Parent company liability for asbestos claims: some international insights

Parent company liability for asbestosclaims: some international insightslest_202 547..569

Helen Anderson*Associate Professor, Melbourne Law School

Throughout the world, the corporate group structure has long proved troublesome to thecreditors, and particularly the tort creditors, of undercapitalised subsidiary companies. Inthe wake of Australia’s James Hardie asbestos compensation inquiry, Senior Counselassisting the Jackson Special Commission, Mr John Sheahan QC, called for the Commis-sion to ‘recommend reform of the Corporations Act so as to restrict the application of thelimited liability principle as regards liability for damages for personal injury or deathcaused by a company that is part of a corporate group . . .’. Following this call, in May2008 the Corporations and Markets Advisory Committee released a report on long-tailliabilities, making various recommendations for reform. Separately, legislation waspassed making pooling available for insolvent group companies in Australia. This paperexamines the long-tail liability suggestions and the 2007 pooling amendments. It will beargued that neither of these is adequate for the proper protection of tort creditors ofinsolvent subsidiaries. It then considers international alternatives which might satisfy MrSheahan’s appeal for reform.

INTRODUCTION

The James Hardie asbestos compensation scandal is well known in Australia. Aselsewhere in the world,1 plaintiffs in Australia were, and still are, seeking redressagainst manufacturers of asbestos products for causing a range of dust related diseasesincluding lung cancer, asbestosis and mesothelioma.2 While other manufacturers metvictims’ claims as they arose either through settlements or litigation, James HardieIndustries’ opted for a long term strategy to overcome the growing volume ofasbestos claims,3 which was seen as an impediment to business expansion in the

* [email protected]. For a European perspective into the prevalence of the problems caused by asbestosexposure, see J Peto et al ‘The European mesothelioma epidemic’ (1999) 79 British Journal ofCancer 666 at 670. They anticipate a quarter of a million Western European male deaths before2035, at 671. See also J Wyckoff and M McBride ‘A comparison of US and UK asbestosliability’ (2003) 15 Environmental Claims Journal 417 at 420.2. See further P Spender ‘Blue asbestos and golden eggs: evaluating bankruptcy and classactions as just responses to mass tort liability’ (2003) 25 Syd LR 223; P Spender ‘Weapons ofmass dispassion: James Hardie and corporate law’ (2005) 14 GLR 280; E Dunn ‘James Hardie:no soul to be damned and no body to be kicked’ (2005) Syd LR 15; J O’Meally ‘Asbestoslitigation in New South Wales’ (2007) 15 JL and Pol’y 1209.3. B Hills ‘The James Hardie story: asbestos victims’ claims evaded by manufacturer’ (2005)11(2) International Journal of Occupational and Environmental Health 212 at 213.

Legal Studies, Vol. 31 No. 4, December 2011, pp. 547–569DOI: 10.1111/j.1748-121X.2011.00202.x

© 2011 The Author. Legal Studies © 2011 The Society of Legal Scholars. Published by Blackwell Publishing, 9600Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA

USA.4 Through a series of manoeuvres designed to exploit the corporate veil, thecompany sought to separate itself from its liabilities. Both solvent and insolventcompanies5 in the USA had used the Bankruptcy Code to limit their financial expo-sures to current and future asbestos claimants; in the UK, administration under theInsolvency Act 1986 had been used.6 In Australia, James Hardie used a complexcorporate restructure to achieve a similar objective.7

James Hardie created the Medical Research and Compensation Foundation(MRCF), a company limited by guarantee, in February 2001 as part of the scheme toseparate the group from asbestos liability, and the MRCF was given $293 million tomeet the claims of future claimants. It became apparent almost immediately that theassets committed to the MRCF were insufficient to meet the new estimates of liability,and the amount required to meet future claims grew with each subsequent estimate.8

As public concern grew, the New South Wales Government set up a Special Com-mission of Inquiry in 20049 to examine whether the MCRF could meet its futureliabilities and to consider whether the circumstances of its creation contributed to thepossible insufficiency of its assets.10 The Commission concluded that there was adeficiency of funds of at least $1.5 billion and possible breaches of the CorporationsAct 2001(Cth). Protracted negotiations ensued between James Hardie, the AustralianCouncil of Trade Unions and asbestos claimant groups, which eventually resulted inJames Hardie agreeing to pay compensation.11

In the 2004 Report following the conclusion of the James Hardie inquiry, SeniorCounsel assisting the Jackson Special Commission, Mr John Sheahan QC, recom-mended that

4. D Jackson QC Report of the Special Commission of Inquiry into the Medical Research andCompensation Foundation (2004) (hereinafter referred to as the Jackson Report), available athttp://www.dpc.nsw.gov.au/publications/publications/publication_list_-_new#11330, p 18.5. The 1997 National Bankruptcy Review Commission Report states that ‘[a]t least 15asbestos manufacturers, including UNR, Amatax, Johns-Manville, National Gypsum, Eagle-Pitcher, Celotex, and Raytech, have reorganised or liquidated in attempts to address massivenumbers of known and unknown asbestos claimants using the Bankruptcy Code’ NationalBankruptcy Review Commission Report (1997) at 315.6. In the UK, Turner and Newall used administration under the Insolvency Act 1986 to dealwith its asbestos liability. T&N was taken over by US company Federal Mogul, which also filedfor ch 11 bankruptcy.7. Between 1996 and 2001, the assets of the James Hardie asbestos manufacturing subsid-iaries, now named Amaca Pty Ltd and Amaba Pty Ltd, were transferred to James HardieIndustries Limited (JHIL), later renamed ABN60, and then to a newly created Netherlandsbased company called James Hardie Industries NV(JHI NV). In 2001, at a time when the JamesHardie 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 Researchand Compensation Foundation (MRCF). See Jackson Report, above n 4, Annexure I, which hasextensive diagrams of the complex corporate restructure arrangement. See also L Moerman andS van der Laan ‘Pursuing shareholder value: the rhetoric of James Hardie’ (2007) 31 AccountingForum 354 at 359–361.8. By October 2002, future liabilities were estimated at $751.8 million, and $1,089.8 millionby 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.

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‘[t]he Commission should recommend reform of the Corporations Act so asto restrict the application of the limited liability principle as regards liability fordamages for personal injury or death caused by a company that is part of acorporate group, confining the benefit of limited liability to members of the ulti-mate holding company.’12

Not surprisingly, Counsel for James Hardie argued against such a solution.13 Itssubmission warned of ‘significant external issues that make [solutions suggested byother submissions] incapable of speedy implementation and create the risk of adverseand unintended consequences’.14 It warned of ‘a high likelihood of a broad, heated andextended debate’, as well as ‘substantial constitutional and/or other legal issues’.15

In terms of reforming the principle of limited liability, Counsel’s submission16 referredto the earlier discussion of the issue by the Companies and Securities AdvisoryCommittee (CASAC), stressing:

‘the negative effects of the imposition of unequivocal liability on parentcompanies on the sustainability, vitality and competitiveness of Australian industryon a regional and global scale . . . Apportioning liability to the parent companywould undermine the principle of diversity and undermine the incentive for risktaking and entrepreneurial activity.’17

However, CASAC had not dismissed the issue outright. It had suggested that ‘theimposition of additional tort liability on parent companies in corporate groups shouldbe left to specific statutes and general common law principles’.18 Nonetheless, a 2006report by the Parliamentary Joint Committee (PJC)19 into corporate social responsi-bility only addressed the tort creditor issue in the context of discussion of the scope ofdirectors’ duties. 20 The PJC Report noted that the chairwoman of James Hardie, MsMeredith Hellicar, had said that ‘the company had taken a “hard nosed” approach toits responsibilities at least in part because of concern by the Directors that the lawrequired them to circumvent liability if this was in the clear interests of the com-pany’.21 The PJC Report made no recommendation to expand the directors’ dutiesprovision to overcome the concern expressed by Ms Hellicar.

