Identifying corporate responsibility for historical disease claims

The process of identifying corporate responsibility for historical disease claims will depend in large part of the availability of accurate information as to the history of the relevant business and of its owners. Whether the previous transactions took place by way of share purchase agreement (SPA) or sale of business agreement (SBA) can make a critical difference. The correct identification of the corporate players is equally vital: the company (registered) number is often the key to accurate corporate genealogy.

In this article, Janine Clark teams up with corporate partner, James Shaw, to review how we should evaluate what liabilities for historical employees of a subsidiary attach to a parent company.

Sins of the past

"Corpses in the cupboard" has to be my favourite translation of the popular phrase "skeletons in the closet". It was used by a Norwegian chief financial officer (CFO) I know to describe the situation where industrial disease claims unexpectedly cropped up against dormant subsidiaries of his group, which had the potential to seriously impact on cash flow. This particular CFO was about to spend the next five years in perpetual misery as the past "sins" of his group came back to haunt him.

These sins were the acquisition of subsidiaries which were stripped of their assets, but not then wound up. The companies were left dormant, struck off the register or (in the case of more sophisticated groups) recycled into something else. The difficulties arise when one of these dormant companies, which has been peacefully slumbering in obscurity for the last few decades, is faced with a disease claim.

The first claim to surface is typically a mesothelioma claim. A flurry of activity usually ensues. Usually the claimant will have adopted a scatter gun approach and included many companies in the claim, regardless of their status. If the company has been struck off the register, it will be restored. The claimant will then knock on the door of the parent company asking for compensation.

If historical insurance can be found, the difficulties are brought swiftly to a conclusion. Unfortunately, in most cases, insurance cannot be found or is in a scheme of arrangement. This leaves the inevitable question: who pays for the claim?

The subsidiary more often than not has little or no money, so the brutally swift solution would be to step back and let the company fall. However, enterprising claimant solicitors have now started alleging that the parent company has acquired the dormant subsidiary’s liabilities, for example through the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) or the acquisition itself.

Chandler v Cape plc [25.04.12] has increased the focus on peering behind the corporate veil and examining the relationship of parent and subsidiary company. I do not necessarily agree with this. In my view the Chandler decision was fact specific and would not necessarily apply to companies that acquired other companies after they finished trading. In those circumstances, and indeed generally when we are looking at whether one company has inherited the liabilities of another, we need a back to basics approach.

Identifying corporate liability: the approach

The starting point is to make sure that you have identified the correct parties involved in the relevant transaction. A historical review of company documentation, including all relevant prior agreements, is likely to be necessary. For companies registered in England and Wales, the essential point to remember is that when a limited company is incorporated, it is given not only a name but also a registered number. Throughout the life of the company, the name of the company may be changed at any time, and on any number of occasions, but the registered number will always stay the same. It is always quicker, and certainly safer, to search the register by reference to the relevant registered numbers, where available.

The second limb of the "back to basics" approach is to try to find out, through research of historical documentation, the route by which a business (and its attendant liabilities) may have been transferred (or alleged to have been transferred) from one company to another. This would usually be by way of either a share purchase agreement (SPA), whereby one company purchases the shares in the business owning company (the target) from the seller company, or a sale of business agreement (SBA) whereby one company sells its own business to a purchaser company.

Download our factsheet which details the difference between an SPA and SBA and the TUPE Regulations (PDF, 26KB)

Book entry transactions

Sometimes it is difficult to find the relevant SPA or SBA in the historical records of the relevant companies. The transfer of the business may nevertheless be noted in the relevant company accounts. This is particularly prevalent where the transfer is between two companies who are members of the same group of companies.

However, where a purported transfer of business is merely noted in relevant company accounts, this should be treated with caution. From a corporate law perspective, the potential implications are ambiguous. Noting the "transfer" or "acquisition" of a business in the accounts is certainly not definitive in determining what assets or liabilities may have been transferred – although again, the inference may be that a transfer of employee liabilities, in respect (only) of those employees of the business at the time of the transfer, would have been affected.