With Great Profit Comes Great Responsibility: Internalising Corporate Risk In New Zealand Via Enterprise Liability

Abstract

Many large multinational enterprises create thinly capitalised subsidiaries that undertake risky activities. The potential is that the risk is externalised onto involuntary creditors such as tort claimants. Where the subsidiary commits large-scale harm, its assets may be insufficient to provide claimants with proper compensation, yet the parent company that profits in the meantime, is protected behind a corporate veil. This is inefficient. Limited liability is generally an efficiency-enhancing principle; however, the motivating rationales do not apply where the shareholder is a corporate entity, and the creditor is involuntary. This paper considers a number of solutions and assesses their adequacy. Recent developments in direct parent company liability in tort seem promising but they risk violating the doctrine of third-party liability and perversely disincentivise parent companies from supervising and guiding subsidiaries. Veil-piercing and unlimited liability are also considered but they are similarly deficient. This paper suggests that an enterprise liability approach should be introduced in New Zealand, using the existing definition of “related” under the Companies Act. The advantages and potential concerns of such a scheme are surveyed before concluding that an enterprise liability regime is needed to not only promote greater economic efficiency but also greater justice.