2007) 15 JL and Pol'y 1209 Google Scholar.

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5 The 1997 National Bankruptcy Review Commission Report states that ‘[a]t least 15 asbestos manufacturers, including UNR, Amatax, Johns-Manville, National Gypsum, Eagle-Pitcher, Celotex, and Raytech, have reorganised or liquidated in attempts to address massive numbers of known and unknown asbestos claimants using the Bankruptcy Code’National Bankruptcy Review Commission Report (1997) at 315.

6 In the UK, Turner and Newall used administration under the Insolvency Act 1986 to deal with its asbestos liability. T&N was taken over by US company Federal Mogul, which also filed for ch 11 bankruptcy.

7 Between 1996 and 2001, the assets of the James Hardie asbestos manufacturing subsidiaries, now named Amaca Pty Ltd and Amaba Pty Ltd, were transferred to James Hardie Industries Limited (JHIL), later renamed ABN60, and then to a newly created Netherlands based company called James Hardie Industries NV(JHI NV). In 2001, at a time when the James Hardie group's global building products business had a market capitalisation of AU$3.6 billion, the ownership of Amaca and Amaba was transferred to a new body, called the Medical Research and Compensation Foundation (MRCF). See Jackson Report, above n 4, Annexure I, which has extensive diagrams of the complex corporate restructure arrangement. See also Moerman, L and van der Laan, S ‘Pursuing shareholder value: the rhetoric of James Hardie’ (2007) 31 Accounting Forum 354 CrossRefGoogle Scholar at 359–361.

8 By October 2002, future liabilities were estimated at $751.8 million, and $1,089.8 million by June 2003, Jackson Report, above n 4, p 31.

9 See the James Hardie website for further information available at http://www.ir.jameshardie.com.au/jh/asbestos_compensation/special_commission_of_inquiry.jsp#Report.

10 Jackson Report, above n 4, p 1.

11 Noted in the Jackson Report, ibid, s 1.23.

12 Ibid, Annexure T, p 424 at [27]. In his final report, Commissioner Jackson did not express any concluded view on whether law reform was appropriate, although he did state that the issues raised in the Special Commission demonstrated that ‘there are significant deficiencies in Australian corporate law’. Ibid, at [30.67].

13 Allens Arthur Robinson ‘Submissions in reply by James Hardie industries NV and ABN 60 pty limited to submissions on terms of reference 4’Special Commission of Inquiry into the Medical Research and Compensation Foundation, available at http://www.ir.jameshardie.com.au/public/download.jsp?id=1085.

14 Ibid, at [2.7].

15 Ibid.

16 Ibid, at [5.3.2].

17 Ibid.

18 Companies and Securities Advisory Committee, Parliament of Australia Corporate Groups Final Report CASAC Report (2000) at [4.22] (hereinafter CASAC Corporate Groups Report).

19 Parliamentary Joint Committee on Corporations and Financial Services, Parliament of Australia Corporate Responsibility: Managing Risk and Creating Value (June 2006) (hereinafter the PJC CSR Report).

20 PJC CSR Report, above n 19, pp 47, 75, 87, 181 and 209.

21 PJC CSR Report, above n 19, at [4.14] (emphasis in original). Ms Hellicar is reported to have said ‘I think protection [for directors seeking to act in the interests of stakeholders other than shareholders] would be beneficial because there is no doubt that the threat of a shareholder suit – even if we get majority shareholder support – a minority shareholder can still say, we don't agree, so some protection would help...it certainly might make us feel more comfortable.’ Ibid.

22 Corporations and Markets Advisory Committee, Parliament of Australia Long-tail Liabilities the Treatment of Unascertained Future Personal Injury Claims Discussion Paper (June 2007) (hereinafter CAMAC Long-tail Liability Discussion Paper).

23 Corporations and Markets Advisories Committee, Parliament of Australia Long-tail Liabilities the Treatment of Unascertained Future Personal Injury Claims Report (May 2008) (hereinafter CAMAC Long-tail Liabilities Report).

24 Corporations Amendment (Insolvency) Act 2007 (Cth), Pt 4.

25 This is the briefest of outlines as the particular vulnerability of tort creditors has been extensively canvassed elsewhere. See for example H Hansmann and R Kraakman ‘Toward unlimited shareholder liability for corporate torts’ (1991) 100 Yale LJ 1879; Thompson, R ‘Unpacking limited liability: direct and vicarious liability of corporate participants for torts of the enterprise’ (1994) 47(1) Vand L Rev 1 Google Scholar; Leebron, D ‘Limited liability, tort victims, and creditors’ (1991) 91 Colum L Rev 1565 CrossRefGoogle Scholar; Mendelson, Na ‘a control-based approach to shareholder liability for corporate torts’ (2002) 102 Colum L Rev 1203 CrossRefGoogle Scholar.