12. Ibid, Annexure T, p 424 at [27]. In his final report, Commissioner Jackson did not expressany concluded view on whether law reform was appropriate, although he did state that the issuesraised in the Special Commission demonstrated that ‘there are significant deficiencies inAustralian corporate law’. Ibid, at [30.67].13. Allens Arthur Robinson ‘Submissions in reply by James Hardie industries NV and ABN60 pty limited to submissions on terms of reference 4’ Special Commission of Inquiry into theMedical Research and Compensation Foundation, available at 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 SecuritiesAdvisory Committee, Parliament ofAustralia Corporate GroupsFinal Report CASAC Report (2000) at [4.22] (hereinafter CASAC Corporate Groups Report).19. Parliamentary Joint Committee on Corporations and Financial Services, Parliament ofAustralia Corporate Responsibility: Managing Risk and Creating Value (June 2006) (herein-after 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 tohave said ‘I think protection [for directors seeking to act in the interests of stakeholders other

Parent company liability for asbestos claims: some international insights 549


However, the Corporations and Markets Advisory Committee (CAMAC),CASAC’s successor, had been considering the matter. It issued a Discussion Paper inJune 2007, entitled ‘Long–tail Liabilities The Treatment of Unascertained FuturePersonal Injury Claims’.22 It was followed by a report of the same name in May2008,23 which made various recommendations for reform. These have not been actedupon at the date of writing. Separately, and following a number of governmentenquiries, legislation was passed to make pooling available for insolvent groupcompanies.24

This paper begins, in Part 1, by examining the 2008 CAMAC recommendationsand the 2007 pooling legislation. The point will be made that neither of them provides,nor will provide, adequate protection for tort creditors. Part 2 will then consider otherways in which these two could have been framed to satisfy Mr Sheahan’s appeal forlegislation. In terms of the legislative protection of tort creditors of the insolventsubsidiaries of a solvent parent, it will examine the Comprehensive EnvironmentalResponse, Compensation and Liability Act (CERCLA) environmental protection leg-islation from the USA which allows veil piercing on parent companies in specifiedcircumstances. It will also explore the equitable subordination doctrine, where parentcompany loans to the subsidiary may be subordinated to the claims of other creditorsor even recharacterised as equity. In terms of pooling, it will evaluate the substantiveconsolidation procedure in the USA and Europe, and the pooling and contributionorder mechanisms of New Zealand and the Republic of Ireland. There are, of course,other ways in which the assets of parent companies can be reached when a subsidiarybecomes insolvent, but for the sake of a manageable discussion, these will not beconsidered here. Part 3 analyses the international measures against their Australian‘counterparts’ and suggests what might be done next. Part 4 concludes.

1. AUSTRALIA SINCE THE JACKSON REPORT

(a) The CAMAC Long-tail Liabilities Report

The James Hardie compensation claimants faced the ‘triple whammy’ of creditorvulnerability. They were tort creditors who were unable to protect themselves ex anteagainst non-payment of their claims; some had unascertained future claims; andall were creditors of a subsidiary which had engaged in ex post intra-group assettransfers.

Tort creditors are not like voluntary contract creditors. As they lack volition in theirrelationships with the tortfeasor company, they are unable to charge appropriatecompensation ex ante for the risks they run, nor investigate the asset backing of the

than shareholders] would be beneficial because there is no doubt that the threat of a shareholdersuit – even if we get majority shareholder support – a minority shareholder can still say, wedon’t agree, so some protection would help . . . it certainly might make us feel more comfort-able.’ Ibid.22. Corporations and Markets Advisory Committee, Parliament of Australia Long-tail Liabili-ties the Treatment of Unascertained Future Personal Injury Claims Discussion Paper (June2007) (hereinafter CAMAC Long-tail Liability Discussion Paper).23. Corporations and Markets Advisories Committee, Parliament of Australia Long-tailLiabilities 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.



company for the purpose of taking necessary protective measures.25 Because relationswith tort creditors are not consensual and contained in a standard form contract, it isarguable that the ‘majoritarian’ default term of limited liability should have no rel-evance to them.26 Moreover, the moral hazard created by limited liability may encour-age excessive risk taking leading to personal injury. Yet oddly, courts in the USA, theUK and Australia are more likely to pierce the corporate veil27 in contract rather thantort cases.28

Likewise, the creditors of subsidiary companies within corporate groups face moredifficulties than creditors of stand-alone companies. Sometimes, it can be difficult toidentify which company within the group is the relevant defendant, or which companyactually owns various ‘group’ assets. The parent company may have deliberatelyundercapitalised the subsidiary, precisely to shield itself from tort liability, eventhough it stands to benefit as a shareholder from the highly risky activities undertakenby the subsidiary. Similarly, the parent company may have used its domination of thesubsidiary to transfer value to itself, through excessive dividends, capital reductions,overpricing of intra-company sales and under pricing of purchases, and similarmechanisms.

These were the issues facing CAMAC. However, as the title of the Report indi-cates, their main focus was the issue of long-tail liabilities, that is, the protection ofclaimants suffering injuries that have ‘not yet emerged and, given the nature of theinjury, may not yet emerge for a long time due to the latency period of the injury’.29

In dealing with the matter of unascertained future personal injury claimants (calledUFCs in the Report), various safeguards were proposed. While the Committee did notgo so far as to advocate making UFCs ‘creditors’ for the purpose of the creditorprotection provisions of the Corporations Act,30 it did suggest some changes to thelaw. These were for standing to be given to a representative of UFCs to challenge adeed of company arrangement in voluntary administration;31 inclusion for a closed

25. This is the briefest of outlines as the particular vulnerability of tort creditors has beenextensively canvassed elsewhere. See for example H Hansmann and R Kraakman ‘Towardunlimited shareholder liability for corporate torts’ (1991) 100 Yale LJ 1879; R Thompson‘Unpacking limited liability: direct and vicarious liability of corporate participants for torts ofthe enterprise’ (1994) 47(1) Vand L Rev 1; D Leebron ‘Limited liability, tort victims, andcreditors’ (1991) 91 Colum L Rev 1565; NA Mendelson ‘A control-based approach to share-holder liability for corporate torts’ (2002) 102 Colum L Rev 1203.26. See for example R Korokbin ‘The status quo bias and contract default rules’ (1998) 83Cornell L Rev 608 at 614; RE Scott ‘A relational theory of default rules for commercialcontracts’ (1990) JLS 597; S Bainbridge ‘Abolishing veil piercing’ (2001) 26 J Corp L 479 at486.27. See further R Thompson ‘Piercing the corporate veil: an empirical study’ (1991) 76Cornell L Rev 1036; I Ramsay and D Noakes ‘Piercing the corporate veil in Australia’ (2001)19 C&SLJ 250.28. For the USA, see Thompson, above n 27, at 1068. For Australia, see Ramsay and Noakes,above n 27, at 265, and Table 6, at 269; R Thompson, ‘Piercing the veil within corporate groups:corporate shareholders as mere investors’ (1998) 13 Connecticut Journal of International Law379 at 386. Freedman cites a study of English courts which came up with a similar finding: JFreedman ‘Limited liability: large company theory and small firms’ (2000) 63 MLR 317 at342–343.29. CAMAC Long-tail Liabilities Report, above n 23, at [1.1].30. Ibid, at [2.2.1].31. Ibid, at [6.7].



class of UFCs in Schemes of Arrangement;32 and for courts to be given the ability toset aside funds in trust for UFCs in liquidations.33

Thus the Report mainly dealt with the narrow issue of long-tail liabilities arisingfrom the Jackson Special Commission rather than the broader, and arguably moresignificant, issue of the protection of tort creditors of insolvent group companies.None of the recommended reforms allows access to the assets of the parent companyor in any way enhances the pool of funds available to subsidiary creditors. Rather, thelimited assets of the insolvent subsidiary are simply reorganised to ensure UFCs havetheir claims taken into account. Sheahan’s recommendation for the enactment oflegislation to restrict the benefit of limited liability to parent company shareholdersrather than the parent company itself was not adopted by CAMAC. Nonetheless, theReport did make some suggestions to manage the wider concerns of tort creditors ofcorporate groups.

