Charities and trading subsidiaries: is your charity at risk of liability?


20 April 2021

Many charities operate with subsidiaries, often to ring-fence risk and protect the parent charity’s assets. However, there is potential for a parent charity to be liable for the actions of its subsidiary, which has been highlighted by the recent Supreme Court case of Okpabi v Royal Dutch Shell plc [2021] UKSC 3 (the RDS case).

Large charities often operate a group structure, whether conducting their income generation activities through a trading subsidiary or carrying out various charitable purposes through separate corporate charities, particularly when operating in another country. One of the primary reasons for setting up a subsidiary in either case is the wish to protect the assets of the parent charity from (in the case of a trading subsidiary) the commercial risks of trading or (in the case of a group of charities) liabilities that may be incurred in the specific jurisdiction where the charitable subsidiary operates.

By forming a separate subsidiary company, a parent charity expects to gain the protection afforded generally under English law that members of a limited liability company cannot be held responsible for that company’s liabilities. This is protection is derived from the principle that a company is a legal person separate from its members with its own property, debts and liabilities, and the liability of each of its members is limited.

The RDS case has, however, further highlighted the potential for a parent charity to be liable for the actions of its subsidiary. While the case concerns a well-known public limited company, and the facts of the case play a key part in the judgment, the points at issue do not concern the company’s plc status. It is, therefore, entirely feasible that the same analysis and findings would be applied to a parent charity.

Before the RDS case we have seen other examples where a parent charity has been found to be liable for the actions of its subsidiary. These include:

  • Regulatory – for example, under the Bribery Act 2010 a company is guilty of an offence if a person associated with that company (such as its subsidiary) bribes another person, intending to obtain or retain business or a business advantage for that company. The parent charity can seek protection from such liability from having “adequate procedures” in place designed to prevent bribery
  • Health and Safety – the 2012 case of Chandler v Cape Plc held that a parent charity can, in certain circumstances, owe a direct duty of care towards an employee of one of its subsidiaries, where the parent charity has assumed responsibility for that employee’s health and safety
  • Mass negligence claims - there has been a trend in recent years of overseas claimants bringing proceedings in the English courts against UK parent companies for the actions of their foreign subsidiaries.

In negligence claims, the principal issue will usually be whether it can be established that the parent charity owed a duty of care to the claimants, and three tests have been used by the courts (although there have been departures from these):

  1. whether the damage which occurs is foreseeable
  2. whether there is a sufficiently proximate relationship between the parties; and
  3. whether it is fair, just and reasonable in all the circumstances to impose a duty of care.

The key issue in these parent/subsidiary cases is one of proximity – i.e. the extent to which the parent company controls, manages and intervenes in activities of its subsidiary, rather than this arising automatically from the parties’ relationship of parent charity and subsidiary.

The RDS case

The RDS case concerned a number of Nigerian farmers whose lands were allegedly polluted by oil leaks from oil pipelines operated by a Nigerian subsidiary of the Royal Dutch Shell group. The case before the Supreme Court was concerned with whether the courts of England and Wales had jurisdiction. To succeed, the claimants had to establish a good and arguable case that the parent company owed them a duty of care.

The Supreme Court decided that there was jurisdiction and the case will now go back to the High Court to hear the main issues. The key points made in this decision were:

  • The question is the extent to which, and the way in which, the parent charity took the opportunity to take over, intervene in, control, supervise or advise the management of the relevant operations (including land use) of the subsidiary.
  • A parent charity is more likely to be exerting operational control where it imposes internal corporate policies and procedures on its subsidiaries. It is, however, necessary to look at the particular procedures. In the RDS case, the parent charity had centralised expertise and exercised top-down control of the health, safety, security and environmental aspects of the business including that of its subsidiary and it knew that the subsidiary would rely on that expertise.
  • It is not true that simply laying down group-wide policies or standards without actively enforcing them can never create a duty of care. Group guidelines may contain systemic errors which, when routinely implemented by a subsidiary, cause harm to third parties.

Practical points to consider

Charities with subsidiaries should consider the following:

  • Group policies – when adopting group-wide policies be careful not to administer these on behalf of a subsidiary. A parent charity can (and often would be expected to) promulgate policies, including health and safety, risk and environmental policies, to its entire group. However, a parent charity should be careful not to effectively administer those policies on behalf of its subsidiaries
  • Avoid significant errors – a parent charity should ensure that any group-wide policies are comprehensive and contain no errors. Where a policy proves to be defective and a third party suffers loss, the parent may well be exposed to liability as a consequence
  • Independence of subsidiary board – matters concerning a particular subsidiary should be dealt with independently by the subsidiary’s board rather than being vested in the parent charity as part of the parent’s group-wide strategic decision-making. It needs to be clear that it is the board of the subsidiary that is making the ultimate decisions regarding the subsidiary’s actions
  • Independence of operations – a parent charity should make it clear that it is not supervising or managing its subsidiary’s affairs. Generally, correspondence relating to the subsidiary’s operations should be sent on the subsidiary’s letterhead and emails should originate from an account in the subsidiary’s name.

How we can help

The Charities Team at Birketts LLP advises on charity governance issues and the setting up and governance of trading subsidiaries and charity group structures. If you would like to receive details of these and our other services for charities please contact Erika Clarke or another member of Birketts’ Charities Team.

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at April 2021.

Author

Erika Clarke

Legal Director

+44 (0)1603 756525

+44 (0)7917 625645

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