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29 CAMAC Long-tail Liabilities Report, above n 23, at [1.1].

30 Ibid, at [2.2.1].

31 Ibid, at [6.7].

32 Ibid, at [7.5]. Schemes of Arrangement are regulated by Corporations Act 2001 (Cth), part 5.1.

33 CAMAC Long-tail Liabilities Report, above n 23, at [8.7].

34 Ibid, at [5.2.5].

35 Ibid, at [5.5.3].

36 Corporations Act, Pt 2J.1.

37 Ibid, Pt 9.

38 CAMAC Long-tail Liabilities Discussion Paper, above n 22, at [3.4].

39 CAMAC Long-tail Liabilities Report, above n 23, at [9.8].

40 International examples of pooling, substantive consolidation and contribution orders will be discussed further below in Part 2.

41 Widen, W ‘Corporate form and substantive consolidation’ (2007) 75 Geo Wash L Rev 237 Google Scholar; Baird, D ‘Substantive consolidation today’ (2005) 47 BCL Rev 5 Google Scholar; Baird , D Elements of Bankruptcy (Foundation Press, New York, 2006)Google Scholar.

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43 Corporations Amendment (Insolvency) Act 2007(Cth).

44 Parliamentary Joint Committee on Corporations and Financial Services Report, Parliament of Australia Corporate Insolvency Laws: A Stocktake, available at http://www.aph.gov.au/library/Pubs/BD/2006-07/07bd180.htm.

45 See Harris, J ‘Corporate group insolvencies: charting the past, present and future of “pooling” arrangements’ (2007) 15 Insolvency Law Journal 78 Google Scholar.

46 Corporations Act 2001 (Cth), Pt 5.1.

47 Ibid, Pt 5.3A.

48 Ibid, ss 436B and 477(1)(c).

49 Courts have been concerned about the position of dissenting creditors and distributions which are not pari passu. See Harris, above n 45, at 91.

50 Australian Law Reform Commission General Insolvency Inquiry (ALRC 45) (hereinafter the Harmer Report), vol 1 at [336] and [857], vol 2 at D13 and PR9. See further J Farrar Corporate Governance in Australia and New Zealand (Melbourne: OUP, 2001) p 240.

51 Insolvency Act 1986 (UK), s 214.

52 Corporations Act 2001 (Cth), s 588V.

53 CASAC Corporate Groups Report, above n 18, ch 6 and recommendation 22, at [6.85].

54 CAMAC Rehabilitating Large and Complex Enterprises in Financial Difficulties (2004) recommendations 40 and 41, at [6.4.2].

55 The passing of the Corporations Amendment (Insolvency) Act 2007 (Cth) included division 8 into part 5.6 of the Corporations Act 2001 (Cth). See further Dickfos, J, Anderson, C and Morrison, D ‘the insolvency implications for corporate groups in Australia – recent events and initiatives’ (2007) 16 International Insolvency Review 103 CrossRefGoogle Scholar.

56 Explanatory Memorandum to Part 4 Facilitating Pooling in External Administration, Corporations Amendment (Insolvency) Bill 2007 at 53.

57 Corporations Act 2001 (Cth), s 579Q. Creditors who are companies in the pooled group are excluded from the definition of an eligible unsecured creditor. See also s 571(2)(b) and (c).

58 Ibid, s 571(2).

59 Ibid, s 571(6)(b).

60 Ibid, s 574.

61 Ibid, s 577.

62 Ibid, s 579E.

63 Ibid, s 579E(12).

64 Ibid, s 579E(12)(f).

65 [1979] 1 WLR 1198 at 1208.

66 See, for example, E Beck ‘The Love Canal tragedy’ (1979) EPA Journal, available at http://www.epa.gov/history/topics/lovecanal/01.htm.

67 G Haigh Asbestos House: The Secret History of James Hardie Industries (Melbourne: Scribe, 2006) p 121. See also McCulloch , J Asbestos: Its Human Cost (Brisbane: University of Queensland Press, 1986)Google Scholar; Engel, S and Martin, B ‘Union carbide and James Hardie: lessons in politics and power’ (2006) 20(4) Global Society 475 CrossRefGoogle Scholar.