Without referring to the difficulties created by corporate groups expressly, theReport looked at capital reductions and share buybacks which have the effect ofmaterially prejudicing the company’s ability to pay its creditors. This sort of valuetransfer is particularly a concern where there are concentrated shareholdings, includ-ing such transfers by subsidiaries to their parent companies. The Report proposed anamendment to the share capital, share buyback and financial assistance provisions ofthe Act to add a requirement that the proposed transaction not materially prejudice theinterests of UFCs.34 However, no limits were recommended in relation to the compa-ny’s ability to pay dividends where tort liabilities remain unmet,35 and the issue ofsubsidiaries which were undercapitalised from the beginning was not even addressed.Arguably therefore, little was achieved in terms of reining in the abuse of limitedliability and the corporate form by parent companies which use undercapitalisedsubsidiaries as a device to enjoy the benefits, but avoid the detriments, of riskyenterprise. Furthermore, the capital maintenance recommendations do not deal withvalue transfers through intra-group sale transactions, which are a far more temptingmeans of shifting assets away from the reach of subsidiary creditors than public andwell-scrutinised capital reduction measures.36

In addition, CAMAC examined a general anti-avoidance provision.37 It wouldprohibit persons entering into agreements or transactions to prevent the recovery of allor a significant part of amounts owing to UFCs, once they were in possession of athreshold level of information about the nature of expected claims.38 While this mayappear to deal with the behaviour of the James Hardie group directors, the Committeerejected the proposal for such a provision, on the basis that it would not achieve itspurpose in practice, and may have unintended consequences and create undue uncer-tainty in corporate decision making.39

32. Ibid, at [7.5]. Schemes of Arrangement are regulated by Corporations Act 2001 (Cth), part5.1.33. 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].



(b) Pooling of Group Assets

Pooling, also known as substantive consolidation, exists in a number of jurisdictions.40

It can be expressed in legislation, as a doctrine acknowledged by the courts, or maysimply be a by-product of the process of reorganisation or liquidation. There aregenerally two elements to pooling. The first is that the assets and liabilities ofcompanies within a group are aggregated, and creditors are paid from the commonpool. The second, a necessary corollary of the first, is that intra-group claims areeliminated. The liability of one company to another will match the other’s correspond-ing asset, and each will cancel the other out.

The principal reasons given for pooling are maximising returns to creditors andfacilitating corporate rescue.41 Returns are maximised by making available assetsowned by other companies in the group, as well as by eliminating intra-group claimswhich might rob creditors of individual companies of some or all of their recovery.Moreover, the cost saving resulting from the liquidator not having to trace extensiveintra-group transactions and sort out considerable intermingling of assets flows backas increased creditor returns. Reorganisation on a consolidated basis can more easilybe achieved, for the benefit of both companies and creditors, where the group com-panies have already substantially integrated their finances and operations.

Nonetheless, courts must still deal with objections to pooling by creditors or groupcompanies. Creditors may object on the basis that the assets of their own debtorcompany will yield a better return to them than they will achieve from the pooled fund,although in cases of extensive intermingling of assets and intra-group claims, it islikely in many instances that creditors will be unaware whether they stand to gain orlose from the pooling of the group’s assets.42 Moreover, it is probable that dealing withany challenges to consolidation by disenchanted creditors will still be cheaper than thecosts of unravelling the complicated transactions of asset integrated companies. Thismakes pooling an attractive option for creditors, especially where the debtor companyis an undercapitalised subsidiary and the creditor has not had the means to self-protectagainst the risk of non-payment.

The foundation of the pooling provisions introduced in Australia in 200743 wasthe Parliamentary Joint Committee’s 2004 report entitled Corporate Insolvency Laws:A Stocktake.44 Prior to the passage of the legislation, pooling was, and remains,possible informally under various forms of external administration.45 These includethe costly scheme of arrangement procedure, requiring two court hearings,46 voluntary

40. International examples of pooling, substantive consolidation and contribution orders willbe discussed further below in Part 2.41. W Widen ‘Corporate form and substantive consolidation’ (2007) 75 Geo Wash L Rev 237;D Baird ‘Substantive consolidation today’ (2005) 47 BCL Rev 5; D Baird Elements ofBankruptcy (Foundation Press, New York, 2006).42. I Mevorach Insolvency within Multinational Enterprise Groups (Oxford: OUP, 2009)p 218.43. Corporations Amendment (Insolvency) Act 2007(Cth).44. Parliamentary Joint Committee on Corporations and Financial Services Report, Parlia-ment of Australia Corporate Insolvency Laws: A Stocktake, available at http://www.aph.gov.au/library/Pubs/BD/2006-07/07bd180.htm.45. See J Harris ‘Corporate group insolvencies: charting the past, present and future of“pooling” arrangements’ (2007) 15 Insolvency Law Journal 78.46. Corporations Act 2001 (Cth), Pt 5.1.



administration47 and even liquidation proceedings.48 However, despite their availabil-ity, there were difficulties in some cases in attaining court approval,49 which promptedcalls for a statutory pooling scheme. In 1988, the Harmer Report recommended thatthe New Zealand model of liability be adopted.50 Instead, Australia followed theBritish wrongful trading model,51 with the addition of a provision for holdingcompany liability for insolvent trading.52 Statutory provisions to expressly permitpooling were again suggested by the CASAC Corporate Groups Report in 2000,53

which considered the New Zealand pooling legislation and the American substantiveconsolidation law extensively. No action was taken by the legislature following thisreport.

In 2004, CAMAC recommended that legislation be passed permitting poolingwhere all or some of the group companies are insolvent.54 Finally in 2007, provisionswere inserted into the Corporations Act.55 They allow pooling of corporate groupassets, where a number of conditions are satisfied, including the fact that each of thecompanies in a group is being wound up. Thus, contrary to CAMAC’s recommenda-tion, pooling orders do not assist creditors of insolvent companies where one or moregroup companies remain solvent. This decision was made for the protection of thesolvent company’s shareholders.56

Under the new provisions, intra-group claims are extinguished.57 Each company inthe group is taken to be jointly and severally liable for each debt payable by, and eachclaim against, each other company in the group.58 External secured creditors areexcluded from claiming from the pool, unless they forfeit their security.59 The poolingprocess involves the liquidator making a pooling determination, then seeking theapproval of eligible unsecured creditors.60 The vote need not be unanimous61 and thecourt can make a pooling order where it is satisfied that it is just and equitable, evenif some creditors object.62 In making a pooling order, the court considers a variety of

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 distributionswhich are not pari passu. See Harris, above n 45, at 91.50. Australian Law Reform Commission General Insolvency Inquiry (ALRC 45) (hereinafterthe Harmer Report), vol 1 at [336] and [857], vol 2 at D13 and PR9. See further J FarrarCorporate 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) includeddivision 8 into part 5.6 of the Corporations Act 2001 (Cth). See further J Dickfos, C Andersonand D Morrison ‘The insolvency implications for corporate groups in Australia – recent eventsand initiatives’ (2007) 16 International Insolvency Review 103.56. 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 groupare 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.



