How and when can a parent company be liable for conduct of its (foreign) subsidiaries
In Hong Kong, a parent company is generally not liable for the wrongdoings of its subsidiaries (foreign or otherwise). The starting point is that each subsidiary incurs liabilities of its own as a separate legal entity. The discussion below sets out some exceptions and a recent Hong Kong case related to this area of law.
Under Hong Kong law, the principle of separate legal personality as established in Salomon v Salomon & Co Ltd applies ordinarily to group companies such that each company in a group of companies is considered to be a separate legal entity. As such, a parent company is generally insulated from legal liability arising out of the activities of its subsidiaries insofar as the law permits. A court cannot disregard the principle of separate legal personality and lift the corporate veil in order to consider the acts of a subsidiary merely because it considers it is just to do so.
The “single economic unit” argument that all companies in a group should be treated as one single unit has not been adopted in Hong Kong. The fact that a subsidiary is wholly owned by a parent company does not by itself lead to a finding that the subsidiary is a mere nominee for its parent, allowing the court to lift the corporate veil. Concepts of “legal entity” and “economic entity” remain distinct with the Hong Kong courts being concerned with the former but not the latter. Matters in relation to the functional organisation of a group, such as whether a subsidiary shares common management, common directors and common staff with its parent company, or whether a subsidiary is run at the direction of its parent company, should not by themselves imply that the subsidiary is a façade or a puppet of the parent company and justify the lifting of corporate veil. The court will only lift the corporate veil if there is some illegitimate purpose, for instance, the subsidiary is found to be a façade or a puppet of the parent company that has been used to perpetrate fraud or evade legal obligation and liability. In such circumstances, the court may find the parent company liable for the conduct of its subsidiary.
Courts have also acknowledged that in limited factual circumstances, a parent company can be held to be a shadow director of a subsidiary. This will be the case where the parent company makes the major policy decisions, exercises close control over the subsidiary’s management and financial affairs, and where the directors of the subsidiary are accustomed to acting in accordance with the parent company’s directions or instructions. However, as a general rule, a parent company who nominates a director of a subsidiary owes no duty to the subsidiary. Even if a decision regarding a subsidiary’s business requires the sanction or approval of the parent company, so long as the decision is made by the directors of the subsidiary exercising their own independent discretion and judgment, the parent company should not be held liable for the decision or be treated as shadow director of the subsidiary.
Whilst Hong Kong courts are not bound by English precedents, they are considered to be highly persuasive in Hong Kong. It is therefore worth noting that the English position on parent company liability (as covered elsewhere in this guide) is likely to be instructive for Hong Kong courts in future. In England & Wales, a parent company can be liable for the tortious acts of its foreign subsidiaries if it can be established that the parent company owed a direct duty of care to the victims. It remains to be seen whether the Hong Kong courts would adopt the same approach in imposing a duty of care on a parent company and holding it liable in respect of the conduct of its subsidiaries.
Jurisdiction gateway considerations
If a plaintiff suffers extra-territorial harm and brings an action against a Hong Kong parent company in Hong Kong, a Hong Kong court would have to determine among other things whether Hong Kong is the appropriate forum to hear the case. It has long been established under Hong Kong law that the appropriate forum is one with which the action has the most real and substantial connection with the dispute, which includes the place where the parties respectively reside and carry on business. As such, whether the jurisdiction gateway is satisfied will depend upon the factual circumstances of the case, the location of the foreign subsidiary and the plaintiff and the location of any wrongdoing.
Where a Hong Kong parent company is found to be responsible for the acts of its foreign subsidiary, or is found to owe a duty of care to the plaintiff (as per the English line of authorities) there is a real risk that the fact that the Hong Kong parent company’s place of business is in Hong Kong could be used to establish a real and substantial connection with Hong Kong. However, where it is possible for the plaintiff to bring a claim against the foreign subsidiary in its jurisdiction and where the wrongdoing also occurred in that jurisdiction, the Hong Kong parent company may be able to argue that the foreign jurisdiction has the most real and substantial connection with the action and is a more appropriate forum than Hong Kong. It would then be for the plaintiff to show that he would be deprived of a legitimate personal or judicial advantage if the action was tried in a forum other than Hong Kong.
Key recent cases and developments
In Yung Wai Tak Abraham William (翁懷德) v. Natural Dairy (NZ) Holdings Limited (in Provisional Liquidation) a parent company listed in Hong Kong was held liable as a joint employer of its wholly owned subsidiary’s employee for unpaid wages and other employee benefits, notwithstanding that the employee only entered into a written employment contract with the subsidiary but not the parent company. Whilst this case deals with a wholly owned subsidiary that was also incorporated in Hong Kong, some of the principles may be instructive in future cases in respect of the liability of a parent for actions of a foreign subsidiary.
Having taken into account all relevant circumstances including in particular that (i) the recruitment advertisements and process were respectively published and handled by the parent company, (ii) the employee mainly provided services to the parent company and (iii) the confession by the senior executives of the parent company that the employee was employed by the parent company, the court inferred an employment relationship between the parent company and the employee.
Practical implications and key takeaways from the Hong Kong approach
Although courts in Hong Kong have reaffirmed the principle of separate legal personality in the context of group companies, parent companies are not always immune from liabilities incurred by their foreign subsidiaries. In addition to the limited exceptions of fraud, evasion of legal liability or interference in a subsidiary’s affairs by the parent company, a parent company may also be held to have owed a direct duty of care to the victim of the foreign subsidiary’s tortious acts and hence liable for such acts. It appears from the case law that such a duty of care is less likely to be established in the event that the head office in Hong Kong has put in place only high-level general policies which the foreign subsidiaries are left to implement to suit their particular circumstances.
Further, the recent decision in Yung indicates that courts can hold parent companies jointly liable with their subsidiaries without undermining the principle of separate legal personality. Group companies should be mindful of this approach and review their existing engagements to assess the risk of joint liabilities between parent companies and their subsidiaries.