Private Law Theory

ABSTRACT
Applying the linked doctrines of separate legal personality and limited liability within corporate groups has long been a controversial issue in many legal systems. In contrast, their application between free-standing companies and their shareholders can be defended on a number of grounds, which, although not accepted by all commentators, have satisfied the law-makers in most modern corporate law systems.

This short article takes as its starting point the decision of the English Court of Appeal, Adams v Cape Industries plc (1990), which is noted for a firm application of the doctrine of separate legal personality within groups. The article then does three things. First, it analyses the relationship between separate legal personality and limited liability. It concludes that the function of shielding shareholders (members) of companies against liability to creditors (both voluntary and involuntary) is achieved through separate legal personality when the company is a going concern. Limited liability is a secondary issue in this context, though it is usually present as well. Limited liability plays a role only when the company is in an insolvency procedure, where shareholders are exposed not to direct actions by creditors but to actions by the company (brought by those in charge of the procedure) to swell the assets of the company. Of course, such actions are functionally for the benefit of the creditors and insolvency is the point at which the members potential exposure is of greatest concern to them.

The second part analyses the decision of the Court of Appeal in Adams v Cape Industries plc. It focusses on the court’s rejection of the various qualifications to the doctrine of separate legal personality which had been suggested in previous decisions and commentary. Although the result is a near bright-line legal rule, which is helpful in terms of legal clarity, the decision can be criticised for failing to show any sensitivity to the group context of the case or, even more importantly, to the fact that the claimants were involuntary creditors, being tort victims.

The third part shows how the English law of tort has responded to these points by recognising a duty of care on the parent company directly to those harmed by the subsidiary’s actions. The circumstances in which this duty arises, and the associated private international law problems when the group operates cross-border, are analysed and the duty is compared with a strict liability approach. It is suggested that a due care approach is marginally preferable to strict liability but that the full extent of the parent tort theory and a reliable solution to the private international law issues remain to be worked out.

Davies, Paul L, Parent Company Liability in the UK: Corporate Law, Tort and Private International Law (August 7, 2026).