matters,63 including the extent to which the management, activities and business of thevarious companies were intermingled, the conduct of companies and their officerstowards the creditors of other group companies, the advantage and disadvantage tocreditors, and the culpability of companies and their officers in the windings up.Courts can also consider any other relevant matter.64

While the new legislation will have the effect of simplifying and clarifying the rightto pool group company assets where all companies in the group are insolvent, none-theless it does nothing to assist the creditors of an insolvent subsidiary of a solventparent company. It therefore offers no help to asbestos victims of undercapitalisedsubsidiaries. The benefits of the group structure were famously celebrated by Temple-man J in Re Southard & Co Ltd:

‘A parent company may spawn a number of subsidiary companies, all con-trolled directly or indirectly by the shareholders of the parent company. If one ofthe subsidiary companies . . . turns out to be the runt of the litter and declines intoinsolvency to the dismay of its creditors, the parent company and the other sub-sidiary companies may prosper to the joy of the shareholders without any liabilityfor the debts of the insolvent subsidiary.’65

Thirty years after this oft-quoted dictum was delivered, and despite the James Hardiecase providing a spectacular example of the abuse of limited liability and the corporateform, Australia is little further advanced.

2. INTERNATIONAL MEASURES TO REACH PARENT COMPANY ASSETS

As noted in the previous Part, in the past decade there have been numerous inquiriestouching on the issues under consideration in this paper, approached from a variety ofangles – corporate groups, corporate insolvency laws, long-tail tort liabilities, andcorporate social responsibility among them. However, despite this flurry of activity, itis this paper’s contention that the protections introduced by the pooling legislation andthose proposed by the CAMAC Long-tail Liability Report do not adequately safe-guard the tort claimants against insolvent subsidiary companies. It is therefore timelyto revisit some of the suggestions put to, and dismissed by, CASAC in 2000, and onenot considered by it.

(a) Targeted Legislation to Impose Liability – CERCLA

Those suffering from asbestos diseases tell heartbreaking stories, of incurableand painful illness and a reluctance of the tortfeasors to be accountable for theirwrongdoing. Public outrage, union activism and the media forced an ad hoc reso-lution in the James Hardie case. Unfortunately, it leaves no judicial precedent forthe benefit of asbestos victims of other subsidiary companies unable to meet theirclaims.

In the US, the devastation to a community from a chemical dump rapidly broughtabout national legislation imposing liability on those responsible. The Love Canal

63. Ibid, s 579E(12).64. Ibid, s 579E(12)(f).65. [1979] 1 WLR 1198 at 1208.



story66 is every bit as heartbreaking as ‘Asbestos House’.67 A canal near Niagara Falls,owned by William T Love, was part of an unsuccessful plan to generate electricity. Inthe 1920s the canal became an industrial chemical dump. In the 1950s, its new ownercovered the canal with soil and sold it to the city.68 Homes and a school were built onthe site. By the late 1970s chemicals leaching from the soil were causing illness,burns, miscarriages and birth defects.

In haste,69 national legislation, called the Comprehensive Environmental Response,Compensation and Liability Act (CERCLA)70 was passed in 1980 to deal with theremediation of land contaminated by hazardous waste. It imposes strict, joint andseveral liability on persons who currently own or operate a facility where hazardoussubstances have been released into the environment; formerly owned or operated afacility when hazardous substances were disposed of at that facility; or generated orarranged for disposal or treatment of a hazardous substance that was released into theenvironment.71

‘Persons’ includes individuals, corporations and other business entities,72 and thusparent companies are included within its reach. However, the Act’s inadequate defini-tion of ‘owner’and ‘operator’73 has left courts with the task of assessing whether partieswill be liable in these roles. The degree of participation required has not been settledjudicially, with some courts limiting liability to those who directly participate in thebreach; others extend liability to those who had the capacity to control the operations ofthe facility, despite a lack of knowledge or direct participation in the breach.

Most cases have involved director and ‘responsible officer’ liability. However, inUS v Bestfoods74 the US Supreme Court dealt with a case of parent company liabilityfor its subsidiary. It held that that a parent company could be liable as an owner oroperator under CERCLA pursuant to veil piercing theory. The Court emphasised thatthe statute did not create a new ground for piercing the corporate veil, but rather thatwhere an existing veil piercing ground existed, CERCLA liability could be imposed.75

In other words, where courts would allow the veil to be pierced because, for example,

66. See, for example, E Beck ‘The Love Canal tragedy’ (1979) EPA Journal, available athttp://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 J McCulloch Asbestos: Its Human Cost (Brisbane: University ofQueensland Press, 1986); S Engel and B Martin ‘Union carbide and James Hardie: lessons inpolitics and power’ (2006) 20(4) Global Society 475.68. The land was sold to the city for one dollar. As Beck says ‘[i]t was a bad buy’. Beck, aboven 66.69. F Grad ‘A legislative history of the Comprehensive Environmental Response, Compen-sation and Liability (‘Superfund’) Act of 1980’ (1982) 8 Colum J Envtl L 1 at 1.70. 42 USC s 9601–9657.71. 42 USC s 9607(a)(1)–(3)(2008). In addition, the Act established prohibitions and require-ments concerning closed and hazardous waste sites, and established a trust fund to provide forcleanup when no responsible party could be identified. CERCLA was amended in 1986 by theSuperfund 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 L Silecchia ‘Pinning the blame and piercing theveil in the mists of metaphor: the Supreme Court’s new standards for the CERCLA liability ofparent companies and a proposal for legislative reform’ (1998) 67 Fordham L Rev 115 at168–173.



there was undercapitalisation of the subsidiary by the parent,76 the parent companycould be liable for the actions of their subsidiary, where the subsidiary was an owneror operator of a facility in breach of the law.

In the absence of a ground for veil piercing, some further basis is required for theparent company to be liable under CERCLA. Frequently parent companies will not bethe actual owners of the facility in question, with ownership in the hands of thesubsidiary or some other party. Therefore CERCLA liability often will turn on theirstatus as operators. The court in Bestfoods made it clear that even in the absence ofgrounds to pierce the corporate veil, parent companies could be liable under a directparticipation theory,77 where the parent has participated directly in the operations ofthe particular facility that breaches the law, and not just in the operations of thesubsidiary which operates that facility.78

However, cases have established that actual knowledge of the release of the haz-ardous material which breaches CERCLA is not required.79 Moreover, parent compa-nies may be liable where they merely have the capacity to control the activities of thesubsidiary. While the court in State of Idaho v Bunker Hill Company held that‘ “normal” activities of a parent with respect to its subsidiary do not automaticallywarrant finding the parent an owner or operator’,80 in this particular instance,

‘[d]efendant . . . was in a position to be, and was, intimately familiar withhazardous waste disposal and releases at the . . . facility; had the capacity to controlsuch disposal and releases; and had the capacity, if not total reserved authority, tomake decisions and implement actions and mechanisms to prevent and abate thedamage caused by the disposal and releases of hazardous wastes at the facility.’81

Liability in such circumstances sits somewhat uneasily with the Model BusinessCorporation Act, which provides that ‘[u]nless otherwise provided in the articles ofincorporation, a shareholder of a corporation is not personally liable for the acts ordebts of the corporation except that he may become personally liable by reason of hisown acts or conduct.’82

CERCLA does not expressly refer to parent companies vis-à-vis their subsidiariesin imposing liability on a ‘person’. Kezsbom et al commented that:

‘[i]n fashioning a body of precedent for this area . . . the courts have relied onthe sparse legislative history of the statute, including the perceived intent of

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



Congress to make those who have “benefitted” from the pollution – rather than thetaxpayers – bear the burden for its consequences.’83

Oswald remarked that ‘CERCLA is an unusual law because its liability provisionsare simultaneously draconian and nebulous’.84 Therefore, as a legislative template forimposing liability on parent companies for the shortcomings of their subsidiaries,CERCLA leaves something to be desired. In particular, by concentrating on theactions and involvement of the parent company, it fails to address its liability foromissions, and encourages it to turn a blind eye to the environmental policies andpractices of its subsidiaries.85 It is an example of legislation passed hurriedly in theface of a dreadful environmental disaster, and therefore gives pause for thought inanswering the call for parent company liability legislation in the wake of JamesHardie. Nonetheless, CERCLA’s deficiencies, as illustrated by cases and commen-tary, provide a valuable lesson in fashioning a measure or measures to deal with unmetasbestos claims.