68 The land was sold to the city for one dollar. As Beck says ‘[i]t was a bad buy’. Beck, above n 66.

69 Grad, F ‘a legislative history of the Comprehensive Environmental Response, Compensation and Liability (‘Superfund’) Act of 1980’ (1982) 8 Colum J Envtl L 1 Google Scholar at 1.

70 42 USC s 9601–9657.

71 42 USC s 9607(a)(1)–(3)(2008). In addition, the Act established prohibitions and requirements concerning closed and hazardous waste sites, and established a trust fund to provide for cleanup when no responsible party could be identified. CERCLA was amended in 1986 by the Superfund Amendments and Reauthorizations Act and is commonly known in the USA as ‘Superfund’. See further http://www.epa.gov/superfund/policy/index.htm.

72 42 USC s 9601(21)(2008).

73 42 USC s 9601(20)(A)(ii)(2008).

74 (1998) 524 US 51.

75 (1998) 524 US 51, at 62–64, See further Silecchia, L ‘Pinning the blame and piercing the veil in the mists of metaphor: the Supreme Court's new standards for the Cercla liability of parent companies and a proposal for legislative reform’ (1998) 67 Fordham L Rev 115 Google Scholar at 168–173.

76 However, veil piercing doctrine is by no means clear cut or settled. Easterbrook and Fischel famously commented that ‘“[p]iercing” seems to happen freakishly. Like lightning, it is rare, severe and unprincipled’. Easterbrook, F and Fischel, D ‘Limited liability and the corporation’ (1985) 52 Chicago Law Review 89 CrossRefGoogle Scholar at 89. The USA has a ‘laundry list’ attitude to the identification of relevant factors which justify shareholder liability. See Thompson, above n 27, at 1063, Bainbridge, above n 26, at 510; Ottolenghi, S ‘from peeping behind the corporate veil, to ignoring it completely’ (1990) 53(3) MLR 338 CrossRefGoogle Scholar at 353; Gevurtz, F, ‘Piercing piercing: an attempt to lift the veil of confusion surrounding the doctrine of piercing the corporate veil’ (1997) 76 Or L Rev 853 Google Scholar, at 861–870.

77 (1998) 524 US 51, at 64–65.

78 (1998) 524 US 51, at 67–68.

79 US v Kayser-Roth Corp 910 F.2d 24 (1st Cir 1990); 724 F Supp 15, 25, n 5 (1991).

80 635 F Supp 665 at 672 (D Idaho, 1986).

81 635 F Supp 665 at 672 (D Idaho, 1986).

82 Revised Model Business Corporation Act 1984 (US), s 6.22(b).

83 Kezsbom, A ‘“Successor” and “parent” liability for superfund cleanups: the evolving state of the law’ (1990) 10 Va Envtl LJ 45 Google Scholar at 45. See also Silecchia, L ‘Pinning the blame and piercing the veil in the mists of metaphor: the Supreme Court's new standards for the Cercla liability of parent companies and a proposal for legislative reform’ (1998) 67 Fordham L Rev 115 Google Scholar at 126.

84 Oswald, Lj ‘New directions in joint and several liability under Cercla?’ (1994) 28 UC Davis L Rev 299 Google Scholar at 313.

85 See Schipani, C ‘the changing face of parent and subsidiary corporations: enterprise theory and federal regulation’ (2005) 37 Conn L Rev 691 Google Scholar at 704.

86 See further Skeel, Da Jr, and Krause-Vilmar, G ‘Recharacterization and the nonhindrance of creditors’ (2006) 7 EBOR 259 Google Scholar at 280.

87 Skeel and Krause-Vilmar observed that shareholder loans have long been an essential source of finance for small- and medium-sized German companies: Skeel and Krause-Vilmar, above n 86, at 280.

88 Ibid, at 280.

89 Landers, J ‘a unified approach to parent, subsidiary and affiliate questions in bankruptcy’ (1975) 42 U Chi L Rev 589 CrossRefGoogle Scholar at 599. Cf Posner, R ‘the rights of creditors of affiliated corporations’ (1975) 43 U Chi L Rev 499 CrossRefGoogle Scholar, sparking an instant rejoinder: Landers, J ‘Another word on parents, subsidiaries and affiliates in bankruptcy’ (1975) 43 U Chi L Rev 527 CrossRefGoogle Scholar. See also Widen, above n 41, at 262–267.