(b) Equitable Subordination

Equitable subordination occurs where the payment of debts owed by a company toinsider-shareholders is deferred behind the payment of outside creditors. This can takeplace even though the debt is secured. In the case of recharacterisation, the debts aretreated as equity. While equitable subordination does not extinguish the claim of thelender, in practical terms it may result in the lender receiving nothing once the claimsof other creditors are met. The aim of the doctrine of equitable subordination is todeter the opportunistic use by controlling shareholders of their insider positions toprioritise their own claims ahead of those of external creditors. This doctrine maytherefore be useful where solvent parent companies have used inadequately fundedsubsidiaries as vehicles for risky enterprises. Shareholders may use informationaladvantages to the detriment of other creditors, and give a misleading perception of thecompany’s capitalisation.86

However, deterring loans from parent companies by means of equitable subordi-nation may hinder the genuine efforts of shareholders to save the subsidiary bythe provision of new debt capital. Where the subsidiary is facing severe financialdifficulties, these funds may be the only ones available, as outside lenders decline torisk funds to a failing entity with possibly few unencumbered assets.87 Shareholderloans also have the advantage of lower transaction costs than outside loans.88

83. A Kezsbom ‘ “Successor” and “parent” liability for superfund cleanups: the evolving stateof the law’ (1990) 10 Va Envtl LJ 45 at 45. See also L Silecchia ‘Pinning the blame and piercingthe veil in the mists of metaphor: the Supreme Court’s new standards for the CERCLA liabilityof parent companies and a proposal for legislative reform’ (1998) 67 Fordham L Rev 115 at 126.84. LJ Oswald ‘New directions in joint and several liability under CERCLA?’ (1994) 28 UCDavis L Rev 299 at 313.85. See C Schipani ‘The changing face of parent and subsidiary corporations: enterprisetheory and federal regulation’ (2005) 37 Conn L Rev 691 at 704.86. See further DA Skeel, Jr and G Krause-Vilmar ‘Recharacterization and the nonhindranceof creditors’ (2006) 7 EBOR 259 at 280.87. Skeel and Krause-Vilmar observed that shareholder loans have long been an essentialsource of finance for small- and medium-sized German companies: Skeel and Krause-Vilmar,above n 86, at 280.88. Ibid, at 280.



Nonetheless there are some fundamental concerns with the provision of debt capitalby shareholders. Landers stressed that because the objective of the parent company inmaking the loan was to protect its earlier equity investment, the parent is not acting inthe best interests of the subsidiary in making the loan.89

This motive90 arguably justifies the subordination of these claims and the clawingback of amounts repaid pursuant to these loans. The two leading jurisdictions to useequitable subordination are the USA and Germany.91 However, their laws differ insignificant ways.

In the USA, the equitable subordination doctrine was codified in 1978.92 It allowsa court to subordinate the claim or interest of a creditor, being a shareholder oraffiliated entity, who has acted inequitably.93 Inequity can arise as a result of themisuse of a shareholder’s control over a bankrupt subsidiary or controlled corporationto the detriment of the corporation or its creditors. The sorts of factors courts considerinclude the level of capitalisation of the controlled company, the parent company’sparticipation in its management, and the manipulation of intra-group transactions bythe parent company to its own advantage. Thus there is no need to allege that theparticular loan or transaction was inequitable, but rather that there was inequity inthe conduct of the controlling shareholder towards the company. This is in contrast tothe fraudulent conveyance laws94 which required the particular unfair transaction to beidentified. Moreover, the doctrine applies to controlling shareholder loans made at anytime and not just at the time of the company’s financial distress. However, if the loanhas been repaid prior to the company’s bankruptcy and therefore there is no outstand-ing loan to subordinate, the money can only be reclaimed if there has been a breachof fraudulent conveyance law.

Unlike equitable subordination, the recharacterisation as equity of debt owed by acompany to an insider-shareholder does not require the shareholder to have actedinequitably.95 The power of courts to recharacterise debt as equity arguably arises fromthe discretion given to courts by the 1978 codification to subordinate other claims ascircumstances warranted.96 Skeel notes the reluctance of courts to adopt the doctrineof recharacterisation and the indeterminability of its limits, with courts developing

89. J Landers ‘A unified approach to parent, subsidiary and affiliate questions in bankruptcy’(1975) 42 U Chi L Rev 589 at 599. Cf R Posner ‘The rights of creditors of affiliated corpora-tions’ (1975) 43 U Chi L Rev 499, sparking an instant rejoinder: J Landers ‘Another word onparents, subsidiaries and affiliates in bankruptcy’ (1975) 43 U Chi L Rev 527. See also Widen,above n 41, at 262–267.90. A Cahn ‘Equitable subordination of shareholder loans?’ (2006) 7 EBOR 287 at 288.91. Equitable subordination has also been adopted in other European countries. Austriafollowed German judicial doctrine in 1991 and codified its law in 2003. Italy and Spain havealso followed the German example. See PO Mülbert ‘A synthetic view of different concepts ofcreditor protection, or: a high-level framework for corporate creditor protection’ (2006) 7EBOR 357 at 394.92. 11 USC s 510; Bankruptcy Act 1978 (US).93. For its origins and theoretical basis, see further A Berle ‘The theory of enterprise entity’(1947) 47 Colum L Rev 343 at 348–350; PI Blumberg ‘The increasing recognition of enterpriseprinciples in determining parent and subsidiary corporation liabilities’ (1996) 28 Conn L Rev295 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).



laundry lists of relevant factors97 reminiscent of common law veil piercing.98 Fre-quently, the issue is decided as recharacterisation because it is unclear whether a debtactually exists, due to a lack of formalities surrounding the provision of the additionalfunds to the company, or because of the inadequacy of the company’s capitalisation.99

In contrast, in a case of equitable subordination, it is the bona fides of the lender, ratherthan the authenticity of the loan, that is in doubt.

German courts have permitted the subordination of shareholder debt since the late1950s,100 if the loans were made when the subsidiary was already in a financial ‘crisis’.Significantly, German law does not require control by the shareholder or abuse of theirinsider position to unfairly extract value from the company. In this way, Germanequitable subordination resembles American recharacterisation. Under judicial doc-trine, the loan would be recharacterised as equity for the period of the crisis, andrepayments to shareholders would be prohibited to the extent required to maintain thecompany’s nominal capital as stated on its balance sheet.101 There is no requirementof insolvency on the part of the company, and loans made during the crisis can berecovered from the parent even if the company survives the crisis, continues inbusiness and the loans are repaid by the subsidiary at that time.102 ‘Crisis’ is broadlydefined, and includes the situation where the company for some reason is unable toobtain credit from outside lenders at fair market rates.103 If the court considers that areasonable outsider would not have given the same loan under the same conditions,it concludes that the company’s circumstances are such that a reasonable share-holder would have made an equity contribution and the shareholder loan is thereforesubordinated.104

As in the USA, the German rules on equitable subordination were then codified.105

The judicially determined meaning of ‘crisis’ was retained,106 but confusingly, otherdifferences were introduced into the codified law, despite an intention to preserve theprevious rules.107 There are two major divergences. The first is that, for the period ofthe crisis, the statute prohibits the repayment of the entire loan, not just the part thatwould cause the assets of the company to fall below the stated capital amount. Thesecond is that the statute only applies to the repayment of loans made in times of actualinsolvency.108 As a result of the differences in the law, equitable subordination inGermany is regulated by both the statute and the pre-existing judicial rules.109 Neither

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 LiabilityCompanies Act (GmbHG).102. Within insolvency – Insolvency Act s 143; outside bankruptcy proceedings – GmbHG s31. 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, InsolvencyAct s 135 and the Law Concerning the Contestability of Legal Acts of a Debtor outsideof 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.



set of rules is subject to discretion by the courts, and both apply automatically once thespecified conditions are found to be present.110 Amendments making minor modifi-cations to the statutory provisions were made in 1998.

Despite these two prominent examples of well-utilised statutory equitable subor-dination, the United Nations Commission on International Trade Law (UNCITRAL)Working Group V on Insolvency Law111 has not recommended any specific legislativetreatment of the doctrine. It is not used in the UK, despite the Cork Report112

advocating subordination in a limited form.113 The Cork Committee distinguisheddebts arising as a result of ordinary trading activities between group companies fromdebts ‘which in substance represent long term working capital and which arise fromfinance provided by the parent company’.114 The Committee considered this moreequitable than an automatic subordination of parent company debt, and analogous toequitable subordination in the USA.115

The dual approach suggested by Cork was not implemented,116 and Milman hassuggested that ‘[a]lthough this solution does offer the benefit of flexibility it does raisethe spectre of complex and expensive litigation.’117 Finch commented that there is noreason to exclude debts in the ordinary course of trading, which are susceptible tomanipulation through transactions not at market value.118

Australia likewise has also not taken up equitable subordination except in a verylimited form.119 However, the provisions do not apply to debt capital lent by membersto the company. The question of subordination of intra-group claims was consideredby the CASAC Corporate Groups Report,120 and the Committee recommended againstits adoption:

‘Subordination orders, like contribution orders, could detrimentally affect theinterests of creditors and/or shareholders of the parent company. A court-basedsubordination power may discourage parent companies from putting loan capitalinto their controlled entities, given the possibility that the parent company wouldrank behind other creditors for recovery of that loan. Accordingly the CorporationsLaw should not be amended to permit courts to subordinate intra-group claims inthe insolvency of a group company.’121

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 Insol-vency 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 ss213 and 214 respectively of the Insolvency Act 1986 (UK).117. D Milman ‘Groups of companies: the path towards discrete regulation’ in D Milman (ed)Regulating Enterprise Law and Business Organisation in the UK (Oxford: Hart Publishing,1999) p 229.118. V Finch, Corporate Insolvency Law Perspectives and Principles (Cambridge: CUP, 2ndedn, 2009) pp 586–587.119. 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].



This is disappointing. Equitable subordination appears to deal effectively with thesituation where subsidiaries are underfunded in terms of equity but operate insteadwith debt capital provided by the parent company. CASAC expressed concern thatparent companies might be discouraged from putting loan capital into their subsid-iaries. That is precisely the purpose of equitable subordination. As Landers madeclear,122 the parent company’s aim in granting the loan is to maximise its return on itsequity investment in the subsidiary. It is not a bank in the business of making moneythrough loans. It funds the subsidiary through debt for the very reason of avoidinglosses in their capacity as a shareholder. The lack of bona fides in extending debtcapital rather than equity to the subsidiary therefore arguably justifies the adoption ofequitable subordination to deal with abuse of limited liability by parent companies.

(c) Substantive Consolidation, Pooling and Contribution Orders

In the USA, American bankruptcy courts use the equity powers provided in s 105 ofthe Bankruptcy Code to order substantive consolidation, as pooling is known.123

Generally, all the companies to be consolidated are insolvent,124 although it is possible,depending on the particular consolidation, for certain companies within the group orcertain debts to be excluded.125 Large corporate reorganisations often use the proce-dure, and Widen described it as ‘the most important doctrine in corporate reorgani-zation’.126 The rights of secured creditors are unaffected, except for intra-groupsecurities.127 However, the process is mainly of common law origin,128 which canresult in a disparity between the doctrine as enunciated by superior courts and lowercourt practice.129 According to Drabkin v Midland-Ross Corp (in re Auto-TrainCorp)130 substantive consolidation is permissible where the proposers show first ‘asubstantial identity between the entities to be consolidated’ where there has been afailure to observe corporate formalities, and second that ‘consolidation is necessary toavoid some harm or to realise some benefit’.131 The consolidation will then beapproved unless its opponent can show that ‘it relied on the separate credit of one ofthe entities and that it will be prejudiced by the consolidation’.132

Other US courts133 have put forward different tests. These are, first, ‘that the affairsof the entities are so closely entwined that each lacks a separate existence for all

122. Landers, above n 89.123. 11 USC s 105(a) provides that ‘The court may issue any order, process, or judgment thatis 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 solventand insolvent companies. See Re 1438 Meridian Place, NW, Inc, 15 Bankr. 89 (Bankr DDC1981); 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 MachineCorp 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 (2dCir 1988); Re Owens Corning 419 F 3d 195 (3d Cir 2005).



practical purposes’, and second, ‘that keeping the entities’ affairs separate is imprac-tical’.134 The latter occurs where the cost of separation exceeds the benefits,135 forexample where there are huge numbers of intercorporate transfers or liabilities.136 Thelack of certainty in the definition of the relevant factors may render substantiveconsolidation an inadequate means of protecting tort creditors and is the main defi-ciency with substantive consolidation in the USA.

In contrast, New Zealand provides one of the clearest examples of comprehensivelegislation137 to allow both pooling of the affairs of an insolvent group of companies,as well as contribution orders to be made against solvent companies in aid of relatedinsolvent companies. The legislation provides wide powers to the courts to orderrelated companies to contribute to the payment of a related company’s debts or fortheir liquidation to take place as though they were one company, where it is just andequitable to do so.138

This is determined in accordance with specified factors.139 While these factors arewidely expressed and include ‘such other matters as the Court thinks fit’, it issignificant that they expressly exclude ‘[t]he fact that creditors of a company inliquidation relied on the fact that another company is, or was, related to it140 as aground for making an order under s 271. According to Farrar, this was inserted141 toallay fears that creditors would base their claim on the fact that they had investedbecause of their debtor company’s relationship with another company.142 It is note-worthy that the definition of a related company143 covers the intermingling of corpo-rate affairs, by including in the definition ‘(d) [t]he businesses of the companies havebeen so carried on that the separate business of each company, or a substantial part ofit, is not readily identifiable’. This echoes one of the pooling grounds, which looks at‘[t]he extent to which the businesses of the companies have been combined’.144

However, despite the breadth of the legislation, New Zealand courts have maderelatively few pooling orders.145 Moreover, in exercising the contribution power,where a solvent group company is required to make a contribution towards meetingthe claims of the insolvent company’s creditors, courts have struggled to reconcile theclaims of both companies’ creditors.146 Farrar commented that:

‘[i]f the contribution sought from a related company threatens that compa-ny’s solvency, then the court must consider the equities involved affecting the

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 amendedthe Companies Act 1955 (NZ). For the history of the provision, see J Farrar ‘Legal issuesinvolving 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 withcontribution 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 LiardetHoldings Limited (1983) BCR 604.



creditors of that company. These creditors will rely on arguments that they haverelied on the separate assets of the company when trading with it and should not bedenied a full payout because of that company’s relationship with anothercompany.’147

Another country with comprehensive pooling and contribution order provisions isthe Republic of Ireland.148 As in New Zealand, pooling is subject to judicial discretion,with identical factors for the court’s consideration.149 In addition, the provision callsfor regard to be paid to the ‘interests of those persons who are members of some, butnot all, of the companies’.150 This seems a far more optimistic approach than NewZealand’s legislation, contemplating that not only will all creditors be paid but alsothat there will be assets left over for distribution among the various companies’members. Contribution orders are also subject to the court’s assessment that it is justand equitable; interestingly though, the legislation provides that ‘[n]o order shall bemade . . . unless the court is satisfied that the circumstances that gave rise to thewinding up of the company are attributable to the actions or omissions of the relatedcompany.’151 The connection between the culpability of the related company and thedemise of the insolvent company is expressed in much stronger terms than its NewZealand equivalent.152

The UNCITRAL Working Group V on Insolvency Law was silent on the matter ofcontribution orders but it has made draft recommendations153 that legislation shouldprovide for substantive consolidation. It states the purpose of the law to be ‘(a) toprovide legislative authority for substantive consolidation, while respecting the basicprinciple of the separate legal identity of each enterprise group member’154 and ‘(b) tospecify the very limited circumstances in which the remedy of substantive consoli-dation may be available in order to ensure transparency and predictability’.155 Thisjustification, however, does not follow: there is no reason why a well-articulatedbroad set of circumstances cannot be as transparent and predictable as very limitedcircumstances.

3. ANALYSIS

This paper began by examining the long-tail liability suggestions and the 2007 poolingamendments. It maintained that neither of these is adequate for the proper protectionof tort creditors of insolvent subsidiaries. By focusing on the particular concerns ofUFCs, the CASAC Long-tail Liabilities Report failed to grapple with undercapitali-sation and abuse of limited liability as a major cause of loss for tort creditors ingeneral. It tinkered around the edges with various capital reduction measures, while

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 ‘inter-mingled’ (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.



ignoring completely the real dangers to subsidiary asset maintenance – inadequateinitial capitalisation, excessive dividends, value extraction through intra-group salesand purchases, and intra-group loans. Overall, the Report was disheartening forproponents of reform to benefit asbestos and other tort claimants – one gets the sensethat opponents need only mention disincentives to investment, international uncom-petitiveness, interference with management prerogatives and the like, for governmentreview bodies to become irrationally conservative and wedded to the status quo.

Likewise, the pooling legislation which has finally been adopted in Australia hastaken the most conservative approach, despite the more adventurous recommendationof CAMAC in suggesting that even a solvent company could be part of a reorgani-sation under a voluntary administration where there was excessive intermingling.156

Certainly, where all companies in a group are insolvent, it may benefit the tortcreditors of insolvent companies to have access to funds pooled from other membersin the group; equally, it may disadvantage them if their own debtor company was theone holding the assets. But by not allowing solvent companies to form part of areorganisation through pooling, it deprives the tort creditors of the undoubted oppor-tunity of increasing their returns. This forces a return to other reorganisation measuressuch as the costly and cumbersome Scheme of Arrangement procedure.

The paper then considered international alternatives which might satisfy the appealfor reform from the Senior Counsel to the James Hardie Inquiry. The first optionconsidered was CERCLA, which was not examined by any of the Australian reviewbodies. Perhaps this is not surprising. The vast literature evaluating CERCLA hasgenerally not been flattering. However, as an example of an anti-avoidance measure,it is not wholly without merit. Perhaps its greatest contribution to the debate inAustralia is that it contradicts the constant refrain that imposing liability on parentcompanies is a disincentive to business investment or interferes with proper businessmanagement. Neither CERCLA nor its application to parent companies in Bestfoodshas discouraged businesses in the USA operating through the group structure orinvesting in enterprises which operate hazardous facilities. The same can be said of theequitable subordination and pooling/substantive consolidation legislation. These havenot had a negative effect on some of the world’s most successful economies – theUSA, Germany and Republic of Ireland.157

The trick, of course, is to determine from these various measures the elementswhich might prove most useful to tort creditors of insolvent subsidiaries. CERCLAsuffers from its failure to anticipate its application to parent companies. It mightappear to be readily applicable to asbestos liability because it is dealing with ahazardous product causing damage which is not immediately apparent. However,CERCLA focuses on the site of environmental pollution rather than losses to thosewho have been affected by hazardous products. This is a significant difference, asattention needs to be diverted away from the owner or operator of the site towards themanufacturer of the product. Needless to say, CERCLA does not assist here. None-theless, its strict liability approach and the ‘direct participation’ doctrine from Best-foods afford a refreshing dose of ‘justice’ to reformers weary of successful evasiontechniques.

156. Above n 54.157. These economies have suffered during the Global Financial Crisis, but they all experi-enced huge financial growth during the periods when their corporations law imposed liability invarious forms on parent companies for the debts of their subsidiaries.



An attempt in the USA to deal with asbestos claims was not considered in Part IIabove because it did not result in legislation. However, a brief mention here isapposite, if only to raise the issue of government intervention to create and administera no-fault fund. The Fairness in Asbestos Injury Resolution Act of 2006 was consid-ered twice by the Senate Committee on the Judiciary.158 It proposed, inter alia,159 theestablishment of a trust fund160 to compensate victims of asbestos exposure, shieldingasbestos manufacturers from future lawsuits. The legislation would also establish theNational Mesothelioma Research and Treatment Program to investigate and advancethe detection, prevention, treatment and cure of malignant mesothelioma. However, nofurther action occurred on either version of this Bill,161 despite a number of amend-ments to address various issues and concerns surrounding it. Nonetheless, while itsaims were laudable and despite the US $140 billion trust fund it proposed, suffererswere relieved that the legislation was not enacted. It would remove the sufferers’ rightsto sue and limit the amount that could be claimed, despite the fund being underwrittenwith taxpayer money. This may well have eventuated: to cover underfunding, theAustralian Federal and New South Wales Governments have lent US $320 million tothe compensation fund for James Hardie asbestos sufferers, to be repaid by 2020.162

Equitable subordination might appear to be a generous option for reaching parentcompany assets. It deals with subsidiaries which are underfunded in terms of equitybut operate instead with debt capital provided by the parent company. In doing so, ittackles one of the major concerns of the abuse of limited liability and the groupstructure. By focusing on the underlying relationship and its abuses, it avoids the timelimitations in laws dealing with fraudulent conveyances and voidable preferences.However, equitable subordination as a means of tort creditor protection has its draw-backs. It relies on the subsidiary owing debts to the parent company. If the subsidiaryis undercapitalised with equity but is funded through debt capital provided by a thirdparty, the doctrine has no benefit. It also will not deal with other value transfersindependent of debt. In other words, it is not a general veil piercing doctrine able tobe utilised whenever there is some degree of exploitation of the subsidiary at the handsof the parent company. One would also need to decide whether the American orGerman model should be adopted, or some hybrid of the two. American equitablesubordination relies on inequitable treatment of the subsidiary by the parent. Thisjudgment is necessarily one for the court, and there is a risk of a ‘laundry list’ offactors evidencing inequitable treatment developing. Ex post ruling on inequity alsolacks the benefit of an ex ante standard by which companies can guide their behaviour.Recharacterisation appears to steer clear of this problem but brings with it its own listof indicative factors. The German doctrine avoids the courts having to rule on inequitybut substitutes it with a ruling on ‘crisis’,163 and an assessment of the lending and

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 responsiblefor 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, Superannua-tion 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 theGerman versions of equitable subordination.



investment inclinations of a ‘conscientious businessman’.164 Moreover, Australia lacksa minimum capitalisation requirement which is essential for the operation of doctrinalequitable subordination, although this is absent with its statutory counterpart.