90 Cahn, A ‘Equitable subordination of shareholder loans?’ (2006) 7 EBOR 287 Google Scholar at 288.

91 Equitable subordination has also been adopted in other European countries. Austria followed German judicial doctrine in 1991 and codified its law in 2003. Italy and Spain have also followed the German example. See Mülbert, Po ‘a synthetic view of different concepts of creditor protection, or: a high-level framework for corporate creditor protection’ (2006) 7 EBOR 357 Google Scholar at 394.

92 11 USC s 510; Bankruptcy Act 1978 (US).

93 For its origins and theoretical basis, see further Berle, A ‘the theory of enterprise entity’ (1947) 47 Colum L Rev 343 CrossRefGoogle Scholar at 348–350; Blumberg, Pi ‘the increasing recognition of enterprise principles in determining parent and subsidiary corporation liabilities’ (1996) 28 Conn L Rev 295 Google Scholar at 328.

94 US Bankruptcy Code s 547(b) (1978).

95 Skeel and Krause-Vilmar, above n 86, p 265.

96 11 USC s 510(c)(1).

97 Skeel and Krause-Vilmar, above n 86, at 265.

98 See above n 76.

99 Benjamin v Diamond (in re Mobile Steel Co) 563 F.2d 692 (1977).

100 Cahn, above n 90, at 289. See also Skeel and Krause-Vilmar, above n 86, at 279.

101 This occurs due to the application by analogy of ss 30 and 31 of the Limited Liability Companies Act (GmbHG).

102 Within insolvency – Insolvency Act s 143; outside bankruptcy proceedings – GmbHG s 31. The time limit for recovery is 5 years.

103 Cahn, above n 90, at 289 and 292; Mülbert, above n 91, at 395.

104 GmbHG s 32a.

105 This was done in 1980. The relevant provisions are GmbHG ss 32a and 32b, Insolvency Act s 135 and the Law Concerning the Contestability of Legal Acts of a Debtor outside of Insolvency Proceedings (AnfG) s 6. The other relevant provisions are set out in Cahn, above n 90, at 290.

106 GmbHG s 32a(1).

107 Cahn, above n 90, at 290.

108 Ibid, at 291. See also Mülbert, above n 91, at 395.

109 Mülbert, above n 91, at 396 and references cited therein.

110 Cahn, above n 90, at 292.

111 United Nations Commission on International Trade Law. See further available at http://www.uncitral.org/uncitral/en/about/origin.html.

112 Report of the Review Committee on Insolvency Law and Practice Cm 8558, June 1982 (‘Cork Report’). It was followed by a White Paper in 1984, A Revised Framework for Insolvency Law Cm 9175, 1984, and these led to the Insolvency Act 1986 (UK).

113 Cork Report, above n 112, at [1958–1965].

114 Ibid, at [1960].

115 Ibid, at [1962].

116 Note however that there is a degree of subordination of parent company debt in the UK. Parent companies as shadow directors may be liable for fraudulent or wrongful trading under ss 213 and 214 respectively of the Insolvency Act 1986 (UK).

117 Milman, D ‘Groups of companies: the path towards discrete regulation’ in Milman, D (ed) Regulating Enterprise Law and Business Organisation in the UK (Oxford: Hart Publishing, 1999) p 229 Google Scholar.

118 Finch, V, Corporate Insolvency Law Perspectives and Principles (Cambridge: CUP, 2nd edn, 2009) pp 586–587 CrossRefGoogle Scholar.

119 See Corporations Act 2001 (Cth), ss 563C (1), 563A and 563AA.

120 CASAC Corporate Groups Report, above n 18, at [6.99]–[6.112].

121 Ibid, at [6.110].

122 Landers, above n 89.

123 11 USC s 105(a) provides that ‘The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.’

124 In the US, it is possible for substantive consolidation to take place between both solvent and insolvent companies. See Re 1438 Meridian Place, NW, Inc, 15 Bankr. 89 (Bankr DDC 1981); Re Crabtree, 39 Bankr. 718 (Bankr. ED Tenn. 1984).

125 PI Blumberg et.al Blumberg on Corporate Groups vol 2 (Aspen Publishers Online, 2005) s 88.04.

126 Widen, above n 41, at 238.

127 Re Gulfco Investment Corp 593 F.2d 921 at 926–297 (1979).

128 The term ‘substantive consolidation’ was first used in Re Continental Vending Machine Corp 517 F.2d 997 (2d Cir 1975).