Arguably the newly introduced Australian version of pooling is better than theAmerican substantive consolidation, despite the latter’s much longer period of devel-opment. The lack of consensus on the relevant tests makes substantive consolidationan inappropriate example to follow. Australia’s legislation largely follows the NewZealand and Irish models on pooling, and therefore is likely to be ‘safe’. It is unlikelyto cause large amounts of litigation or a major upheaval among parent companiesfearing that limited liability has been lost. Nonetheless, for those very reasons, it isunlikely to provide a breakthrough in the quest to secure a means of providingcompensation for the tort creditors of insolvent subsidiaries.

The provision most beneficial to tort creditors examined by this paper is the NewZealand and Irish contribution order powers. By allowing courts to order that solventparent companies are required to contribute to the debts of their insolvent subsidiarieswhere it is just and equitable, the contribution order opens up the possibility of aremedy for James Hardie-type tort plaintiffs gaining access to parent company assets.The discretion afforded to the court should ensure that limited liability is only over-come in appropriate circumstances.

However, it is of concern that the provision is little utilised in New Zealand.165

Milman also comments that ‘there is no evidence of [the pooling and contributionorder] provisions having been invoked in Ireland since their introduction and it isdifficult to judge their impact.’166 Perhaps the provision appears too generous andappears to go against judges’ long-held belief in the sanctity of limited liability andseparate legal entity for corporations. Perhaps the concern for the parent company’screditors blinds the court to the claims of the subsidiary’s creditors. While there mightbe some slim logic to this one – that those creditors who took the trouble to assesscreditworthiness before entering into their contracts with a particular group companyshould not be deprived of the rewards of their labours – this seems especially unfairin the case of tort creditors who did not choose which company in the group would betheir tortfeasor.

The concerns for parent company creditors and shareholders might also be some-what overstated. When James Hardie agreed to a multi-billion dollar settlement in thewake of the Jackson Inquiry, instead of the AU $293 million it had initially promised,it had a beneficial effect on the company’s share price,167 and the company continuedto expand its American operations.168 Spender noted a similar increase in share pricefor asbestos companies in the USA once their liabilities had been defined by areorganisation or class action certification.169

Therefore, in terms of an approach which is broad enough to be beneficial for tortclaimants, but not so wide that courts are timid in using their powers, perhapssomething can be learned from CERCLA and the German version of equitable sub-ordination. In both cases, where the constituent elements are made out, liability is

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, availableat http://www.ir.jameshardie.com.au/jh/home.jsp.169. Spender, above n 2, at 251.



strict. However, fault of some sort should be an element.170 To fashion a contributionorder power which takes into account fault but nonetheless imposes strict liability ischallenging. Milman has made the following suggestion:

‘A significant improvement might be . . . a rebuttable presumption . . . to theeffect that parents were to be held liable for subsidiary obligations unless theycould establish that there had been no interference in the business management ofthe subsidiary and that the subsidiary had not been able to obtain any credit byvirtue of its relationship with the parent. By reversing the burden of proof in thisway the policy of the law would be directed very much towards enterprise liabilityand would reflect the realities of the situation.’171

This sort of provision would need some adjustment if the objective were theprotection of tort creditors. For example, the parent company could escape liability byestablishing that the subsidiary had been properly capitalised and insured, and that theparent company had not misused its domination of the subsidiary to unduly benefititself, or cause detriment to the subsidiary.172 Capitalisation and insurance levelswould depend on the company’s particular circumstances, and would interrelate. Theywould not be specified in the legislation.173 Fear of liability should ensure that com-panies over-provide rather than under-provide, avoiding the difficulties of trying to setappropriate levels in legislation.

CONCLUSION

There was a sense of relief for asbestos sufferers when the James Hardie Inquiry ledto the creation of a substantial compensation fund, the Asbestos Injuries Compensa-tion Fund (AICF). This was tempered by James Hardie’s announcement in April 2009that it was reasonably foreseeable that, within two years, the available assets of theAICF were likely to be insufficient. The AU $320 million loan by the Federal and NewSouth Wales Governments will temporarily alleviate that deficiency, but it serves tounderline the extent of the compensation required by victims.

Given the nature of the settlement – an ongoing contribution of a percentage ofprofits – it is understandable that imposing crushing liability on the James Hardieparent company might have done more harm than good. As Spender observed, ‘Man-ville argued that it needed to survive in order to pay future asbestos claims and it wascritical not to kill off the goose that laid the golden egg’.174 Nonetheless, the outcomeof the Inquiry does nothing to help asbestos sufferers injured by other companies or,more broadly, other tort victims of subsidiary companies where the parent companyhas abandoned it to insolvency.

Perhaps more importantly, the lack of any legislation to impose liability on parentcompanies for the tort claims of their undercapitalised, underinsured subsidiaries

170. D Millon ‘Piercing the corporate veil, financial responsibility, and the limits of limitedliability’Working Paper No 2006-08, September 2006, Washington & Lee Public Legal StudiesResearch 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 transac-tions, could be used as a model here.173. See Gevurtz, above n 76, at 884.174. Spender, above n 2, at 253.



means that there is no effective deterrence of excessively risky enterprises beingcarried on through these entities. Doubts about asbestos safety were being airedaround the turn of the twentieth century and by 1933, writs had been issued againstJohns Manville.175 Despite this, asbestos mining and manufacture continued apace inmany places around the world. Courts and legislatures upholding the concepts oflimited liability and the separate legal entity of companies within a corporate groupmust bear some responsibility for this.

In the absence of such deterrence, the abuse of limited liability will continue –market forces and the imperative to maximise shareholder wealth will see to that. Toavoid another James Hardie, this paper has examined a range of ways in whichliability can be imposed on solvent parent companies. It argued that the present reformproposals in Australia would do little to help tort claimants, and that the new poolingprovisions, while a good start, fall far short of what is required. A legislative responseis needed, to ensure some certainty and send a message of deterrence.

However, that legislation must be well considered and thorough, a lesson learntfrom CERCLA. Its focus on the owner or operator of a facility makes the ascriptionof liability to parent companies uncertain, and encourages parents to turn a blind eye.The New Zealand and Irish contribution provisions appear to meet the requirements.By allowing access to the assets of solvent parent companies, the making of contri-bution orders where it is just and equitable in the court’s opinion appears to overcomethe limitations of more prescriptive provisions. However, their lack of use is worryingand may indeed be attributed to their generosity. Pooling orders, on the other hand, dolittle for the creditors of insolvent subsidiaries, as they simply redistribute assetsamong insolvent companies without any further assets being added to the pool.

A strict liability provision would overcome a possible reluctance of courts to utilisecontribution order powers, with the onus being placed on parent companies to showthat they were not responsible for the inability of the subsidiary to meet its financialcommitments. In addition, equitable subordination would be a useful addition to therange of remedies available to liquidators. As noted, however, it has its limitations andsome careful decisions would need to be made as to the format of the legislation.

175. Spender, above n 2, at 226.



Parent company liability for asbestos claims: some international insights

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