129 See Widen, above n 41, at 239; Baird, above n 41, at 15.

130 810 F.2d 270 at 276 (DC Cir 1987).

131 See further Baird, above n 41, pp 173–174.

132 Ibid, p 174.

133 Union Savings Bank v Augie/Restivo Baking Company Ltd 860 F.2d 515, at 518–519 (2d Cir 1988); Re Owens Corning 419 F 3d 195 (3d Cir 2005).

134 Baird, above n 41, p 176.

135 For other factors to be considered, see Baird, above n 41, at footnote 15, who remarks that ‘[t]he Auto-Train test has morphed into long laundry lists’.

136 See for example, Re WorldCom (2003) WL 23861928 at *11.

137 ss 315A, 315B and 315C of the Companies Amendment Act 1980 (NZ), which amended the Companies Act 1955 (NZ). For the history of the provision, see J Farrar ‘Legal issues involving corporate groups’ (1998) 16 C&SLJ 184 at 195.

138 Companies Act 1993 (NZ), s 271.

139 The factors are specified under Companies Act 1993 (NZ), s 272. Subsection 1 deals with contribution orders under s 271(1)(a) and ss 2 deals with pooling orders under s 271(1)(b).

140 Companies Act 1993 (NZ), s 272(3).

141 Companies Amendment Act 1980 (NZ), s 315C.

142 Farrar, above n 137, at 195.

143 Companies Act 1993 (NZ), s 2(3).

144 Companies Act 1993 (NZ), s 272(2)(d).

145 CASAC Corporate Groups Report, above n 18, at [6.64].

146 Lewis v Poultry Processors (1988) 4 NZCLC 64508 at 64513. See also Re Liardet Holdings Limited (1983) BCR 604.

147 Farrar, above n 137, at 197.

148 See Companies Act 1990 (Ireland), s 140 (contribution) and s 141 (pooling).

149 The only difference is that s 141(4)(d) speaks of the companies’ businesses being ‘intermingled’ (the American term), rather than ‘combined’.

150 Companies Act 1990 (Ireland), s 141(2).

151 Ibid, s 140(3).

152 Companies Act 1993 (NZ), s 272(1)(c).

153 Working Group V (Insolvency Law) Thirty-Sixth session, New York, 18–22 May 2009, A/CN.9.WG.V/WP85.

154 Ibid, p 11, at [2]. This is also stressed in recommendation 217.

155 Ibid, p 11, at [1], [2] and recommendation 218.

156 Above n 54.

157 These economies have suffered during the Global Financial Crisis, but they all experienced huge financial growth during the periods when their corporations law imposed liability in various forms on parent companies for the debts of their subsidiaries.

158 s 3274, amending the earlier s 852.

159 For its other elements, see http://www.mesothelioma-care.org/asbestos-in-the-workplace/.

160 Asbestos manufacturers and their insurance companies were to be primarily responsible for the funding. See HR 1360 s 3(11).

161 See further http://olpa.od.nih.gov/legislation/109/pendinglegislation/asbestos.asp.

162 See the statement by the Hon Chris Bowen, Minister for Financial Services, Superannuation and Corporate Law available at http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=transcripts/2009/052.htm&pageID=004&min=ceba&Year=&DocType. See also http://www.ir.jameshardie.com.au/jh/news.jsp.

163 See Skeel and Krause-Vilmar, above n 86, at 281–284 for some of the difficulties with the German versions of equitable subordination.

164 See above n 105.

165 See Farrar, above n 137, and accompanying text.

166 Milman, above n 117, p 230.

167 See http://www.ir.jameshardie.com.au/jh/jhx_shares.jsp.

168 See further Response to Media Comments on Asbestos Compensation Funding, available at http://www.ir.jameshardie.com.au/jh/home.jsp.

169 Spender, above n 2, at 251.

170 D Millon ‘Piercing the corporate veil, financial responsibility, and the limits of limited liability’ Working Paper No 2006-08, September 2006, Washington & Lee Public Legal Studies Research Paper Series, available at http://ssrn.com/abstract=932959, p 49.

171 Milman, above n 117, p 232.

172 s 588FB of the Corporations Act, which deals with liability for uncommercial transactions, could be used as a model here.

173 See Gevurtz, above n 76, at 884.

174 Spender, above n 2, at 253.

175 Spender, above n 2, at 226.